Washington, D.C. 20549
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
The accompanying condensed notes are an integral part of these consolidated financial statements.
CLEARWATER PAPER CORPORATION
Consolidated Statements of Stockholders’ Equity
Unaudited (In thousands)(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
(In millions, except share amounts which are in thousands) | Shares | | Amount | | | | | | | | |
Balance at December 31, 2018 | 16,482 | | | $ | — | | | $ | 6.4 | | | $ | 487.3 | | | $ | (67.3) | | | $ | 426.4 | |
Net income | — | | | — | | | — | | | 3.8 | | | — | | | 3.8 | |
Stock-based compensation expense | — | | | — | | | 1.2 | | | — | | | — | | | 1.2 | |
Issuance of shares under stock plans, net | 33 | | | — | | | (0.4) | | | — | | | — | | | (0.4) | |
Pension and other postretirement employee benefit plans, net of tax of $0.5 | — | | | — | | | — | | | — | | | 1.2 | | | 1.2 | |
Balance at March 31, 2019 | 16,515 | | | $ | — | | | $ | 7.2 | | | $ | 491.1 | | | $ | (66.1) | | | $ | 432.2 | |
Net loss | — | | | — | | | — | | | (0.4) | | | — | | | (0.4) | |
Stock-based compensation expense | — | | | — | | | 1.2 | | | — | | | — | | | 1.2 | |
Pension and other postretirement employee benefit plans, net of tax of $0.5 | — | | | — | | | — | | | — | | | 1.3 | | | 1.3 | |
Balance at June 30, 2019 | 16,515 | | | $ | — | | | $ | 8.4 | | | $ | 490.7 | | | $ | (64.8) | | | $ | 434.3 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| | Shares | | Amount | |
Balance at December 31, 2017 | | 16,448 |
| | $ | 2 |
| | $ | 1,161 |
| | $ | 618,254 |
| | $ | (43,983 | ) | | $ | 575,434 |
|
Net earnings | | — |
| | — |
| | — |
| | 2,600 |
| | — |
| | 2,600 |
|
Performance share, restricted stock unit, and stock option awards | | 13 |
| | — |
| | 1,267 |
| | — |
| | — |
| | 1,267 |
|
Reclassification of the income tax effects of the Tax Cuts and Jobs Act | | — |
| | — |
| | — |
| | 12,852 |
| | (12,852 | ) | | — |
|
Pension and other postretirement employee benefit plans, net of tax of $507 | | — |
| | — |
| | — |
| | — |
| | 1,419 |
| | 1,419 |
|
Balance at March 31, 2018 | | 16,461 |
| | $ | 2 |
| | $ | 2,428 |
| | $ | 633,706 |
| | $ | (55,416 | ) | | $ | 580,720 |
|
Net earnings | | — |
| | — |
| | — |
| | 6,961 |
| | — |
| | 6,961 |
|
Performance share, restricted stock unit, and stock option awards | | — |
| | — |
| | 1,552 |
| | — |
| | | | 1,552 |
|
Pension and other postretirement employee benefit plans, net of tax of $477 | | — |
| | — |
| | | | — |
| | 1,336 |
| | 1,336 |
|
Balance at June 30, 2018 | | 16,461 |
| | $ | 2 |
| | $ | 3,980 |
| | $ | 640,667 |
| | $ | (54,080 | ) | | $ | 590,569 |
|
Net earnings | | — |
| | — |
| | — |
| | 34,444 |
| | — |
| | 34,444 |
|
Performance share, restricted stock unit, and stock option awards | | — |
| | — |
| | 1,734 |
| | — |
| | | | 1,734 |
|
Pension and other postretirement employee benefit plans, net of tax of $492 | | — |
| | — |
| | | | — |
| | 1,378 |
| | 1,378 |
|
Balance at September 30, 2018 | | 16,461 |
| | $ | 2 |
| | $ | 5,714 |
| | $ | 675,111 |
| | $ | (52,702 | ) | | $ | 628,125 |
|
CLEARWATER PAPER CORPORATION
Consolidated Statements of Stockholders’ Equity
Unaudited (In thousands)(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
(In millions, except share amounts which are in thousands) | Shares | | Amount | | | | | | | | |
Balance at December 31, 2019 | 16,515 | | | $ | — | | | $ | 9.8 | | | $ | 481.7 | | | $ | (59.5) | | | $ | 432.0 | |
Net income | — | | | — | | | — | | | 10.3 | | | — | | | 10.3 | |
Stock-based compensation expense | — | | | — | | | 1.3 | | | — | | | — | | | 1.3 | |
Issuance of shares under stock plans, net | 54 | | | — | | | (0.7) | | | — | | | — | | | (0.7) | |
Pension and other postretirement employee benefit plans,
net of tax of $0.6 | — | | | — | | | — | | | — | | | 1.8 | | | 1.8 | |
Balance at March 31, 2020 | 16,569 | | | $ | — | | | $ | 10.4 | | | $ | 492.1 | | | $ | (57.7) | | | $ | 444.8 | |
Net income | — | | | — | | | — | | | 22.8 | | | — | | | 22.8 | |
Stock-based compensation expense | — | | | — | | | 1.4 | | | — | | | | | 1.4 | |
Issuance of shares under stock plans, net | 2 | | | — | | | — | | | — | | | — | | | — | |
Pension and other postretirement employee benefit plans,
net of tax of $0.6 | — | | | — | | | — | | | — | | | 1.8 | | | 1.8 | |
Balance at June 30, 2020 | 16,571 | | | $ | — | | | $ | 11.8 | | | $ | 514.8 | | | $ | (55.8) | | | $ | 470.8 | |
See accompanying Notes to the Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| | Shares | | Amount | |
Balance at December 31, 2018 | | 16,482 |
| | $ | 2 |
| | $ | 6,403 |
| | $ | 487,339 |
| | $ | (67,348 | ) | | $ | 426,396 |
|
Net earnings | | — |
| | — |
| | — |
| | 3,837 |
| | — |
| | 3,837 |
|
Performance share, restricted stock unit, and stock option awards | | 33 |
| | — |
| | 772 |
| | — |
| | — |
| | 772 |
|
Pension and other postretirement employee benefit plans, net of tax of $442 | | — |
| | — |
| | — |
| | — |
| | 1,239 |
| | 1,239 |
|
Balance at March 31, 2019 | | 16,515 |
| | $ | 2 |
| | $ | 7,175 |
| | $ | 491,176 |
| | $ | (66,109 | ) | | $ | 432,244 |
|
Net loss | | — |
| | — |
| | — |
| | (424 | ) | | — |
| | (424 | ) |
Performance share, restricted stock unit, and stock option awards | | — |
| | — |
| | 1,211 |
| | — |
| | — |
| | 1,211 |
|
Pension and other postretirement employee benefit plans, net of tax of $475 | | — |
| | — |
| | — |
| | — |
| | 1,334 |
| | 1,334 |
|
Balance at June 30, 2019 | | 16,515 |
| | $ | 2 |
| | $ | 8,386 |
| | $ | 490,752 |
| | $ | (64,775 | ) | | $ | 434,365 |
|
Net loss | | — |
| | — |
| | — |
| | (10,973 | ) | | — |
| | (10,973 | ) |
Performance share, restricted stock unit, and stock option awards | | — |
| | — |
| | 467 |
| | — |
| | — |
| | 467 |
|
Pension and other postretirement employee benefit plans, net of tax of $459 | | — |
| | — |
| | — |
| | — |
| | 1,286 |
| | 1,286 |
|
Balance at September 30, 2019 | | 16,515 |
| | $ | 2 |
| | $ | 8,853 |
| | $ | 479,779 |
| | $ | (63,489 | ) | | $ | 425,145 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
Clearwater Paper Corporation
Condensed Notes to Consolidated Financial Statements
Unaudited(Unaudited)
NOTE 1 Nature of Operations and Basis of Presentation
GENERAL
Clearwater Paper manufactures quality consumer tissue, away-from-home tissue, parent roll tissue, bleached paperboard and pulp at manufacturing facilities across the nation. The company is a premier supplier of private label tissue to major retailers and wholesale distributors, including grocery, drug, mass merchants and discount stores. In addition, the company produces bleached paperboard used by quality-conscious printers and packaging converters, and offers services that include custom sheeting, slitting and cutting. Clearwater Paper's employees build shareholder value by developing strong customer relationships through quality and service.
FINANCIAL STATEMENT PREPARATION ANDBASIS OF PRESENTATION
The accompanying Consolidated Balance Sheets at September 30, 2019 and December 31, 2018, and the related Consolidated Statements of Operations, Comprehensive Income and Stockholders' Equity for the three and nine months ended September 30, 2019 and 2018, and Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018,unaudited consolidated financial statements have been prepared in conformityaccordance with accounting principles generally acceptedthe instructions to Form 10-Q and, in the United Statesopinion of America, or GAAP. We believe thatmanagement, include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation ofto present fairly, in all material respects, the consolidated financial position, results of operations, stockholders' equity and cash flows for us and our subsidiaries for the interim periods presented have been included. The resultspresented. Results of operations for any interim periodperiods are not necessarily indicative of the results of operations to be expected for the fullan entire year.
This Quarterly Report on Form 10-Q These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with2019. All dollar amounts are shown in millions, except per share.
NOTE 2 RECENTLY ADOPTED AND NEW ACCOUNTING STANDARDS
Recently Adopted Accounting Standards
In March 2020, the Securities and Exchange Commission, or SEC on March 18, 2019. Certain 2018 amounts have been reclassified to conform to the 2019 presentation.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptionsissued a final rule that affect the reported amounts of assets and liabilities,amended the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods. Significant areas that may require the use of estimates and measurement of uncertainty include determination of net realizable value for deferred tax assets, uncertain income tax positions, assessment of impairment of long-lived assets and goodwill, assessment of environmental matters, equity-based compensation and pension and postretirement obligation assumptions. Actual results could differ from those estimates and assumptions.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
We consider all highly liquid instruments with maturities of three months or less at date of purchase to be cash equivalents. Cash that is held by a third party and has restrictions on its availability to us is classified as restricted cash. The following table provides details of cash, cash equivalents and restricted cash reported on the Consolidated Balance Sheets and Consolidatedrequirements under SEC Regulation S-X Rule 3-10, Financial Statements of Cash Flows.
|
| | | | | | | | | | | |
(In thousands) | September 30, 2019 | | December 31, 2018 | | September 30, 2018 |
Cash and cash equivalents | $ | 7,815 |
| | $ | 22,484 |
| | $ | 76,150 |
|
Restricted cash | 1,440 |
| | — |
| | 1,080 |
|
Restricted cash included in other assets, net | 1,040 |
| | 2,463 |
| | 2,457 |
|
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows | $ | 10,295 |
| | $ | 24,947 |
| | $ | 79,687 |
|
PROPERTY, PLANT AND EQUIPMENT
Property, plantGuarantors and equipment are stated at cost, including any interest costs capitalized, less accumulated depreciation. DepreciationIssuers of buildings, equipment and other depreciable assetsGuaranteed Securities Registered or Being Registered. The final rule is determined using the straight-line method. Assets we acquire through business combinations have estimated lives that are typically shorter than the assets we construct or buy new.
For the nine months ended September 30, 2019, we capitalized $4.9 million of interest expense associated with the construction of a paper machine at our Shelby, North Carolina consumer products facility and $0.8 million of interest expense associated with the construction of a continuous pulp digester at our Lewiston, Idaho pulp and paperboard facility. For the nine months ended September 30, 2018, we capitalized $5.1 million of interest expense associated with the Shelby paper machine and $0.9 million of interest expense associated with the continuous pulp digester project.
We review the carrying amount of long-lived assets with definite lives that are held-for-use and evaluate them for recoverability whenever events or changes in circumstances indicate that we may be unable to recover the carrying amount of the assets.
LEASES
All significant lease arrangements are generally recognized at lease commencement. Operating lease right-of-use, or ROU, assets and lease liabilities are recognized at commencement. An ROU asset and corresponding lease liability are not recorded for leases with an initial term of 12 months or less (short-term leases), and we recognize lease expense for these leases as incurred over the lease term.
ROU assets represent our right to use an underlying asset during the reasonably certain lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease ROU assets and liabilities are recognized at commencement date based on the present valuepremise that the primary source of lease payments overinformation that investors in guaranteed debt rely on is the lease term. We primarily use our incremental borrowing rate, whichconsolidated financial statements of the parent company. The final rule replaces the previous requirement to provide separate condensed consolidating financial information of the guarantors. The final rule is updated quarterly, basedeffective for filings on the information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments related to initial direct costor after January 4, 2021, and prepayments and excludes lease incentives. Refer to Note 4, "Leases," for additional information.
REVENUE RECOGNITION
We enter into contracts that can include various combinations of tissue and paperboard products, which are generally distinct and accounted for as separate performance obligations.
Revenueearly adoption is recognized at a point in time upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Transfer of control typically occurs when the title and risk of loss passes to the customer. Shipping terms generally indicate when title and the risk of loss have passed. Revenue is recognized at shipment for sales when shipping terms are free on board, or FOB, shipping point. For sales where shipping terms are FOB destination, revenue is recognized when the goods are received by the customer. Revenue from both domestic and foreign sales of our products can involve shipping terms of either FOB shipping point or FOB destination or other shipping terms, depending upon the sales agreement with the customer.permitted. We have elected to treat shipping and handling costs for FOB shipping point contracts as a fulfillment cost, not as a separate performance obligation. No revenue is recognized over time. We typically expense incremental direct costs of obtaining a contract (sales commissions) when incurred becauseearly adopt this rule which resulted in the amortization period is generally 12 months or less. We have also elected to use the practical expedient to not disclose unsatisfied or partially satisfied performance obligations as we have no unsatisfied contracts where the remaining portions are expected to be satisfied in a period greater than one year.
We provide for trade promotions, customer cash discounts, customer returns and other deductions as reductions to net sales, which are accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available. Revenue net of returns and credits is only recognized to the extent that it is probable that a significant reversal of any incremental revenue will not occur. Significant judgment is required to determine the most probable amount of variable consideration to apply as a reduction to net sales. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.
Payment terms and conditions vary by contract. Terms generally include a requirement of payment within 30 days, and do not include a significant financing component.
Trade accounts receivable are reported within Receivables, net, and are stated at the amount we expect to collect. Trade accounts receivable were $156.3 million and $142.8 million at September 30, 2019 and December 31, 2018, respectively. Trade accounts receivable do not bear interest. The allowance for doubtful accounts is our best estimateremoval of the losses we expect will result from the inability of our customers to make required payments. We generally determine the allowance based on a combination of actual historical write-off experience and an analysis of specific customer accounts. As of September 30, 2019 and December 31, 2018, we had allowances for doubtful accounts of $1.4 million and $1.5 million, respectively.supplemental guarantor financial information footnote.
Refer to Note 14, "Segment Information," for further information, including the disaggregation of revenue by segment, primary geographical market, and major product type.
ACCOUNTS RECEIVABLE ARRANGEMENTS
We had an Account Purchase Agreement ("APA") to sell, on a revolving and discounted basis, certain trade accounts receivable balances to an unrelated third-party financial institution. Under the APA, the maximum amount of receivables that could be sold and outstanding was $30.0 million. We retained no interest in the receivables sold under the APA, however, we did have servicing responsibilities for the sold receivables, such as collection. The fair value of the servicing arrangement was not material to our financial statements.
As of September 30, 2019, all amounts collected from customers under the APA had been remitted to the third-party financial institution. At December 31, 2018, we had collected $4.9 million of cash from customers that had not yet been remitted to the third-party financial institution.
During the third quarter of 2019, we entered into an uncommitted supply-chain financing program with a global financial institution under which trade accounts receivable with a large customer may be acquired, without recourse, by the financial institution at a discounted rate. Available capacity under this program is dependent on the level of our trade accounts receivable with this customer and the financial institution’s willingness to purchase such receivables. We have no servicing responsibilities under this agreement.
Receivables sold are de-recognized from our Consolidated Balance Sheet. As of September 30, 2019, we had no sold receivables outstanding being serviced by us. For the nine months ended September 30, 2019, we sold $159.3 million of receivables. The proceeds from these sales of receivables are included within the "Changes in working capital, net" line within operating activities of our Consolidated Statements of Cash Flows. For the nine months ended September 30, 2019, factoring expense on the sale of receivables was $0.7 million, which is included in the "Interest expense, net" line in the Consolidated Statement of Operations. For the nine months ended September 30, 2018, factoring expense was $0.1 million.
ACCOUNTS PAYABLE ARRANGEMENTS
We have entered into supply-chain financing programs with financial intermediaries, which provide certain of our vendors the option to be paid by the financial intermediaries on our trade payables earlier than the due date on the applicable invoice. When a vendor receives an early payment from a financial intermediary on a trade payable for which it invoiced us, we pay that financial intermediary the face amount of the invoice on the regularly scheduled due date. If we reimburse these vendors for certain fees they may incur in connection with receiving an early payment on an invoice, the amount of such invoice that would have otherwise been included in our trade payables is included in our short-term debt. As of December 31, 2018, $20.8 million was included in “Short-term debt” on our Consolidated Balance Sheets related to invoices for which we had reimbursed our vendors’ fees. There were no such amounts as of September 30, 2019.
DERIVATIVES
We had no activity during the three and nine months ended September 30, 2019 and 2018 that required hedge or derivative accounting treatment. To help mitigate our exposure to market risk for changes in utility commodity pricing, we use firm price contracts to supply a portion of the natural gas requirements for our manufacturing facilities, which were reported through "Cost of sales" on our Consolidated Statements of Operations. As of September 30, 2019, these contracts covered approximately 47% of our expected average monthly natural gas requirements for the remainder of 2019, and a lesser amount for 2020. These contracts qualify for treatment as “normal purchases or normal sales” under authoritative guidance and thus required no mark-to-market adjustment.
NOTE 2 Recently Adopted and New Accounting Standards
RECENTLY ADOPTED ACCOUNTING STANDARDS
On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842), and subsequent ASUs related to Topic 842. The new guidance increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The adoption of Topic 842 had a material impact on our Consolidated Balance Sheet due to the recognition of right-of-use assets of approximately $83 million and lease liabilities of approximately $88 million as of January 1, 2019. The difference between these lease assets and lease liabilities represents deferred rent balances that were reclassified on the balance sheet. The adoption of Topic 842 did not have a material impact on our Consolidated Statement of Operations or our Consolidated Statement of Cash Flows. We will continue to report periods prior to January 1, 2019 under prior guidance as outlined in Accounting Standards Codification Topic 840, "Leases". Refer to Note 4, "Leases", for further discussion.
