Business News

Caraustar Industries, Inc. Reports Fourth Quarter and Full-Year 2008 Results

Monday 02. March 2009 - Sales Reflect General Economic Downturn, Though Ongoing Rightsizing and Rationalization Efforts Result in Operational Improvements

– Q4 Net Sales down 16 percent, 2008 Net Sales down 4 percent

– Gross margins improve in most segments

– Year-end cash balance of $35.5 million

– Amended Revolving Credit Agreement to Defer Notice Date

Caraustar Industries, Inc. (NASDAQ:CSAR) today announced that sales from continuing operations for the fourth quarter ended December 31, 2008 were $171.7 million, compared to sales of $203.9 million for the same quarter in 2007. Loss from operations before restructuring and impairment costs for the fourth quarter ended December 31, 2008 was $2.5 million compared to a loss of $4.4 million for the same quarter in 2007. Net loss from continuing operations for the fourth quarter of 2008 was $22.7 million, or a loss of $0.79 per share, compared to 2007 fourth quarter loss of $7.0 million, or $0.25 per share. The fourth quarter 2008 and 2007 results from continuing operations included a pre-tax restructuring and impairment charge of approximately $8.7 million, or $0.19 per share, and $3.5 million, or $0.08 per share, respectively. The fourth quarter 2008 included increased tax expense of $9.1 million, or $0.32 cents per share from valuation reserves applied to the company’s deferred tax assets. The $3.4 million decrease in pre-tax operating results was primarily attributable to higher restructuring and impairment costs of $5.1 million, which were partially offset by lower interest expense of $0.5 million and lower selling, general and administrative costs of $0.5 million.

Total paperboard volume for the fourth quarter of 2008 decreased approximately 57.4 thousand tons, or 26.6 percent, compared to the same quarter last year. The decrease was attributable to 28.0 thousand tons of fewer gypsum facing paper and other specialty paperboard tons from PBL (Premier Boxboard Limited LLC), which membership interest was sold on July 24, 2008, a 9.3 thousand ton decrease in other (non-PBL) gypsum facing paper and a 17.9 thousand ton decrease in tube and core board. The decline in gypsum facing paper is associated with declines in the construction industry, and the shortfall in tube and core was driven by the July 2008 closure of our Chattanooga URB mill and general economic conditions. In the fourth quarter of 2008, Caraustar’s mill capacity utilization was 73.6 percent, compared with industry capacity utilization of 77.2 percent. Versus the same quarter last year, mill margins improved $74 per ton as increased selling prices of $28 per ton and decreased fiber costs of $53 per ton were partially offset by higher fuel and energy costs of $7 per ton. This per ton increase in energy costs is attributable to decreased volume – which provides fewer tons over which to spread fixed costs – and increased energy consumption to heat our facilities. Tube and core margins increased $34 per ton, primarily due to an increase in selling price. Compared to the fourth quarter of 2007, gross margins improved in all business segments except our recovered fiber group segment, which experienced decreased margin due to the sharp decline in recovered fiber prices in the fourth quarter 2008.

Michael J. Keough, president and chief executive officer of Caraustar, commented, “Caraustar felt the impact of the global recession in the fourth quarter as demand decreased in most of the end use markets we serve. This decrease was particularly hard felt by our business segments that are driven by industrial production. While the fourth quarter is typically slow seasonally, we experienced softness greater than historic seasonality, which led to manufacturing inefficiencies and extended downtime at many of our production facilities. Partially offsetting reduced volume were dramatically lower fiber costs, higher selling prices, and lower selling, general and administrative costs.

“Year-to-date in 2009, volume seems more solid than in the fourth quarter 2008 and we believe our current liquidity position is adequate to support our day-to-day business operations. We continue to work diligently on a resolution of the near-term maturity of our 2009 Senior Notes, and the 2009 and 2010 noteholders have formed an ad hoc committee, which has facilitated discussions. The company has retained legal and financial advisors and expects that our discussions with the ad hoc committee will be productive. We will continue to consider all options. As developments unfold, we will communicate to all of our constituents, as appropriate.

