Clearwater Paper Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are with the same 2015 periods. The company manufactures consumer and away-from-home tissue, parent-roll tissue, bleached paperboard and pulp.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $436.7 | $444.6 | $873.9 | $878.6 |
| Operating income | $40.2 | $32.1 | $77.9 | $47.3 |
| Operating margin | 9.2% | 7.2% | 8.9% | 5.4% |
| Net earnings | $20.9 | $15.6 | $39.3 | $21.4 |
| Diluted earnings per share | $1.21 | $0.81 | $2.26 | $1.10 |
| Operating cash flow | — | $96.4 | $87.9 | |
| Capital expenditures | — | $57.4 | $55.5 |
- Margins and earnings: Cost of sales fell to 82.9% of sales in Q2 from 86.5%; for the first half it was 83.6% versus 88.1%. Net margin was 4.8% in Q2 versus 3.5%, and 4.5% for the first half versus 2.4%.
- Cash flow: First-half operating cash flow less capital expenditures was approximately $39.0 million. Operating cash flow increased year over year, supported by higher earnings and tax refunds, partly offset by cash used in working capital.
- Liquidity and debt: At June 30, cash was $9.4 million and current assets were $412.1 million against current liabilities of $215.9 million. Long-term debt was $569.4 million carrying value; the notes’ aggregate principal amount was $575 million. There were no revolver borrowings; $4.8 million supported letters of credit, and the company reported $120.2 million of additional borrowing capacity.
- Capital returns: The company repurchased $35.2 million of stock in the first half. Under its current $100 million program, it had $64.8 million of authorization remaining at June 30.
Material changes and operating drivers
- Sales were nearly flat year over year for the first half, down 0.5%. Lower paperboard and tissue pricing and a shift toward lower-priced non-extruded paperboard were partly offset by higher paperboard and retail tissue shipments.
- Consumer Products first-half sales increased 3.9% to $492.9 million and operating income rose to $36.9 million from $29.4 million. Higher retail tissue shipments and lower energy and packaging costs helped; average retail tissue price was lower.
- Pulp and Paperboard first-half sales declined to $380.9 million from $404.0 million, while operating income rose to $75.2 million from $43.9 million. Lower prices and competitive pressure weighed on sales; lower input costs and the absence of about $22 million of prior-year planned maintenance supported earnings.
- Profit comparisons also benefited from a net $2.8 million reimbursement of prior recovery-boiler-related costs. In Q2, the segment’s results additionally benefited from the absence of approximately $7 million of prior-year maintenance costs.
- Q2 selling, general and administrative expense increased to $34.7 million from $28.1 million, largely reflecting a $3.6 million mark-to-market expense for directors’ stock units, versus a $1.5 million benefit in Q2 2015.
Outlook, risks and unusual items
- Facility outage: A July 6, 2016 power outage at the Lewiston, Idaho facility disrupted production. Management estimated a $4 million to $5 million reduction in third-quarter operating income from repairs and lost production.
- Maintenance and investment: Management expected $15 million to $18 million of planned maintenance at the Idaho facility in Q3, including five days of paper-machine downtime. The Lewiston continuous pulp digester project was estimated at $148 million to $158 million, excluding capitalized interest; $50.1 million had been incurred by June 30. The company expected to spend another $42 million on the project in 2016 and anticipated completion in the second half of 2017.
- Funding and costs: Management said operating cash flow, cash and revolver capacity should cover expected needs for the next 12 months. Annual 2016 cash interest on the notes was estimated at $28.5 million. The company expected no qualified pension-plan contributions in 2016; estimated non-qualified pension contributions were $0.4 million.
- Risks: Key exposures include competitive pricing and capacity, raw-material and energy costs, customer demand and concentration, transportation, operational interruptions, labor, environmental matters, pension costs, and debt covenants. Natural-gas firm-price contracts covered about 44% of expected average monthly requirements for the remainder of 2016.
- Contingencies and accounting: The company said it was not party to reportable off-balance-sheet arrangements and believed pending claims and proceedings would not, in aggregate, materially affect financial condition. It reported no material change in previously disclosed risk factors. The filing provides no formal full-year earnings or revenue guidance.
Important facts for investors to verify
- Whether the estimated $4 million to $5 million Q3 outage impact and planned maintenance costs were realized.
- Progress, remaining spend and expected completion timing for the pulp digester project.
- Whether paperboard price pressure, mix changes and competitive conditions persist, and how segment operating income performs without prior-year maintenance comparisons and the reimbursement benefit.
- Cash generation, capital spending, repurchases and available revolver capacity relative to debt service and covenant requirements.
- The impact of volatile director equity-compensation mark-to-market expense and the higher estimated 2016 effective tax rate of approximately 37%.