NEW ACCOUNTING STANDARDS
In August 2018,March 2020, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU requires capitalization ofprovides practical expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain implementation costs incurred in a cloud computing arrangement that is a service contract.criteria are met. This ASU is effective for fiscal years beginning after December 15, 2019 and for interim periods therein, with early adoption permitted. We do not believe this ASU will have a material impact onapplicable to our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), which modifies the disclosure requirements for defined benefit and other postretirement plans. This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties and the effects of interest rate basis point changes on assumed health care costs, with other disclosures being added to address significant gains and losses related to changes in benefit obligations. This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations.contracts that reference LIBOR. The amendments inmay be applied through December 31, 2022. We will apply this ASU are effective for fiscal years ending after December 15, 2020, with early adoption permittedguidance to transactions and adoption on a retrospective basis for all periods presented required. We are currently assessing the timingmodifications of our adoption of this ASU and do not believe it will have a material impact on our consolidated financial statements beyond updating footnote disclosures.
these arrangements. We reviewed all other new accounting pronouncements issued in the period and concluded that they are not applicable or not material to our business.
NOTE 3 Inventories & Property, Plant and EquipmentFAIR VALUE MEASUREMENTS
Inventories at the balance sheet dates consist of:
|
| | | | | | | |
(In thousands) | September 30, 2019 | | December 31, 2018 |
Pulp, paperboard and tissue products | $ | 166,063 |
| | $ | 159,499 |
|
Materials and supplies | 93,965 |
| | 86,892 |
|
Logs, pulpwood, chips and sawdust | 22,367 |
| | 19,853 |
|
| $ | 282,395 |
| | $ | 266,244 |
|
Property, Plant and Equipment at the balance sheet dates consist of:
|
| | | | | | | | |
(In thousands) | | September 30, 2019 | | December 31, 2018 |
Machinery and equipment | | $ | 2,341,596 |
| | $ | 2,161,306 |
|
Buildings and improvements | | 479,359 |
| | 381,071 |
|
Land improvements | | 95,914 |
| | 84,525 |
|
Office and other equipment | | 52,491 |
| | 49,980 |
|
Land | | 10,756 |
| | 10,756 |
|
Construction in progress | | 58,348 |
| | 273,291 |
|
| | $ | 3,038,464 |
| | $ | 2,960,929 |
|
Less accumulated depreciation and amortization | | (1,764,990 | ) | | (1,691,658 | ) |
| | $ | 1,273,474 |
| | $ | 1,269,271 |
|
NOTE 4 Leases
Our adoption of ASU 2016-02, Leases (Topic 842), and subsequent ASUs related to Topic 842, requires us to recognize substantially all leasesCarrying amounts reported on the balance sheet asfor cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. We estimated the Senior Notes due 2023 and 2025 to have a ROU assettotal fair market value of $576.6 million and a corresponding lease liability. The new guidance also requires additional disclosures as detailed below.$574.0 million at June 30, 2020 and December 31, 2019 based upon market quotations. We adopted this standard onestimated the effective datefair value of January 1, 2019the Term Loan to be $236.9 million and used this effective date as the date of initial application. Under this application method, we were not required to restate prior period financial information or provide Topic 842 disclosures for prior periods. We elected the ‘package of practical expedients’ which permitted us to not reassess our prior conclusions related to lease identification, lease classification$300.0 million at June 30, 2020 and initial direct costs, as well as the practical expedient to not reassess certain land easements. We did not elect the use of hindsight. We combine ROU asset amortization and the change in the lease liability in the same line item on the Consolidated Statements of Cash Flows.December 31, 2019.
NOTE 4 RECEIVABLES
Receivables consist of:
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Trade accounts receivable | $ | 168.8 | | | $ | 157.0 | |
Allowance for current expected credit losses | (1.7) | | | (1.5) | |
Taxes receivable | 23.4 | | | 0.3 | |
Interest receivable | — | | | 1.0 | |
Other | 1.4 | | | 2.6 | |
| $ | 191.9 | | | $ | 159.4 | |
NOTE 5 INVENTORIES
Inventories consist of:
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Logs, pulpwood, chips and sawdust | $ | 11.8 | | | $ | 19.4 | |
Materials and supplies | 92.6 | | | 93.1 | |
Pulp, paperboard and tissue products | 130.9 | | | 168.9 | |
| $ | 235.3 | | | $ | 281.4 | |
NOTE 6 LEASES
We have operating leases for manufacturing, office, warehouse and distribution space, paperboard sheeting and chipping facilities, equipment and vehicles. We also have finance leases related to our North Carolina converting and manufacturing facilities, as well as for certain office and other equipment. We determine if a contract is a lease at the inception of the arrangement. We review all options to extend, terminate or purchase the ROU assets, and when reasonably certain to exercise, we include the option in the determination of the lease term and lease liability. Our leases have remaining lease terms from less than one year to twelveeleven years years, and some of our leases include one or more options to renew.
Lease ROU assets and liabilities are recognized at the commencement date of the lease. Lease ROU assets and liabilities are measured based on the present value of lease payments over the lease term and are reduced by any lease incentives received. When readily determinable, we use the implicit rate in determining the present value of lease payments. When leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date, including the lease term.
Short-term leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheet. Lease expense for short-term leases is recognized on a straight-line basis over the lease term. As of September 30, 2019, our short-term leases were not material. Certain of our leases contain lease and non-lease components that are treated as a single lease component. Our variable lease costs consist primarily of taxes, insurance and common area maintenance. For the three and nine months ended September 30, 2019, sublease income was immaterial to the financial statements.
The tables below present financial information associated with our leases. This information is only presented as of, and for the three and six months ended, September 30, 2019. As noted above, we adopted Topic 842 using a transition method that does not require application to periods prior to adoption.
| | | Three Months Ended | | Nine Months Ended | |
(In thousands) | September 30, 2019 | |
Lease expense | | Lease expense | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | | | 2020 | | 2019 | | 2020 | | 2019 |
Operating lease costs | $ | 4,062 |
| | $ | 11,071 |
| Operating lease costs | $ | 3.9 | | | $ | 3.5 | | | $ | 7.8 | | | $ | 7.0 | |
| | | | |
Finance lease costs: | | | | Finance lease costs: | |
Amortization of right-of-use assets | 395 |
| | 1,273 |
| Amortization of right-of-use assets | 0.4 | | | 0.5 | | | 0.9 | | | 0.9 | |
Interest on lease liabilities | 466 |
| | 1,405 |
| Interest on lease liabilities | 0.4 | | | 0.5 | | | 0.9 | | | 0.9 | |
Total finance lease costs | 861 |
| | 2,678 |
| Total finance lease costs | 0.9 | | | 0.9 | | | 1.8 | | | 1.8 | |
| | | | |
Variable lease costs | 290 |
| | 846 |
| Variable lease costs | 0.4 | | | 0.3 | | | 0.8 | | | 0.6 | |
| | | | |
Total lease costs | $ | 5,213 |
| | $ | 14,595 |
| Total lease costs | $ | 5.2 | | | $ | 4.8 | | | $ | 10.4 | | | $ | 9.4 | |
| | | | | | | | | | | |
Supplemental cash flow information | Six Months Ended June 30, | | |
| 2020 | | 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 8.8 | | | $ | 8.1 | |
Operating cash flows from finance leases | 0.9 | | | 0.9 | |
Financing cash flows from finance leases | 0.7 | | | 0.6 | |
| | | |
Non-cash amounts for lease liabilities arising from obtaining right-of-use assets: | | | |
Operating leases | $ | 1.7 | | | $ | 0.9 | |
Finance leases | 0.3 | | | 0.5 | |
| | | | | | | | | | | | | | |
Supplemental balance sheet information | | | | |
| Classification | June 30, 2020 | | December 31, 2019 |
Lease ROU Assets | | | | |
Operating lease assets | Operating lease right-of-use assets | $ | 68.2 | | | $ | 73.1 | |
Finance lease assets | Property, plant and equipment, net | 26.7 | | | 26.5 | |
Accumulated depreciation | | (11.8) | | | (11.1) | |
Total lease ROU assets | | $ | 83.1 | | | $ | 88.5 | |
| | | | |
Lease Liabilities | | | | |
Current operating lease liabilities | Other accrued liabilities | $ | 14.5 | | | $ | 13.9 | |
Current finance lease liabilities | Short-term debt | 1.6 | | | 1.4 | |
Total current lease liabilities | | 16.1 | | | 15.3 | |
| | | | |
Non-current operating lease liabilities | Long-term operating lease liabilities | 60.1 | | | 65.6 | |
Non-current finance lease liabilities | Long-term debt | 20.0 | | | 20.6 | |
Total non-current lease liabilities | | 80.1 | | | 86.2 | |
| | | | |
Total operating lease liabilities | | 74.6 | | | 79.5 | |
Total finance lease liabilities | | 21.6 | | | 22.0 | |
Total lease liabilities | | $ | 96.2 | | | $ | 101.5 | |
SUPPLEMENTAL CASH FLOW INFORMATION
|
| | | |
| Nine Months Ended |
(In thousands) | September 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 12,635 |
|
Operating cash flows from finance leases | 1,405 |
|
Financing cash flows from finance leases | 1,023 |
|
| |
Non-cash amounts for lease liabilities arising from obtaining right-of-use assets: | |
Operating leases | $ | 973 |
|
Finance leases | 493 |
|
SUPPLEMENTAL BALANCE SHEET INFORMATION
|
| | | | |
(In thousands) | Classification | September 30, 2019 |
Lease ROU Assets | | |
Operating lease assets | Operating lease right-of-use assets | $ | 74,503 |
|
Finance lease assets | Property, plant and equipment, net | 15,837 |
|
Total lease ROU assets | | $ | 90,340 |
|
| | |
Lease Liabilities | | |
Current operating lease liabilities | Accounts payable and accrued liabilities | $ | 13,200 |
|
Current finance lease liabilities | Accounts payable and accrued liabilities | 1,398 |
|
Total current lease liabilities | | 14,598 |
|
| | |
Non-current operating lease liabilities | Operating lease liabilities | 66,571 |
|
Non-current finance lease liabilities | Other long-term obligations | 20,929 |
|
Total non-current lease liabilities | | 87,500 |
|
| |
|
|
Total operating lease liabilities | | 79,771 |
|
Total finance lease liabilities | | 22,327 |
|
Total lease liabilities | | $ | 102,098 |
|
LEASE TERM AND DISCOUNT RATE
|
| | |
| September 30, 2019 |
Weighted average remaining lease term (years) | |
Operating leases | 6.9 |
|
Finance leases | 10.9 |
|
| |
Weighted average discount rate | |
Operating leases | 4.9 | % |
Finance leases | 8.3 | % |
MATURITY OF LEASE LIABILITIES
As of September 30, 2019, our future maturities of lease liabilities were as follows:
|
| | | | | | | |
(In thousands) | Operating | | Finance |
2019 | $ | 3,964 |
| | $ | 774 |
|
2020 | 16,727 |
| | 3,175 |
|
2021 | 16,019 |
| | 3,220 |
|
2022 | 15,081 |
| | 3,128 |
|
2023 | 9,413 |
| | 2,897 |
|
Thereafter | 33,661 |
| | 21,468 |
|
Total lease payments | $ | 94,865 |
| | $ | 34,662 |
|
Less interest portion | (15,094 | ) | | (12,335 | ) |
Total | $ | 79,771 |
| | $ | 22,327 |
|
As of December 31, 2018, as previously disclosed in our 2018 Annual Report on Form 10-K, and under the previous lease accounting standard, we had future minimum lease payments as follows:
|
| | | | | | | |
(In thousands) | Operating | | Capital |
2019 | $ | 12,038 |
| | $ | 3,093 |
|
2020 | 11,421 |
| | 3,062 |
|
2021 | 10,424 |
| | 3,112 |
|
2022 | 9,489 |
| | 3,019 |
|
2023 | 7,163 |
| | 2,789 |
|
Thereafter | 24,276 |
| | 21,710 |
|
Total future minimum lease payments | $ | 74,811 |
| | $ | 36,785 |
|
Less interest portion | | | (13,887 | ) |
Present value of future minimum lease payments | | | $ | 22,898 |
|
NOTE 5 Intangible Assets
Intangible assets at the balance sheet dates comprise the following:
|
| | | | | | | | | | | | | |
| September 30, 2019 |
(Dollars in thousands, lives in years) | Weighted Average Useful Life | | Historical Cost | | Accumulated Amortization | | Net Balance |
Customer relationships | 9.4 | | $ | 56,453 |
| | $ | (39,995 | ) | | $ | 16,458 |
|
Trade names and trademarks | 7.4 | | 6,786 |
| | (4,800 | ) | | 1,986 |
|
Other intangibles | 6.0 | | 572 |
| | (291 | ) | | 281 |
|
| | | $ | 63,811 |
| | $ | (45,086 | ) | | $ | 18,725 |
|
| | | | | | | |
| December 31, 2018 |
(Dollars in thousands, lives in years) | Weighted Average Useful Life | | Historical Cost | | Accumulated Amortization | | Net Balance |
Customer relationships | 9.4 | | $ | 56,453 |
| | $ | (35,469 | ) | | $ | 20,984 |
|
Trade names and trademarks | 7.4 | | 6,786 |
| | (4,029 | ) | | 2,757 |
|
Other intangibles | 6.0 | | 572 |
| | (233 | ) | | 339 |
|
| | | $ | 63,811 |
| | $ | (39,731 | ) | | $ | 24,080 |
|
As of September 30, 2019, estimated future annual amortization is as follows:
|
| | | | |
(In thousands) | | For the Years Ending December 31, |
2019 | | $ | 1,785 |
|
2020 | | 3,246 |
|
2021 | | 2,917 |
|
2022 | | 2,217 |
|
2023 | | 2,140 |
|
Thereafter | | 6,420 |
|
Total | | $ | 18,725 |
|
For the three months ended September 30, 2019 and 2018, intangible assets amortization expense was $1.8 million and $1.9 million, respectively. For the nine months ended September 30, 2019 and 2018, intangible assets amortization expense was $5.4 million and $5.8 million, respectively.
NOTE 6 Income Taxes
Consistent with authoritative guidance, our estimated annual effective tax rate is used to allocate expected annual income tax expense to interim periods. The rate is the ratio of estimated annual income tax expense to estimated pre-tax ordinary income, and excludes "discrete items," which are significant, unusual or infrequent items reported separately net of their related tax effect. The estimated annual effective tax rate is applied to the current interim period's ordinary income to determine the income tax expense allocated to the interim period. The income tax effects of discrete items are then determined separately and recognized in the interim period in which the income or expense items arise.
Our estimated annual effective tax rate for the third quarter of 2019 is approximately 34%, compared with approximately 32% for the comparable interim period in 2018. The annual effective tax rate in 2019 is subject to variation due to several factors, including variability in pre-tax income (or loss), forecasted pre-tax income (or loss), changes in business practices, changes in tax credits and tax law developments. The rate in 2018 reflected the Federal rate reduction enacted by the Tax Cuts and Jobs Act offset by an increase in the rate due to basis differences associated with the goodwill written-off as part of the sale of our Ladysmith facility.
NOTE 7 Accounts Payable and Accrued LiabilitiesDEBT
Accounts payable and accrued liabilities at the balance sheet dates consistLong-term debt consists of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2020 | | | | | | December 31, 2019 | | | | |
| Interest Rate at June 30, 2020 | | Principal | | Unamortized Debt Costs | | Total | | Principal | | Unamortized Debt Costs | | Total |
Term loan maturing 2026, variable interest rate | 4.3% | | $ | 239.3 | | | $ | (3.8) | | | $ | 235.4 | | | $ | 300.0 | | | $ | (5.1) | | | $ | 294.9 | |
2013 Notes, maturing 2023, fixed interest rate | 4.5% | | 275.0 | | | (1.2) | | | 273.8 | | | 275.0 | | | (1.5) | | | 273.5 | |
2014 Notes, maturing 2025, fixed interest rate | 5.4% | | 300.0 | | | (1.3) | | | 298.7 | | | 300.0 | | | (1.5) | | | 298.5 | |
ABL Credit Agreement, variable interest rate | 3.3% | | — | | | — | | | — | | | 13.5 | | | — | | | 13.5 | |
Finance leases | | | 21.6 | | | — | | | 21.6 | | | 22.0 | | | — | | | 22.0 | |
Total debt | | | 835.9 | | | (6.4) | | | 829.5 | | | 910.5 | | | (8.1) | | | 902.4 | |
Less: current portion | | | (1.6) | | | — | | | (1.6) | | | (17.9) | | | — | | | (17.9) | |
Net long-term portion | | | $ | 834.2 | | | $ | (6.4) | | | $ | 827.9 | | | $ | 892.6 | | | $ | (8.1) | | | $ | 884.5 | |
|
| | | | | | | |
(In thousands) | September 30, 2019 | | December 31, 2018 |
Trade accounts payable | $ | 141,458 |
| | $ | 228,059 |
|
Accrued wages, salaries and employee benefits | 37,395 |
| | 41,426 |
|
Lease liabilities | 14,598 |
| | — |
|
Accrued taxes other than income taxes payable | 7,037 |
| | 6,243 |
|
Accrued utilities | 6,707 |
| | 6,934 |
|
Accrued discounts and allowances | 6,502 |
| | 8,143 |
|
Accrued interest | 5,322 |
| | 14,672 |
|
Accrued account purchase agreement liabilities | — |
| | 4,885 |
|
Other | 10,544 |
| | 10,670 |
|
| $ | 229,563 |
| | $ | 321,032 |
|
NOTE 8 Debt
CREDIT AGREEMENTS
On July 26, 2019, we entered into credit agreements with several lenders and JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, which included (a) a $300 million Term Loan Credit Agreement (the “Term Loan Credit Agreement”) and (b) a $250 million asset based lending, or ABL, Credit Agreement (the "Term Loan Credit Agreement" and "ABL Credit Agreement" collectively the "Credit Agreements"). At closing, the Term Loan Credit Agreement was fully advanced and $58.0 million was
drawn under the ABL Credit Agreement, proceeds of which were used to refinance and terminate our: (a) $200 million credit agreement dated October 31, 2016, as amended, with Wells Fargo Bank, National Association, ("Wells Fargo") as administrative agent, and the lenders party thereto, of which $135.0 million was outstanding and b) the $200 million credit agreement dated October 31, 2016, as amended, with Northwest Farm Credit Services, PCA, ("Farm Credit") as administrative agent, and the lenders party thereto, of which $200.0 million was outstanding (the "Prior Credit Agreements"); pay fees and expenses in connection with the Credit Agreements; and for working capital purposes.
In conjunction with the termination of the Prior Credit Agreements, of which the $200 million credit agreement with Wells Fargo was treated as a modification under Topic 470, "Debt", debt extinguishment costs, consisting of $1.7 million in breakage fees and $1.1 million in unamortized debt issuance costs, were written-off as debt retirement costs during the three months ended SeptemberJune 30, 2019. Unamortized debt issuance costs of $1.6 million, related to the debt modification, are being amortized over the remaining term of the ABL Credit Agreement. We incurred debt issuance costs of $7.1 million, which are allocated and amortized over the respective terms of the Credit Agreements.
As of September 30, 2019, there was $300.0 million outstanding under our Term Loan and $58.0 million outstanding under our ABL Credit Agreement.
