Clearwater Paper Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Clearwater Paper manufactures consumer and away-from-home tissue, parent-roll tissue, bleached paperboard and pulp.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $437.2 million | $434.0 million |
| Operating income | $37.8 million | $15.2 million |
| Operating margin | 8.6% | 3.5% |
| Net earnings | $18.4 million | $5.8 million |
| Diluted EPS | $1.05 | $0.30 |
| Operating cash flow | $49.0 million | $28.1 million |
| Capital expenditures | $30.955 million cash additions | $25.240 million cash additions |
Sales grew 0.7%; operating income more than doubled, with margin rising 5.1 percentage points. Cost of sales fell to 84.3% of sales from 89.8%, principally reflecting the absence of approximately $15 million of prior-year Idaho maintenance costs, plus lower energy and packaging costs. SG&A rose $1.8 million to $30.8 million, including a $0.7 million director-award mark-to-market expense versus a $0.5 million benefit in Q1 2015, and higher bad-debt expense. Net margin was 4.2%, versus 1.3%.
Segments and material comparisons
- Consumer Products: Sales increased 4.2% to $245.0 million; operating income rose to $18.4 million from $12.4 million. Tissue shipments increased to 99,385 short tons from 92,209, while average sales price per ton declined to $2,464 from $2,546. Higher volumes and lower energy, pulp and packaging costs supported results.
- Pulp and Paperboard: Sales declined 3.4% to $192.2 million as average paperboard price fell 7.7% to $952 per ton; shipments rose 5.1% to 201,340 short tons. Operating income increased to $35.2 million from $16.2 million, largely because Q1 2015 included the Idaho maintenance outage, as well as lower energy and certain fiber and chemical costs.
- Taxes: The reported effective tax rate was 38.8%, versus 22.8%. The prior-year rate benefited from approximately $1.0 million of reserve release related to expiring research-credit tax positions. Management estimated the 2016 annual effective rate at approximately 36%, citing state tax-rate changes.
Cash, debt and liquidity
Operating cash flow was $49.0 million, including a favorable $14.2 million change in taxes receivable, primarily reflecting tax refunds; working capital used $9.5 million, mainly due to lower accounts payable and accrued liabilities. Investing activities used $30.7 million and financing activities used $21.7 million. Cash declined $3.4 million to $2.2 million.
At March 31, cash was $2.2 million, restricted cash $2.3 million, and current assets $392.8 million against current liabilities of $206.4 million. Long-term debt was $569.2 million and revolving-facility borrowings were $6.0 million. The company reported $113.2 million of additional revolver borrowing capacity; $5.8 million of the facility supported standby letters of credit. 2016 cash interest on the senior notes was estimated at $28.5 million.
Outlook, capital plans and risks
- No specific full-year earnings or revenue guidance is provided. Management said operating cash flow, cash and short-term investments, and revolver capacity should fund the next 12 months of debt service, operations, capital spending, repurchases and working capital; it noted uncertainty in future cash flows and refinancing.
- The Lewiston continuous pulp digester project is estimated at $150–$160 million, excluding capitalized interest. $40.5 million had been incurred by March 31, including $9.5 million in Q1; approximately $52 million of additional spending was expected in 2016, with completion expected in the second half of 2017. Management expects lower emissions, improved pulp quality and production, and lower costs.
- Planned Idaho major maintenance in Q3 2016 was estimated at $15–$18 million and five days of paper-machine downtime. No major maintenance outage occurred in Q1 2016.
- The company repurchased 709,366 shares in Q1 at an average $38.99 per share, spending $27.7 million; $72.3 million remained under the $100 million authorization.
- Risks cited include competitive pricing and capacity, customer demand or loss of significant customers, cyclical markets, raw-material and energy availability and costs, transportation, operational disruptions, labor, environmental obligations, pensions, debt covenants and refinancing. Natural-gas firm-price contracts covered about 43% of expected monthly requirements for the rest of 2016.
- Management reported no material change in previously disclosed risk factors, no material change in internal control over financial reporting, and no off-balance-sheet arrangements requiring disclosure. It believed pending legal matters would not, in aggregate, materially harm financial condition.
Investor verification priorities
- Assess how much of the operating-income improvement reflects the prior-year maintenance outage and lower input costs, and whether those benefits persist.
- Track tissue and paperboard pricing, product mix, shipment volumes, and segment margins.
- Reconcile operating cash generation with tax refunds, working-capital movements and capital-spending commitments.
- Monitor digester project costs, schedule, expected returns, and Q3 maintenance spending and downtime.
- Review liquidity and covenant headroom, debt-service needs, repurchases, and the company’s ability to refinance debt on acceptable terms.
- Evaluate the sustainability of the effective tax rate and exposures to raw-material, energy, customer, operating and pension risks.