Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CLW > SEC Filings for CLW > Form 10-Q on 30-Jul-2013All Recent SEC Filings

Show all filings for CLEARWATER PAPER CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CLEARWATER PAPER CORP


30-Jul-2013

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our stock repurchase program and accelerated stock buyback program, the costs and benefits associated with the closure of our Thomaston, Georgia facility, future growth opportunities, future revenues, cash flows, capital expenditures, tax rates, operating costs, corporate expenses, timing and cost of major maintenance and repairs, manufacturing capability, liquidity, benefit plan funding levels, capitalized interest, interest expenses, and the tax treatment of the alternative fuels and cellulosic biofuels tax credits. Words such as "anticipate," "expect," "intend," "plan," "target," "project," "believe," "schedule," "estimate," "may," and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are based on management's current expectations, estimates, assumptions and projections that are subject to change. Our actual results of operations may differ materially from those expressed or implied by the forward-looking statements contained in this report. Important factors that could cause or contribute to such differences include those risks discussed in the section entitled "Risk Factors" in our 2012 Form 10-K, as well as the following:
customer acceptance and timing of purchases of our new through-air-dried, or TAD, products and capacity;

difficulties with the optimization and realization of the benefits expected from our new TAD paper machine and converting lines in Shelby, North Carolina;

the loss of business from a significant customer;

increased dependence on wood pulp;

changes in transportation costs and disruptions in transportation services;

manufacturing or operating disruptions, including equipment malfunction and damage to our manufacturing facilities caused by fire or weather-related events and IT system failures;

changes in the cost and availability of wood fiber and wood pulp;

changes in costs for and availability of packaging supplies, chemicals, energy and maintenance and repairs;

competitive pricing pressures for our products, including as a result of increased capacity as additional manufacturing facilities are operated by our competitors;

changes in customer product preferences and competitors' product offerings;

our qualification to retain, or ability to utilize, tax credits associated with alternative fuels or cellulosic biofuels and the tax treatment associated with receipt of such credits;

environmental liabilities or expenditures;

changes in the U.S. and international economies and in general economic conditions in the regions and industries in which we operate;

increased supply and pricing pressures resulting from increasing Asian paper production capabilities;

changes in expenses and required contributions associated with our pension plans;

cyclical industry conditions;

reliance on a limited number of third-party suppliers for raw materials;

labor disruptions;

inability to successfully implement our expansion strategies;

inability to fund our debt obligations;

restrictions on our business from debt covenants and terms; and

changes in laws, regulations or industry standards affecting our business.

Forward-looking statements contained in this report present management's views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management's views to reflect events or circumstances occurring after the date of this report.


OVERVIEW
Background
Clearwater Paper Corporation is a leading North American producer of private label tissue and paperboard products. We manufacture quality consumer tissue, away-from-home tissue, parent rolls (non-converted tissue product), machine-glazed tissue, bleached paperboard and pulp at 15 manufacturing locations in the U.S. and Canada. Our private label consumer tissue products - facial and bath tissue, paper towels and napkins - are used primarily at-home and are principally sold to major retailers and wholesale distributors, which include grocery, drug, mass-merchant and discount stores. Our paperboard is sold primarily in the high-end segment of the packaging industry, which demands high-quality construction and print surfaces for graphics. Our products are made primarily from wood fiber pulp.
Recent Developments
Thomaston Closure
On March 6, 2013, we announced the planned permanent closure of our Thomaston, Georgia converting and distribution facility. The shutdown is occurring gradually as converting lines are being relocated and installed at our other facilities, with some operations at Thomaston continuing to run into the first quarter of 2014. We expect the total impact of exit related costs to be approximately $6 million to $7 million, of which approximately $5 million to $6 million is expected to be incurred in 2013. The exit costs are primarily attributable to the costs of relocating the converting lines and labor costs. The cost savings benefits resulting from the equipment relocation and converting facility optimization, which are part of our previously announced cost savings programs, are expected to be fully realized beginning in the fourth quarter of 2014. We have incurred $1.2 million of costs associated with this announcement to date, of which $1.0 million was incurred during the three months ended June 30, 2013.
Capital Allocation
On January 23, 2013, we issued $275 million aggregate principal amount of 4.5% senior notes, which we refer to as the 2013 Notes. Approximately $166 million of the net proceeds from the issuance was used to redeem all of our $150 million aggregate principal amount of 10.625% senior notes due 2016, which we refer to as the 2009 Notes.
In January 2013, we announced that our Board of Directors approved a common stock repurchase program authorizing the repurchase of up to $100 million of our common stock, to be funded by a portion of the proceeds from the issuance of the 2013 Notes. In connection with this program, on March 1, 2013, we entered into a $50 million accelerated stock buyback, or ASB, agreement with a major financial institution. See Note 1 to the Consolidated Financial Statements, under the subheading "Stockholders' Equity," for additional discussion of the ASB agreement.
We have also repurchased 208,582 shares of our outstanding common stock as of June 30, 2013 through open market transactions, of which 205,433 shares were repurchased at an average price of $47.80 per share during the second quarter. As of June 30, 2013, we have repurchased 1,035,199 total shares of our outstanding common stock, which includes repurchases made through both the ASB agreement and open market transactions. Approximately $49 million of the authorized repurchase program remains as of June 30, 2013, including $9.2 million of the $50 million already paid to the financial institution as part of the ASB agreement. We account for share repurchases under the program as treasury stock and record the amounts paid to repurchase shares at cost as a component of stockholders' equity. We have not retired any treasury shares and may choose to reissue shares held in treasury stock in a future period.


