Clearwater Paper Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. Clearwater Paper manufactures private-label consumer and away-from-home tissue, bleached paperboard, and pulp. It operates through Consumer Products and Pulp and Paperboard segments. The specialty business and five mills were sold on December 30, 2014, affecting year-over-year comparisons.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $1,752.4 million | $1,967.1 million |
| Income from operations | $123.7 million; 7.1% margin | $79.8 million; 4.1% margin |
| Net earnings (loss) | $56.0 million; $2.97 diluted EPS | $(2.3) million; $(0.11) diluted EPS |
| Operating cash flow | $159.7 million | $139.1 million |
| Capital expenditures | $128.9 million cash additions to plant and equipment | $93.0 million |
- Gross margin, calculated as sales less cost of sales, was approximately 13.7%, compared with 13.1% in 2014.
- Operating cash flow less cash additions to plant and equipment was approximately $30.8 million. Cash declined to $5.6 million from $27.3 million; working capital was $199.0 million, down from $302.1 million.
- At year-end, gross debt was $575.0 million ($569.0 million net carrying amount); the company had $118.9 million available under its revolving credit facility and no revolver borrowings. The most recent fixed-charge coverage ratio was 1.3-to-1.0.
- Debt to total capitalization, excluding accumulated other comprehensive loss, was 52.0%, versus 50.3% in 2014. Stockholders’ equity was $474.9 million.
Segments and fourth quarter
- Consumer Products: Sales were $959.9 million, down 18.9%, largely reflecting the specialty-business divestiture and lower non-retail shipments. Segment operating income was $55.7 million, compared with a $6.0 million loss in 2014; the comparison was substantially affected by the prior-year divestiture loss and facility-closure costs.
- Pulp and Paperboard: Sales rose 1.1% to $792.5 million as shipments increased 2.8%, partly offset by a 1.9% decline in average selling price. Operating income fell 16.2% to $120.9 million, principally due to about $22 million of planned maintenance costs.
- Fourth quarter 2015: Sales were $431.6 million, operating income $36.3 million, and net earnings $11.6 million, or $0.65 per diluted share. In fourth-quarter 2014, the company reported an operating loss of $17.8 million and net loss of $27.2 million, including divestiture and impairment charges.
Material changes and unusual items
- Sales declined 10.9% year over year, reflecting the divestiture, fewer converted tissue cases, and lower commodity-grade paperboard pricing. Lower costs associated with the divested business, milder weather, and reduced energy and chemical costs helped improve operating results.
- Net earnings improved from a loss in 2014. The 2014 comparison included a $40.2 million loss on divested assets, $8.2 million of impairment charges, and $24.4 million of debt-retirement costs. 2015 included a $1.3 million gain related primarily to settlement of the sale working-capital escrow.
- Interest expense fell to $31.2 million from $39.2 million, following the 2014 refinancing of higher-rate notes. Adjusted EBITDA, a non-GAAP measure defined by the company, was $210.7 million versus $238.5 million.
- The company repurchased approximately $100.0 million of shares in 2015, completing its 2014 authorization, and approved a new authorization of up to $100 million. It has not paid cash dividends and does not anticipate paying one in 2016.
Outlook, management commentary, and risks
- Management expects approximately $155 million of total capital expenditures in 2016, including about $60 million for the Lewiston continuous pulp digester project. The project’s estimated total cost is $150–$160 million, excluding capitalized interest, with completion expected in the second half of 2017. Management expects operating efficiency, pulp-quality, production, wood-chip utilization, and emissions benefits.
- Planned 2016 major maintenance at the Idaho facility is estimated at $15 million, with five days of paper-machine downtime. The estimated 2016 effective tax rate is approximately 37%; management does not expect cash contributions to qualified pension plans in 2016.
- Management stated that operating cash flow, cash and short-term investments, and available revolver capacity should be adequate for the next 12 months’ debt service, operations, capital spending, repurchases, and working capital, while noting uncertainty from competitive and cyclical markets.
- Key risks include increased tissue and paperboard capacity and pricing pressure; concentrated customers and limited minimum-volume commitments; volatility in pulp, wood fiber, chemicals, energy, and transportation costs; production outages and maintenance needs; labor negotiations, with three collective bargaining agreements expiring in 2016; and execution and returns on capital projects.
- Pension exposure includes company-sponsored plans underfunded by $24.4 million at year-end and multiemployer-plan risk. PIUMPF was certified as in critical and declining status; the filing estimates a potential complete-withdrawal liability above $72 million based on available plan information, while the exact exposure is uncertain. Environmental compliance, cyber-security, IT implementation, debt covenants, and refinancing are also identified risks.
- The company paid a $0.3 million fine in 2015 to resolve the Clean Air Act matter concerning its Lewiston facility. It expects approximately $6 million of spending to meet a boiler and process-heater air-emissions rule, with the remaining spending expected in 2016. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of the improved 2015 operating performance reflects sustainable operating gains versus divestiture-related and other one-time comparisons.
- Whether the Lewiston digester project stays within the $150–$160 million estimate and delivers the expected cost, production, and environmental benefits.
- Customer retention, tissue and paperboard pricing, shipment trends, and the effects of new industry capacity on segment margins.
- Cash generation after capital expenditures and share repurchases, alongside debt service and the availability of the asset-based revolver.
- Developments in PIUMPF funding and employer withdrawals, potential withdrawal liability, and the 2016 labor negotiations.