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CLW > SEC Filings for CLW > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for CLEARWATER PAPER CORP

Form 10-Q for CLEARWATER PAPER CORP


30-Apr-2014

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 the costs and benefits associated with the closure of our Long Island, New York, and Thomaston, Georgia facilities, cash flows, capital expenditures, tax rates, operating costs, including energy costs, selling, general and administrative expenses, timing of major maintenance and repairs, liquidity, benefit plan funding, interest expenses, and the completion and results of ongoing tax audits. 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 2013 Form 10-K, as well as the following:
customer acceptance, timing and quantity of purchases of our new through-air-dried, or TAD, products;

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

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 or changes in prices in regards to a significant customer;

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 transportation costs and disruptions in transportation services;

labor disruptions;

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

changes in customer product preferences and competitors' product offerings;

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

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;

cyclical industry conditions;

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

inability to successfully implement our expansion strategies;

inability to fund our debt obligations;

restrictions on our business from debt covenants and terms;

changes in laws, regulations or industry standards affecting our business; and

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.

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 13 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. Recent Developments
Facility closures
On February 17, 2014, we announced the permanent and immediate closure of our Long Island, New York, tissue converting and distribution facility. As of March 31, 2014, we have incurred $8.4 million of costs associated with the closure. We expect the total impact of non-recurring exit related costs for this facility to be approximately $12 million to $15 million, of which approximately $12 million is expected to be incurred in 2014 and the remainder in 2015. The cost savings benefits resulting from the facility consolidation and optimization, which are incremental to the company's previously announced cost savings programs, are expected to be approximately $6 million in operating costs savings in 2014 and approximately $12 million on an annual basis thereafter beginning in 2015.
On March 6, 2013, we announced the planned permanent closure of our Thomaston, Georgia converting and distribution facility. The shutdown occurred gradually as converting lines were relocated and installed at our other facilities, with all operations at Thomaston ceasing at the end of 2013. We have incurred $6.7 million of costs associated with this closure, of which $0.8 million was incurred during the three months ended March 31, 2014. 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. Capital Allocation
On February 5, 2014, we announced that our Board of Directors had approved a stock repurchase program authorizing the repurchase of up to $100.0 million of our common stock. The repurchase program authorizes purchases of our common stock from time to time through open market purchases, negotiated transactions or other means, including accelerated stock repurchases and 10b5-1 trading plans in accordance with applicable securities laws and other restrictions. We have no obligation to repurchase stock under this program and may suspend or terminate the program at any time. During the quarter ended March 31, 2014, we repurchased 458,584 shares of our outstanding common stock at an average price of $63.96 per share.


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 be primarily 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 March 31,
(Dollars in thousands)               2014                           2013
                                       Percentage of                  Percentage of
                            Cost       Cost of Sales       Cost       Cost of Sales
Purchased pulp           $  73,072           17.1 %     $  71,635           17.3 %
Chemicals                   49,062           11.5          47,447           11.5
Transportation1             45,936           10.8          45,445           11.0
Energy                      37,069            8.7          31,853            7.7
Chips, sawdust and logs     35,553            8.3          37,098            8.9
Packaging supplies          25,268            5.9          24,269            5.9
Depreciation                19,995            4.7          19,750            4.7
Maintenance and repairs2    19,109            4.5          22,962            5.5
                         $ 305,064           71.5 %     $ 300,459           72.5 %

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 paperboard, from external suppliers. For the three months ended March 31, 2014, total purchased pulp costs increased by $1.4 million, but decreased 0.2 percentage points as a percentage of cost of sales compared to the same period in 2013 due to an overall increase in our cost of sales, which is discussed further under "Results of Operations." The higher purchased pulp costs were due primarily to increased market pricing for purchased softwood and hardwood pulp.
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 $1.6 million for the first quarter of 2014, compared to the first quarter of 2013, due primarily to higher polyethylene pricing, as well as higher production.
Transportation. Fuel prices largely impact transportation costs for 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 months ended March 31, 2014, compared to the same period in 2013, increased slightly due to higher carrier costs attributable to limited vendor shipping availability resulting from extreme weather conditions in the Midwest and Northeast during the first quarter of 2014. In addition, we experienced higher overall costs associated with increased paperboard shipments. These higher costs were partially offset by the absence of regional internal inventory distribution costs that occurred during the first quarter of 2013 as a result of reduced inventory levels during our TAD transition.
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. TAD tissue production, however, involves increased natural gas usage as compared to conventional tissue manufacturing and, as a result, our natural gas requirements have increased with the ramp up of our North Carolina TAD paper machine. Energy costs for the three months ended March 31, 2014 were 16.4% higher than the first quarter of 2013 due to higher natural gas consumption and pricing, which were both negatively impacted by the extremely cold weather conditions in the Midwest and Northeast during the first quarter of 2014. 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 March 31, 2014, these contracts covered approximately 10% of our expected average monthly natural gas requirements for the remainder of 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.


