Clearwater Paper Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Clearwater Paper manufactures tissue, paperboard and pulp at 13 U.S. and Canadian locations.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $498.8M | $471.0M | $983.7M | $931.8M |
| Operating income | $33.1M | $29.7M | $53.6M | $42.2M |
| Operating margin | 6.6% | 6.3% | 5.4% | 4.5% |
| Net earnings | $12.5M | $11.7M | $18.7M | $10.8M |
| Diluted EPS | $0.61 | $0.52 | $0.90 | $0.47 |
- Q2 sales rose 5.9%; operating income increased 11.3%. Net earnings rose 6.8%, while the net margin remained 2.5%.
- First-half sales rose 5.6%; operating income increased 27.0%. The year-over-year net earnings comparison also reflects $17.1M of debt retirement costs in 2013 and an unusually large tax benefit in 2013.
- Q2 Consumer Products sales increased to $299.1M, but operating income declined to $12.7M from $14.8M. First-half segment income fell to $12.2M from $24.9M, primarily due to closure costs and weather-related costs.
- Q2 Pulp and Paperboard sales rose to $199.6M and operating income to $33.6M from $24.8M. First-half operating income increased to $70.4M from $42.3M, reflecting improved pricing and volume.
- First-half operating cash flow was $94.9M, versus $22.0M in 2013; working capital generated $14.8M, compared with $43.8M used in the prior period. Investing cash outflow was $21.0M, including $32.6M of capital expenditures; financing cash outflow was $75.1M, largely reflecting share repurchases.
- At June 30, cash was $22.5M, short-term investments $59.0M, current assets $560.9M and current liabilities $229.2M. Long-term debt was $650.0M; no revolver borrowings were outstanding, and $118.1M was available after letters of credit.
Changes, outlook and material items
- Long Island facility closure costs totaled $10.3M through June 30; total exit costs are expected to be about $15M. Management expects approximately $6M of operating cost savings in 2014 and $12M annually beginning in 2015. Thomaston closure costs totaled $7.1M; related savings were expected to be fully realized beginning in Q4 2014.
- Long Island closure drove $4.3M of non-cash asset impairments in Q1 2014. First-half closure costs were $11.4M, versus $1.2M in the prior-year period.
- Arkansas pulp and paperboard operations experienced disruption in Q2, with lower throughput and elevated energy and chemical use. Severe winter weather also raised first-quarter energy and transportation costs. The next planned major maintenance outage is spring 2015.
- On July 29, 2014, after quarter-end, the company issued $300M of 5.375% senior notes due 2025 and arranged to redeem $375M of 7.125% notes due 2018. Redemption requires about $401M, including an approximately $18M make-whole premium and accrued interest; related costs are expected in Q3. The refinancing was expected to leave $575M of senior notes and $37M drawn on the revolver.
- The company repurchased $74.3M of stock in the first half under a $100M authorization; $25.7M remained at June 30. Management stated available cash, investments, operating cash flow and revolver capacity should fund needs for the next 12 months, while noting uncertainty from cyclical markets and cash generation.
- Management estimated the 2014 annual effective tax rate at approximately 35%, excluding discrete items. The Q2 GAAP tax rate was 44.4%; state tax adjustments included a $2.9M prior-period apportionment correction. The IRS audit of 2008–2012 returns was in final review; management expected approval without further changes in 2014.
- Risks highlighted include competitive pricing and capacity, customer demand and concentration, TAD production optimization, raw-material and energy costs, operational interruptions, pension funding, environmental matters, and debt restrictions. An EPA/DOJ matter alleging Clean Air Act violations at the Lewiston facility remained under discussion; the tolling agreement was due to expire October 31, 2014 unless extended. Management said other proceedings were not expected to have a material adverse effect.
- No formal full-year revenue or earnings guidance was provided. Management’s outlook included the stated closure savings, expected pension contributions of about $4M for the remainder of 2014, and confidence in 12-month liquidity.
Investor verification priorities
- Assess whether paperboard pricing and demand can offset weaker Consumer Products segment earnings and the Arkansas production disruption.
- Track realization of Long Island and Thomaston savings against continuing closure costs, and monitor the scheduled 2015 maintenance outage.
- Review the completed refinancing’s final debt, interest expense, make-whole and debt-retirement charges, and revolver utilization.
- Evaluate the sustainability of first-half operating cash flow, particularly the working-capital contribution, alongside ongoing repurchases and pension funding.
- Check tax-audit developments and the status and potential financial exposure of the EPA/DOJ matter.