“Our skilled employees and the proactive steps we have taken in the past three years have provided us with the appropriate cost structure to meet current challenges, even given this recessionary economy. It has taken a lot of hard work from the entire Caraustar team to better position the business to demonstrate operational improvement against a tough economic backdrop. We look forward to positioning our company for a bright future.

“We have been undergoing a Strategic Transformation Plan, through which we have rationalized our portfolio by exiting under-performing businesses; right-sized operations through consolidation of facilities; significantly reduced SG&A costs; and increased financial flexibility by redeeming the 2010 Senior Subordinated Notes, paying off the term loan and paying down all outstanding balances on the revolving credit facility.”

On December 9, 2008, Caraustar announced that it is finalizing and will complete a cost take-out plan, including additional corporate staff reductions. To date, the company has eliminated 49 positions, with projected annual pre-tax savings of approximately $7.0 million. Caraustar will incur approximately $2.8 million in costs associated with this restructuring activity, which costs are comprised primarily of severance and other employee related items. The company expects to complete its corporate reductions on or before the end of the first quarter of 2009. On December 11, 2008 the company announced the permanent closure of its Richmond Paperboard mill. Non-cash impairment of fixed assets of $5.3 million and cash costs, related to severance, of approximately $435 thousand were incurred in the year ended December 31, 2008.

Year ended December 31, 2008

Sales from continuing operations for the year ended December 31, 2008 were $819.7 million compared to sales of $854.2 million for the same period in 2007. Income from operations before restructuring and impairment costs for the year ended December 31, 2008 was $10.1 million compared to $3.2 million for the same period in 2007. Net loss from continuing operations for the year ended December 31, 2008 was $98.7 million, or a loss of $3.44 per share, compared to a loss of $17.6 million, or a loss of $0.62 per share, in the same period last year. Results from continuing operations for the years ended December 31, 2008 and 2007 included restructuring and impairment costs of approximately $14.4 million, or $0.31 per share, and $13.2 million, or $0.29 per share, respectively. The $91.3 million decrease in pre-tax operating results was primarily attributable to 2008 impairment of goodwill of $125.3 million, which was partly offset by lower selling, general and administrative costs of $4.2 million, lower interest expense of $2.3 million, increased income from unconsolidated affiliates of $1.9 million, and a $23.8 million gain on the sale of the company’s fifty-percent ownership interest in PBL.

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 September 30, 2008 and cash costs (related to severance) of approximately $834 thousand were incurred in the year ended December 31, 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 carrying values exceed the fair 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.

Liquidity

The company ended 2008 with a cash balance of $35.5 million compared to $6.5 million at December 31, 2007. For the years ended December 31, 2008 and 2007, the company generated $10.4 million and $0.4 million, respectively, of cash from operating activities. The $10.0 million increase in cash generated 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 $12.2 million from $26.6 million in 2007.

The company reduced its total debt by $31.8 million from December 31, 2007 to December 31, 2008 and as of December 31, 2008; the company had $22.0 million of availability under its Senior Credit Facility, after giving effect to $15.7 million in letters of credit and the $20.0 million minimum availability reserve, both of which reduce availability. The company has approval from its bank group to amend its Senior Credit Facility to defer the March 1, 2009 notification date, at which time the company would have been required to advise the participating lenders in the bank group of the company’s plan to refinance or defease the 7.375 percent Senior Notes, to April 30, 2008.

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 December 31, 2008. Given the turmoil in the credit markets, it is likely that the company will not be able to refinance its Senior Notes. Continuing as a going concern is dependent on a satisfactory refinancing or restructuring of the Senior Notes, which will involve negotiations with the noteholders. We expect to be able to continue to service our customers’ needs and expect no disruptions to our operations. The outcome of the negotiations, however, is uncertain. Accordingly, as of December 31, 2008, there is substantial doubt regarding the company’s ability to continue as a going concern. The financial statements do not include any of the adjustments that would be required to reflect possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.