Clearwater Paper Corporation — Q3 2017 Form 10-Q
Business context and reporting period. The company manufactures consumer and away-from-home tissue, parent-roll tissue, bleached paperboard and pulp. This unaudited quarterly report covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $426.5 million | $435.3 million | $1,293.7 million | $1,309.2 million |
| Operating income | $5.5 million | $9.3 million | $45.7 million | $87.2 million |
| Operating margin | 1.3% | 2.1% | 3.5% | 6.7% |
| Net earnings | $0.9 million | $0.9 million | $16.4 million | $40.2 million |
| Diluted earnings per share | $0.05 | $0.05 | $0.99 | $2.33 |
Q3 pretax results were a $2.2 million loss, versus $1.8 million of pretax earnings a year earlier; a $3.1 million tax benefit resulted in slightly lower reported net earnings. Nine-month cost of sales rose to 89.2% of sales from 86.1%, and net margin declined to 1.3% from 3.1%.
- Cash flow: Nine-month operating cash flow was $152.2 million, up from $138.9 million. Investing cash outflow was $135.9 million, including $136.7 million in property and equipment additions. Financing cash outflow was $30.8 million. Cash fell to $8.5 million from $23.0 million at year-end 2016.
- Debt and liquidity: September 30 balance-sheet debt comprised $110.0 million outstanding under revolving facilities and $570.3 million in long-term debt carrying value. The company reported $183.2 million of additional borrowing capacity, after $6.8 million of letters of credit, under facilities with $300 million of aggregate commitments. Cash plus stated additional capacity was approximately $191.7 million.
- Balance sheet: Current assets were $423.3 million and current liabilities were $381.0 million. Total assets were $1.729 billion and stockholders’ equity was $486.4 million.
Material changes versus prior comparable periods
- Q3 sales fell 2.0%; nine-month sales fell 1.2%. Lower tissue shipments were partly offset by paperboard sales and Manchester Industries, acquired in December 2016 for $71.7 million.
- Consumer Products segment Q3 sales decreased $20.4 million and operating income fell to $4.4 million from $17.2 million. Nine-month operating income declined to $21.2 million from $54.1 million, reflecting weaker volumes and higher transportation, pulp, packaging and depreciation costs, among other factors.
- Pulp and Paperboard Q3 sales rose to $193.6 million from $182.0 million and operating income increased to $15.0 million from $10.0 million. For nine months, sales increased to $586.4 million, but operating income fell to $63.9 million from $85.2 million, with higher pulp, maintenance and energy costs among the pressures.
- Nine-month operating income declined 47.6%. Management attributed the deterioration to higher transportation and energy costs, elevated pulp prices, Manchester-related costs, higher depreciation and inventory costs, partly offset by lower labor costs and insurance recoveries.
- Nine-month capital expenditures excluding capitalized interest were $135.4 million, versus $107.8 million in the prior-year period. Cash used for capital additions increased by $31.1 million.
Outlook, commentary and risks
- Management said cash from operations, cash on hand and revolver capacity should be adequate for the next 12 months’ debt service, operations, capital spending, repurchases and working capital needs. No quantified earnings or revenue guidance was provided.
- The Lewiston continuous pulp digester completed construction and began start-up at quarter-end. Total project cost was estimated at approximately $153 million, excluding capitalized interest; most remaining spending was expected in Q4. Expected benefits include improved pulp quality and production, lower costs and reduced emissions.
- The planned Shelby, North Carolina tissue expansion was estimated at $280 million for the machine, converting equipment and buildings, plus approximately $60 million for warehouse purchase and expansion. Completion was projected for early 2019, with full operations expected in 2020; full-capacity output was estimated at 70,000 tons annually.
- The Oklahoma City converting facility closed March 31, 2017. Q3 included $4.3 million of asset writedowns and $0.8 million of related closure costs; management expected approximately $3 million of additional loss in Q4 from the sublease. The October 2017 sublease was expected to substantially reduce remaining cash obligations under the master lease, which expires in May 2023.
- Risks highlighted include competitive pricing and capacity, customer demand and concentration, execution and timing of strategic projects, raw-material and energy costs and availability, transportation disruptions, manufacturing outages, labor, environmental obligations, pension costs, cybersecurity, debt covenants and debt service. Two hurricanes increased Q3 transportation costs; fires at Las Vegas and Shelby generated insurance recoveries during 2017.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. It reported no material change in previously disclosed risk factors and no off-balance-sheet arrangements requiring disclosure.
Important facts for investors to verify
- Whether tissue shipment and Consumer Products profitability recover, and whether transportation, pulp, packaging and other input costs remain elevated.
- The Lewiston digester start-up, remaining project spending and realized operating benefits; and Shelby project costs, construction schedule, funding and demand assumptions.
- The final cash and accounting effects of the Oklahoma City asset transfer and sublease, including the expected Q4 loss and reduction in lease obligations.
- Available revolver capacity, debt covenant headroom, interest-rate exposure and the effect of significant capital spending on liquidity.
- Manchester Industries’ contribution to paperboard revenue and earnings, including whether acquisition-related costs and integration benefits develop as expected.