The borrowings outstanding under the Prior Credit Agreements as of December 31, 2018 consisted of a combination of short-term floating base rate and LIBOR rate loans, which were classified as current liabilities in our Consolidated Balance Sheet, and $100.0 million of borrowings with a three-year fixed interest rate that was included in “Long-term debt” in our Consolidated Balance Sheet.
The Credit Agreements contain certain customary representations, warranties, and affirmative and negative covenants of us and our subsidiaries that restrict us and our subsidiaries’ ability to take certain actions, including, incurrence of indebtedness, creation of liens, mergers or consolidations, dispositions of assets, repurchase or redemption of capital stock and certain types of indebtedness, making certain investments, entering into certain transactions with affiliates or changing the nature of our business. At September 30, 2019,2020, we were in compliance with covenants in our various credit agreements. The maturities of our Term loan and our ABL Credit Agreement are subject to the refinancing of our 2013 Notes. If the 2013 Notes are not refinanced 91 days before their maturity, the ABL Credit Agreements.Agreement and Term Loan Credit Agreement will become due.
Term Loan Credit Agreement
The Term Loan Credit Agreement matures on July 26, 2026. We are required to repay the aggregate outstanding principal amount in quarterly installments on the last day of each March, June, September and December, commencing March 31, 2020, and ending with the last such day to occur prior to the maturity date, in an aggregate amount for each such date equal to the aggregate principal amount of the initial loan amount (as such amount may be adjusted pursuant to the prepayment provisions of the Term Loan Credit Agreement) multiplied by 0.25%. In the second quarter, we made a voluntary prepayment of $60 million. This prepayment was applied against our quarterly required installments through 2026.
In addition, we must make mandatory prepayments of principal under the Term Loan Credit Agreement upon the occurrence of certain specified events, including certain asset sales (subject to customary reinvestment rights), debt issuances not permitted under the Term Loan Credit Agreement, and based on a percentage, which may vary from 50%0% to 0%50% depending on our secured leverage ratio, of annual excess cash flowsExcess Cash Flows in excess of certain threshold amounts, less any voluntary prepayments under the Term Loan Credit Agreement. Any remaining outstanding principal balance under the Term Loan Credit Agreement is repayable on the maturity date. Amounts repaid or prepaid by us with respect to the loans under the Term Loan Credit Agreement cannot be reborrowed. We may, at our option, prepay any borrowings under the Term Loan Credit Agreement, in whole or in part, at any time and from time to time without premium or penalty (except in certain circumstances).
We may add one or more incremental term loan facilities to the Term Loan Credit Agreement, subject to obtaining commitments from any participating lenders and certain other conditions, in an amount not to exceed (1) $100 million, plus (2) the amount of all voluntary prepayments of the Term Loan Credit Agreement (other than prepayments funded with long-term indebtedness), plus (3) an additional amount, so long as after giving effect to the incurrence of such additional amount, our pro forma first lien secured leverage ratio would not exceed 2.002.00x to 1.00.1.00x. At June 30, 2020 our pro forma first lien secured ratio was 0.97x. Under the Term Loan Credit Agreement, loans generally may bear interest based on LIBOR or an annual base rate, as applicable, plus, in each case, an applicable margin, whenmargin. When our leverage ratio is (i) less than or equal to 4.25 to 1.00, ofthe margin is 3.00% per annum in the case of LIBOR loans and of 2.00% per annum in the case of annual base rate loans and (ii) greater than 4.25 to 1.00, ofthe margin is 3.25% per annum in the case of LIBOR loans and of 2.25% per annum in the case of annual base rate loans. At SeptemberJune 30, 2019,2020, our leverage ratio was 3.59x and therefore our applicable margin on LIBOR loans was 3.25%3.00%.
ABL Credit Agreement
The ABL Credit Agreement matures on July 26, 2024 and includes a $250 million revolving loan commitment, subject to borrowing base limitations based on a percentage of applicable eligible receivables and eligible inventory. UpBased upon our Consolidated Balance Sheet as of June 30, 2020, our borrowings supported up to $15$220.6 million availability under the line of the ABL Credit Agreement is available for the issuance ofwhich we utilized $4.4 million, no borrowings outstanding and $4.4 million under letters of credit, of which $5.5 million was utilized at September 30, 2019.credit. We may, at our option, prepay any borrowings under the ABL Credit Agreement, in whole or in part, at any time and from time to time without premium or penalty (except in certain circumstances). Borrowings under the ABL Credit Agreement are also subject to mandatory prepayment in certain circumstances, including in the event that borrowings exceed applicable borrowing base limits. We may also increase commitments under the ABL Credit Agreement in an aggregate principal amount of up to $100 million, subject to obtaining commitments from any participating lenders and certain other conditions.
Under the ABL Credit Agreement, loans may bear interest based on LIBOR or an annual base rate, as applicable, plus, in each case, an applicable margin that is based on availability (as determined under the ABL Credit Agreement) that may vary from 1.25% per annum to 1.75% per annum in the case of LIBOR loans and 0.25% per annum to 0.75% per annum in the case of annual base rate loans. In addition, a commitment fee based on unused availability is also payable which may vary from 0.25% per annum to 0.375% per annum. From July 26, 2019 through September 30, 2019, our weighted average interest rate was 3.8%. At September 30, 2019, we were able to borrow with an applicable margin of 1.25% on LIBOR loans and our commitment fee rate was 0.375%.
The ABL Credit Agreement also contains a financial covenant, which requires us to maintain a consolidated fixed charge coverage ratio of not less than 1.10 to 1.00, provided that the financial covenant under the ABL Credit Agreement is only applicable when unused availability falls below $25 million. As of June 30, 2020, our fixed charge coverage ratio was approximately 1.50x which included the impact of our voluntary debt prepayments. Our ability to utilize our ABL Credit Agreement could be limited in the future by our bond indentures which have limitations on liens.
NOTE 8 INCOME TAXES
For interim periods, accounting standards require that income tax expense be determined by applying the estimated annual effective income tax rate to year-to-date results, unless this method does not result in a certain threshold.reliable estimate of year-to-date income tax expense. Each period, the income tax accrual is adjusted to the latest estimate and the difference from the previously accrued year-to-date balance is adjusted to the current quarter.
For the first six months of 2020, our income tax expense reflects a rate of 11% as compared to rate of 54% in the comparable period of 2019. For the first six months of 2020, the primary differences between the U.S. federal income tax rate of 21% and the effective rate of 11% relates to the effect of tax credits and a $7.1 million benefit from the provisions of the Coronavirus Aid, Relief, and Economic Security Act. For the first six months of 2019, the primary differences between the U.S. federal income tax rate of 21% and the effective rate of 54% relates to the effect of tax credits and non-deductible compensation expense.
NOTE 9 Other Long-Term ObligationsOTHER OPERATING CHARGES
Other long-term obligations atThe major components of “Other operating charges, net” in the balance sheet dates consist of:Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 are reflected in the table below and described in the paragraphs following the table:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Reorganization expenses | $ | 0.6 | | | $ | 0.1 | | | $ | 3.4 | | | $ | 0.1 | |
Union settlement | — | | | — | | | 6.6 | | | — | |
Gain on divested assets | — | | | — | | | (1.4) | | | — | |
Directors' equity-based compensation expense (benefit) | 1.9 | | | — | | | 2.1 | | | (0.3) | |
Other | 0.5 | | | 0.3 | | | 0.8 | | | 0.4 | |
| $ | 3.0 | | | $ | 0.4 | | | $ | 11.5 | | | $ | 0.1 | |
2020
During the second quarter of 2020, we recorded $3.0 million of expenses in "Other operating charges, net." The components of the expenses include:
•expenses of $0.6 million related to reorganization expenses (primarily related to corporate expenses), and
•expense of $1.9 million relating to directors' equity based compensation.
During the first quarter of 2020, we recorded $8.5 million of expenses in "Other operating charges, net." The components of the expenses include:
•expenses of $2.8 million related to reorganization expenses (primarily related to corporate expenses),
|
| | | | | | | |
(In thousands) | September 30, 2019 | | December 31, 2018 |
Finance lease obligations, net of current portion | $ | 20,929 |
| | $ | 21,589 |
|
Deferred compensation | 4,471 |
| | 2,585 |
|
Deferred proceeds | 3,955 |
| | 4,511 |
|
Other | 4,635 |
| | 10,292 |
|
| $ | 33,990 |
| | $ | 38,977 |
|
•expenses of $6.6 million associated with union settlement retroactive wage payments ($2.6 million associated with Consumer Products and $4.0 million associated with Paperboard segments),•gain of $1.4 million associated with the Ladysmith Consumer Products facility sale escrow release, and •expense of $0.2 million relating to directors' equity based compensation.
NOTE 10 PensionNON-OPERATING INCOME (EXPENSE)
The components of “Non-operating expense” in the Consolidated Statements of Operations for the three and Other Postretirement Employee Benefit Planssix months ended June 30, 2020 and 2019 are reflected in the table below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Interest expense | $ | (11.5) | | | $ | (12.7) | | | $ | (23.7) | | | $ | (24.6) | |
Capitalized interest | — | | | 2.0 | | | — | | | 5.4 |
Amortization of debt issuance costs | (0.5) | | | (0.4) | | | (1.1) | | | (0.9) | |
Interest income | — | | | 0.3 | | | — | | | 0.7 |
Interest expense, net | (12.0) | | | (10.9) | | | (24.9) | | | (19.4) | |
| | | | | | | |
Debt retirement costs | (1.0) | | | — | | | (1.0) | | | — | |
Non-operating pension and other postretirement employee benefits income (expense) | (2.0) | | | (1.5) | | | (3.8) | | | (2.8) | |
Total non-operating expense | $ | (14.9) | | | $ | (12.4) | | | $ | (29.6) | | | $ | (22.2) | |
NOTE 11 PENSION AND POSTRETIREMENT EMPLOYEE BENEFIT PLANS
The following table details the components of net periodic cost of our company-sponsored pension and other postretirement employee benefit or OPEB, plans for the periods presented:
| | | | | | | | | | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| Three Months Ended September 30, | |
(In thousands) | 2019 | | 2018 | | 2019 | | 2018 | |
| Pension Benefit Plans | | Other Postretirement Employee Benefit Plans | |
Pension Benefit Plans | | Pension Benefit Plans | 2020 | | 2019 | | 2020 | | 2019 |
Service cost | $ | 609 |
| | $ | 447 |
| | $ | 23 |
| | $ | 34 |
| Service cost | $ | 0.6 | | | $ | 0.7 | | | $ | 1.2 | | | $ | 1.2 | |
Interest cost | 3,110 |
| | 3,005 |
| | 700 |
| | 609 |
| Interest cost | 2.6 | | | 3.1 | | | 5.2 | | | 6.2 | |
Expected return on plan assets | (4,134 | ) | | (4,250 | ) | | — |
| | — |
| Expected return on plan assets | (3.7) | | | (4.1) | | | (7.5) | | | (8.3) | |
Amortization of prior service credit | — |
| | — |
| | — |
| | (419 | ) | |
Amortization of actuarial loss (gain) | 1,844 |
| | 2,515 |
| | (99 | ) | | (226 | ) | Amortization of actuarial loss (gain) | 2.5 | | | 1.8 | | | 5.0 | | | 3.7 | |
Net periodic cost (benefit) | $ | 1,429 |
| | $ | 1,717 |
| | $ | 624 |
| | $ | (2 | ) | |
Net periodic cost | | Net periodic cost | $ | 2.0 | | | $ | 1.4 | | | $ | 3.9 | | | $ | 2.9 | |
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| Pension Benefit Plans | | Other Postretirement Employee Benefit Plans |
Service cost | $ | 1,828 |
| | $ | 1,342 |
| | $ | 68 |
| | $ | 102 |
|
Interest cost | 9,333 |
| | 9,015 |
| | 2,099 |
| | 1,827 |
|
Expected return on plan assets | (12,401 | ) | | (12,751 | ) | | — |
| | — |
|
Amortization of prior service credit | — |
| | — |
| | — |
| | (1,257 | ) |
Amortization of actuarial loss (gain) | 5,529 |
| | 7,543 |
| | (294 | ) | | (677 | ) |
Net periodic cost (benefit) | $ | 4,289 |
| | $ | 5,149 |
| | $ | 1,873 |
| | $ | (5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
Other Postretirement Employee Benefit Plans | 2020 | | 2019 | | 2020 | | 2019 |
Service cost | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Interest cost | $ | 0.6 | | | $ | 0.8 | | | $ | 1.1 | | | $ | 1.4 | |
| | | | | | | |
Amortization of actuarial loss (gain) | — | | | — | | | — | | | (0.2) | |
Net periodic cost | $ | 0.6 | | | $ | 0.8 | | | $ | 1.2 | | | $ | 1.2 | |
During the nine months ended September 30, 2019 and 2018, we made no contributions to our qualified pension plans. We do not expect, nor are we required, to make contributions in 2019.
During the nine months ended September 30, 2019, we made contributions of $0.3 million to our company-sponsored non-qualified pension plan. We estimate contributions will total $0.4 million in 2019. We do not anticipate funding our OPEB plans in 2019 except to pay benefit costs as incurred during the year by plan participants.
We record the service component of net periodic cost (benefit) as part of "Cost of sales" and "Selling, general, and administrative expenses," while the non-service components of net periodic cost (benefit) are recorded to "Non-operating pension and other postretirement benefit costs (income)""Other non-operating expense" on our Consolidated Statements of Operations. For the three and six months ended June 30, 2020, we recorded $0.4 million and $0.7 million to "Cost of sales" and $0.2 million and $0.5 million to "Selling, general, and administrative expenses". For the three and six months ended June 30, 2019, we recorded $0.4 million and $0.8 million to "Cost of sales" and $0.3 million and $0.5 million to "Selling, general, and administrative expenses".
NOTE 11 Earnings12 ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss, net of tax, is comprised of the following:
| | | | | | | | | | | |
| Pension Plan Adjustments | Other Post Retirement Employee Benefit Plan Adjustments | Total |
Balance at December 31, 2018 | $ | (83.0) | | $ | 15.7 | | $ | (67.3) | |
| | | |
Amounts reclassified from accumulated other comprehensive loss | 2.7 | | (0.1) | | 2.5 | |
Other comprehensive income, net of tax | 2.7 | | (0.1) | | 2.5 | |
Balance at June 30, 2019 | $ | (80.3) | | $ | 15.6 | | $ | (64.8) | |
| | | |
Balance at December 31, 2019 | $ | (67.8) | | $ | 8.3 | | $ | (59.5) | |
| | | |
Amounts reclassified from accumulated other comprehensive loss | 3.7 | | — | | 3.7 | |
Other comprehensive income, net of tax | 3.7 | | — | | 3.7 | |
Balance at June 30, 2020 | $ | (64.1) | | $ | 8.3 | | $ | (55.8) | |
NOTE 13 STOCKHOLDERS' EQUITY
Common Stock Plans
We have stock-based compensation plans under which restricted stock awards and stock options are granted according to time or performance vesting requirements. At June 30, 2020, approximately 1.3 million shares were available for future issuance under our current plan.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | 2020 | | 2019 | | | | |
Total stock-based compensation expense (selling, general and administrative and other operating charges, net) | $ | 3.4 | | | $ | 1.2 | | | $ | 4.8 | | | $ | 2.1 | | | | | |
Income tax benefit related to stock-based compensation | $ | 0.9 | | | $ | 0.3 | | | $ | 1.3 | | | $ | 0.5 | | | | | |
Impact on cash flow due to taxes paid related to net share settlement of equity awards | $ | — | | | $ | — | | | $ | 0.7 | | | $ | 0.4 | | | | | |
At June 30, 2020, $12.2 million of compensation cost related to unvested restricted stock units, performance awards and stock options attributable to future service had not yet been recognized.
During the first six months ended June 30, 2020, we granted 371,267 restricted stock units (time vesting) at an average grant date fair value of $23.18 per Shareshare and 120,382 restricted stock units (performance vesting) at an average grant date fair value of $27.67.
NOTE 14 EARNINGS PER SHARE
Basic income (loss) earnings per share is based on the weighted-average number of shares of common stock outstanding. Diluted earningsincome (loss) per share is based upon the weighted-average number of shares of common stock outstanding plus all potentially dilutive securities that were assumed to be converted into common shares at the beginning of the period under the treasury stock method. This method requires the effect of potentially dilutive
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Basic weighted-average common shares outstanding1 | 16,594 | | | 16,539 | | | 16,575 | | | 16,528 | |
Incremental shares due to: | | | | | | | |
Stock-based awards | 92 | | | — | | | 70 | | | 24 | |
Diluted weighted-average common shares outstanding | 16,686 | | | 16,539 | | | 16,644 | | | 16,552 | |
1Basic weighted-average common shares outstanding includes restricted stock equivalents beunit awards that are fully vested, but are deferred for future issuance.
Anti-dilutive shares excluded from the calculation of diluted earnings per share for the periods in which net losses are reported because the effect is anti-dilutive.
The following table reconciles the number of common shares used in calculating the basic and diluted net earnings per share:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Basic weighted-average common shares outstanding1 | 16,538,569 |
| | 16,486,935 |
| | 16,531,195 |
| | 16,492,843 |
|
Incremental shares due to: | | | | | | | |
Restricted stock units | — |
| | 22,461 |
| | — |
| | 27,893 |
|
Performance shares | — |
| | 54,253 |
| | — |
| | 52,508 |
|
Stock options | — |
| | — |
| | — |
| | 60 |
|
Diluted weighted-average common shares outstanding | 16,538,569 |
| | 16,563,649 |
| | 16,531,195 |
| | 16,573,304 |
|
| | | | | | | |
Basic net (loss) earnings per common share | $ | (0.66 | ) | | $ | 2.09 |
| | $ | (0.46 | ) | | $ | 2.67 |
|
Diluted net (loss) earnings per common share | (0.66 | ) | | 2.08 |
| | (0.46 | ) | | 2.66 |
|
| | | | | | | |
Anti-dilutive shares excluded from calculation | 1,060,643 |
| | 985,312 |
| | 1,040,544 |
| | 935,037 |
|
| |
1
| Basic weighted-average common shares outstanding includes restricted stock unit awards that are fully vested, but are deferred for future issuance. |
NOTE 12 Equity-Based Compensation
We recognize equity-based compensation expense for all equity-based payment awards made to employees and directors, including restricted stock units, or RSUs, performance shares and stock options, based on estimated fair values.