Components and Trends in our Business
Net sales
Net sales predominantly consist of sales of consumer tissue and paperboard products, net of discounts, returns and allowances and any sales taxes collected. Prices for our consumer tissue products tend to primarily be driven by the value of our products to our customers, and are generally priced relative to the prices of branded tissue products. Demand and pricing for our pulp and paperboard products are largely determined by general global market conditions and the demand for high quality paperboard.

Operating costs
                                                          Three Months Ended June 30,
(Dollars in thousands)                               2013                             2012
                                                        Percentage of                    Percentage of
                                            Cost        Cost of Sales        Cost        Cost of Sales
Purchased pulp                          $   73,049            17.6 %     $   60,660            15.2 %
Chemicals                                   48,644            11.7           46,994            11.8
Transportation1                             45,814            11.1           41,813            10.5
Chips, sawdust and logs                     35,656             8.6           43,572            11.0
Energy                                      31,453             7.6           26,348             6.6
Packaging supplies                          26,206             6.3           21,180             5.3
Depreciation                                20,792             5.0           17,313             4.3
Maintenance and repairs2                    20,773             5.0           21,960             5.5
                                        $  302,387            72.9 %     $  279,840            70.2 %

1   Includes internal and external
transportation costs.
2    Excluding related labor costs.

Operating costs
                                                           Six Months Ended June 30,
(Dollars in thousands)                               2013                             2012
                                                        Percentage of                    Percentage of
                                            Cost        Cost of Sales        Cost        Cost of Sales
Purchased pulp                          $  144,684            17.4 %     $  122,396            15.2 %
Chemicals                                   96,091            11.6           92,864            11.6
Transportation1                             91,259            11.0           83,511            10.4
Chips, sawdust and logs                     72,754             8.8           83,920            10.5
Energy                                      63,306             7.6           53,355             6.7
Packaging supplies                          50,475             6.1           43,337             5.4
Maintenance and repairs2                    43,735             5.3           57,109             7.1
Depreciation                                40,542             4.9           34,553             4.3
                                        $  602,846            72.7 %     $  571,045            71.2 %

1 Includes internal and external transportation costs.

2 Excluding related labor costs.

Purchased pulp. We purchase a significant amount of the pulp needed to manufacture our consumer products, and to a lesser extent our pulp and paperboard, from external suppliers. For the three and six months ended June 30, 2013, total purchased pulp costs were 17.6% and 17.4% of our cost of sales, respectively, representing 2.4 and 2.2 percentage point increases compared to the same periods in 2012. The increases in purchased pulp were due primarily to increased usage associated with the ramp up of our North Carolina TAD paper machine, as well as higher purchased pulp costs as a result of machine downtime taken at our Arkansas pulp and paperboard facility in the first quarter of 2013. Chemicals. We consume a substantial amount of chemicals in the production of pulp and paperboard, as well as in the production of TAD tissue. The chemicals we generally use include polyethylene, caustic, starch, sodium chlorate, latex and specialty paper process chemicals. A large portion of the chemicals used in our manufacturing processes, particularly in the pulp-making process, are petroleum-based and are impacted by petroleum prices.


