Clearwater Paper Corporation — Q3 2016 Form 10-Q
Business context and reporting period. Clearwater Paper manufactures consumer and away-from-home tissue, parent-roll tissue, bleached paperboard and pulp. This unaudited filing covers the three and nine months ended September 30, 2016; comparisons are to the corresponding 2015 periods. Amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $435.3 | $442.2 | $1,309.2 | $1,320.8 |
| Operating income | $9.3 | $40.0 | $87.2 | $87.4 |
| Operating margin | 2.1% | 9.1% | 6.7% | 6.6% |
| Net earnings | $0.9 | $23.1 | $40.2 | $44.4 |
| Diluted earnings per share | $0.05 | $1.21 | $2.33 | $2.30 |
| Net cash from operating activities | Not presented by quarter | $138.9 | $107.6 |
Q3 cost of sales was $396.6 million, or 91.1% of sales, versus $373.9 million, or 84.5%, a year earlier. Nine-month cost of sales declined to $1,127.1 million from $1,148.1 million. Nine-month capital expenditures were $105.5 million, giving approximate operating cash flow less capital expenditures of $33.4 million. Cash and cash equivalents were $0.3 million at September 30, down from $5.6 million at year-end 2015.
At September 30, total debt consisted of $569.6 million of long-term debt and $13.0 million of revolver borrowings. The company reported $107.1 million of additional borrowing capacity under its revolving facility; $4.8 million of facility capacity supported standby letters of credit. Stockholders’ equity was $471.2 million.
Material changes and segment results
- Q3 sales declined 1.6% year over year; operating income fell $30.8 million and net earnings fell $22.2 million. Lower paperboard prices and shipments, planned Idaho maintenance, and the Lewiston outage weighed on results.
- Consumer Products Q3 sales were $253.3 million and operating income $17.2 million, up from $247.0 million and $15.5 million. Higher retail tissue volume and lower energy, transportation and packaging costs helped; the escrow settlement gain also contributed.
- Pulp and Paperboard Q3 sales were $182.0 million and operating income $10.0 million, versus $195.2 million and $37.4 million. Paperboard average selling price declined 5.3%, and domestic competition reduced shipments.
- For the first nine months, Consumer Products operating income improved to $54.1 million from $44.9 million. Pulp and Paperboard operating income rose to $85.2 million from $81.4 million despite lower sales and pricing.
- Nine-month operating income was essentially unchanged, but net earnings declined 9.5%, partly reflecting higher income tax expense: $24.4 million versus $19.5 million.
Outlook, management commentary, risks and unusual items
- Management said cash from operations, cash on hand and available revolver capacity should be adequate for debt service, operations, capital spending, repurchases and working-capital needs over the next 12 months. No earnings or revenue guidance was provided.
- The Lewiston continuous pulp digester project is estimated to cost $148–$158 million, excluding capitalized interest. $73.1 million had been incurred through September 30, 2016; management expected to spend approximately $18 million more in 2016, with completion anticipated in the second half of 2017. Expected benefits include improved pulp quality and production, lower wood-chip costs and reduced air emissions.
- A July electrical incident at Lewiston disrupted pulping operations through July. The company received $5.0 million in final insurance proceeds; net outage-related costs reduced Q3 operating income by approximately $3.5 million.
- Q3 included approximately $18 million of planned major maintenance, an approximately $3.5 million non-cash pension settlement charge, and a $1.8 million net gain from settlement of an indemnity escrow related to the former specialty business sale. The Q3 tax rate was 48.8%, affected by low pretax income; the estimated 2016 annual effective tax rate was approximately 36%.
- Management identified competitive pricing and capacity, input-cost and supply availability, customer demand and concentration, operational disruptions, maintenance and capital-project execution, pension costs, environmental obligations, debt and covenant constraints, and transportation disruptions among the risks. The filing reported no material changes to the previously disclosed risk factors.
Important facts for investors to verify
- Whether paperboard pricing and competitive pressure continue, and whether tissue volume growth can offset them.
- Actual digester project costs, schedule, startup and realized operating and environmental benefits.
- Whether the $3.5 million outage impact was fully resolved and whether insurance proceeds covered the claimed losses and repairs.
- Liquidity and covenant headroom after capital spending and share repurchases; repurchases totaled $51.5 million in the first nine months, with $48.5 million of authorization remaining.
- How much of the Q3 earnings decline reflects recurring operating conditions versus maintenance, outage and pension items, and how the tax rate develops against management’s approximately 36% annual estimate.