EMPLOYEE AWARDS
Employee equity-based compensation expense (income) was recognized as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Restricted stock units | $ | 794 |
| | $ | 595 |
| | $ | 1,975 |
| | $ | 1,599 |
|
Performance shares | (682 | ) | | 499 |
| | (164 | ) | | 1,409 |
|
Stock options | 357 |
| | 639 |
| | 1,047 |
| | 1,767 |
|
Total employee equity-based compensation expense | $ | 469 |
| | $ | 1,733 |
| | $ | 2,858 |
| | $ | 4,775 |
|
As provided in the Clearwater Paper Corporation 2017 Stock Incentive Plan, the performance measure used to determine the number of performance shares ultimately issuable for performance shares granted in 2019 is a free cash flow performance measure for 70% of the performance share awards. For the remaining 30% of the grants, a return on invested capital measure is used. The combined performance of these measures is then subject to an adjustment (increase or decrease) of up to 25% based on our total shareholder return, or TSR, compared to the TSR performance of a selected index. The number of performance shares actually issued, as a percentage of the amount subject to the performance share award, could range from 0%-200%. Throughout the service periods we assess the probability of achieving the performance conditions for our applicable performance share grants, and expense is recognized based on the probable outcomes.
During the nine months ended September 30, 2019, 47,504 RSUs were settled and distributed. After adjusting for minimum tax withholdings, a net 32,992 shares were issued. In connection with the issued RSUs, the minimum tax withholding payments made during the nine months ended September 30, 2019 totaled $0.4 million.
During the nine months ended September 30, 2019, we had 75,223 stock option awards expire with a weighted-average exercise price of $51.69. At September 30, 2019, we had 515,438 stock option awards that were exercisable with a weighted-average exercise price of $51.19.
The following table summarizes the number of share-based awards granted under the Clearwater Paper Corporation 2017 Stock Incentive Plan during the nine months ended September 30, 2019 and the grant-date fair value of the awards:
|
| | | | | | |
| Nine Months Ended |
| September 30, 2019 |
| Number of Shares Subject to Award | | Weighted-Average Fair Value of Award Per Share |
Restricted stock units | 137,037 |
| | $ | 26.61 |
|
Performance shares | 151,664 |
| | 26.60 |
|
DIRECTOR AWARDS
Annually, each outside member of our Board of Directors receives deferred equity-based awards that are measured in units of our common stock and ultimately settled in cash at the time of payment. Accordingly, the compensation expense associated with these awards is subject to fluctuations each quarter based on mark-to-market adjustments at each reporting period in line with changes in the market price of our common stock. As a result of the mark-to-market adjustment, we recorded director equity-based compensation expense of $0.40.7 million and $0.81.1 million for the three months ended SeptemberJune 30, 2020 and 2019 and 2018, respectively. For0.8 million and 1.0 million for the ninesix months ended SeptemberJune 30, 20192020 and 2018, we recorded director equity-based compensation expense2019.
NOTE 15 SEGMENT INFORMATION
We operate in two segments: Consumer Products and Paperboard. Our business units have been aggregated into these two segments based upon the similarity of $0.1 millioneconomic characteristics, customers and a benefitdistribution methods. Our results of $1.9 million, respectively.
Asoperations are summarized below for each of September 30, 2019,these segments separately. Segment information was prepared in accordance with the liability amounts associated with director equity-based compensationsame accounting principles as those described in Note 1 of the Notes to the consolidated financial statements included in "Other long-term obligations"our Annual Report on Form 10-K for the accompanying Consolidated Balance Sheet were $2.2 million. Atyear ended December 31, 2018, the liability amounts associated with director equity-based compensation included in "Other long-term obligations" and "Accounts payable and accrued liabilities" totaled $0.8 million and $1.3 million, respectively.2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Segment net sales: | | | | | | | |
Consumer Products | $ | 275.1 | | | $ | 224.3 | | | $ | 540.8 | | | $ | 447.7 | |
Paperboard | 205.4 | | | 227.7 | | | 417.6 | | | 433.1 | |
Total segment net sales | $ | 480.5 | | | $ | 452.0 | | | $ | 958.4 | | | $ | 880.8 | |
| | | | | | | |
Operating income (loss): | | | | | | | |
Consumer Products | $ | 36.6 | | | $ | (5.1) | | | $ | 50.9 | | | $ | (3.9) | |
Paperboard | 32.2 | | | 33.6 | | | 58.7 | | | 63.0 | |
Corporate | (17.6) | | | (12.7) | | | (31.1) | | | (29.3) | |
Other operating charges, net | (3.0) | | | (0.4) | | | (11.5) | | | (0.1) | |
Income from operations | $ | 48.1 | | | $ | 15.3 | | | $ | 67.0 | | | $ | 29.7 | |
NOTE 13 Fair Value Measurements
The estimated fair values of our financial instruments at the dates presented below are as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Major products: | | | | | | | |
Paperboard | $ | 204.1 | | | $ | 226.2 | | | $ | 415.1 | | | $ | 429.2 | |
Retail tissue | 260.4 | | | 210.5 | | | 508.4 | | | 415.1 | |
Non-retail tissue | 10.2 | | | 12.3 | | | 24.1 | | | 30.7 | |
Other | 5.8 | | | 3.0 | | | 10.7 | | | 5.8 | |
Total net sales | $ | 480.5 | | | $ | 452.0 | | | $ | 958.4 | | | $ | 880.8 | |
|
| | | | | | | | | | | | | | | |
| September 30, | | December 31, |
| 2019 | | 2018 |
| Carrying | | Fair | | Carrying | | Fair |
(In thousands) | Amount | | Value | | Amount | | Value |
Cash, cash equivalents and restricted cash (Level 1) | $ | 10,295 |
| | $ | 10,295 |
| | $ | 24,947 |
| | $ | 24,947 |
|
Short-term borrowings under revolving credit agreements (Level 2) | 58,000 |
| | 58,000 |
| | 100,000 |
| | 99,909 |
|
Other short-term debt (Level 1) | — |
| | — |
| | 20,833 |
| | 20,833 |
|
Long-term debt (Level 2) | 875,000 |
| | 863,340 |
| | 675,000 |
| | 612,546 |
|
Accounting guidance establishes a framework for measuring the fair value of financial instruments, providing a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities, or “Level 1” measurements, followed by quoted prices of similar assets or observable market data considering the assets' underlying maturities, or “Level 2” measurements, and the lowest priority to unobservable inputs, or “Level 3” measurements.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used should seek to maximize the use of observable inputs and minimize the use of unobservable inputs.
Cash, cash equivalents and restricted cash, borrowings under the revolving credit agreements, other short-term debt and long-term debt are the only items measured at fair value on a recurring basis.
For cash, cash equivalents, restricted cash and any revolving line of credit borrowings, the carrying amount approximates fair value due to the short-term nature of these financial instruments.
The fair value of our long-term debt is estimated based upon quoted market prices for similar debt issues or estimated based on average market prices for comparable debt when there is no quoted market price.
We do not have any financial assets measured at fair value on a nonrecurring basis.
NOTE 14 Segment Information
Our reportable segments are described below.
CONSUMER PRODUCTS
Our Consumer Products segment manufactures and sells a complete line of at-home tissue products, or retail products, and away-from-home tissue products, or non-retail products, and parent rolls. Retail products include bath, paper towels, facial and napkin product categories. Non-retail products include conventional one and two-ply bath tissue, two-ply paper towels, some facial tissue product categories, hard wound towels and dispenser napkins sold to customers with commercial and industrial tissue needs. Each category is further distinguished according to quality segments: ultra, premium, value and economy.
PULP and PAPERBOARD
Our Pulp and Paperboard segment manufactures and markets solid bleached sulfate paperboard for the high-end segment of the packaging industry as well as offers custom sheeting, slitting and cutting of paperboard. Our overall production consists primarily of folding carton, liquid packaging, cup and plate products and commercial printing grades. The majority of our Pulp and Paperboard customers are packaging converters, folding carton converters, merchants and commercial printers.
The table below presents information about our reportable segments:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Segment net sales: | | | | | | | |
Consumer Products | $ | 228,544 |
| | $ | 211,642 |
| | $ | 676,220 |
| | $ | 672,069 |
|
Pulp and Paperboard | 216,644 |
| | 214,818 |
| | 649,740 |
| | 623,442 |
|
Total segment net sales | $ | 445,188 |
| | $ | 426,460 |
| | $ | 1,325,960 |
| | $ | 1,295,511 |
|
| | | | | | | |
Earnings (loss) before income taxes: | | | | | | | |
Consumer Products1 | $ | (4,438 | ) | | $ | (1,269 | ) | | $ | (8,300 | ) | | $ | (3,244 | ) |
Gain on divested assets | — |
| | 22,944 |
| | — |
| | 22,944 |
|
Pulp and Paperboard1 | 17,098 |
| | 38,280 |
| | 80,073 |
| | 98,626 |
|
| 12,660 |
| | 59,955 |
| | 71,773 |
| | 118,326 |
|
Corporate1 | (15,120 | ) | | (13,055 | ) | | (44,530 | ) | | (41,506 | ) |
(Loss) income from operations | (2,460 | ) | | 46,900 |
| | 27,243 |
| | 76,820 |
|
Interest expense, net | (13,077 | ) | | (7,547 | ) | | (32,477 | ) | | (23,290 | ) |
Debt retirement costs | (2,725 | ) | | — |
| | (2,725 | ) | | — |
|
Non-operating pension and other postretirement benefit costs | (1,421 | ) | | (1,234 | ) | | (4,266 | ) | | (3,700 | ) |
(Loss) earnings before income taxes | $ | (19,683 | ) | | $ | 38,119 |
| | $ | (12,225 | ) | | $ | 49,830 |
|
| | | | | | | |
Depreciation and amortization: | | | | | | | |
Consumer Products | $ | 19,025 |
| | $ | 14,447 |
| | $ | 51,227 |
| | $ | 42,964 |
|
Pulp and Paperboard | 11,168 |
| | 9,316 |
| | 30,144 |
| | 28,106 |
|
Corporate | 1,797 |
| | 1,579 |
| | 4,972 |
| | 4,616 |
|
Total depreciation and amortization | $ | 31,990 |
| | $ | 25,342 |
| | $ | 86,343 |
| | $ | 75,686 |
|
| | | | | |
1
| Income (loss) from operations for the Consumer Products, Pulp and Paperboard and Corporate segments for the nine months ended September 30, 2018 include $1.7 million, $0.5 million and $4.2 million, respectively, of expenses associated with our selling, general and administrative cost control measures.
|
For the nine months ended September 30, 2019, no customer accounted for more than 10% of our total company net sales. For the nine months ended September 30, 2018, one customer in our Consumer Products segment, the Kroger Company, accounted for approximately 11.9% of our total company net sales.
Net sales, classified by the major geographic areas in which our customers are located and by major products, were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Primary geographical markets: | | | | | | | |
United States | $ | 424,743 |
| | $ | 404,593 |
| | $ | 1,270,944 |
| | $ | 1,237,644 |
|
Other countries | 20,445 |
| | 21,867 |
| | 55,016 |
| | 57,867 |
|
Total net sales | $ | 445,188 |
| | $ | 426,460 |
| | $ | 1,325,960 |
| | $ | 1,295,511 |
|
| | | | | | | |
Major products: | | | | | | | |
Paperboard | $ | 215,370 |
| | $ | 214,818 |
| | $ | 644,565 |
| | $ | 623,442 |
|
Retail tissue | 215,255 |
| | 183,948 |
| | 630,354 |
| | 601,557 |
|
Non-retail tissue | 12,421 |
| | 27,624 |
| | 43,153 |
| | 68,348 |
|
Other | 2,142 |
| | 70 |
| | 7,888 |
| | 2,164 |
|
Total net sales | $ | 445,188 |
| | $ | 426,460 |
| | $ | 1,325,960 |
| | $ | 1,295,511 |
|
NOTE 15 Supplemental Guarantor Financial Information
All of our subsidiaries that are 100% directly or indirectly owned by Clearwater Paper, guarantee our $275 million aggregate principal amount of 4.5% senior notes issued in January 2013 and due 2023, which we refer to as the 2013 Notes, on a full and unconditional, and joint and several basis. There are no significant restrictions on the ability of the guarantor subsidiaries to make distributions to Clearwater Paper, the issuer of the 2013 Notes. The following tables present the results of operations, financial position and cash flows of Clearwater Paper and its subsidiaries, the guarantor subsidiaries, and the eliminations necessary to arrive at the information for Clearwater Paper on a consolidated basis.
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Three Months Ended September 30, 2019
|
| | | | | | | | | | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
Net sales | $ | 416,293 |
| | $ | 67,869 |
| | $ | (38,974 | ) | | $ | 445,188 |
|
Costs and expenses: | | | | | | | |
Cost of sales | (396,794 | ) | | (60,240 | ) | | 38,330 |
| | (418,704 | ) |
Selling, general and administrative expenses | (24,255 | ) | | (4,689 | ) | | — |
| | (28,944 | ) |
Total operating costs and expenses | (421,049 | ) | | (64,929 | ) | | 38,330 |
| | (447,648 | ) |
(Loss) income from operations | (4,756 | ) | | 2,940 |
| | (644 | ) | | (2,460 | ) |
Interest expense, net | (13,076 | ) | | (1 | ) | | — |
| | (13,077 | ) |
Debt retirement costs | (2,725 | ) | | — |
| | — |
| | (2,725 | ) |
Non-operating pension and other postretirement benefit costs | (1,421 | ) | | — |
| | — |
| | (1,421 | ) |
(Loss) earnings before income taxes | (21,978 | ) | | 2,939 |
| | (644 | ) | | (19,683 | ) |
Income tax benefit (provision) | 13,996 |
| | (1,397 | ) | | (3,889 | ) | | 8,710 |
|
Equity in income of subsidiary | 1,542 |
| | — |
| | (1,542 | ) | | — |
|
Net (loss) earnings | $ | (6,440 | ) | | $ | 1,542 |
| | $ | (6,075 | ) | | $ | (10,973 | ) |
Other comprehensive income, net of tax | 1,286 |
| | — |
| | — |
| | 1,286 |
|
Comprehensive (loss) income | $ | (5,154 | ) | | $ | 1,542 |
| | $ | (6,075 | ) | | $ | (9,687 | ) |
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Nine Months Ended September 30, 2019
|
| | | | | | | | | | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
Net sales | $ | 1,250,145 |
| | $ | 203,094 |
| | $ | (127,279 | ) | | $ | 1,325,960 |
|
Costs and expenses: | | | | | | | |
Cost of sales | (1,154,834 | ) | | (181,741 | ) | | 123,800 |
| | (1,212,775 | ) |
Selling, general and administrative expenses | (71,578 | ) | | (14,364 | ) | | — |
| | (85,942 | ) |
Total operating costs and expenses | (1,226,412 | ) | | (196,105 | ) | | 123,800 |
| | (1,298,717 | ) |
Income from operations | 23,733 |
| | 6,989 |
| | (3,479 | ) | | 27,243 |
|
Interest expense, net | (32,338 | ) | | (139 | ) | | — |
| | (32,477 | ) |
Debt retirement costs | (2,725 | ) | | — |
| | — |
| | (2,725 | ) |
Non-operating pension and other postretirement benefit costs | (4,266 | ) | | — |
| | — |
| | (4,266 | ) |
(Loss) earnings before income taxes | (15,596 | ) | | 6,850 |
| | (3,479 | ) | | (12,225 | ) |
Income tax benefit (provision) | 10,221 |
| | (1,821 | ) | | (3,735 | ) | | 4,665 |
|
Equity in income of subsidiary | 5,029 |
| | — |
| | (5,029 | ) | | — |
|
Net (loss) earnings | $ | (346 | ) | | $ | 5,029 |
| | $ | (12,243 | ) | | $ | (7,560 | ) |
Other comprehensive income, net of tax | 3,859 |
| | — |
| | — |
| | 3,859 |
|
Comprehensive income | $ | 3,513 |
| | $ | 5,029 |
| | $ | (12,243 | ) | | $ | (3,701 | ) |
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Three Months Ended September 30, 2018
|
| | | | | | | | | | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
Net sales | $ | 426,816 |
| | $ | 50,340 |
| | $ | (50,696 | ) | | $ | 426,460 |
|
Costs and expenses: | | | | | | | |
Cost of sales | (383,737 | ) | | (45,693 | ) | | 53,209 |
| | (376,221 | ) |
Selling, general and administrative expenses | (20,721 | ) | | (5,562 | ) | | — |
| | (26,283 | ) |
Gain on divested assets, net | — |
| | 22,944 |
| | — |
| | 22,944 |
|
Total operating costs and expenses | (404,458 | ) | | (28,311 | ) | | 53,209 |
| | (379,560 | ) |
Income from operations | 22,358 |
| | 22,029 |
| | 2,513 |
| | 46,900 |
|
Interest expense, net | (7,366 | ) | | (181 | ) | | — |
| | (7,547 | ) |
Non-operating pension and other postretirement benefit costs | (1,234 | ) | | — |
| | — |
| | (1,234 | ) |
Earnings before income taxes | 13,758 |
| | 21,848 |
| | 2,513 |
| | 38,119 |
|
Income tax benefit (provision) | 1,748 |
| | (5,043 | ) | | (380 | ) | | (3,675 | ) |
Equity in income of subsidiary | 16,805 |
| | — |
| | (16,805 | ) | | — |
|
Net earnings | $ | 32,311 |
| | $ | 16,805 |
| | $ | (14,672 | ) | | $ | 34,444 |
|
Other comprehensive income, net of tax | 1,378 |
| | — |
| | — |
| | 1,378 |
|
Comprehensive income | $ | 33,689 |
| | $ | 16,805 |
| | $ | (14,672 | ) | | $ | 35,822 |
|
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Nine Months Ended September 30, 2018
|
| | | | | | | | | | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
Net sales | $ | 1,315,819 |
| | $ | 150,866 |
| | $ | (171,174 | ) | | $ | 1,295,511 |
|
Costs and expenses: | | | | | | | |
Cost of sales | (1,190,954 | ) | | (133,971 | ) | | 169,117 |
| | (1,155,808 | ) |
Selling, general and administrative expenses | (69,579 | ) | | (16,248 | ) | | — |
| | (85,827 | ) |
Gain on divested assets, net | — |
| | 22,944 |
| | — |
| | 22,944 |
|
Total operating costs and expenses | (1,260,533 | ) | | (127,275 | ) | | 169,117 |
| | (1,218,691 | ) |
Income from operations | 55,286 |
| | 23,591 |
| | (2,057 | ) | | 76,820 |
|
Interest expense, net | (22,922 | ) | | (368 | ) | | — |
| | (23,290 | ) |
Non-operating pension and other postretirement benefit costs | (3,700 | ) | | — |
| | — |
| | (3,700 | ) |
Earnings before income taxes | 28,664 |
| | 23,223 |
| | (2,057 | ) | | 49,830 |
|
Income tax provision | (1,208 | ) | | (5,242 | ) | | 625 |
| | (5,825 | ) |
Equity in income of subsidiary | 17,981 |
| | — |
| | (17,981 | ) | | — |
|
Net earnings | $ | 45,437 |
| | $ | 17,981 |
| | $ | (19,413 | ) | | $ | 44,005 |
|
Other comprehensive income, net of tax | 4,133 |
| | — |
| | — |
| | 4,133 |
|
Comprehensive income | $ | 49,570 |
| | $ | 17,981 |
| | $ | (19,413 | ) | | $ | 48,138 |
|
Clearwater Paper Corporation
Consolidating Balance Sheet
|
| | | | | | | | | | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 7,815 |
| | $ | — |
| | $ | — |
| | $ | 7,815 |
|
Restricted cash | 1,440 |
| | — |
| | — |
| | 1,440 |
|
Receivables, net | 139,201 |
| | 18,728 |
| | — |
| | 157,929 |
|
Taxes receivable | 6,716 |
| | 24 |
| | (19 | ) | | 6,721 |
|
Inventories | 246,211 |
| | 39,663 |
| | (3,479 | ) | | 282,395 |
|
Other current assets | 7,725 |
| | 235 |
| | — |
| | 7,960 |
|
Total current assets | 409,108 |
| | 58,650 |
| | (3,498 | ) | | 464,260 |