Our chemical costs increased $1.7 million and $3.2 million, respectively, for the three and six months ended June 30, 2013, compared to the same periods ending in 2012, due primarily to the first six months of full production on our North Carolina TAD paper machine, which resulted in higher chemical consumption. In addition, during the second quarter of 2013 chemical consumption increased at our Arkansas pulp and paperboard facility due to recovery boiler operational issues.
Transportation. Fuel prices largely impact transportation costs related to delivery of raw materials to our manufacturing facilities, internal inventory transfers and delivery of our finished products to customers. Changing fuel prices particularly affect our margins for consumer products because we supply customers throughout the U.S. and transport unconverted parent rolls from our tissue mills to our tissue converting facilities. Our transportation costs for the three and six months ended June 30, 2013, compared to the same periods in 2012, were higher as a result of increased external shipments as well as lower first quarter inventory levels for our Consumer Products segment related to our TAD transition. The reduced inventory levels required multiple shifts in regional distributions for our tissue product lines, and as a result we incurred an overall increase of internal tons shipped.
Chips, sawdust and logs. We purchase chips, sawdust and logs used to manufacture pulp. We source residual wood fibers under both long-term and short-term supply agreements, as well as in the spot market. Overall costs decreased for chips, sawdust and logs for the three and six months ended June 30, 2013, both in dollars and as a percentage of cost of sales, compared to the same 2012 periods. The overall decline in the 2013 periods was primarily attributable to lower overall pricing at our Idaho pulp and paperboard facility and decreased usage at our Arkansas pulp and paperboard facility in the second quarter of 2013 due to recovery boiler operational issues, partially offset by higher overall pricing at our Arkansas facility due primarily to supply limitations caused by wet weather conditions in the region.
Energy. We use energy in the form of electricity, hog fuel, steam and natural gas to operate our mills. Energy prices have fluctuated widely over the past decade. We have taken steps, and intend to continue to take steps, to reduce our exposure to volatile energy prices through conservation. In addition, cogeneration facilities that produce steam and electricity at our East Hartford, Connecticut, Lewiston, Idaho and Menominee, Michigan manufacturing sites help to lower our energy costs. However, TAD tissue production involves greater natural gas usage than conventional tissue manufacturing and, as a result, we expect our natural gas requirements will increase as we ramp up our North Carolina TAD paper machine. Energy costs for the three and six months ended June 30, 2013 were higher than the prior year comparable periods due to the first full six months of production on our North Carolina TAD paper machine, as well as higher natural gas prices. To help mitigate our exposure to changes in natural gas prices, from time to time we have used firm-price contracts to supply a portion of our natural gas requirements. As of June 30, 2013, these contracts covered approximately 13% of our expected average monthly natural gas requirements for the remainder of 2013, plus lesser amounts for 2014. Our energy costs in future periods will depend principally on our ability to produce a substantial portion of our electricity needs internally, on changes in market prices for natural gas and on our ability to reduce our energy usage through conservation. Packaging supplies. As a significant producer of private label consumer tissue products, we package to order for retail chains, wholesalers and cooperative buying organizations. Under our agreements with those customers, we are responsible for the expenses related to the unique packaging of our products for direct retail sale to consumers. For the three and six months ended June 30, 2013, packaging costs were $5.0 million and $7.1 million higher, respectively, than the same periods in 2012 primarily due to higher retail case shipments and an increase in prices for poly wrapping and corrugated cardboard. Maintenance and repairs. We regularly incur significant costs to maintain our manufacturing equipment. We perform routine maintenance on our machines and periodically replace a variety of parts such as motors, pumps, pipes and electrical parts.
Major equipment maintenance and repairs in our Pulp and Paperboard segment also require maintenance shutdowns approximately every 18 months at our Idaho and Arkansas facilities, which increases costs and may reduce net sales in the quarters in which the major maintenance shutdowns occur. During the first quarter of 2013, we had four days of machine downtime costing $5.0 million, excluding labor, at our Arkansas facility, compared to major maintenance costs of $15.5 million incurred at our Idaho facility in the first quarter of 2012. There was no major maintenance in the second quarters of 2013 and 2012. During the third quarter of 2013, we expect to have 10 days of paper machine downtime for planned major maintenance at our Idaho facility. The total cost of this major maintenance is expected to be approximately $16.5 million, consisting of $13.0 million related to the paper machine maintenance repairs and $3.5 million of other outage related costs.
In addition to ongoing maintenance and repair costs, we make capital expenditures to increase our operating capacity and efficiency, improve safety at our facilities and comply with environmental laws. Excluding $4.4 million and $6.3 million, respectively, of capital expenditures for our TAD tissue expansion project, we spent $12.5 million and $24.0 million on capital expenditures during the three and six months ended June 30, 2013, respectively. During the three and six months ended June 30, 2012, excluding $43.0 million and $82.6 million, respectively, of expenditures for our TAD project, we spent $10.0 million and $20.6 million on capital expenditures.
Depreciation. We record substantially all of our depreciation expense associated with our plant and equipment in "Cost of sales" on our Consolidated Statements of Operations. Depreciation expense for the three and six months ended June 30, 2013 was $3.5 million and $6.0 million higher than the 2012 comparable periods, respectively, due primarily to additional depreciation expense associated with our North Carolina TAD paper machine, which started up in December 2012.


