Clearwater Paper Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017, compared with Q1 2016. Clearwater Paper manufactures consumer and away-from-home tissue, paperboard, and pulp. The quarter includes Manchester Industries, acquired in December 2016.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $437.5 million | $437.2 million |
| Operating income | $20.6 million | $37.8 million |
| Operating margin | 4.7% | 8.6% |
| Net earnings | $7.5 million | $18.4 million |
| Diluted EPS | $0.45 | $1.05 |
| Adjusted EBITDA | $49.3 million | $60.1 million |
| Operating cash flow | $45.5 million | $49.0 million |
| Capital expenditures, including capitalized interest | $42.2 million | $31.0 million |
Cost of sales rose to $387.0 million from $368.6 million, reaching 88.5% of sales versus 84.3%. Net margin was approximately 1.7%, compared with 4.2%. Interest expense was $8.0 million, up from $7.6 million. The Q1 2017 tax provision was $5.0 million; the reported effective rate was approximately 40%. Management estimated a 2017 annual effective tax rate of approximately 34%, excluding discrete items.
Cash and cash equivalents were $16.0 million at quarter-end, down from $23.0 million at December 31, 2016. Current assets were $413.6 million and current liabilities $340.4 million. Revolver borrowings were $130.0 million; long-term debt carrying value was $569.9 million. The company reported $163.2 million of additional revolver availability after letters of credit. Total debt on these balance-sheet carrying amounts was approximately $699.9 million. Stockholders’ equity was $473.6 million.
Material changes and operating drivers
- Sales were nearly flat year over year. Higher paperboard shipments, including Manchester Industries, and retail tissue sales largely offset lower non-retail tissue shipments and weaker paperboard pricing/mix.
- Consumer Products operating income fell to $6.2 million from $18.4 million; segment margin declined to 2.6% from 7.5%. Tissue volume fell 4.0%, as lower non-retail shipments more than offset retail growth.
- Pulp and Paperboard operating income declined to $27.2 million from $35.2 million, despite higher segment sales. Lower paperboard pricing/mix, higher energy and supply costs, and increased depreciation weighed on results.
- Higher transportation, natural gas, maintenance, depreciation, and other operating costs pressured consolidated earnings. Lower pulp, chemical, and wood-fiber costs and operational efficiencies provided partial offsets.
- Operating cash flow decreased $3.5 million. Investing outflow increased, principally because of capital spending. Financing outflow was $10.7 million, including $5.0 million of net revolver repayments and $4.9 million of share repurchases.
Outlook, projects, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management said cash from operations, cash on hand, and revolving-credit availability should be adequate for the next 12 months to support operations, debt service, capital spending, repurchases, and working capital; it noted uncertainty in cash generation and refinancing.
- The Lewiston continuous pulp digester project was estimated at $148–$158 million, excluding capitalized interest; $102.6 million had been incurred through March 31. Completion was expected in Q4 2017.
- The planned Shelby, North Carolina tissue machine and related facilities were estimated at approximately $283 million, plus approximately $57 million for warehouse acquisition and expansion. Construction was projected to finish in early 2019, with operations expected in 2020.
- Planned major maintenance was expected to cost approximately $9 million at Arkansas in Q2 2017 and $18 million at Idaho in Q3 2017, with forecast downtime of three and four days, respectively.
- The Oklahoma City converting facility closed March 31, 2017. Q1 closure costs were $5.7 million, including $3.7 million of accelerated depreciation; cumulative costs were $7.4 million.
- Insurance recoveries of $4.3 million were recorded in cost of sales for the Las Vegas and Shelby incidents. Las Vegas’ 2016 fire caused about 17 days of paper-machine downtime; the Shelby warehouse fire occurred in January 2017.
- Adoption of share-based payment accounting guidance resulted in approximately $1.0 million of Q1 tax expense, reducing EPS by $0.06. Adjusted EBITDA excludes specified items and is a non-GAAP measure.
- Key disclosed risks include competitive pricing and capacity, customer demand, execution of expansion projects, input and transportation costs, operating disruptions, wood-fiber supply, labor, environmental obligations, debt service, and covenant restrictions. Management reported no material changes to previously disclosed risk factors and no material change in internal controls.
Important facts for investors to verify
- Whether earnings and segment margins recover from the sharp year-over-year declines, and how much was attributable to temporary outages, higher costs, and closure charges.
- Actual project spending, schedule, ramp-up, and returns for the Lewiston digester and Shelby expansion.
- Whether planned maintenance shutdowns, input costs, transportation needs, and customer pricing affect subsequent-period margins and cash flow.
- Debt capacity, interest-rate exposure, covenant headroom, and the company’s ability to fund investment plans and repurchases. A 1 percentage-point rate change on assumed $130 million revolver borrowings was estimated to affect annual interest expense by approximately $1.3 million.
- Final purchase-price allocation and realized benefits from Manchester Industries, and any further costs or savings from the Oklahoma City closure.