The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and related notes that appear elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including those set forth in the section entitled "Risk Factors" and elsewhere in this report. A discussion of the earliest year may be found in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10K filed onMarch 9, 2020 . OVERVIEW Impact of COVID-19 During 2020, we actively addressed the COVID-19 pandemic and its impact on our business and operations. We believe that the actions we took in 2020 in response to the pandemic will position us well for long-term growth. However, we cannot reasonably estimate the duration and severity of the COVID-19 pandemic or its ultimate impact on the global economy, our business and results and the markets in which we operate. We experienced increased volatility in demand in 2020 for some of our products as consumers adapted to the evolving environment. Beginning in the first quarter of 2020, demand across our consumer tissue products (Consumer Products segment) increased as consumers increased home inventory levels in response to COVID-19. We expect the increase to be followed by periods of potential demand softness and volatility as consumers use existing home inventories and demand potentially returns to more normal levels. Executive Summary For the year ended 2020, we reported net sales of$1.9 billion , up from$1.8 billion reported for the year ended 2019. We reported net income for the year of$77.1 million , or$4.61 per diluted share, compared to a net loss of$5.6 million or$0.34 per diluted share in 2019. Adjusted EBITDA was$283.2 compared to$167.3 million reported in 2019. Increases in Adjusted EBITDA for 2020 as compared to 2019 was primarily driven by a significantly higher sales volume for retail tissue as a result of the COVID-19 pandemic. Increased demand resulted in increased production which in turn drove increased fixed cost absorption and improved margins. The pulp and paperboard business also benefited on a comparative basis due to the absence of major maintenance in our pulp and paperboard operations. See discussion on segment level results regarding sales, operating results and Adjusted EBITDA in "Our Operating Results" below. See Note 17 "Segment Information" of the Notes to Consolidated Financial Statements included in Item 8 of this report for further information. Drivers Tissue Industry Overview TheU.S. tissue market can be divided into two market segments: the at-home or consumer retail purchase segment, which represented about 72% of 2020 U.S. tissue market sales and away-from-home segment, representing the remaining 28% ofU.S. tissue market sales and includes tissue for locations such as restaurants, hotels and office buildings (according to Fastmarkets RISI(RISI) Outlook for World Tissue Business,September 2020 ). TheU.S. at-home tissue segment consists of bath, paper towels, facial and napkin products categories. Each category is further distinguished according to quality segments: ultra, premium, value and economy. As a result of manufacturing process improvements and consumer preferences, the majority of at-home tissue sold inthe United States is ultra and premium quality. At-home tissue producers are comprised of companies that manufacture branded tissue products, private label tissue products, or both. Branded tissue suppliers manufacture, market and sell tissue products under their own nationally branded labels. Private label tissue producers manufacture tissue products for retailers to sell as their store brand. The following charts, with data from RISI, provides a breakdown of private brand versus branded offerings and product mix for the at-home industry: 22 --------------------------------------------------------------------------------
[[Image Removed: clw-20201231_g3.jpg]] [[Image Removed: clw-20201231_g4.jpg]]
Source: RISI, Outlook for Worlds Tissue Business,
In theU.S. , at-home tissue is primarily sold through grocery stores, mass merchants, warehouse clubs, drug stores and discount dollar stores. Tissue has experienced steady demand growth largely due to population growth inthe United States . In addition to economic and demographic drivers, tissue demand is affected by product innovations and shifts in distribution channels. TheU.S. tissue 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 for consumer tissue products has experienced a significant increase for at-home tissue products in 2020 primarily driven by the COVID-19 pandemic which resulted in a shift of tissue consumption from away-from-home to at-home . As consumers return to pre-COVID away from home activities, we expect this demand for tissue to normalize and approach pre-COVID-19 levels. Paperboard Industry Overview SBS paperboard is a premium paperboard grade that is most frequently used to produce folding cartons, liquid packaging, cups and plates, blister and carded packaging, top sheet and commercial printing items. SBS paperboard is used for such products because it is manufactured using virgin fiber combined with the kraft bleaching process, which results in superior cleanliness, brightness and consistency. SBS paperboard is often manufactured with a clay coating to provide superior surface printing qualities. In general, the process of making paperboard begins by chemically cooking wood fibers to make pulp. The pulp is bleached to provide a white, bright pulp, which is formed into paperboard. Bleached pulp that is to be used as market pulp is dried and baled on a pulp drying machine, bypassing the paperboard machines. The various grades of paperboard are wound into rolls for converting to final end users. Liquid packaging and cup stock grades are often coated with polyethylene, a plastic coating, in a separate operation to create a resistant and durable liquid barrier. The chart below