Other. Other costs not mentioned in the above table primarily consist of wage and benefit expenses and miscellaneous operating costs. Although period cut-offs and inventory levels can impact cost of sales amounts, we would expect this impact to be relatively steady as a percentage of costs on a period-over-period basis. We experienced an increase in wage and benefit expenses in the first half of 2013, compared to the first half of 2012, due largely to the incremental costs associated with the startup of our North Carolina TAD facility, as well as higher overall employee costs.
Selling, general and administrative expenses Selling, general and administrative expenses primarily consist of compensation and associated expenses for sales and administrative personnel, as well as commission expenses related to sales of our products. Our selling, general and administrative expenses for the three months ended June 30, 2013 and 2012 were $26.8 million and $30.5 million, respectively. The lower expense for the second quarter of 2013 was primarily a result of a $1.1 million mark-to-market benefit in the second quarter of 2013, compared to a $0.3 million expense in the second quarter of 2012, related to our directors' common stock units, which will ultimately be settled in cash, as well as lower expense associated with profit-dependent accruals and lower legal expenses. During the third and fourth quarters of 2013, we expect our selling, general and administrative expenses to be approximately $29 million to $31 million per quarter. Interest expense
Interest expense is mostly comprised of interest on the 2013 Notes and our $375 million aggregate principal amount of 7.125% senior notes due 2018 issued in October 2010, which we refer to as the 2010 Notes. Interest expense also includes amortization of deferred issuance costs associated with all of our notes and our revolving credit facility. As a result of the issuance of the 2013 Notes at an interest rate significantly lower than that of our former 2009 Notes, which were redeemed in the first quarter of 2013 using a portion of the proceeds from the 2013 Notes, our interest expense is expected to decrease by approximately $3.6 million on an annual basis. However, this favorable change in interest expense associated with our notes will be more than offset by a decrease in capitalized interest, as no capitalized interest is expected in 2013 compared to total capitalized interest in 2012 of $12.6 million. Income taxes
Income taxes are based on reported earnings and tax rates in the jurisdictions in which our operations occur and offices are located, adjusted for available credits, changes in valuation allowances and differences between reported earnings and taxable income using current tax laws and rates. We generally expect our effective income tax rate, excluding discrete items, to remain fairly constant, but it could fluctuate due to changes in tax law. We are registered with the Internal Revenue Service, or IRS, as both an alternative fuel mixer and a producer of cellulosic biofuel. During 2009, we received refundable tax credit payments in connection with our use of an alternative fuel mixture, commonly referred to as "black liquor," to produce energy at our pulp mills. The amount of the refundable tax credit is equal to $0.50 per gallon of alternative fuel mixture used. The Alternative Fuel Mixture Tax Credit, or AFMTC, expired on December 31, 2009.
The Cellulosic Biofuel Producer Credit, or CBPC, enables us to claim $1.01 per gallon in regards to black liquor produced and used as a fuel by us at our pulp mills in 2009. During 2010, the IRS issued guidance clarifying the treatment of the CBPC and the AFMTC in regards to the production or use of black liquor at the same facility, in the same tax year. Under the guidance provided, both credits may be claimed in the same year as long as the credits are not claimed for the same gallons of fuel. Furthermore, the IRS guidance clarified the ability to convert previously claimed gallons from the AFMTC to the CBPC. Our ability to convert previously claimed gallons from the AFMTC to the CBPC expired on March 15, 2013.
During the first quarter of 2012, we converted certain gallons claimed under the CBPC back to gallons claimed under the AFMTC, which resulted in a net discrete expense of $5.5 million comprised of $2.5 million relating to the conversion back to the AFMTC and an additional $3.0 million increase in our liabilities for uncertain tax positions.
During the first quarter of 2013, we reversed our position and converted certain gallons claimed under the AFMTC back to gallons claimed under the CBPC. This reversal allowed us to recognize a net discrete benefit for the quarter of $9.8 million, which was primarily comprised of a $5.6 million benefit relating to the conversion back to the CBPC and a $4.2 million decrease to our liabilities for uncertain tax positions, partially offset by interest accrued on uncertain tax positions. As of June 30, 2013, we have no remaining CBPC carryforwards. There is relatively little guidance regarding the AFMTC and CBPC, and the laws governing these credits are complex. Accordingly, there remains uncertainty as to our qualification to receive the tax credit in 2009, as well as to whether we will be entitled to retain the amounts we received upon further review by the IRS. In addition, while it is our position that payments received or credits taken in relation to the AFMTC should not be subject to corporate income tax, there can be no assurance as to whether or not the amounts we have received will be subject to taxation.
During the fourth quarter of 2012, the IRS commenced an audit of our tax returns for the tax years ending December 31, 2008 through December 31, 2012. The audit is ongoing, with no defined conclusion date as of June 30, 2013.


