Clearwater Paper Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Dollar amounts below are in millions unless otherwise noted. Clearwater Paper manufactures consumer tissue and pulp and paperboard products.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $426.5 | $426.5 | $1,295.5 | $1,293.7 |
| Operating income | $46.9 | $5.2 | $76.8 | $44.8 |
| Net earnings | $34.4 | $0.9 | $44.0 | $16.4 |
| Diluted EPS | $2.08 | $0.05 | $2.66 | $0.99 |
| Operating margin | 11.0% | 1.2% | 5.9% | 3.5% |
- Q3 operating income included a $22.9 million gain on the Ladysmith facility sale. Excluding the gain, operating income was about $24.0 million, or 5.6% of sales.
- Q3 cost of sales declined $10.5 million year over year; SG&A declined $8.3 million to $26.3 million. Interest expense was broadly unchanged at $7.5 million.
- For the first nine months, cost of sales was $1,155.8 million, about 89.2% of sales, and SG&A was $85.8 million, or 6.6% of sales. Adjusted EBITDA, a non-GAAP measure, was $131.3 million versus $132.0 million.
Segments and changes versus prior periods
- Consumer Products: Q3 sales fell 9% to $211.6 million. Segment operating income was $21.7 million including the Ladysmith gain; excluding it, the segment recorded a $1.3 million operating loss versus $4.5 million income a year earlier. Nine-month sales declined to $672.1 million; segment operating income was $19.7 million including the gain, versus $21.4 million in 2017. Excluding the sale gain, the nine-month result was a $3.2 million operating loss.
- Pulp and Paperboard: Q3 sales rose 11% to $214.8 million and operating income increased to $38.3 million from $14.7 million. Nine-month sales rose to $623.4 million and operating income to $98.6 million from $63.0 million. Higher volumes and prices and the absence of major maintenance outages helped results; higher wood-fiber, chemical and transportation costs partly offset the benefit.
- Total sales were essentially flat: stronger paperboard sales and pricing offset weaker tissue volume and pricing. Management cited continued tissue-sector capacity additions and competitive pricing, and said the largest tissue customer’s move to multi-sourcing reduced volumes.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $121.1 million, down from $152.2 million. Investing cash use was $102.3 million, including $174.0 million of property, plant and equipment additions and $70.9 million of Ladysmith sale proceeds. Financing provided $44.1 million, largely reflecting $45.0 million of net revolving-credit borrowings.
- Cash and cash equivalents were $76.2 million at September 30, 2018; total cash, cash equivalents and restricted cash were $79.7 million. Current assets were $492.5 million and current liabilities $448.7 million.
- Revolving-credit borrowings totaled $200.0 million, with $7.6 million of facility capacity supporting letters of credit and $192.4 million of additional borrowing availability reported at quarter-end. Long-term debt on the balance sheet was $671.1 million. The company reported a four-quarter leverage ratio of 3.97x and interest coverage of 2.56x under the then-current covenants.
- Management believed operating cash flow, cash on hand and available borrowing capacity would fund debt service, operations, working capital and capital spending for the next 12 months, while cautioning that results and market conditions could affect covenant compliance.
Outlook, significant items and risks
- Shelby expansion: Management estimated project costs at $320–$330 million for the tissue machine, converting equipment and buildings, plus about $60 million for warehouse purchase and expansion. Estimates had increased by approximately $40–$50 million, citing tariffs and steel costs, weather delays, a tight labor market and accelerated converting start-up. Management expected construction completion in early 2019 and full operation in 2020; annual capacity is expected to be about 70,000 tons. The filing reports $220.7 million of construction-related costs incurred through September and $246.5 million of total capital expenditures excluding capitalized interest for the nine-month period.
- SG&A initiative: The company reported approximately $8 million of annualized savings achieved versus 2017 and expected approximately $20 million in annual savings beginning in Q1 2019. It incurred $6.4 million of related costs during the first nine months of 2018.
- Divestiture and tax: The Ladysmith facility was sold August 21 for approximately $71 million net proceeds, generating a $22.9 million gain that included a $14.0 million goodwill write-off. Q3 tax results also reflected $10.0 million of federal alternative-energy production tax credits related to Lewiston projects.
- Post-quarter credit amendments: On November 8, 2018, the company amended its credit agreements. Amendments increased certain interest margins and commitment fees and replaced prior financial covenants with a maximum secured leverage ratio of 2.00x through December 2019 and 1.50x from March 2020, minimum interest coverage of 1.25x, and minimum asset coverage of 1.00x.
- Key stated risks include competitive pricing and capacity, customer concentration or order reductions, execution and cost overruns on Shelby and other projects, raw-material and transportation costs, operational disruptions, debt service and covenant compliance. The company reported no material change to previously disclosed risk factors and said pending legal matters were not expected, in aggregate, to materially affect financial condition.
- No specific full-year earnings guidance is provided in the filing. Management’s projections are subject to uncertainty, and interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of the reported earnings improvement reflects the one-time Ladysmith gain and tax credits, versus recurring operations.
- Whether Consumer Products can restore profitability amid weaker retail tissue volumes, customer sourcing changes and competitive pricing.
- Shelby project completion, total cost, start-up timing, customer demand and the expected realization of cost and transportation benefits.
- Compliance with the amended credit covenants, borrowing costs, available liquidity and the company’s ability to service debt.
- Capital spending and working-capital requirements, particularly given lower operating cash flow and substantial accrued capital expenditures.