Business context and reporting period
Clearwater Paper Corporation’s Form 10-K covers the fiscal year ended December 31, 2016. The company manufactures private-label consumer and away-from-home tissue, bleached paperboard and pulp. Its two segments are Consumer Products and Pulp and Paperboard. Manchester Industries, a paperboard sales and converting business, was acquired on December 16, 2016, for $71.7 million; its 2016 results include only 16 days of operations.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $1,734.8 million | $1,752.4 million |
| Operating income | $111.3 million | $123.7 million |
| Net earnings | $49.6 million | $56.0 million |
| Diluted EPS | $2.90 | $2.97 |
| Operating margin | 6.4% | 7.1% |
| Net margin | 2.9% | 3.2% |
| Operating cash flow | $172.8 million | $159.7 million |
| Capital expenditures | $155.7 million | $134.1 million |
Cost of sales was 86.2% of revenue, implying a 13.8% gross margin, versus 86.3% and 13.7% in 2015. Adjusted EBITDA, a non-GAAP measure, was $214.8 million versus $210.7 million; it should not be treated as a substitute for GAAP results or cash flow.
Consumer Products sales rose 3.0% to $988.4 million, supported by higher retail tissue volumes; segment operating income in the MD&A discussion increased to $67.9 million from $55.7 million. Pulp and Paperboard sales fell 5.8% to $746.4 million, mainly due to lower prices and product mix; operating income declined 6.7% to $112.7 million. Paperboard shipments were nearly flat, while average selling price fell to $937 per ton from $990.
Cash and cash equivalents were $23.0 million at year-end, compared with $5.6 million. Working capital was $80.0 million versus $199.0 million, with the decline largely reflecting $135.0 million of revolving-credit borrowings classified as current. Gross debt was $710.0 million, up from $575.0 million; stockholders’ equity was $469.9 million. The company had $300 million of revolving facilities, with $135 million drawn, and reported compliance with financial covenants. Its 2016 total debt-to-capitalization ratio, excluding accumulated other comprehensive loss, was 57.5%, versus 52.0%.
Changes versus prior period and notable events
- Sales declined 1.0% and operating income declined 10.0%; net earnings fell 11.5%. Tissue volume and cost efficiencies partly offset paperboard pricing and mix pressure and higher SG&A.
- Operating cash flow increased, but investing cash outflow rose to $222.5 million, reflecting the Manchester acquisition and higher capital spending. Financing cash flow was $67.1 million, including $135.0 million net revolving borrowings and $65.3 million of share repurchases.
- The company incurred $3.5 million in net costs from a July electrical outage at Lewiston after receiving $5.0 million of insurance proceeds. A Las Vegas fire caused about 17 days of paper-machine downtime; a further $1.5 million insurance receivable was recorded, with the rest of the claim expected to be resolved in early 2017.
- Two Neenah tissue machines were shut down in late December 2016, and the Oklahoma City converting facility was scheduled to close March 31, 2017. Related costs recorded through year-end were $1.0 million and $1.7 million, respectively.
- Manchester added $35.2 million of goodwill and $25.5 million of intangible assets; purchase-price allocation remained preliminary. The filing’s internal-control assessment excluded Manchester, and the auditor’s unqualified opinion on company controls likewise excluded the acquired business.
Outlook, risks and contingencies
Management said operating cash flow, cash on hand and revolver capacity were expected to support debt service, operations, capital spending, repurchases and working capital for the next 12 months, while noting uncertainty from cyclical markets. The filing gives no broad earnings or revenue guidance. Management estimated a 2017 effective tax rate of about 36%.
The Lewiston continuous pulp digester project was estimated at $148–$158 million, excluding capitalized interest; $90.8 million had been incurred by year-end, with completion expected in the second half of 2017. A February 2017 announcement described a separate Shelby, North Carolina tissue-machine and converting project estimated at $283 million, plus about $57 million for warehouse purchase and expansion. Completion was projected for early 2019, with full operation in 2020; these are plans, not guarantees.
Key risks include tissue and paperboard pricing pressure and industry capacity additions; dependence on concentrated customers (Kroger represented 13.4% of total sales); raw-material, energy and transportation cost volatility; manufacturing interruptions; successful execution of capital projects and integration of Manchester; labor negotiations; environmental compliance; and debt service and covenant constraints. Company-sponsored pension plans were underfunded by $18.8 million. The PIUMPF multiemployer plan was in critical and declining status; the company estimated potential complete-withdrawal payments at approximately $5.7 million annually for 20 years, subject to significant uncertainty. Management reported no material environmental liabilities known to it and no material litigation expected from proceedings in aggregate.
Important facts for investors to verify
- Whether paperboard pricing and mix stabilize and whether retail tissue growth and improved segment performance persist.
- Actual digester and Shelby-project costs, schedules, production quality, customer demand and expected returns.
- Manchester’s integration progress, final purchase-price allocation, customer retention and contribution to earnings and cash flow.
- Revolver availability and covenant headroom, refinancing capacity, and the effect of current-classified borrowings on liquidity.
- Insurance recoveries and the financial impact of facility disruptions, closures, Neenah restructuring and scheduled 2017 maintenance.
- Customer concentration, union negotiations, pension and multiemployer-plan exposure, and future environmental or other contingencies.