RESULTS OF OPERATIONS
Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012
The following table sets forth data included in our Consolidated Statements of
Operations as a percentage of net sales.
                                                      Three Months Ended June 30,
(Dollars in thousands)                               2013                    2012
Net sales                                    $ 471,002     100.0 %   $ 473,572     100.0 %
Costs and expenses:
Cost of sales                                 (414,521 )    88.0      (398,546 )    84.2
Selling, general and administrative expenses   (26,767 )     5.7       (30,529 )     6.4
Total operating costs and expenses            (441,288 )    93.7      (429,075 )    90.6
Income from operations                          29,714       6.3        44,497       9.4
Interest expense, net                          (11,094 )     2.4        (9,147 )     1.9
Earnings before income taxes                    18,620       4.0        35,350       7.5
Income tax provision                            (6,962 )     1.5       (13,861 )     2.9
Net earnings                                 $  11,658       2.5     $  21,489       4.5

Net sales-Second quarter 2013 net sales decreased by $2.6 million, or 0.5%, compared to the second quarter of 2012, primarily due to decreases in both shipments and net selling prices of paperboard, partially offset by higher net sales for our consumer products due to both increased shipments and net selling prices for retail tissue. These items are discussed below under "Discussion of Business Segments."
Cost of sales-Cost of sales was 88.0% of net sales for the three months ended June 30, 2013 and 84.2% of net sales for the same period in 2012. The increase was primarily a result of $4.2 million in TAD transition costs incurred during the second quarter of 2013, $2.9 million of incremental costs associated with an electrical disruption and operational issues with maintenance and repairs performed on the recovery boiler at our Arkansas pulp and paperboard facility, and higher energy and employee costs.
Selling, general and administrative expenses-Selling, general and administrative expenses decreased $3.8 million primarily as a result of a $1.1 million mark-to-market benefit in the second quarter of 2013, compared to a $0.3 million expense in the second quarter of 2012, related to our directors' common stock units, as well as lower expense associated with profit-dependent accruals and lower legal expenses.
Interest expense-Interest expense increased $1.9 million during the three months ended June 30, 2013, compared to the same period of 2012. The increase was attributable to the lack of capitalized interest during the current year period, compared to $2.8 million of capitalized interest associated with our TAD tissue expansion project in the second quarter of 2012. The increase in interest expense was partially offset by the benefit of refinancing the 2009 Notes with proceeds from the issuance of the 2013 Notes, which carry a significantly lower interest rate.
Income tax provision-Our estimated annual effective tax rate for the second quarter of 2013 is 38.1%, compared with 35.1% for the second quarter of 2012. The higher estimated annual effective tax rate for 2013 is due to reduced permanent tax benefits related to our domestic production activities deduction. . . .

  Add CLW to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CLW - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.