Chips, sawdust and logs. We purchase chips, sawdust and logs 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 by $1.5 million for chips, sawdust and logs for the three months ended March 31, 2014, compared to the same 2013 period. The decline in the first quarter of 2014 was primarily attributable to lower overall pricing at our Arkansas and Idaho pulp and paperboard facilities.
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 months ended March 31, 2014, packaging costs were $1.0 million higher than in the same period in 2013 primarily due to an increase in prices for poly wrapping and corrugated cardboard.
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 months ended March 31, 2014 was relatively consistent with the first quarter of 2013.
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 to 24 months, which increases costs and may reduce net sales in the quarters in which the major maintenance shutdowns occur. Our next planned major maintenance outage is currently scheduled for the spring of 2015. We did not have any outages during the first quarter of 2014, compared to the first quarter of 2013 during which we incurred four days of machine downtime costing $5.0 million, excluding labor, at our Arkansas facility.
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. We spent $14.8 million on capital expenditures during the first quarter of 2014, compared to $13.4 million of capital expenditures during the first quarter of 2013.
Other. Other costs not included 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 lower wage and benefit expenses in the first quarter of 2014, compared to the first quarter of 2013, due largely to favorable medical costs resulting primarily from fewer medical claims, as well as decreased pension related expenses.
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 March 31, 2014 and 2013 were $33.5 million and $34.1 million, respectively. The lower expense for the first quarter of 2014 was primarily a result of a $2.8 million mark-to-market expense in the first quarter of 2014, compared to a $3.5 million expense in the first quarter of 2013, related to our directors' common stock units, which will ultimately be settled in cash, partially offset by higher expense associated with profit-dependent compensation accruals and $0.2 million of expense related to the closure of our Long Island facility. Interest expense
Interest expense is mostly comprised of interest on $275 million aggregate principal amount of 4.5% senior notes due 2023 issued in January 2013, which we refer to as the 2013 Notes, and $375 million aggregate principal amount of 7.125% senior notes due 2018 issued in October 2010, which we refer to as the 2010 Notes. A portion of the proceeds from the 2013 Notes were used to redeem $150 million of 10.625% senior unsecured notes issued in June 2009, which we refer to as the 2009 Notes. Interest expense also includes amortization of deferred issuance costs associated with all of our notes and our revolving credit facility.
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.
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. This audit has moved into final review stages with the Joint Committee on Taxation. We expect to receive final approval with no additional changes from the Committee. As a result, we have recognized an additional deferred tax asset of $0.4 million and a tax benefit of the same amount.
During the second quarter of 2013, the IRS commenced an audit of our wholly-owned subsidiary Cellu Tissue Holdings, Inc. and its subsidiaries for the year ended December 27, 2010; the period immediately before our acquisition of Cellu Tissue Holdings, Inc. During the first quarter of 2014, we successfully closed the audit of Cellu Tissue Holdings, Inc.


RESULTS OF OPERATIONS
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
The following table sets forth data included in our Consolidated Statements of
Operations as a percentage of net sales.
                                                     Three Months Ended March 31,
(Dollars in thousands)                               2014                    2013
Net sales                                    $ 484,920     100.0 %   $ 460,824     100.0 %
Costs and expenses:
Cost of sales                                 (426,629 )    88.0      (414,209 )    89.9
Selling, general and administrative expenses   (33,514 )     6.9       (34,132 )     7.4
Impairment of assets                            (4,259 )     0.9             -         -
Total operating costs and expenses            (464,402 )    95.8      (448,341 )    97.3
Income from operations                          20,518       4.2        12,483       2.7
Interest expense, net                          (10,734 )     2.2       (10,982 )     2.4
Debt retirement costs                                -         -       (17,058 )     3.7
Earnings (loss) before income taxes              9,784       2.0       (15,557 )     3.4
Income tax (provision) benefit                  (3,558 )     0.7        14,675       3.2
Net earnings (loss)                          $   6,226       1.3 %   $    (882 )     0.2 %

