Business News

Caraustar Industries, Inc. Reports Third Quarter 2008 Results

Monday 03. November 2008 - -- EBITDA of $12.8 million -- Non-cash goodwill write-off of $125.3 million -- Cash of $37.7 million; Liquidity of $80.8 million

Caraustar Industries, Inc. (NASDAQ:CSAR) today announced that sales from continuing operations for the third quarter ended September 30, 2008 were $214.5 million compared to sales of $209.6 million for the same quarter in 2007. Income from operations before restructuring and impairment costs for the third quarter ended September 30, 2008 was $7.0 million compared to $6.2 million for the same quarter in 2007. Net loss from continuing operations for the third quarter of 2008 was $75.4 million, or a loss of $2.63 per share, compared to 2007 third quarter income of $1.1 million, or $0.04 per share. The third quarter 2008 and 2007 results from continuing operations included a pre-tax restructuring and impairment gain of approximately $809 thousand, or $0.02 per share, and a charge of $157 thousand, or $0.00 per share, respectively. The $98.4 million decrease in pre-tax operating results was primarily attributable to the non-cash impairment of goodwill of $125.3 million, which was offset by other lower restructuring and impairment costs of $1.0 million, lower interest expense of $0.9 million and a gain on the sale of the company’s fifty-percent interest in Premier Boxboard Limited, LLC (PBL) of $23.8 million. The Benefit for Income Taxes in the third quarter 2008 was $21.3 million dollars. Timing and permanent adjustments resulted in a 22 percent effective tax rate for the quarter versus the 38 percent statutory tax rate. The unfavorable income tax rate impact was $15.5 million (54 cents per share).

On July 24 2008, Caraustar sold its fifty-percent interest in PBL to its joint venture partner, Temple Inland, Inc. for $62 million pre-tax. The company used approximately $31 million of the proceeds to repay all outstanding debt under its Senior Credit Facility and had excess sale proceeds of approximately $31 million. The company also announced on July 22, 2008 the closure of its Chattanooga paperboard mill, which is expected to save approximately $9.0 million (pre-tax) in costs annually. Non-cash impairment of fixed assets of $5.0 million was recorded as of June 30, 2008 and cash costs (related to severance) of approximately $1.0 million were incurred in the third quarter of 2008. At June 30, 2008, the company had $125.3 million of recorded goodwill, which represented the excess purchase price over the fair value of the net tangible and intangible assets acquired in prior periods. Goodwill is reviewed at least annually or more frequently on the occurrence of events or circumstances which may indicate that fair values exceed carrying values. During the third quarter of 2008, the company determined that recorded amounts of goodwill were not supported by the fair values as calculated by several methods, including the impact of the decline in the company’s share price during the quarter. Accordingly, a non-cash goodwill impairment loss of $125.3 million was recorded as of September 30, 2008. The company has amortizable basis of approximately $43 million in goodwill for federal income tax purposes, which is available to offset future taxable income from operations or gains from sales of assets, subject to potential limitations under the Internal Revenue Code.

Total paperboard volume for the third quarter of 2008 decreased approximately 13.8 thousand tons, or 5.9 percent, compared to the same quarter last year. The decrease was attributable to 23.2 thousand tons of lower gypsum facing paper and other specialty paperboard volume from PBL (which was sold on July 24, 2008) and 1.2 thousand tons of lower coated recycled boxboard (CRB) volume from downtime associated with a machine upgrade. This was partly offset by an increase in same-mill uncoated recycled boxboard (URB) volume of 4.2 thousand tons and an increase in outside purchases of 6.4 thousand tons. Caraustar’s mill capacity utilization was 96.0 percent, comparing favorably with industry capacity utilization of 85.4 percent. Versus the same quarter last year, mill margins were essentially flat as increased selling prices of $11 per ton and decreased fiber costs of $2 per ton were offset by higher fuel and energy costs of $15 per ton. Tube and core margins increased $26 per ton, primarily due to a decrease in paperboard cost of $24 per ton and an increase in selling price of $2 per ton versus the same period last year.