|
Property, plant and equipment, net | 1,202,690 |
| | 70,784 |
| | — |
| | 1,273,474 |
|
Operating lease right-of-use assets | 69,211 |
| | 5,292 |
| | — |
| | 74,503 |
|
Goodwill | 35,074 |
| | — |
| | — |
| | 35,074 |
|
Intangible assets, net | 261 |
| | 18,464 |
| | — |
| | 18,725 |
|
Intercompany (payable) receivable | (72,415 | ) | | 68,936 |
| | 3,479 |
| | — |
|
Investment in subsidiary | 180,330 |
| | — |
| | (180,330 | ) | | — |
|
Other assets, net | 13,906 |
| | 2,960 |
| | (1,825 | ) | | 15,041 |
|
TOTAL ASSETS | $ | 1,838,165 |
| | $ | 225,086 |
| | $ | (182,174 | ) | | $ | 1,881,077 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Short-term debt | $ | 58,000 |
| | $ | — |
| | $ | — |
| | $ | 58,000 |
|
Accounts payable and accrued liabilities | 211,805 |
| | 17,777 |
| | (19 | ) | | 229,563 |
|
Current liability for pension and other postretirement employee benefits | 7,430 |
| | — |
| | — |
| | 7,430 |
|
Total current liabilities | 277,235 |
| | 17,777 |
| | (19 | ) | | 294,993 |
|
Long-term debt | 866,702 |
| | — |
| | — |
| | 866,702 |
|
Operating lease liabilities | 62,792 |
| | 3,779 |
| | — |
| | 66,571 |
|
Liability for pension and other postretirement employee benefits | 73,738 |
| | — |
| | — |
| | 73,738 |
|
Other long-term obligations | 33,990 |
| | — |
| | — |
| | 33,990 |
|
Accrued taxes | 2,186 |
| | 884 |
| | — |
| | 3,070 |
|
Deferred tax liabilities | 96,377 |
| | 22,316 |
| | (1,825 | ) | | 116,868 |
|
TOTAL LIABILITIES | 1,413,020 |
| | 44,756 |
| | (1,844 | ) | | 1,455,932 |
|
Stockholders’ equity excluding accumulated other comprehensive loss | 488,634 |
| | 180,330 |
| | (180,330 | ) | | 488,634 |
|
Accumulated other comprehensive loss, net of tax | (63,489 | ) | | — |
| | — |
| | (63,489 | ) |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,838,165 |
| | $ | 225,086 |
| | $ | (182,174 | ) | | $ | 1,881,077 |
|
Clearwater Paper Corporation
Consolidating Balance Sheet
At December 31, 2018
|
| | | | | | | | | | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 22,484 |
| | $ | — |
| | $ | — |
| | $ | 22,484 |
|
Receivables, net | 127,952 |
| | 17,567 |
| | — |
| | 145,519 |
|
Taxes receivable | 16,634 |
| | 41 |
| | (10,374 | ) | | 6,301 |
|
Inventories | 222,960 |
| | 48,361 |
| | (5,077 | ) | | 266,244 |
|
Other current assets | 3,346 |
| | 53 |
| | — |
| | 3,399 |
|
Total current assets | 393,376 |
| | 66,022 |
| | (15,451 | ) | | 443,947 |
|
Property, plant and equipment, net | 1,192,716 |
| | 76,555 |
| | — |
| | 1,269,271 |
|
Goodwill | 35,074 |
| | — |
| | — |
| | 35,074 |
|
Intangible assets, net | 1,045 |
| | 23,035 |
| | — |
| | 24,080 |
|
Intercompany (payable) receivable | (62,846 | ) | | 57,769 |
| | 5,077 |
| | — |
|
Investment in subsidiary | 175,301 |
| | — |
| | (175,301 | ) | | — |
|
Other assets, net | 14,839 |
| | 2,618 |
| | (1,711 | ) | | 15,746 |
|
TOTAL ASSETS | $ | 1,749,505 |
| | $ | 225,999 |
| | $ | (187,386 | ) | | $ | 1,788,118 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Short-term debt | $ | 120,833 |
| | $ | — |
| | $ | — |
| | $ | 120,833 |
|
Accounts payable and accrued liabilities | 299,715 |
| | 31,691 |
| | (10,374 | ) | | 321,032 |
|
Current liability for pension and other postretirement employee benefits | 7,430 |
| | — |
| | — |
| | 7,430 |
|
Total current liabilities | 427,978 |
| | 31,691 |
| | (10,374 | ) | | 449,295 |
|
Long-term debt | 671,292 |
| | — |
| | — |
| | 671,292 |
|
Liability for pension and other postretirement employee benefits | 78,191 |
| | — |
| | — |
| | 78,191 |
|
Other long-term obligations | 38,977 |
| | — |
| | — |
| | 38,977 |
|
Accrued taxes | 1,918 |
| | 867 |
| | — |
| | 2,785 |
|
Deferred tax liabilities | 104,753 |
| | 18,140 |
| | (1,711 | ) | | 121,182 |
|
TOTAL LIABILITIES | 1,323,109 |
| | 50,698 |
| | (12,085 | ) | | 1,361,722 |
|
Stockholders’ equity excluding accumulated other comprehensive loss | 493,744 |
| | 175,301 |
| | (175,301 | ) | | 493,744 |
|
Accumulated other comprehensive loss, net of tax | (67,348 | ) | | — |
| | — |
| | (67,348 | ) |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,749,505 |
| | $ | 225,999 |
| | $ | (187,386 | ) | | $ | 1,788,118 |
|
Clearwater Paper Corporation
Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2019
|
| | | | | | | | | | | | | | | |
| | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
Net (loss) earnings | $ | (346 | ) | | $ | 5,029 |
| | $ | (12,243 | ) | | $ | (7,560 | ) |
Adjustments to reconcile net (loss) earnings to net cash flows from operating activities: | | | | | | | |
Depreciation and amortization | 74,186 |
| | 12,157 |
| | — |
| | 86,343 |
|
Equity-based compensation expense | 2,959 |
| | — |
| | — |
| | 2,959 |
|
Deferred taxes | (10,286 | ) | | 4,263 |
| | — |
| | (6,023 | ) |
Employee benefit plans | 1,006 |
| | — |
| | — |
| | 1,006 |
|
Amortization of deferred issuance costs on debt
| 1,452 |
| | — |
| | — |
| | 1,452 |
|
Loss on retirement of debt | 2,725 |
| | — |
| | — |
| | 2,725 |
|
Other non-cash activity, net | 734 |
| | (10 | ) | |
|
| | 724 |
|
Changes in working capital, net | (111,631 | ) | | 2,504 |
| | 10,861 |
| | (98,266 | ) |
Changes in taxes receivable | 9,918 |
| | 17 |
| | (10,355 | ) | | (420 | ) |
Other, net | 1,086 |
| | (261 | ) | | — |
| | 825 |
|
Net cash flows from operating activities | (28,197 | ) | | 23,699 |
| | (11,737 | ) | | (16,235 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
Additions to property, plant and equipment | (124,111 | ) | | (1,683 | ) | | — |
| | (125,794 | ) |
Other, net | 4 |
| | 10 |
| | — |
| | 14 |
|
Net cash flows from investing activities | (124,107 | ) | | (1,673 | ) | | — |
| | (125,780 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
Borrowings on long-term debt | 296,146 |
| | — |
| | — |
| | 296,146 |
|
Repayments of borrowings on long-term debt | (101,671 | ) | | — |
| | — |
| | (101,671 | ) |
Borrowings on short-term debt | 534,877 |
| | — |
| | — |
| | 534,877 |
|
Repayments of borrowings on short-term debt | (598,715 | ) | | — |
| | — |
| | (598,715 | ) |
Payments for debt issuance costs | (1,844 | ) | | — |
| | — |
| | (1,844 | ) |
Investment from (to) parent | 10,289 |
| | (22,026 | ) | | 11,737 |
| | — |
|
Other, net | (1,430 | ) | | — |
| | — |
| | (1,430 | ) |
Net cash flows from financing activities | 137,652 |
| | (22,026 | ) | | 11,737 |
| | 127,363 |
|
Decrease in cash, cash equivalents and restricted cash | (14,652 | ) | | — |
| | — |
| | (14,652 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 24,947 |
| | — |
| | — |
| | 24,947 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 10,295 |
| | $ | — |
| | $ | — |
| | $ | 10,295 |
|
Clearwater Paper Corporation
Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2018
|
| | | | | | | | | | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
Net earnings | $ | 45,437 |
| | $ | 17,981 |
| | $ | (19,413 | ) | | $ | 44,005 |
|
Adjustments to reconcile net earnings to net cash flows from operating activities: | | | | | | | |
Depreciation and amortization | 59,632 |
| | 16,054 |
| | — |
| | 75,686 |
|
Equity-based compensation expense | 2,845 |
| | — |
| | — |
| | 2,845 |
|
Deferred taxes | 10,662 |
| | (6,732 | ) | | — |
| | 3,930 |
|
Employee benefit plans | 102 |
| | — |
| | — |
| | 102 |
|
Deferred issuance costs on long term debt | 943 |
| | — |
| | — |
| | 943 |
|
Gain on divested assets | — |
| | (25,510 | ) | | — |
| | (25,510 | ) |
Other non-cash activity, net | 84 |
| | — |
| | — |
| | 84 |
|
Changes in working capital, net | 22,045 |
| | (7,383 | ) | | (7,260 | ) | | 7,402 |
|
Changes in taxes receivable | 8,053 |
| | 26 |
| | 5,455 |
| | 13,534 |
|
Other, net | (1,800 | ) | | (122 | ) | | — |
| | (1,922 | ) |
Net cash flows from operating activities | 148,003 |
| | (5,686 | ) | | (21,218 | ) | | 121,099 |
|
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
Additions to property, plant and equipment | (172,434 | ) | | (1,600 | ) | | — |
| | (174,034 | ) |
Net proceeds from divested assets | 70,930 |
| | — |
| | — |
| | 70,930 |
|
Other, net | 793 |
| | 14 |
| | — |
| | 807 |
|
Net cash flows from investing activities | (100,711 | ) | | (1,586 | ) | | — |
| | (102,297 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
Borrowings on short-term debt | 322,454 |
| | — |
| | — |
| | 322,454 |
|
Repayments of borrowings on short-term debt | (277,454 | ) | | — |
| | — |
| | (277,454 | ) |
Investment (to) from parent | (28,490 | ) | | 7,272 |
| | 21,218 |
| | — |
|
Other, net | (853 | ) | | — |
| | — |
| | (853 | ) |
Net cash flows from financing activities | 15,657 |
| | 7,272 |
| | 21,218 |
| | 44,147 |
|
Increase in cash, cash equivalents and restricted cash | 62,949 |
| | — |
| | — |
| | 62,949 |
|
Cash, cash equivalents and restricted cash at beginning of period | 16,738 |
| | — |
| | — |
| | 16,738 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 79,687 |
| | $ | — |
| | $ | — |
| | $ | 79,687 |
|
|
| |
ITEM 2. | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
FORWARD-LOOKING STATEMENTS
Our disclosure, discussion 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 accounting standards; production quality and quantity, costs and timing associated with the expansion of our Shelby, North Carolina facility; components and trends; our strengths and related benefits; competitive market conditions; operating costs and input usage and costs, including energy costs and usage; major maintenance schedule and costs; tax rates; cash flows; raw materials; capital resources and expenditures; expected contributions to benefit plans; strategic projects and related costs and benefits; return on investment from capital projects; liquidity; debt and finance arrangements, including compliance with covenants; capitalized interest; interest expenses and the outcome of legal proceedings. 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 2018 Form 10-K, as well as the following:
competitive pricing pressures for our products, including as a result of increased capacity as additional manufacturing facilities are operated by our competitors;
the loss of, changes in prices in regard to, or reduction in, orders from a significant customer;
changes in customer product preferences and competitors' product offerings;
our ability to achieve full production at our new tissue manufacturing operations in Shelby, North Carolina on time and within current cost expectations;
customer acceptance and timing and quantity of purchases of our tissue products, including the existence of sufficient demand for and the quality of tissue manufactured at our expanded Shelby, North Carolina operations upon full production;
consolidation and vertical integration of converting operations in the paperboard industry;
our ability to successfully implement our operational efficiencies and cost savings strategies, along with related capital projects, and achieve the expected operational or financial results of those projects, including from the continuous pulp digester at our Lewiston, Idaho facility;
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 the U.S. and international economies and in general economic conditions in the regions and industries in which we operate;
manufacturing or operating disruptions, including IT system and IT system implementation failures, equipment malfunctions and damage to our manufacturing facilities;
changes in costs for and availability of packaging supplies, chemicals, energy and maintenance and repairs;
larger competitors having operational and other advantages;
cyclical industry conditions;
changes in expenses, required contributions and potential withdrawal costs associated with our pension plans;
environmental liabilities or expenditures;
cyber-security risks;
reliance on a limited number of third-party suppliers for raw materials;
our ability to attract, motivate, train and retain qualified and key personnel;
material weaknesses in our internal control over financial reporting;
our substantial indebtedness and ability to service 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
BackgroundImpact of COVID-19 on Our Business
We manufacture quality consumer tissue, away-from-home tissue, parent roll tissue, bleached paperboardIn response to the outbreak and pulp at manufacturing facilities acrossbusiness disruption caused by the nation. Wenovel coronavirus (COVID-19) pandemic, we are a premier supplier of private label tissue to major retailersfocused on two priorities - the health and wholesale distributors, including grocery, drug, mass merchant and discount stores. In addition, we produce bleached paperboard used by quality-conscious printers and packaging converters. Our employees build shareholder value by developing strong customer relationships through quality and service.
Recent Events
Debt Refinancing
On July 26, 2019, we completed the refinancingsafety of our secured revolving creditemployees and continuing to safely operate our facilities withto meet the needs of our customers. We have implemented important health and safety measures across our facilities, including temperature checks, social distancing guidelines, sanitation practices, remote work for those whose jobs allow them to do so, and travel and visitor restrictions.
The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption and may adversely affect our business. To date, our industry has been classified as essential by the Federal Government, through the Department of Homeland Security’s Cyber and Infrastructure Security Agency (CISA), and in each of the jurisdictions in which we operate, which enabled us to operate our facilities through the first six months of 2020. We do not expect there to be any changes in this designation and as a seven-year term loan credit agreementresult, we do not anticipate having to curtail or cease our operations due to any governmental imposed shutdown.
Our company and our competitors have experienced a five-year revolving credit facility provided under an asset based loan credit facility. Refer to the "Liquidity and Capital Resources" discussion, under the heading "Credit Agreements,"significant increase in demand for additional information.
Shelby Expansion Project
During the second quarter of 2019, we began production on our new tissue machine at our facility in Shelby, North Carolina. The new tissue machine will produce a variety of high-quality private label ultra and premium bath, paper towel and napkin products. At full production capacity, it is expected to produce approximately 70,000 to 75,000 tons of"at home" tissue products annually. The total cost for the project includes approximately $360 million for the tissue machine, converting equipment and buildings, and approximately $60 million for warehouse expansion that consolidated southeastern warehousing in Shelby.
We project that the new tissue machine at this facility will attain a full production run-rate in mid-2020. During the nine months ended September 30, 2019, we incurred costs of $51.7 million on construction related activities and the new tissue machine in Shelby. We also capitalized $4.9 million of interest during the nine months ended September 30, 2019 related to the Shelby expansion. We have incurred additional labor, operating supply and energy related costs associated with ramping up production of the new machine, and our inventory levels have also increased in connection with the ramp-up.
Components and Trends in our Business
Net sales
Prices for our consumer tissue products are affected by competitive conditions and the prices of branded tissue products. Our Consumer Products segment competes based on product quality, customer service and price. We deliver customer-focused business solutions by assisting in managing product assortment, category management, and pricing and promotion optimization.
In recent years, the industry has experienced an increase in ultra and premium tissue products as industry participants have added or improved through-air-dried, or TAD, or equivalent production capacity as well as added conventional tissue capacity. Demand and pricing for consumer tissue products is currently being affected by this increased capacity, as well as changing dynamics in the at-home tissue segmentfirst six months of 2020 as a result of changing consumer purchasing habits, consolidationsCOVID-19. We expect that demand for tissue will normalize and new entrants in the consumer retail channel, and new and evolving sales and distribution channels. These changing conditions contributedwill eventually return to a very competitive environmentpre-COVID-19 levels. Demand for consumer tissue over the past several years, whichpaperboard products has continued through the first nine months of 2019.
Our pulp and paperboard business is affected by macro-economic conditions around the world and has historically experienced cyclical market conditions. As a result, historical prices for our products and sales volumes havealso been volatile. Product pricing is significantly affected by the relationship between supplyCOVID-19 pandemic, with increases in some end-market segments like food packaging and demand for our products. Product supplydecreases in the industry is influenced primarily by fluctuations in available manufacturing production, which tends to increase during periods when prices remain strong. In addition, currency exchange rates affect U.S. supplies of paperboard, as non-U.S. manufacturers are more attracted to the U.S. market when the dollar is relatively strong. Additionally, while there has been some announced permanent reduction in solid bleached sulphate, or SBS, paperboard production in North America, there has also been new SBS production capacity brought on line which makes for a dynamic supplyfood service and demand market between paperboard grades and segments.
commercial print.
The markets for our products are highly competitive. Our business is capital intensive, which leads to high fixed costs and large capital outlays and generally results in continued production as long as prices are sufficient to cover variable costs. These conditions have contributed to substantial price competition, particularly during periodseffects of reduced demand. Somethe COVID-19 pandemic may negatively impact various aspects of our competitors have lower production costs, greater buying powerbusiness including, but are not limited to:
•the ability of our suppliers to meet delivery requirements and are integrated, and, as a result, may be less adversely affected than we are by price decreases.commitments;
Net sales consist of sales of consumer tissue, paperboard, and to a lesser extent pulp, net of discounts, returns and allowances and any sales taxes collected.