Net sales-First quarter 2014 net sales increased by $24.1 million, or 5.2%, compared to the first quarter of 2013, primarily due to near record paperboard volumes resulting from strong market backlogs and higher pricing during the first quarter of 2014 compared to the first quarter of 2013. In addition, overall net selling prices for retail tissue and non-retail tissue increased during the first quarter of 2014, but were partially offset by lower tissue and converted product case shipments. These items are further discussed below under "Discussion of Business Segments."
Cost of sales-Cost of sales was 88.0% of net sales for the first quarter of 2014 and 89.9% of net sales for the same period in 2013. The decrease as a percentage of net sales was primarily a result of higher net sales during the first quarter of 2014. Dollars spent for cost of sales grew 3.0%, when compared to the first quarter of 2013, due primarily to incremental costs associated with extreme cold weather conditions in the Midwest and Northeast during the first quarter of 2014, as well as $4.7 million of costs related to the closure of our Thomaston and Long Island facilities.
Selling, general and administrative expenses-Selling, general and administrative expenses decreased $0.6 million primarily as a result of a $2.8 million mark-to-market expense adjustment in the first quarter of 2014, compared to a $3.5 million expense adjustment in the first quarter of 2013, related to our directors' common stock units, partially offset by higher expense associated with profit-dependent compensation accruals and $0.2 million of expense related to the closure of our Long Island facility in the current quarter.
Impairment of assets-During the quarter ended March 31, 2014, as a result of the permanent closure of our Long Island facility, we assessed both our intangible and long-lived assets for recoverability. As a result of this assessment, we recorded non-cash impairment losses for intangible and long-lived assets in the amounts of $1.3 million and $3.0 million, respectively.
Interest expense-Interest expense decreased $0.2 million during the first quarter of 2014, compared to the same period of 2013. The slight decrease was attributable to reduced interest rates on our debt as a result of the refinancing in the first quarter of 2013 of the 2009 Notes with proceeds from the issuance of the 2013 Notes, which carry a significantly lower interest rate. Debt retirement costs-Debt retirement costs included a one-time charge in connection with the complete redemption of the 2009 Notes on February 22, 2013. Total costs of $17.1 million included cash charges of approximately $14 million related to a "make whole" premium plus accrued and unpaid interest and a non-cash charge of approximately $3 million related to the write off of deferred issuance costs and unamortized discounts.


Income tax provision-During the first quarters of 2014 and 2013, there were a number of items that were included in the calculation of our income tax provision that we do not believe were indicative of our core operating performance. Excluding these items, the adjusted tax rate for the first quarter of 2014 would have been 36.2%, compared to 52.6% for the first quarter of 2013. The following table details these items:

                                                      Three Months Ended
                                                          March 31,
(In thousands)                                        2014          2013
Income tax (provision) benefit                     $  (3,558 )   $ 14,675
Special items, tax impact:
Debt retirement costs                                      -       (6,277 )
Directors' equity-based compensation expense          (1,015 )     (1,278 )
Costs associated with Thomaston facility closure        (270 )        (67 )
Costs associated with Long Island facility closure    (3,038 )          -
Discrete tax items related to credit conversions           -       (9,766 )
Adjusted income tax provision                      $  (7,881 )   $ (2,713 )


Discussion of Business Segments
Consumer Products
                                                    Three Months Ended
                                                        March 31,
(Dollars in thousands - except per ton amounts)     2014          2013
Net sales                                       $ 286,508      $ 284,902
Operating (loss) income                              (523 )       10,124
Percent of net sales                                 (0.2 )%         3.6 %

Shipments (short tons)
Non-retail                                         56,839         55,235
Retail                                             70,919         77,361
Total tissue tons                                 127,758        132,596
Converted products cases (in thousands)            13,437         13,781

Sales price (per short ton)
Non-retail                                      $   1,489      $   1,432
Retail                                              2,841          2,661
Total tissue                                    $   2,239      $   2,149

Our Consumer Products segment net sales for the first quarter of 2014 were slightly higher compared to the first quarter of 2013. The increase was primarily driven by increased sales of higher-priced TAD tissue, which largely offset the effect of decreased shipments of other retail tissue products, as well as increases in non-retail tissue shipments and net selling prices of 2.9% and 4.0% respectively.
Segment operating results for the first quarter of 2014 decreased by $10.6 million compared to the same period in 2013 due primarily to $9.2 million of costs related to the closures of our Long Island and Thomaston facilities and higher energy and transportation costs related to poor weather conditions in the Midwest and Northeast, as well as increased costs for packaging and pulp.

Pulp and Paperboard
                                                   Three Months Ended
                                                        March 31,
(Dollars in thousands - except per ton amounts)    2014          2013
Net sales                                       $ 198,412     $ 175,922
Operating income                                   36,776        17,553
Percent of net sales                                 18.5 %        10.0 %

Paperboard shipments (short tons)                 200,665       186,350
Paperboard sales price (per short ton)          $     988     $     935

Net sales for the Pulp and Paperboard segment increased by $22.5 million, or 12.8%, in the first quarter of 2014, compared to the first quarter of 2013. This increase was primarily due to a 7.7% increase in paperboard shipments, which was a result of near record shipment volumes supported by strong market backlogs. In addition, paperboard net selling prices increased 5.7% as a result of increased average pricing resulting from higher market pricing and an improved sales mix. Operating income for the segment increased $19.2 million during the first quarter of 2014, compared to the same period in 2013, primarily due to the improved paperboard volume and pricing coupled with lower maintenance and fiber costs. These improvements were partially offset by higher energy and transportation costs, which were both negatively impacted by poor weather conditions in the Midwest and Northeast during the first quarter of 2014.


EARNINGS BEFORE INTEREST, TAX, DEPRECIATION AND AMORTIZATION (EBITDA) AND ADJUSTED EBITDA
We use earnings before interest (including debt retirement costs), taxes, depreciation and amortization, or EBITDA, and EBITDA adjusted for certain items, or Adjusted EBITDA, as supplemental performance measures that are not required by, or presented in accordance with GAAP. EBITDA and Adjusted EBITDA should not . . .

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