Clearwater Paper Corporation — Q1 2015 Form 10-Q
Business context and reporting period: The filing covers the three months ended March 31, 2015, compared with the same period in 2014. Clearwater Paper makes consumer and away-from-home tissue, parent-roll tissue, bleached paperboard and pulp. Comparisons are affected by the December 2014 sale of its specialty business and mills.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $434.0 million | $484.9 million |
| Income from operations | $15.2 million | $20.5 million |
| Operating margin | 3.5% | 4.2% |
| Net earnings | $5.8 million | $6.2 million |
| Diluted earnings per share | $0.30 | $0.29 |
| Operating cash flow | $28.1 million | $35.3 million |
| Capital expenditures paid | $25.2 million | $16.2 million |
| Adjusted EBITDA | $37.9 million | $54.7 million |
Cost of sales was 89.8% of sales, versus 88.0% a year earlier. The GAAP effective tax rate was 22.8%, compared with 36.4%; the lower rate primarily reflected discrete tax items, including a release of uncertain tax positions. Management’s adjusted tax-rate comparison was approximately 24% versus 36%.
Balance sheet and liquidity
- At March 31, 2015, cash was $29.8 million and short-term investments were $11.0 million, down from $27.3 million and $50.0 million, respectively, at year-end 2014.
- Total debt was $575.0 million, unchanged from year-end. No revolving-credit borrowings were outstanding; $7.2 million supported letters of credit, and $117.8 million was available to draw.
- Current assets were $479.3 million and current liabilities were $214.4 million. The company reported $466.6 million of stockholders’ equity.
- Operating cash flow less cash capital expenditures was approximately $2.8 million, versus approximately $19.0 million in Q1 2014. The company spent $37.1 million on share repurchases.
Material changes and drivers
- Sales declined 10.5%, principally because specialty-business and mill sales reduced non-retail shipments. Higher average tissue prices and paperboard pricing partly offset the decrease.
- Consumer Products sales fell $51.3 million, while segment operating income improved to $12.4 million from a $0.5 million loss. The comparison benefited from fewer closure costs, lower energy and transportation costs, and lower external pulp costs; tissue mix and prices also improved.
- Pulp and Paperboard sales were nearly flat at $198.9 million, but operating income fell to $16.2 million from $36.8 million. The main factors were approximately $15 million of planned Idaho maintenance costs and lower shipments, partly offset by higher paperboard prices.
- Operating income declined 25.7%; net earnings declined 7.5%. Lower interest expense and a lower tax provision partly cushioned the operating-profit decline. Q1 2014 included $4.3 million of impairment charges related to the Long Island closure, which did not recur.
Outlook, risks and unusual items
- Management expects approximately $2 million of Long Island closure costs in 2015 and estimates annual savings from consolidation and optimization at approximately $12 million.
- Planned Arkansas maintenance in Q2 2015 is expected to cost $6 million to $8 million and cause about five days of paper-machine downtime. The Idaho facility had eleven days of planned downtime in Q1.
- The company expected approximately $8 million of additional qualified pension contributions during the remainder of 2015, plus estimated 2015 contributions of $0.4 million to its non-qualified pension plan.
- Estimated 2015 cash interest on the senior notes was $28.6 million. Management said cash flows, cash and short-term investments, and revolver capacity should fund the next twelve months’ debt service, operations, capital spending, repurchases and working capital needs.
- Key risks cited include competitive pricing and capacity, TAD-product acceptance and production optimization, significant-customer changes, supply and price changes for fiber, energy and other inputs, operational disruptions, transportation constraints, pension costs, environmental exposure, and debt restrictions.
- The company had a tentative agreement with the DOJ and EPA over alleged Clean Air Act violations at its Lewiston facility; it expected to pay a $0.3 million fine in Q2 2015 and had reserved for it. It reported no material changes to previously disclosed risk factors.
- The company repurchased 599,495 shares in Q1 at an average $61.97 per share, with $62.9 million of program authorization remaining at quarter-end.
Important facts for investors to verify
- Whether tissue pricing and TAD mix can sustain Consumer Products’ improved profitability after the specialty-business divestiture.
- Whether paperboard shipments and segment margins recover after planned maintenance and West Coast port-related shipping delays.
- Cash generation after capital spending, pension contributions and share repurchases, and continued availability under the revolver and compliance with its covenant.
- The extent to which the Q1 tax benefit and adjusted EBITDA adjustments are nonrecurring.
- Actual costs and savings from the Long Island closure, and the timing and cost of upcoming maintenance work.