Clearwater Paper Corporation — Q3 2015 Form 10-Q
Business context and period: The filing covers the quarter and nine months ended September 30, 2015. Clearwater Paper manufactures consumer and away-from-home tissue, parent-roll tissue, bleached paperboard and pulp. Comparisons are affected by the December 2014 sale of its specialty business and mills.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $442.2 million | $511.1 million | $1,320.8 million | $1,494.8 million |
| Operating income | $40.0 million | $44.0 million | $87.4 million | $97.6 million |
| Operating margin | 9.1% | 8.6% | 6.6% | 6.5% |
| Net earnings | $23.1 million | $6.3 million | $44.4 million | $24.9 million |
| Diluted EPS | $1.21 | $0.31 | $2.30 | $1.21 |
| Adjusted EBITDA | $63.2 million | $72.0 million | $151.8 million | $184.0 million |
Cash flow and liquidity: Nine-month operating cash flow was $107.6 million, compared with $101.9 million. Capital expenditures were $78.5 million; operating cash flow less capital expenditures was approximately $29.1 million. Cash was $13.4 million, short-term investments $10.0 million, and current restricted cash $2.3 million at quarter-end. Current assets were $468.3 million and current liabilities $252.9 million.
Debt: Long-term debt was $575.0 million. No revolver borrowings were outstanding; $6.2 million supported letters of credit, and the company reported $118.8 million of additional borrowing availability. The debt comprised $275 million of 4.5% notes due 2023 and $300 million of 5.375% notes due 2025. The revolving facility was amended to extend to September 2020.
Material changes and drivers
- Q3 sales fell 13.5%; nine-month sales fell 11.6%, primarily reflecting the specialty-business divestiture and lower non-retail shipments. Lower paperboard pricing and shipments also weighed on Q3 sales.
- Q3 operating income declined despite a higher operating margin. Consumer Products operating income rose to $15.5 million from $12.5 million, while Pulp and Paperboard income fell to $37.4 million from $45.6 million.
- For the first nine months, Consumer Products operating income increased to $44.9 million from $24.7 million, while Pulp and Paperboard income declined to $81.4 million from $116.0 million. Planned mill maintenance costs of approximately $22 million and labor-agreement costs contributed to the latter decline.
- Net earnings improved substantially versus 2014 partly because 2014 included $24.4 million of debt-retirement costs and $5.1 million of asset impairments. Interest expense also declined following refinancing of higher-rate debt.
- Cash used in investing was $37.9 million, including $78.5 million of capital expenditures and a $40 million net reduction in short-term investments. Financing used $83.6 million, largely due to $84.3 million of share repurchases.
Outlook, commentary and risks
- No specific earnings or revenue guidance is provided. Management said cash from operations, cash and short-term investments, and revolver capacity should fund the next 12 months of debt service, operations, capital spending and working capital, while noting uncertainty in cash flows.
- The Lewiston continuous pulp digester project is estimated at $150–$160 million, excluding capitalized interest; construction was expected to begin in 2015 and finish in the second half of 2017. Planned spending: approximately $26 million in 2015 and $61 million in 2016, with the balance thereafter. Expected benefits include lower emissions and improved pulp quality, production and wood-chip utilization.
- Management expected Long Island facility closure costs below $1 million for the remainder of 2015 and estimated annual savings of approximately $12 million from consolidation and optimization. Cumulative closure costs were $20.8 million through September 30, 2015.
- Key stated risks include competitive pricing and capacity, customer demand and acceptance of price increases or new products, customer concentration, raw-material and energy costs and availability, transportation constraints, operational disruptions, labor issues, pension costs, environmental liabilities, execution of efficiency and expansion plans, and debt and covenant constraints.
- Unusual items included approximately $2 million of discrete tax benefits from releasing state valuation allowances; Q3 director equity-compensation mark-to-market benefit of $1.9 million; $2.0 million of non-routine legal and settlement expenses and $1.1 million of reorganization expenses. The company paid a $0.3 million EPA-related fine in Q3. It reported no material change to previously disclosed risk factors and said disclosure controls were effective.
Important facts for investors to verify
- How much of the sales and earnings movement reflects the specialty-business sale versus underlying demand, pricing and product mix?
- Whether paperboard pricing and shipments stabilize, and whether Consumer Products gains persist despite lower non-retail volumes.
- Delivery, total cost and expected returns of the Lewiston digester project, including funding alongside ongoing capital needs.
- Cash conversion and liquidity after capital expenditures and completed share repurchases; the program was completed after quarter-end with an additional 131,113 shares repurchased.
- Exposure to maintenance outages, input costs, customer concentration, legal matters and pension obligations; assess the company’s non-GAAP Adjusted EBITDA alongside GAAP results.