Operating Costs
Prices for our principal operating cost items are variable and directly affect our results of operations. In a strong economy, we normally would expect our operating costs to increase. Competitive market conditions, however, can limit our ability to pass cost increases through•disruptions to our customers. The following table shows our principal operating cost items and associated percentagesupply chains;
•the ability of net sales for the periods presented:
|
| | | | | | | | | | | | | | | | | |
Cost of sales | | |
| Three Months Ended September 30, | | |
(Dollars in thousands) | 2019 | | 2018 | | |
| Cost | | Percentage of Sales | | Cost3 | | Percentage of Sales | | Cost Variance |
Wages and benefits | $ | 74,004 |
| | 16.6 | % | | $ | 70,143 |
| | 16.4 | % | | $ | 3,861 |
|
Purchased pulp | 50,916 |
| | 11.4 |
| | 45,347 |
| | 10.7 |
| | 5,569 |
|
Transportation1 | 47,705 |
| | 10.7 |
| | 44,264 |
| | 10.4 |
| | 3,441 |
|
Chemicals | 42,151 |
| | 9.5 |
| | 43,096 |
| | 10.1 |
| | (945 | ) |
Chips, sawdust and logs | 40,765 |
| | 9.2 |
| | 41,535 |
| | 9.7 |
| | (770 | ) |
Packaging and operating supplies | 40,479 |
| | 9.1 |
| | 36,399 |
| | 8.5 |
| | 4,080 |
|
Depreciation | 28,371 |
| | 6.4 |
| | 21,790 |
| | 5.1 |
| | 6,581 |
|
Energy | 21,064 |
| | 4.7 |
| | 22,715 |
| | 5.3 |
| | (1,651 | ) |
Maintenance and repairs2 | 32,623 |
| | 7.3 |
| | 19,968 |
| | 4.7 |
| | 12,655 |
|
| 378,078 |
| | 84.9 |
| | 345,257 |
| | 80.9 |
| | 32,821 |
|
Other operating costs | 40,626 |
| | 9.2 |
| | 30,964 |
| | 7.3 |
| | 9,662 |
|
Total cost of sales | $ | 418,704 |
| | 94.1 | % | | $ | 376,221 |
| | 88.2 | % | | $ | 42,483 |
|
| | | | | | | | | |
| Nine Months Ended September 30, | | |
(Dollars in thousands) | 2019 | | 2018 | | |
| Cost | | Percentage of Sales | | Cost3 | | Percentage of Sales | | Cost Variance |
Wages and benefits | $ | 213,019 |
| | 16.1 | % | | $ | 213,316 |
| | 16.4 | % | | $ | (297 | ) |
Purchased pulp | 154,528 |
| | 11.6 |
| | 138,614 |
| | 10.7 |
| | 15,914 |
|
Transportation1 | 146,954 |
| | 11.1 |
| | 155,131 |
| | 12.0 |
| | (8,177 | ) |
Chemicals | 125,856 |
| | 9.5 |
| | 130,719 |
| | 10.0 |
| | (4,863 | ) |
Chips, sawdust and logs | 124,300 |
| | 9.4 |
| | 123,902 |
| | 9.6 |
| | 398 |
|
Packaging and operating supplies | 114,941 |
| | 8.7 |
| | 111,710 |
| | 8.7 |
| | 3,231 |
|
Depreciation | 75,910 |
| | 5.7 |
| | 65,086 |
| | 5.0 |
| | 10,824 |
|
Energy | 70,400 |
| | 5.3 |
| | 64,879 |
| | 5.0 |
| | 5,521 |
|
Maintenance and repairs2 | 67,782 |
| | 5.1 |
| | 55,425 |
| | 4.3 |
| | 12,357 |
|
| 1,093,690 |
| | 82.5 |
| | 1,058,782 |
| | 81.7 |
| | 34,908 |
|
Other operating costs | 119,085 |
| | 9.0 |
| | 97,026 |
| | 7.5 |
| | 22,059 |
|
Total cost of sales | $ | 1,212,775 |
| | 91.5 | % | | $ | 1,155,808 |
| | 89.2 | % | | $ | 56,967 |
|
| |
1
| Includes internal and external transportation costs. |
| |
2
| Excludes related labor costs. |
| |
3
| Certain 2018 operating costs were reclassified to conform to the 2019 presentation. |
Wages and benefits. Costs related to our employees primarily consistto perform their work due to illness caused by the pandemic, the complete or partial closure of wages and related benefit costs and payroll taxes. Wage and benefit costs increased for the three months ended September 30, 2019, compared to the same period in 2018, due primarily to increased headcount at our Shelby, North Carolina facility and annual wage increases, partially offset by reduced headcount resulting from the saleone or more of our Ladysmith, Wisconsin facility in August 2018 and the favorable impact in 2019 of selling, general and administrative, or SG&A, cost reduction efforts implemented throughout 2018. For the nine months ended September 30, 2019, wage and benefit costs were flat compared to the same period in 2018, as reduced headcount related to the sale of our Ladysmith facility and the impact of the SG&A cost reduction efforts were offset by increased headcount at our North Carolina facility and annual wage increases.
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. Purchased pulp costs increased in the three and nine months ended September 30, 2019, compared to the same periods in 2018, primarily as a result of increased purchases of external pulp resulting from a major maintenance outage at our Idaho pulp manufacturing facility in the third quarter of 2019 and the ramp-up of production on our new tissue machine in North Carolina.
Transportation. Fuel prices, mileage driven and line-haul rates largely impact transportation costs for the delivery of raw materials to our manufacturing facilities, internal inventory transfersor local, state, or federal orders requiring employees to remain at home and ;
•disruptions or delays in the delivery of our finished products to customers. Changing fuel prices particularly affect our margins for consumer products because we supply customers throughout the United States and transport unconverted parent rolls from our tissue mills to our tissue converting facilities. Transportation costs increasedcustomers;
•a decrease in the three months ended September 30, 2019, compared to the same period in 2018, due primarily to increased retail tissue case shipmentsdemand for our Consumer Products segment, partially offset by reductions in internal tissue parent roll and finished good shipments as a result of the ramp-up of production on the new tissue machine and converting lines in North Carolina. Transportation costs decreased in the nine months ended September 30, 2019, compared to the same period in 2018, due largely to production from the new tissue machine and converting lines in North Carolina that reduced internal shipments, as well as improvements in our Consumer Products segment's operating model resulting in lower miles shipped overall and lower line haul-rates, partially offset by increased retail tissue case shipments.products;
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. Chips, sawdust and log costs were essentially flat for both the three and nine months ended September 30, 2019, compared to the same periods in 2018. For the three month period, the benefit of lower residual pricing for our Idaho pulp and paperboard facility, as well as lower usage at that facility due to the major maintenance outage in the third quarter of 2019, was offset by higher residual pricing for our Arkansas pulp and paperboard facility due to inclement weather. For the nine month period, unfavorable residual pricing at both our Idaho and Arkansas pulp and paperboard facilities for the nine months ended September 30, 2019 was offset by lower residual usage as a result of the major maintenance outage at the Idaho facility and unplanned downtime at the same facility.
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 paper processing chemicals. A portion of the chemicals used•disruptions in our manufacturing processes, particularlyoperations due to localized conditions;
•limitations on the ability of our customers to pay us on a timely basis; and
•negative impact on some of our customers due to challenging economic conditions.
We are evaluating and taking actions to monitor and ensure appropriate levels of available liquidity and may experience disruptions in our business as we implement modifications to preserve adequate liquidity and ensure that our business can continue to operate during this uncertain time. However, we believe that our cash flows from operations, our cash on hand and our borrowing capacity under our credit agreements will be adequate to fund debt service requirements and provide cash to support our ongoing operations, capital expenditures and working capital needs for the next twelve months.
As the COVID-19 pandemic continues to evolve, we will continue to actively monitor the situation and may take actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the paperboard extrusion process, are petroleum based and are impacted by petroleum prices.
Chemical costs decreased in the three and nine months ended September 30, 2019, compared to the same periods in 2018, due to favorable pricing on polyethylene, caustic and latex, as well as the salebest interests of our Ladysmith manufacturing facility in 2018.employees, customers, suppliers, and shareholders.
Packaging and operating 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 their consumers. Packaging and operating supplies costs increased for the three and nine months ended September 30, 2019, compared to the same periods in 2018, due primarily to increased retail sales volumes at our Consumer Products segment and increased operating supplies usage as a result of the planned major maintenance outage at our Idaho pulp and paperboard facility in the third quarter of 2019.Executive Summary
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 nine months ended September 30, 2019 increased compared to the same periods in 2018 due primarily to the startup of the new Shelby tissue machine and two converting lines, and the resulting commencement of depreciation for these assets, in 2019, as well as additional depreciation expense recorded in association with a review of depreciable lives and remaining salvage values for certain of our fixed assets.
Energy. We use energy in the form of electricity, hog fuel, steam and natural gas to operate our mills. Energy prices may fluctuate widely from period-to-period primarily due to volatility in temperatures and electricity and natural gas rates. We generally strive to reduce our exposure to volatile energy prices through conservation. In addition, a co-generation facility that produces steam and electricity at our Idaho manufacturing site helps to lower our energy costs. Energy costs for the three months ended September 30, 2019 decreased compared to the same period in 2018 due primarily to the sale of our Ladysmith facility in 2018, partially offset by increased natural gas usage in the third quarter of 2019 related to the planned major maintenance at our Idaho pulp and paperboard facility. Energy costs increased for the nine months ended September 30, 2019, compared to the same period in 2018, primarily due to a regional pipeline disruption in the first quarter of 2019 that caused natural gas prices to increase at our Lewiston, Idaho facility, combined with the increased natural gas usage at our Idaho pulp and paperboard facility related to the planned major maintenance, partially offset by the sale of our Ladysmith facility in 2018 and lower electricity prices.
To help mitigate our exposure to changes in natural gas prices, we use firm-price contracts to supply a portion of our natural gas requirements. As of September 30, 2019, these contracts covered approximately 47% of our expected average monthly natural gas requirements for the remainder of 2019, and a lesser amount for 2020.
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 to 24 months at both our Idaho and Arkansas facilities, which increase costs and may reduce net sales in the quarters in which the major maintenance shutdowns occur. During the three and nine months ended September 30, 2019, maintenance and repair spending was higher than the same periods in 2018 due to the planned major maintenance that took place at our Idaho pulp and paperboard facility in the third quarter of 2019, as well as increased maintenance associated with the startup of our new tissue machine in North Carolina. We expect our fourth quarter 2019 planned major maintenance costs to be approximately $6 to $7 million at our Arkansas facility.
Other operating costs. Our other operating costs increased $9.7 million and $22.1 million, respectively, for the three and nine months ended September 30, 2019, compared to the same periods in 2018, due mainly to ramp-up costs associated with the Shelby expansion project, increased purchased paper costs and higher inventory related 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.
Interest expense
Interest expense for the three and nine months ended September 30, 2019 and 2018 includes interest on our $275 million aggregate principal amount of 4.5% senior notes issued in January 2013 and due 2023, which we refer to as the 2013 Notes, and interest on our $300 million aggregate principal amount of 5.375% senior notes issued in 2014 and due 2025, which we refer to as the 2014 Notes. In addition, interest expense includes interest on amounts drawn on our Term Loan Credit Agreement and ABL Credit Agreement entered into on July 26, 2019, as well as interest prior to July 26, 2019 on the amounts drawn under our prior revolving credit facilities. Interest expense also includes amortization of deferred issuance costs associated with all of our notes, Term Loan Credit Agreement and ABL Credit Agreement. These interest expense amounts are partially offset by capitalized interest associated with major capital project spending.
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. The annual effective tax rate is subject to variation due to several factors, including variability in pre-tax income (or loss), changes in tax credits, forecasted pre-tax income (or loss), changes in business practices and tax law developments.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018
The following table sets forth data included in our Consolidated Statements of Operations as a percentage of net sales.
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, |
(Dollars in thousands) | 2019 | | 2018 |
Net sales | $ | 445,188 |
| | 100.0 | % | | $ | 426,460 |
| | 100.0 | % |
Costs and expenses: | | | | | | | |
Cost of sales | (418,704 | ) | | 94.1 |
| | (376,221 | ) | | 88.2 |
|
Selling, general and administrative expenses | (28,944 | ) | | 6.5 |
| | (26,283 | ) | | 6.2 |
|
Gain on divested assets, net | — |
| | — |
| | 22,944 |
| | 5.4 |
|
Total operating costs and expenses | (447,648 | ) | | 100.6 |
| | (379,560 | ) | | 89.0 |
|
(Loss) income from operations | (2,460 | ) | | 0.6 |
| | 46,900 |
| | 11.0 |
|
Interest expense, net | (13,077 | ) | | 2.9 |
| | (7,547 | ) | | 1.8 |
|
Debt retirement costs | (2,725 | ) | | 0.6 |
| | — |
| | — |
|
Non-operating pension and other postretirement benefit costs | (1,421 | ) | | 0.3 |
| | (1,234 | ) | | 0.3 |
|
(Loss) earnings before income taxes | (19,683 | ) | | 4.4 |
| | 38,119 |
| | 8.9 |
|
Income tax benefit (provision) | 8,710 |
| | 1.9 |
| | (3,675 | ) | | 0.8 |
|
Net (loss) earnings | $ | (10,973 | ) | | 2.5 | % | | $ | 34,444 |
| | 8.1 | % |
Net sales—Third quarter 2019 net sales increased compared to the third quarter of 2018, due to higher net paperboard and tissue prices and retail tissue shipments, partially offset by lower non-retail tissue shipments primarily resulting from the sale of our Ladysmith, Wisconsin facility in August 2018. These items are further discussed below under “Discussion of Business Segments.”
Cost of sales—Cost of sales was 94.1% of net sales for the third quarter of 2019 and 88.2% of net sales for the same period in 2018. Our overall cost of sales was $42.5 million higher than the third quarter of 2018, primarily due to costs associated with the planned major maintenance at our Idaho pulp and paperboard facility in the third quarter of 2019, higher purchased pulp costs and increased depreciation expense and ramp-up costs associated with our new paper machine and converting lines at our North Carolina facility.
Selling, general and administrative expenses—Selling, general and administrative expenses for the third quarter of 2019 increased compared to the third quarter of 2018. The increase was primarily due to higher professional fees in the third quarter of 2019 compared to the third quarter of 2018.
Gain on divested assets—On August 21, 2018, we sold our Ladysmith facility for net cash proceeds of approximately $71.0 million. In total, we recorded $22.9 million of gain on the sale in the third quarter of 2018, which included $34.0 million of net assets sold, $14.0 million of goodwill write-off and other expenses related to the sale.
Interest expense—Interest expense for the third quarter of 2019 was $5.5 million higher than the third quarter of 2018 due to higher interest expense associated with a larger average balance on our revolving credit facilities and lower capitalized interest.
Debt retirement costs—In association with the refinancing of our prior revolving credit facilities in the third quarter of 2019, we incurred $2.7 million of debt retirement costs, which consisted largely of breakage fees of $1.7 million and the write-off of unamortized deferred fees associated with the prior credit facilities.
Income tax benefit (provision)—We recorded an income tax benefitincrease of $8.76% in sales to $480.5 million for the three months ended SeptemberJune 30, 2019,2020 compared to a $3.7$452.0 million provision in the same period of 2018. The rate determined under generally accepted accounting principles, or GAAP, for the three months ended SeptemberJune 30, 2019 was a benefit2019. We recorded net income for the three months ended June 30, 2020 of approximately 44%,$22.8 million, or $1.36 per diluted share, compared to a provisionnet loss of approximately 10%$0.4 million or $0.03 per diluted share in the second quarter of 2019. We recorded Adjusted EBITDA for the same periodthree months ended June 30, 2020 of 2018. The rate for the third quarter of 2018 included the benefit of federal income tax credits while the tax benefit for 2019 resulted from the pre-tax loss for the quarter.
Discussion of Business Segments
Consumer Products
|
| | | | | | | |
| Three Months Ended |
| September 30, |
(Dollars in thousands - except per ton amounts) | 2019 | | 2018 |
Net sales | $ | 228,544 |
| | $ | 211,642 |
|
Operating (loss) income | (4,438 | ) | | 21,675 |
|
Percent of net sales | (1.9 | )% | | 10.2 | % |
| | | |
Shipments (short tons) | | | |
Retail | 79,526 |
| | 70,335 |
|
Non-retail | 6,882 |
| | 18,525 |
|
Total tissue tons | 86,408 |
| | 88,860 |
|
Converted products cases (in thousands) | 13,162 |
| | 11,789 |
|
| | | |
Sales price (per short ton) | | | |
Retail | $ | 2,707 |
| | $ | 2,615 |
|
Non-retail | 1,805 |
| | 1,491 |
|
Total tissue | $ | 2,635 |
| | $ | 2,381 |
|
Net sales for the Consumer Products segment during the third quarter of 2019 increased by $16.9$79.0 million compared to $44.3 million reported in the thirdsecond quarter of 2018 due2019.
We recorded an increase of 9% in sales to higher retail tissue volumes sold, increased average selling prices for both retail and non-retail tissue products, and a favorable mix shift to a higher percentage of retail shipments, partially offset by a reduction in non-retail sales volume resulting from the sale of our Ladysmith facility in August 2018.
The segment had an operating loss of $4.4$958.4 million for the third quarter of 2019,six months ended June 30, 2020 compared to operating income of $21.7$880.8 million in the third quarter of 2018 that included a gain of $22.9 million on the sale of our Ladysmith facility. Excluding this gain, the larger loss for the third quarter of 2019 was primarily attributable to higher pulp costs and increased depreciation expense and ramp-up costs associated with our Shelby expansion project.
Pulp and Paperboard
|
| | | | | | | |
| Three Months Ended |
| September 30, |
(Dollars in thousands - except per ton amounts) | 2019 | | 2018 |
Net sales | $ | 216,644 |
| | $ | 214,818 |
|
Operating income | 17,098 |
| | 38,280 |
|
Percent of net sales | 7.9 | % | | 17.8 | % |
| | | |
Paperboard shipments (short tons) | 214,537 |
| | 218,135 |
|
Paperboard sales price (per short ton) | $ | 1,004 |
| | $ | 985 |
|
Net sales for the Pulp and Paperboard segment increased by $1.8 million during the third quarter of 2019, compared to the third quarter of 2018. The increase was due to higher paperboard selling prices from previously announced price increases, partially offset by decreased shipment volumes.
Operatingsix months ended June 30, 2019. We recorded net income for the segment decreased by $21.2six months ended June 30, 2020 of $33.1 million, during the third quarter of 2019,or $1.99 per diluted share, compared to the third quarternet income of 2018, primarily due to the planned major maintenance at our Idaho pulp and paperboard facility$3.4 million or $0.21 per diluted share in the third quartersix months
ended June 30, 2019. We recorded Adjusted EBITDA for the six months ended June 30, 2020 of $134.3 million compared to $84.1 million reported in the first six months of 2019.