illustrates the North American Paperboard production by type (as reported by RISI North American Capacity report as ofSeptember 2020 ): [[Image Removed: clw-20201231_g5.jpg]] Source:RISI NA Capacity Report as ofSeptember 2020 with adjustments based upon RISI announced closures and curtailments, in tons. 23 -------------------------------------------------------------------------------- Folding Carton Category. Folding carton is the largest portion of the SBS category of theNorth America paperboard industry. Within the folding carton segment, there are varying qualities of SBS paperboard, as well as competing paperboard substrates that can be substituted for SBS. The high end of the folding carton category requires a premium print surface and includes uses such as packaging for pharmaceuticals, cosmetics and other premium retail goods. SBS paperboard is also used in the packaging of frozen foods, beverages and baked goods.Liquid Packaging . Liquid packaging paperboard is used in rigid containers including juice, milk and wine sold in supermarket retail channels Cup and Plate Category. Cup and plate category is primarily converted into packaging for premium ice cream, hot and cold cups used in quick service channels and commodity focus plates. Other. Other applications include carded packaging for blister board alternatives (ie. batteries and lip stick) and bleached bristols which are used to produce premium printing heavyweight papers grades used in commercial application. Bristols can be clay coated on one side or both sides for applications such as brochures, presentation folders and paperback book covers. The paperboard industry is affected by macro-economic conditions around the world and has historically experienced cyclical market conditions. As a result, historical prices for products and sales volumes have been volatile. Product pricing is significantly affected by the relationship between supply and demand for our products. Product supply in the industry is influenced primarily by fluctuations in available manufacturing production, which tends to increase during periods when prices remain strong. In 2020, demand for paperboard products has been affected by the COVID-19 pandemic, with increases in some end-market segments like food packaging and decreases in food service and commercial print. Critical Accounting Policies and Significant Estimates A discussion of our significant accounting policies and significant accounting estimates and judgments is presented in Note 1 of the Notes to Consolidated Financial Statements in Item 8 of this report. Throughout the preparation of the financial statements, we employ significant judgments in the application of accounting principles and methods. We believe that the accounting estimates discussed below represent the accounting estimates requiring the exercise of judgment where a different set of judgments could result in the greatest changes to reported results. We reviewed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board of Directors. For 2020, these significant accounting estimates and judgments include: Pension and Other Post Retirement Employee Benefits We have a number of pension plans inthe United States covering many of our employees. Benefit accruals under most of our defined benefit pension plan inthe United States were frozen prior toJanuary 2014 . We account for the consequences of our sponsorship of these plans using assumptions to calculate the related assets, liabilities and expenses recorded in our financial statements. Net actuarial gains and losses occur when actual experience differs from any of the assumptions used to value defined benefit plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value obligations as of the measurement date and the differences between expected and actual returns on pension plan assets. This accounting method results in the potential for volatile and difficult to forecast gains and losses. We record amounts relating to these defined benefit plans based on various actuarial assumptions, including discount rates, assumed rates of return, compensation increases and life expectancy. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current economic conditions and trends. We believe that the assumptions utilized in recording our obligations under our plans are reasonable based on our experience and on advice from our independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect our financial condition or results of operations. The following table illustrates the estimated impact on hypothetical pension obligations and expenses that would have resulted from a 25 basis point reduction in two key assumptions (in millions): (in millions) Statement of Operations Balance Sheet Impact Discount rate $ 0.5 $
9.6
Expected long term rate of return $ 0.7 $
-
24 -------------------------------------------------------------------------------- It is not possible to forecast or predict whether there will be actuarial gains and losses in future periods, and if required, the magnitude of any such adjustment. These gains and losses are driven by differences in actual experience or changes in the assumptions that are beyond our control, such as changes in interest rates and the actual return on pension plan assets. Non-GAAP Financial Measures In evaluating our business, we utilize several non-GAAP financial measures. A non-GAAP financial measure is generally defined by theSEC 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-K, 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, goodwill impairment, other operating charges, net, and debt retirement costs as Adjusted EBITDA which is a non-GAAP financial measure. Adjusted EBITDA is not a substitute for the GAAP measure of net income or for any other GAAP measures of operating performance. We have included Adjusted EBITDA on a consolidated and business segment basis in this report because we use it as important supplemental measures of our performance and believe that it is frequently used by securities analysts, investors and other interested persons in the evaluation of companies in our industry, some of which present Adjusted EBITDA when reporting their results. We 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 Adjusted EBITDA reported by other companies. 