Nine-month period ended September 30, 2008

Sales from continuing operations for the nine months ended September 30, 2008 were $648.0 million compared to sales of $650.3 million for the same period in 2007. Income from operations before restructuring and impairment costs for the nine months ended September 30, 2008 was $12.6 million compared to $7.7 million for the same period in 2007. Net loss from continuing operations for the nine months ended September 30, 2008 was $78.8 million, or a loss of $2.75 per share, compared to a loss of $10.6 million, or a loss of $0.37 per share, in the same period last year. Results from continuing operations for the nine-month periods ended September 30, 2008 and 2007 included restructuring and impairment costs of approximately $5.8 million, or $0.13 per share, and $9.7 million, or $0.22 per share, respectively. The $87.9 million decrease in pre-tax operating results was primarily attributable to the impairment of goodwill of $125.3 million, which was offset by lower selling, general and administrative costs of $3.7 million, lower restructuring and impairment costs of $3.9 million, lower interest expense of $1.8 million, increased income from unconsolidated affiliates of $2.7 million and a $23.8 million gain on the sale of the company’s fifty-percent ownership interest in Premier Boxboard Limited, LLC (PBL).

Michael J. Keough, president and chief executive officer of Caraustar, commented, “Caraustar’s operating results for the third quarter 2008 were significantly improved sequentially and over the same period last year, despite a challenging economic environment. Year-over-year increases in selling prices were mostly offset by increases in energy. Our margin improvement was primarily the result of internal cost take-out and restructuring initiatives implemented in prior periods. Our investments in strategic capital projects have enabled us to provide cost effective, value-added products that have improved mix.

“While we are pleased to see positive results from these efforts, our financial performance was clearly impacted by global recessionary fears, increased energy costs and a depressed housing market. Input cost and market volatility will continue to be significant drivers throughout the remainder of 2008. Our liquidity position is improved compared to both December 31, 2007 and the second quarter of 2008. EBITDA was approximately $13 million for the third quarter 2008. While we have clearly been attentive to the business and have improved our operating results, our main focus and top priority continues to be the redemption of our Senior Notes, which mature in June 2009. To this end, on October 29, 2008, the company announced that it is marketing its Recovered Fiber Group for sale.”

Joint Ventures

Caraustar’s former fifty-percent ownership interest in the PBL mill contributed $611 thousand in equity in income from unconsolidated affiliates for the three weeks in operation in the third quarter 2008 versus $430 thousand in the third quarter of 2007. Cash distributions were $1.6 million in the third quarter 2008 compared to $1.0 million for the same period last year. For the nine-month periods ended September 30, 2008 and 2007, equity in income from unconsolidated affiliates was $3.7 million and $0.9 million, respectively. Cash distributions were $5.6 million in the nine-month period ended September 30, 2008 compared to $1.0 million for the same period last year. Both the increase in earnings and cash distributions were attributable to increased margins.

Liquidity

The company ended the quarter with a cash balance of $37.7 million compared to $6.5 million at December 31, 2007. For the nine-month periods ended September 30, 2008 and 2007, the company generated $9.7 million and used $5.5 million, respectively, of cash in operating activities. The $15.2 million increase in cash generated from operating activities in the first nine months of 2008 versus the first nine months of 2007 was primarily due to improved operating results, excluding both the goodwill impairment and the gain on the sale of PBL. Year-to-date capital expenditures decreased to $9.3 million from $20.7 million in 2007.

As of September 30, 2008, the company had $43.1 million of availability under its Senior Credit Facility after giving effect to $16.1 million in letters of credit and the $15 million minimum availability reserve, both of which reduced availability. The company is in negotiations to amend its Senior Credit Facility to extend the December 1, 2008 date at which time it is required to advise its participating lenders of its plan to refinance or defease the Senior Notes in the amount of approximately $190 million that are due June 1, 2009.

The 7.375 percent Senior Notes due on June 1, 2009 are recorded as a current liability, which results in a working capital deficit as of September 30, 2008. The company expects to use cash generation and any net proceeds from asset sales to enhance liquidity and to generate the additional liquidity required to satisfy its obligations on maturity of the 7.375 percent Senior Notes due June 1, 2009. In the current environment, no assurance can be given that such efforts will produce sufficient liquidity to permit the company to refinance the Senior Notes on terms favorable to the company, or at all. The company continues to focus on refinancing the Senior Notes.