RESULTS OF OPERATIONS
Nine Months Ended SeptemberThe increase in sales, net income and Adjusted EBITDA for both the three and six month periods ended June 30, 2019 Compared to Nine Months Ended September 30, 2018
The following table sets forth data included in our Consolidated Statements of Operations2020 was primarily driven by a significantly higher sales volume for retail tissue as a percentage of net sales.
|
| | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(Dollars in thousands) | 2019 | | 2018 |
Net sales | $ | 1,325,960 |
| | 100.0 | % | | $ | 1,295,511 |
| | 100.0 | % |
Costs and expenses: | | | | | | | |
Cost of sales | (1,212,775 | ) | | 91.5 |
| | (1,155,808 | ) | | 89.2 |
|
Selling, general and administrative expenses | (85,942 | ) | | 6.5 |
| | (85,827 | ) | | 6.6 |
|
Gain on divested assets, net | — |
| | — |
| | 22,944 |
| | 1.8 |
|
Total operating costs and expenses | (1,298,717 | ) | | 98.0 |
| | (1,218,691 | ) | | 94.1 |
|
Income from operations | 27,243 |
| | 2.1 |
| | 76,820 |
| | 5.9 |
|
Interest expense, net | (32,477 | ) | | 2.5 |
| | (23,290 | ) | | 1.8 |
|
Debt retirement costs | (2,725 | ) | | 0.2 |
| | — |
| | — |
|
Non-operating pension and other postretirement benefit costs | (4,266 | ) | | 0.3 |
| | (3,700 | ) | | 0.3 |
|
(Loss) earnings before income taxes | (12,225 | ) | | 0.9 |
| | 49,830 |
| | 3.8 |
|
Income tax benefit (provision) | 4,665 |
| | 0.3 |
| | (5,825 | ) | | 0.4 |
|
Net (loss) earnings | $ | (7,560 | ) | | 0.6 |
| | $ | 44,005 |
| | 3.4 |
|
Net sales—Net sales for the nine months ended September 30, 2019 increased by $30.4 million, or 2.4%, compared to the same period in 2018. The increase was primarily due to higher prices for both segments, partially offset by reduced non-retail tissue shipment volumes resulting primarily from the August 2018 saleresult of the Ladysmith facility. These items are further discussed below under “Discussion of Business Segments.”
Cost of sales—Cost of sales was 91.5% of net sales for the nine months ended September 30, 2019COVID-19 pandemic and 89.2% of net sales for the same periodincreases in 2018. Our overall cost of sales was $57.0 million higherdemand based upon new customer programs. Increased demand resulted in the nine months ended September 30, 2019 compared to the same period of 2018, primarilyimproved margins due to increased costs for purchased pulp, maintenanceproduction that drove increased fixed cost absorption.
See discussion on segment level results regarding sales, operating results and energy, as well as higher depreciation expenseAdjusted EBITDA in “Our Operating Results” below.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires our management to select and ramp-up costs associatedapply accounting policies that best provide the framework to report our results of operations and financial position. The selection and application of those policies requires management to make difficult, subjective and complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. As a result, it is possible that materially different amounts would be reported under different conditions or using different assumptions.
As of June 30, 2020, there have been no significant changes with regard to the critical accounting policies disclosed in our Shelby expansion project. These unfavorable comparisons were partially offset by lower transportation and chemical costs.
Selling, general and administrative expenses—Selling, general and administrative expensesAnnual Report on Form 10-K for the nine monthsyear ended September 30, 2019 were comparable to the same period in 2018. Lower wage and benefit expenses in the nine months ended September 30, 2019 and the absence of $6.2 million of reorganization related expenses incurred in the nine months ended September 30, 2018 were offset primarily by $0.1 million of expense related to the mark-to-market adjustment for directors' equity based compensation for the nine months ended September 30, 2019, compared to a $1.9 million benefit for the same period in 2018, and increased legal and professional fees in the nine months ended September 30,December 31, 2019.
Gain on divested assets—On August 21, 2018, we sold our Ladysmith facility for net cash proceeds of approximately $71.0 million. In total, we recorded $22.9 million of gain on the sale in the third quarter of 2018, which included $34.0 million of net assets sold, $14.0 million of goodwill write-off and other expenses related to the sale.
Interest expense—Interest expense for the nine months ended September 30, 2019 increased $9.2 million compared to the same period in 2018 driven by higher interest expense associated with a larger average balance on our revolving credit facilities and lower capitalized interest for the nine months ended September 30, 2019, compared to the same period in 2018.
Debt retirement costs—In association with the refinancing of our prior revolving credit facilities in the third quarter of 2019, we incurred $2.7 million of debt retirement costs in the nine months ended September 30, 2019, which consisted largely of breakage fees of $1.7 million and the write-off of unamortized deferred fees associated with the prior credit facilities.
Income tax benefit (provision)—We recorded an income tax benefit of $4.7 million in the nine months ended September 30, 2019, compared to a provision of $5.8 million in the same period of 2018. The rate determined under GAAP for the nine months ended September 30, 2019 was a benefit of approximately 38%, compared to a provision of approximately 12% for the same period of 2018. The rate for the nine months ended September 30, 2018 included the benefit of federal income tax credits while the tax benefit for the nine months ended September 30, 2019 resulted from the pre-tax loss for the period.
Consumer Products
|
| | | | | | | |
| Nine Months Ended |
| September 30, |
(Dollars in thousands - except per ton amounts) | 2019 | | 2018 |
Net sales | $ | 676,220 |
| | $ | 672,069 |
|
Operating (loss) income | (8,300 | ) | | 19,700 |
|
Percent of net sales | (1.2 | )% | | 2.9 | % |
| | | |
Shipments (short tons) | | | |
Retail | 229,057 |
| | 224,376 |
|
Non-retail | 23,771 |
| | 47,077 |
|
Total tissue tons | 252,828 |
| | 271,453 |
|
Converted products cases (in thousands) | 37,970 |
| | 37,078 |
|
| | | |
Sales price (per short ton) | | | |
Retail | $ | 2,752 |
| | $ | 2,681 |
|
Non-retail | 1,815 |
| | 1,452 |
|
Total tissue | $ | 2,664 |
| | $ | 2,468 |
|
Net sales for our Consumer Products segment increased $4.2 million for the nine months ended September 30, 2019, compared to the same period of 2018, due to higher average net selling prices and a favorable mix shift resulting from a higher percentage of retail sales, partially offset by decreased non-retail sales volume resulting primarily from the sale of our Ladysmith facility in the third quarter of 2018.
The segment had an operating loss of $8.3 million for the nine months ended September 30, 2019, compared to operating income of $19.7 million for the same period of 2018, which included a gain of $22.9 million on the sale of our Ladysmith facility. Excluding this gain, the unfavorable comparison was primarily due to higher pulp costs and ramp-up costs, increased depreciation expense and higher wage and benefit costs associated with the Shelby expansion project, partially offset by lower transportation costs.
Pulp and Paperboard
|
| | | | | | | |
| Nine Months Ended |
| September 30, |
(Dollars in thousands - except per ton amounts) | 2019 | | 2018 |
Net sales | $ | 649,740 |
| | $ | 623,442 |
|
Operating income | 80,073 |
| | 98,626 |
|
Percent of net sales | 12.3 | % | | 15.8 | % |
| | | |
Paperboard shipments (short tons) | 642,559 |
| | 641,026 |
|
Paperboard sales price (per short ton) | $ | 1,003 |
| | $ | 973 |
|
Net sales for the Pulp and Paperboard segment increased by $26.3 million during the nine months ended September 30, 2019, compared to the same period of 2018, due to favorable pricing.
Operating income for the segment decreased $18.6 million during the nine months ended September 30, 2019, compared to the same period of 2018, primarily due to the planned major maintenance at our Idaho pulp and paperboard facility in the third quarter of 2019, as well as higher energy costs. These unfavorable comparisons were partially offset by lower chemical costs and the favorable pricing.
NON-GAAP MEASURES
We useIn evaluating our business, we utilize several non-GAAP financial measures. A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so excluded or included under applicable GAAP guidance. In this report on Form 10-Q, we disclose overall and segment earnings (loss) from operations before interest expense, net, non-operating pension and other post employment benefit costs, taxes, depreciation and amortization, or EBITDA,goodwill impairment, other operating charges, net, and EBITDA adjusted for certain items, ordebt retirement costs as Adjusted EBITDA as supplemental performance measures that are not required by, or presented in accordance with, GAAP. EBITDA andwhich is a non-GAAP financial measure. Adjusted EBITDA shouldis not be considered as alternatives toa substitute for the GAAP measure of net earnings, operating income or for any other performance measure derivedGAAP measures of operating performance.
We have included Adjusted EBITDA on a consolidated and segment basis in accordance with GAAP, orthis report because we use them as alternatives to cash flows from operating activities or a measureimportant supplemental measures of our liquidity or profitability. In addition,performance and believe that they are frequently used by securities analysts, investors and other interested persons in the evaluation of companies in our calculationindustry, some of EBITDA andwhich present Adjusted EBITDA may when reporting their results. We also use Adjusted EBITDA to evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates. It should be noted that companies calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA measures may not be comparable to similarly titled measures usedAdjusted EBITDA reported by other companies.
We present EBITDA and Our Adjusted EBITDA measures have material limitations as performance measures because they exclude interest expense, income tax (benefit) expense and depreciation and amortization which are necessary to operate our business or which we believe they assist investorsotherwise incur or experience in connection with the operation of our business. In addition, we exclude other income and analysts in comparing our performance across reporting periods on a consistent basis by excludingexpense items that we do not believewhich are indicativeoutside of our core operating performance. In addition, we use EBITDA and Adjusted EBITDA: (i) as factors in evaluating management’s performance when determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies and (iii) because our credit agreement and the indenture governing the 2013 Notes use metrics similar to EBITDA to measure our compliance with certain covenants.operations.
The following table provides our EBITDA and Adjusted EBITDA for the periods presented, as well as a reconciliation to net earnings.income.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In millions) | 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) | $ | 22.8 | | | $ | (0.4) | | | $ | 33.1 | | | $ | 3.4 | |
Income tax provision | 10.4 | | | 3.3 | | | 4.2 | | | 4.0 | |
Interest expense, net | 12.0 | | | 10.9 | | | 24.9 | | | 19.4 | |
Depreciation and amortization expense | 27.8 | | | 28.5 | | | 55.8 | | | 54.3 | |
Other operating charges, net | 3.0 | | | 0.4 | | | 11.5 | | | 0.1 | |
Other non-operating expense | 2.0 | | | 1.5 | | | 3.8 | | | 2.8 | |
Debt retirement costs | 1.0 | | | — | | | 1.0 | | | — | |
Adjusted EBITDA | $ | 79.0 | | | $ | 44.3 | | | $ | 134.3 | | | $ | 84.1 | |
| | | | | | | |
Consumer Products segment income | $ | 36.6 | | | $ | (5.1) | | | $ | 50.9 | | | $ | (3.9) | |
Depreciation and amortization | 17.1 | | | 17.4 | | | 34.4 | | | 32.1 | |
Adjusted EBITDA Consumer Products segment | $ | 53.7 | | | $ | 12.3 | | | $ | 85.3 | | | $ | 28.2 | |
| | | | | | | |
Paperboard segment income | $ | 32.2 | | | $ | 33.6 | | | $ | 58.7 | | | $ | 63.0 | |
Depreciation and amortization | 9.2 | | | 9.5 | | | 18.5 | | | 19.0 | |
Adjusted EBITDA Paperboard segment | $ | 41.4 | | | $ | 43.1 | | | $ | 77.2 | | | $ | 82.0 | |
| | | | | | | |
Corporate and other expense | $ | (17.6) | | | $ | (12.7) | | | $ | (31.1) | | | $ | (29.3) | |
Depreciation and amortization | 1.5 | | | 1.6 | | | 3.0 | | | 3.2 | |
Adjusted EBITDA Corporate and other | $ | (16.2) | | | $ | (11.1) | | | $ | (28.1) | | | $ | (26.1) | |
| | | | | | | |
Consumer Products segment | $ | 53.7 | | | $ | 12.3 | | | $ | 85.3 | | | $ | 28.2 | |
Paperboard segment | 41.4 | | | 43.1 | | | 77.2 | | | 82.0 | |
Corporate and other | (16.2) | | | (11.1) | | | (28.1) | | | (26.1) | |
Adjusted EBITDA | $ | 79.0 | | | $ | 44.3 | | | $ | 134.3 | | | $ | 84.1 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Net (loss) earnings | $ | (10,973 | ) | | $ | 34,444 |
| | $ | (7,560 | ) | | $ | 44,005 |
|
Interest expense, net1 | 15,802 |
| | 7,547 |
| | 35,202 |
| | 23,290 |
|
Income tax (benefit) provision | (8,710 | ) | | 3,675 |
| | (4,665 | ) | | 5,825 |
|
Depreciation and amortization expense | 31,990 |
| | 25,342 |
| | 86,343 |
| | 75,686 |
|
EBITDA | $ | 28,109 |
| | $ | 71,008 |
| | $ | 109,320 |
| | $ | 148,806 |
|
Directors' equity-based compensation expense (benefit) | 420 |
| | 769 |
| | 101 |
| | (1,930 | ) |
Non-operating pension and other postretirement benefit costs2 | 1,421 |
| | 1,234 |
| | 4,266 |
| | 3,700 |
|
Reorganization related expenses | 934 |
| | 158 |
| | 986 |
| | 950 |
|
Gain on divested assets, net | — |
| | (22,944 | ) | | — |
| | (22,944 | ) |
Reorganization related expenses associated with SG&A cost control measures | — |
| | 210 |
| | — |
| | 6,390 |
|
Other | — |
| | (338 | ) | | — |
| | — |
|
Adjusted EBITDA | $ | 30,884 |
| | $ | 50,097 |
| | $ | 114,673 |
| | $ | 134,972 |
|
OUR OPERATING RESULTS
Our results of operations for each of our segments are discussed below. See Note 15 "Segment Information" of the Notes to the Consolidated Financial Statements included in Item 1 of this report for further information regarding our segments.
| |
1
Consumer Products | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | | | | | Six Months Ended June 30, | | | | (Dollars in millions, except per unit) | 2020 | 2019 | | Increase (decrease) | | 2020 | 2019 | | Increase (decrease) | Sales: | | | | | | | | | | Retail tissue | $ | 260.4 | | $ | 210.5 | | | 23.7 | % | | $ | 508.4 | | $ | 415.1 | | | 22.5 | % | Non-retail tissue | 10.2 | | 12.3 | | | (17.2) | % | | 24.1 | | 30.7 | | | (21.6) | % | Other | 4.5 | | 1.6 | | | n.m. | | 8.3 | | 1.9 | | | n.m. | | $ | 275.1 | | $ | 224.3 | | | 22.6 | % | | $ | 540.8 | | $ | 447.7 | | | 20.8 | % | | | | | | | | | | | Operating income (loss) | $ | 36.6 | | $ | (5.1) | | | n.m. | | $ | 50.9 | | $ | (3.9) | | | n.m. | Operating margin | 13.3 | % | (2.3) | % | | | | 9.4 | % | (0.9) | % | | | | | | | | | | | | | Adjusted EBITDA | $ | 53.7 | | $ | 12.3 | | | 337.8 | % | | $ | 85.3 | | $ | 28.2 | | | 202.3 | % | Adjusted EBITDA margin | 19.5 | % | 5.5 | % | | | | 15.8 | % | 6.3 | % | | | | | | | | | | | | | Shipments (short tons) | | | | | | | | | | Retail | 95,432 | | 76,175 | | | 25.3 | % | | 186,223 | | 149,531 | | | 24.5 | % | Non-retail | 5,812 | | 6,623 | | | (12.2) | % | | 14,814 | | 16,889 | | | (12.3) | % | | 101,244 | | 82,798 | | | 22.3 | % | | 201,037 | | 166,420 | | | 20.8 | % | | | | | | | | | | | Cases (in thousands) | 16,016 | | 12,488 | | | 28.3 | % | | 31,220 | | 24,808 | | | 25.8 | % | | | | | | | | | | | Sales price (per short ton) | | | | | | | | | | Retail | $ | 2,729 | | $ | 2,764 | | | (1.3) | % | | $ | 2,730 | | $ | 2,776 | | | (1.7) | % | Non-retail | 1,746 | | 1,851 | | | (5.7) | % | | 1,626 | | 1,819 | | | (10.6) | % |
n.m. - not meaningful
Sales volumes increased in our Consumer Products segment for the three and six month periods ended June 30, 2020 compared to the same periods in the prior year due to significantly higher sales volume for retail tissue as a result of the COVID-19 pandemic and increases in demand based upon new customer programs which were implemented prior to the COVID-19 pandemic. Sales prices decreased slightly in our Consumer Products segment for the three and six month periods ended June 30, 2020 compared to the same periods in the prior year due primarily to changes in product mix. From a product perspective, we saw the largest increases in period to period bath tissue and napkin sales with smaller increases in paper towel and facial tissue. As a percentage of our Consumer Products segment, paper towel and bath tissue represent more than 80% of our business. Overall, the increase in operating income and Adjusted EBITDA for the three and six month periods ended June 30, 2020 compared to the same periods in the prior year was driven by higher sales as noted above as well as improvement in margin due to increased production that drove increased fixed cost absorption. Additionally, we realized lower input costs, primarily in external pulp prices and freight costs.
