Clearwater Paper Corporation — 2017 Form 10-K
Business context and period. The filing covers the fiscal year ended December 31, 2017; fourth-quarter figures are also presented. Clearwater manufactures private-label consumer and away-from-home tissue, bleached paperboard and pulp. Its two segments are Consumer Products and Pulp and Paperboard.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $1,730.4 million | $1,734.8 million |
| Operating income | $72.3 million | $111.3 million |
| Operating margin | 4.2% | 6.4% |
| Net earnings | $97.3 million | $49.6 million |
| Diluted earnings per share | $5.88 | $2.90 |
| Operating cash flow | $177.7 million | $172.8 million |
| Capital expenditures | $198.7 million | $155.7 million |
| Gross debt | $730.0 million | $710.0 million |
| Cash and cash equivalents | $15.7 million | $23.0 million |
Net earnings included a $70 million tax benefit from remeasuring deferred tax liabilities after enactment of the Tax Cuts and Jobs Act. Excluding specified items, management reported Adjusted EBITDA of $189.5 million, down from $214.8 million. Cost of sales rose to 88.4% of sales from 86.2%, reducing gross margin to 11.6% from 13.8%. Operating cash flow less capital expenditures was negative $22.1 million.
At year-end, working capital was $33.5 million and the current ratio was approximately 1.08. The company had $155 million drawn on its $300 million revolving facilities, with $137.4 million of additional borrowing availability after letters of credit. Its debt-to-total-capitalization ratio, excluding accumulated other comprehensive loss, was 53.9%, versus 57.5% in 2016. Management said cash, operating cash flow and available credit were expected to cover the next 12 months’ debt service, operations and planned capital spending.
Material changes versus 2016
- Consumer Products sales fell 4.7% to $941.9 million; operating income fell 57.9% to $28.6 million. Tissue shipments declined about 8%, while average selling price per ton rose 3.2%.
- Pulp and Paperboard sales increased 5.6% to $788.5 million, reflecting Manchester Industries and higher shipments/mix. Segment operating income decreased 12.6% to $98.5 million as input and energy costs rose.
- Overall sales were nearly flat, but operating income fell 35.0%. Higher transportation costs, pulp prices, depreciation, closure costs and other operating costs weighed on results.
- The company completed start-up of its Lewiston continuous pulp digester late in the third quarter. It spent $139.7 million on the project through year-end and expected full production by the end of first-quarter 2018.
- Capital spending increased to $198.7 million, including investments in the digester, Shelby expansion and warehouse automation. The company also repurchased $4.9 million of stock in 2017, compared with $65.3 million in 2016.
Fourth quarter: Net sales were $436.7 million versus $425.6 million a year earlier; operating income was $26.7 million versus $24.1 million. Net earnings were $80.9 million versus $9.3 million, principally reflecting the tax benefit. Fourth-quarter diluted EPS was $4.88 versus $0.56.
Outlook, commentary, risks and unusual items
- Management expected a lower overall tissue sales volume in 2018 because its largest tissue customer shifted from single-source to multi-source procurement, beginning in first-quarter 2018. The filing says Clearwater did not expect to replace all lost volume during 2018.
- The Shelby, North Carolina tissue project was estimated at approximately $340 million, including a new machine, converting equipment, buildings and warehouse expansion. Completion was projected for early 2019, with full production capability in 2020; the new machine was expected to produce about 70,000 tons annually at capacity.
- Management anticipated an approximately 26% effective tax rate for 2018, subject to further analysis and clarification of the tax law.
- Key risks include customer concentration (Kroger represented 15.3% of 2017 company sales), intense tissue competition and capacity additions, inability to pass through pulp and transportation cost increases, volatile wood fiber, chemicals and energy costs, and execution/customer-acceptance risks for Shelby.
- About 49% of employees were covered by collective bargaining agreements. Two Lewiston labor contracts covering approximately 1,010 employees had expired in 2017 and were being renegotiated.
- The company estimated potential PIUMPF complete-withdrawal exposure at more than $78 million; the amount and timing depend on triggering events and plan funding. Company-sponsored pension plans were underfunded by $6.8 million at year-end; no 2018 qualified-plan contribution was expected.
- Unusual items included $14.7 million of Oklahoma City closure costs in 2017, including losses associated with asset disposal and subleasing; $2.3 million of SG&A restructuring costs; and insurance recoveries related to facility incidents. No material environmental liability was identified, and the company reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Customer volumes and pricing after the largest tissue customer’s 2018 sourcing change, and whether lost volume can be replaced.
- Whether the Shelby project remains on schedule and within the estimated cost, and whether customers accept its production.
- Progress in stabilizing segment operating margins amid elevated freight, pulp and other input costs.
- Revolving-credit availability, covenant compliance and the capacity to fund capital spending while servicing $730 million of gross debt.
- PIUMPF funding status and potential withdrawal liability, together with pension and postretirement obligations.
- Whether the approximately 26% 2018 tax-rate expectation is realized; 2017 net income and EPS were materially affected by the one-time tax benefit.