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 otherwise incur or experience in connection with the operation of our business. In addition, we exclude other income and expense items which are outside of our core operations. 25 -------------------------------------------------------------------------------- The following table provides our Adjusted EBITDA reconciliation for the last three years: (In millions) Year ended December 31, 2020 2019 2018 Net income (loss)$ 77.1 $ (5.6) $ (143.8) Income tax provision (benefit) 21.1 (2.3) 10.3 Interest expense, net 46.5 44.9 30.7 Debt retirement costs 5.9 2.7 - Depreciation and amortization expense 111.0 115.6 101.9 Goodwill impairment - - 195.1 Other operating charges, net 14.0 6.3 (17.5) Other non-operating expense 7.6 5.7 4.9 Adjusted EBITDA$ 283.2 $ 167.3 $ 181.6
Consumer Products segment income (loss)
68.5 69.7 57.8
Adjusted EBITDA Consumer Products segment
Pulp and Paperboard segment income$ 126.0 $ 115.3 $ 130.9 Depreciation and amortization 36.7 39.4 37.8
Adjusted EBITDA Pulp and Paperboard segment
Corporate and other expense$ (63.0) $ (57.0) $ (51.5) Depreciation and amortization 5.8 6.5 6.3 Adjusted EBITDA Corporate and other$ (57.2) $ (50.5) $ (45.2) Consumer Products segment$ 177.7 $ 63.1 $ 58.1 Pulp and Paperboard segment 162.6 154.7 168.7 Corporate and other (57.2) (50.5) (45.2) Adjusted EBITDA$ 283.2 $ 167.3 $ 181.6 26
-------------------------------------------------------------------------------- OUR OPERATING RESULTS Consumer Products Segment Our Consumer Products segment sells and manufacturers a complete line of at-home tissue products and minor amounts of away from home products. Our integrated manufacturing and converting operations and geographic footprint enable us to deliver a broad range of cost-competitive products with brand equivalent quality to our customers. Segment sales, operating income and Adjusted EBITDA for the Consumer Products segment were as follows: (Dollars in millions, except per unit) Increase (decrease) Year ended December 31, 2020 2019 2018 2020 - 2019 2019 - 2018 Sales: Retail tissue$ 975.8 $ 845.6 $ 794.4 15.4 % 6.4 % Non-retail tissue 41.1 56.5 88.2 (27.3) % (35.9) % Other 15.8 4.8 2.2 231.2 % 113.6 %$ 1,032.7 $ 906.8 $ 884.8 13.9 % 2.5 % Operating income (loss)$ 109.2 (6.6) 0.3 nm nm Operating margin 10.6 % (0.7) % - % Adjusted EBITDA$ 177.7 $ 63.1 $ 58.1 181.4 % 8.6 % Adjusted EBITDA Margin 17.2 % 7.0 % 6.6 % Shipments (short tons): Retail tissue 355,862 308,805 293,856 15.2 % 5.1 % Non-retail tissue 25,111 32,164 58,577 (21.9) % (45.1) % Cases (in thousands) 59,596 51,260 48,699 16.3 % 5.3 % Sales price (short tons): Retail tissue$ 2,742 $ 2,738 $ 2,703 0.1 % 1.3 % Non-retail tissue$ 1,636 $ 1,756 $ 1,506 (6.8) % 16.6 % Sales volumes increased in our Consumer Products segment for 2020 compared to 2019 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 changed in our Consumer Products segment for 2020 compared to the same period in the prior year due primarily to changes in product mix. From a product perspective, for 2020 compared to 2019, we saw the largest increases in bath tissue. As a percentage of our Consumer Products segment, bath tissue and paper towels combined represent more than 80% of our business. We have seen a significant reduction in our non-retail business due to the COVID-19 pandemic which was driven by lower away-from-home products and decreases in contract manufacturing and parent roll sales. Overall, the increase in operating income and Adjusted EBITDA for 2020 compared to 2019 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. 27
-------------------------------------------------------------------------------- Pulp and Paperboard Segment Our Pulp and Paperboard segment markets and produces bleached paperboard to quality-conscious printers and packaging converters, and offers services that include custom sheeting, slitting and cutting. Segment sales, operating income and Adjusted EBITDA for the Pulp and Paperboard segment were as follows: (Dollars in millions, except per unit) Increase (decrease) Year ended December 31, 2020 2019 2018 2020 - 2019 2019 - 2018 Sales: Paperboard$ 828.3 $ 846.7 $ 835.5 (2.2) % 1.3 % Other 7.6 7.9 3.9 (4.0) % 320.0 %$ 835.9 $ 854.7 $ 839.4 (2.2) % 1.8 % Operating income$ 126.0 $ 115.3 $ 130.9 9.2 % (11.9) % Operating margin 15.1 % 13.5 % 15.6 % Adjusted EBITDA$ 162.6 $ 154.7 $ 168.7 5.1 % (8.3) % Adjusted EBITDA Margin 19.5 % 18.1 % 20.1 % Shipments (short tons) 821,415 827,913 835,372 (0.8) % (0.9) % Sales price (short tons)$ 1,008 $ 1,023 $ 1,000 (1.4) % 2.3 % Sales volumes decreased in our Pulp and Paperboard segment for 2020 compared to 2019 due to impacts of COVID-19 which led 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 Pulp and Paperboard segment for 2020 compared to 2019 due to the impacts of mix and some price reductions. During 2019, the Pulp and Paperboard segment completed its planned major maintenance which resulted in higher operating costs during that year. Overall, the increase in operating income and Adjusted EBITDA for 2020 as compared to 2019 was driven by reduced sales offset by improved input costs, primarily consisting of natural gas, wood and pulp and absence of planned major maintenance. Corporate expenses Corporate expenses were$63.0 million in 2020 as compared to$57.0 million in 2019. The increase for the year ended 2020 as compared to 2019 was 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 10 "Other Operating Charges, net" of the Notes to the Consolidated Financial Statements included in Item 8 of this report for additional information. Interest expense, net Interest expense for the year endedDecember 31, 2020 compared toDecember 31, 2019 was$1.6 million higher due to the absence of capitalized interest due to the completion of our Shelby expansion in the latter portion of 2019. See Note 11 "Non-operating income (expense)" of the Notes to the Consolidated Financial Statements included in Item 8 of this report for additional information. Potential impairments We review from time to time possible dispositions or reorganization of various assets in light of current and anticipated economic and industry conditions, our strategic plan and other relevant factors. Because a determination to dispose or reorganize particular assets may require management to make assumptions regarding the transaction structure 28 -------------------------------------------------------------------------------- of the disposition or reorganization and to estimate the net sales proceeds, which may be less than previous estimates of undiscounted future net cash flows, we may be required to record impairment charges in connection with decisions to dispose of assets. LIQUIDITY AND CAPITAL RESOURCES Overview Our principal sources of liquidity are existing cash, cash generated by our operations and our ability to borrow under such credit facilities as we may have in effect from time to time. At times, we may also issue equity, debt or hybrid securities or engage in other capital market transactions. Due to the competitive and cyclical nature of the markets in which we operate, there is uncertainty regarding the amount of 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 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. Our principal uses of liquidity are paying the costs and expenses associated with our operations, servicing outstanding indebtedness and making capital expenditures. We may also from time to time prepay or repurchase outstanding indebtedness or shares or acquire assets or businesses that are complementary to our operations. Any such repurchases may be commenced, suspended, discontinued or resumed, and the method or methods of effecting any such repurchases may be changed at any time or from time to time without prior notice. Operating Activities During 2020, we generated$247.0 million of cash from operations, as compared to$55.6 million in 2019. This increase was driven by increases in our net income and changes in working capital due to increased demand in our consumer products division which resulted in lower inventories. Accounts receivable and accounts payable agings have remained relatively consistent with balances as ofDecember 31, 2019 . Investing Activities During 2020, we used$39.6 million in cash from investing activities, as compared to$140.1 for capital expenditures during 2019.This decrease is primarily due to the completion of our Shelby expansion in late 2019. Included in accounts payable and accrued liabilities was$5.5 million and$6.6 million related to capital expenditures that had not yet been paid atDecember 31, 2020 . Financing Activities Net cash flows used in financing activities were$192.9 million for 2020 as compared to net cash flows provided by financing activities of$82.0 million for 2019. The change was driven by improved operating results and lower capital expenditures, resulting in additional available cash to fund debt repayments in the year endedDecember 31, 2020 . Commitments As ofDecember 31, 2020 , we have purchase commitments of$76.0 million related to contracts for the purchase of chemicals, pulp and contracts with natural gas and electricity providers that are legally binding on us and specify fixed or minimum quantities. Additionally, we have$17.4 million in purchase commitment associated with capital expenditures. 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. Our strategic projects are intended to grow our business to meet customer demands and to reduce future manufacturing costs and provide a positive return on investment. In 2021, we expect cash paid for capital expenditures to be approximately$60 million to$65 million . 29 -------------------------------------------------------------------------------- Credit Agreements We must make mandatory prepayments of principal under the Term Loan Credit Agreement upon the occurrence of certain specified events, including based upon a percentage of annual Excess Cash Flow we generate which can fluctuate depending on our Senior Secured Leverage Ratio (as those terms are defined in the Term Loan Credit Agreement). For instance, if our Senior Secured Leverage Ratio on the last day of a fiscal year is below 1.50x, we are not subject to an Excess Cash Flow mandatory prepayment. 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 2022. During the year endedDecember 31, 2020 , we prepaid$170 million of principal under the Term Loan Credit Agreement which offsets the mandatory prepayment that would otherwise have been required in 2021. 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 2.00x to 1.00x. AtDecember 31, 2020 , our first lien secured leverage ratio was 0.39x. 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. Both 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 1.10x to 1.00x, provided that the financial covenant under the ABL Credit Agreement is only applicable when availability falls below$25 million . AtDecember 31, 2020 , we were in compliance with the 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. 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 Notes to Consolidated Financial Statements included in this report for additional discussion of our Credit Agreements. 30
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