Paperboard | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | | | | | Six Months Ended June 30, | | | | (Dollars in millions, except per ton amounts) | 2020 | 2019 | | Increase (decrease) | | 2020 | 2019 | | Increase (decrease) | Sales: | | | | | | | | | | Paperboard | $ | 204.1 | | $ | 226.2 | | | (9.7) | % | | $ | 415.1 | | $ | 429.2 | | | (3.3) | % | Other | 1.3 | | 1.5 | | | (12.4) | % | | 2.5 | | 3.9 | | | (36.8) | % | | $ | 205.4 | | $ | 227.7 | | | (9.8) | % | | $ | 417.6 | | $ | 433.1 | | | (3.6) | % | | | | | | | | | | | Operating income | 32.2 | | 33.6 | | | (4.2) | % | | 58.7 | | 63.0 | | | (6.8) | % | Operating margin | 15.7 | % | 14.8 | % | | | | 14.1 | % | 14.5 | % | | | | | | | | | | | | | Adjusted EBITDA | $ | 41.4 | | $ | 43.1 | | | (3.8) | % | | $ | 77.2 | | $ | 82.0 | | | (5.9) | % | Adjusted EBITDA margin | 20.2 | % | 18.9 | % | | | | 18.5 | % | 18.9 | % | | | | | | | | | | | | | Shipments (short tons) | 207,410 | | 225,188 | | | (7.9) | % | | 418,706 | | 428,022 | | | (2.2) | % | Sales price (per short tons) | $ | 984 | | $ | 1,004 | | | (2.0) | % | | $ | 991 | | $ | 1,003 | | | (1.2) | % |
Sales volumes decreased in our Paperboard segment for the three and six month periods ended June 30, 2020 compared to the same periods in the prior year due to impacts of COVID-19 which lead to a reduction in our commodity food service business offset by increases in our folding carton and coated cup business. Sales prices decreased in our Paperboard segment for the three and six month periods ended June 30, 2020 compared to the same periods in the prior year due to the impacts of price reductions reported by RISI in February 2020. Overall, the slight decrease in operating income and Adjusted EBITDA for the three and six month periods ended June 30, 2020 as compared to the same periods in the prior year was driven by reduced sales offset by improved input costs, primarily consisting of natural gas, wood and pulp. Corporate expenses Corporate expenses for the three and six month periods ended June 30, 2020 were $17.6 million and $31.1 million and $12.7 million and $29.3 million in the same periods in the prior year. The increases for the three and six month periods ended June 30, 2020 compared to the same periods in the prior year were related to higher incentive pay due to improved results and increased costs associated with professional services. Corporate expenses primarily consist of corporate overhead such as wages and benefits, professional fees, insurance and other expenses for corporate functions including certain executive officers, public company costs, information technology, financial services, environmental and safety, legal, supply management, human resources and other corporate functions not directly associated with the business operations. Other operating charges See Note 9 "Other operating charges" of the Notes to the Consolidated Financial Statements included in Item 1 of this report for additional information. Interest expense Interest expense for the three and six month periods ended June 30, 2020 were $1.1 million and $5.5 million higher compared to the same periods in the prior year due to lower capitalized interest due to the completion of our Shelby expansion in the latter portion of 2019. See Note 10 "Non-operating income (expense)" of the Notes to the Consolidated Financial Statements included in Item 1 of this report for additional information.
| Interest expense, net for the three and nine months ended September 30, 2019 includes debt retirement costs of $2.7 million.
|
| |
2
| In 2018, we adopted Accounting Standards Update 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires all net periodic pension and postretirement costs other than service cost to be presented on a line outside of operating income. Beginning in the first quarter of 2019, we are excluding these non-operating costs from the calculation of Adjusted EBITDA. The corresponding prior period amounts have been reclassified to conform with the current period presentation.
|
LIQUIDITY AND CAPITAL RESOURCES
The following table presents information regardingOur principal sources of liquidity are existing cash balances, cash generated by our cash flows foroperations and our ability to borrow under such credit facilities as we may have in effect from time to time. Our principal uses of liquidity are paying the nine months ended September 30, 2019costs and 2018:expenses associated with our operations, servicing outstanding indebtedness and making capital expenditures. We may also from time to time prepay or repurchase outstanding indebtedness (including by issuing new indebtedness subject to market conditions to refinance such outstanding indebtedness) or acquire assets or businesses that are complementary to our operations.
|
| | | | | | | |
(In thousands) | 2019 | | 2018 |
Net cash flows from operating activities | $ | (16,235 | ) | | $ | 121,099 |
|
Net cash flows from investing activities | (125,780 | ) | | (102,297 | ) |
Net cash flows from financing activities | 127,363 |
| | 44,147 |
|
Cash Flows SummaryOperating Activities
Net cash flows fromprovided by operating activities for the ninesix months ended SeptemberJune 30, 2019 decreased by $137.32020 were $121.1 million compared to $14.7 million in the same periodfirst six months of 2019. This increase was driven by increases in 2018. The decreaseour net income and changes in operating cash flows was largelyworking capital due to higher costincreased demand in our consumer products division which resulted in lower inventories. Accounts receivable and accounts payable agings have remained relatively consistent with balances as of sales as a result of higher purchased pulp, maintenance and energy costs, including higher production costs associated withDecember 31, 2019.
Investing Activities
During the ramp-up of the new tissue machine at our North Carolina facility, as well as an $11.3 million increase in cash paid for interest for the ninesix months ended SeptemberJune 30, 2019.
Net2020, net cash flows used for investing activities for the nine months ended September 30, 2019 increased by $23.5was $17.8 million compared to $108.4 million in the prior year periodperiod. This decrease is primarily due to the completion of our Shelby expansion as well as the Lewiston pulp optimization project in the first half oflate 2019. Included in "Other accrued liabilities" on our Consolidated Balance Sheets was $4.6 million and $28.7 million related to capital expenditures that had not yet been paid at June 30, 2020 and 2019.
Throughout 2020, we expect cash paid for capital expenditures to be approximately $45 to $50 million.
Financing Activities
Net cash flows used by financing activities were $76.5 million for the six months ended June 30, 2020 as compared to provided by financing activities were $127.4 million for the nine months ended September 30, 2019 due to increased net borrowings. With the closing of our $300 million Term Loan Credit Agreement and $250 million ABL Credit Agreement, of which $58 million was advanced, we repaid our $200.0 million outstanding credit agreement balance with Northwest Farm Credit Services and the $135.0 million outstanding balance on our credit agreement with Wells Fargo. Net cash flows provided by financing activities were $44.1 $113.0 million for the same period of 2018, primarily due to net borrowings of $45.0 million on our short-term debt.
Capital Resources
Due to the competitive2019. The change was driven by improved operating results and cyclical nature of the marketslower capital expenditures, resulting in which we operate, there is uncertainty regarding the amount ofadditional available cash flows we will generate during the next twelve months. However, we believe that our cash flows from operations, our cash on hand, and our borrowing capacity under our credit agreements, as discussed below under "Credit Agreements," will be adequate to fund our debt service requirements and provide cash required to support our ongoing operations, capital expenditures, and working capital needs for the next twelve months.
We may choose to refinance all or a portion of our indebtedness on or before maturity. We cannot be certain that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.
Capital Expenditures
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. For the nine months ended September 30, 2019, excluding capitalized interest of $5.7 million, we incurred $73.6 million on capital expenditures, which included $61.9 million of capital spending on strategic projects and other projects designed to reduce future manufacturing costs and provide a positive return on investment. Including $46.5 million of capital expenditures that were incurred in 2018 and paid in 2019, as well as the capitalized interest of $5.7 million, cash paid for capital expendituresrepayments in the ninefirst six months ended September 30, 2019 totaled $125.8 million. Cash paid for capital expenditures in the nine months ended September 30, 2018 totaled $174.0 million, which included capitalized interest of $6.0 million and excluded $78.5 million of capital expenditures that had been accrued but not yet paid as of September 30, 2018.2020.
Senior Notes
Our annual debt service obligation, consisting of cash payments for interest on the 2013 Notes and the 2014 Notes, is estimated to be $28.5 million for 2019. The terms of the 2013 Notes limit our ability and the ability of any restricted subsidiaries to borrow money, pay dividends, redeem or repurchase capital stock, make investments, sell assets, create restrictions on the payment of dividends or other amounts to us from any restricted subsidiaries, enter into transactions with affiliates, enter into sale and lease back transactions, create liens, and consolidate, merge or sell all or substantially all of our assets. The terms of the 2014 Notes limit our ability and the ability of any restricted subsidiaries to incur certain liens, engage in sale and leaseback transactions and consolidate, merge with, or convey, transfer, or lease substantially all of our or their assets to another person.
Credit Agreements
Commencing March 31, 2020, we are required to make quarterly installment payments of approximately $0.8 million on the outstanding principal of our Term Loan Credit Agreement.
In addition, weWe must make mandatory prepayments of principal under the Term Loan Credit Agreement upon the occurrence of certain specified events.events, including based upon a percentage of annual Excess Cash Flow and Senior Secured Leverage Ratio as defined by the Term Loan Credit Agreement. There is uncertainty in the amount of Excess Cash Flow that we may generate during the current fiscal year, therefore, we are unable to estimate the mandatory prepayment under the Term Loan Credit Agreement that could be required at the time such payment is due in 2021. The $60 million prepayment of debt in the first six months of 2020 can offset the mandatory Excess Cash Flow amount. Amounts repaid or prepaid cannot be reborrowed. However, we may add one or more incremental term loan facilities to the Term Loan Credit Agreement, subject to obtaining commitments from any participating lenders and certain other conditions, so long as our first lien secured leverage ratio does not exceed 2.002.00x to 1.00.
At the end of the second quarter of 2020, our first lien secured ratio was 0.97x.
The ABL Credit Agreement includes a $250 million revolving loan commitment, subject to borrowing base limitations. Borrowings under the ABL Credit Agreement are subject to mandatory prepayment in certain circumstances. We may also increase commitments under the ABL Credit Agreement in an aggregate principal amount of up to $100 million, subject to obtaining commitments from any participating lenders and certain other conditions.
OurBoth Credit Agreements contain certain customary representations, warranties, and affirmative and negative covenants. The ABL Credit Agreement also contains a financial covenant, which requires us to maintain a consolidated fixed charge coverage ratio of not less than 1.101.10x to 1.00,1.00x, provided that the financial covenant under the ABL Credit Agreement is only applicable when availability falls below a certain threshold.
$25 million.
At SeptemberJune 30, 2019,2020, we were in compliance with the Credit Agreements,all covenants in both of our credit agreements, and based on our current financial projections, we expect to remain in compliance. However, if our financial position, results of operations or market conditions deteriorate, we may not be able to remain in compliance. There can be no assurance that we will be able to remain in compliance with our Credit
Agreements.credit agreements. If we are unable to do so, it would be necessary to seek an amendment from our lenders, which, if obtained, could require payment of additional fees, increased interest rates or other conditions or restrictions.
See Note 8, "Debt," to the condensed notes to the consolidated financial statements included in this report for additional discussion of our credit agreements.
OTHER FINANCING ARRANGEMENTS
To provide additional working capital, we have agreements with unrelated third-party financial institutions to sell certain trade receivables. For the nine months ended September 30, 2019, we sold $159.3 million of receivables. We also have supply-chain financing programs with financial intermediaries, which provide certain of our vendors the option to be paid by the financial intermediaries on our trade payables earlier than the due date on the applicable invoice. Refer to "Accounts Receivable Arrangements" and "Accounts Payable Arrangements" in Note 1, "Nature of Operations and Basis of Presentation", for further information.
CONTRACTUAL OBLIGATIONS
As of September 30, 2019, except for the new Credit Agreements and the retirement of the Prior Credit Agreements, there were no significant changes to the contractual obligations table disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018. Refer to "Credit Agreements" in Note 8, "Debt", for further discussion.
OFF-BALANCE SHEET ARRANGEMENTS
We currently are not a party to off-balance sheet arrangements that would require disclosure under this section.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires our management to select and apply accounting policies that best provide the framework to report our results of operations and financial position. The selection and application of those policies requires management to make difficult, subjective and complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. As a result, it is possible that materially different amounts would be reported under different conditions or using different assumptions.
As of September 30, 2019, there have been no significant changes with regard to the critical accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
See Note 2, "Recently Adopted and New Accounting Standards", to the Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information regarding recently adopted and new accounting pronouncements.
|
| | | | |
ITEM 3. | |
Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
Our exposure to market risks on financial instruments includes interest rate risk on our secured revolving credit facilities.Term Loan and ABL Credit Agreement. As of SeptemberJune 30, 2019,2020, there were $58.0$239.3 million in borrowings outstanding under our ABL and $300 million under our Term Loan Credit Agreement.credit agreements. The reference interest ratesrate applied to borrowings under the Credit Agreements areis adjusted, often and therefore may react quickly to any movementat our option, at one, two, three, or six month intervals for LIBOR-based borrowings (or daily in the general trendcase of market interest rates. For example, aalternative based rate borrowings). A one percentage point increase or decrease in interest rates, based on assumed outstanding credit facilities' borrowings of $358.0$239.3 million, would have an approximate $3.6$2.4 million annual effect on interest expense. We currently do not attempt to alleviate the effects of short-term interest rate fluctuations on our credit facilities' borrowings through the use of derivative financial instruments.
Commodity Risk
We are exposed to market risk for changes in natural gas commodity pricing, which we partially mitigate through the use of firm price contracts for a portion of our natural gas requirements for our manufacturing facilities. As of September 30, 2019, these contracts covered approximately 47% of our expected average monthly natural gas requirements for the remainder of 2019, and a lesser amount for 2020.
Foreign Currency Risk
We have minimal foreign currency exchange risk. Nearly all of our international sales are denominated in U.S. dollars.
|
| | | | |
ITEM 4. | |
Controls and Procedures |
We maintain “disclosureAs of June 30, 2020, our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have carried out, with the participation of our Disclosure Committee and management, an evaluation of the effectiveness of our disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934 or(the Act). Based upon this evaluation, the Exchange Act,CEO and CFO have concluded that our disclosure controls and procedures are designedeffective to ensureprovide reasonable assurance that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SECthe Securities and Exchange Commission rules and forms and that such information required to be disclosed by us in the reports we file or submit under the Act is accumulated and communicated to our management, including our Chief Executive Officer, or CEO and Chief Financial Officer, or CFO, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally,
Changes in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Material Weaknesses In Internal Control Over Financial Reporting
Subject to the limitations noted above, our management, with the participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the third quarter of 2019. Based on that evaluation, the CEO and CFO have concluded that, as of September 30, 2019, our disclosure controls and procedures were not effective to meet the objective for which they were designed as a result of the material weaknesses in our internal control over financial reporting previously disclosed under Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, or Annual Report.
Remediation Efforts
The material weaknesses in our internal control over financial reporting, which are described more fully in our Annual Report, continued to exist as of September 30, 2019. We are actively engaged in implementing the remediation efforts described in the Annual Report which are designed to address these material weaknesses, and subsequent to the filing of our Annual Report we have implemented enhanced controls governing our sub-certifications and are in the process of hiring additional accounting personnel, implementing enhanced controls governing our risk management committee and our disclosure committee, and designing additional controls over the documentation and application of technical accounting guidance with particular emphasis on events outside the ordinary course of business, including changes to payment arrangements with vendors. While progress has been made, additional time is needed to fully implement and demonstrate the effectiveness of the remediation efforts. We are committed to operating effective controls, and management continues to regularly assess the progress and sufficiency of the ongoing initiatives and make adjustments as and when necessary.
Notwithstanding the identified material weaknesses, management has concluded that the consolidated financial statements included in this quarterly report on Form 10-Q fairly present in all material respects our financial position, results of operations and cash flows at and for the periods presented in accordance with U.S. generally accepted accounting principles.
Changes in Internal Controls
Other than the remediation efforts related to the material weaknesses described in our Annual Report, thereThere was no change in our internal control over financial reporting that occurred during our most recent fiscal quarterthe three months ended June 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II
We may from time to time be involved in claims, proceedings and litigation arising from our business and property ownership. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition.
The COVID-19 pandemic may adversely affect our operations and financial condition.
Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.
The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and financial markets. The outbreak of COVID-19 in many countries, including the United States, has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and, as cases of COVID-19 have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel.
As has been widely reported in the media, companies like ours experienced a significant increase in demand for tissue and paperboard products in the first six months of 2020 as a result of the COVID-19 pandemic, particularly due to residential consumer purchasing behavior. The stocking up of tissue products by residential consumers during the pandemic will likely lead to a drop in regular purchasing as the pandemic, or concerns as to tissue shortages as a result of the pandemic, subside. We expect that residential consumer demand will flatten and that sales of tissue and paperboard products will eventually normalize in terms of annual volumes.
Nevertheless, our business, the businesses of our customers and the businesses of our suppliers could be materially and adversely affected by the impact and risks of the pandemic. Such risks include, but are not limited to, the following:
•the complete or partial closure of one or more of our manufacturing facilities;
•limitations on our ability to operate our business as a result of any federal, state or local regulations, including any changes to the designation of our business as “essential” by the US Department of Homeland Security;
•disruptions to international trade, or further restrictions or prohibitions on international travel, on which we rely to make our products (for example, an interruption in eucalyptus pulp from Brazil or lack of availability for spare parts or technical support from European suppliers of our production and converting equipment);
•a decrease in demand for our products as a result of a prolonged economic downturn or global recession (for example, during previous, extreme recessionary periods in the U.S., we experienced significant declines in demand for our paperboard used in folding carton, cup and liquid packaging applications);
•the interruption of our distribution system or delays in the delivery of our products;
•temporary or long-term disruption in our supply chains (for example, governmental restrictions on construction and the resulting decline in lumber production could result in a decline in the availability of wood residuals);
•volatility related to pension plan assets (for example, we may need to make additional contributions to address an increase in obligations and/or a loss in plan assets as a result of the combination of declining market interest rates and/or past or future plan asset investment losses);
•significant disruption of global financial markets, which could have a negative impact on our ability to access capital in the future;
•a decline in our ability to collect on accounts receivable, which could materially affect our liquidity;
•bankruptcy of customers that leads to a decrease in demand for our products;
•the loss of our management team and employee base that possess unique technical skills for the execution of our business plan; and
•an interruption in processing or an inability to process accounts payable by our third-party processor, which could result in our suppliers and vendors withholding supplies or services.
The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict, as information is rapidly evolving with respect to the duration and severity of the pandemic. At this point, we cannot reasonably estimate the duration and severity of the COVID-19 pandemic, or its overall impact on our business. Moreover, many of the risk factors set forth in our Form 10-K for the year ended December 31, 2019 should be interpreted as heightened risks as a result of the COVID-19 pandemic.
There are no other material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. See Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, entitled “Risk Factors.”
| | | | | |
ITEM 2. | Unregistered Sale of Equity Securities |
None.
| | | | | |
ITEM 3. | Defaults Upon Senior Securities |
None.
| | | | | |
ITEM 4. | Mine Safety Disclosures |
Not applicable.
None.
ITEM 6.
Exhibits
| | | | | | | | |
EXHIBIT NUMBER | | DESCRIPTION |
| | |
| | |
EXHIBIT
NUMBER 10.1 | | DESCRIPTION |
10.1* | | |
| | |
10.2 | | |
| | |
10.2* | | |
| | |
10.3 | | |
| | |
(31)31 | | |
| | |
(32)32*** | | |
| | |
101.INS | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
101.INS | | XBRL Instance Document |
| | |
101.SCH | | XBRL Taxonomy Extension Schema. |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase. |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase. |
| | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase. |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase. |
| | | | | |
* | Incorporated by reference. |
| |
*
| Incorporated by reference. |
| |
** | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act. |
| |
| |
| |
| |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | | | | |
| | | | |
| | | | |
| | | CLEARWATER PAPER CORPORATION | |
| | | (Registrant) | |
| | | | |
| | | | |
November 5, 2019August 4, 2020 | | By | By: | /s/ ROBERT G. HRIVNAKARSEN S. KITCH |
| | | | Robert G. HrivnakArsen S. Kitch |
| | | | President, Chief Executive Officer and Director (Principal Executive Officer) |
| | | | |
| | | | |
August 4, 2020 | | | By: | /s/ MICHAEL J. MURPHY |
| | | | Michael J. Murphy |
| | | | Senior Vice President, Finance and |
| | | | Chief Financial Officer |
| | | | (Duly Authorized Officer; Principal |
| | | | (Principal Financial Officer and Principal |
| | | | Accounting Officer) |
| | | | |
| | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |