Clearwater Paper Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Clearwater Paper manufactures consumer and away-from-home tissue, paperboard, and pulp. Comparisons below are with the corresponding 2016 periods; amounts are in millions of dollars unless otherwise indicated.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $429.7 | $436.7 | $867.2 | $873.9 |
| Operating income | $19.7 | $40.2 | $40.2 | $77.9 |
| Operating margin | 4.6% | 9.2% | 4.6% | 8.9% |
| Net earnings | $8.0 | $20.9 | $15.6 | $39.3 |
| Diluted EPS | $0.48 | $1.21 | $0.94 | $2.26 |
| Adjusted EBITDA (non-GAAP) | $45.0 | $66.3 | $94.3 | $126.4 |
Q2 cost of sales rose to 88.6% of sales from 82.9%; the resulting gross margin was approximately 11.4%, versus 17.1%. First-half cost of sales was 88.5% of sales, versus 83.6%. SG&A declined year over year, partly reflecting favorable mark-to-market changes in director equity awards.
- Segments, Q2: Consumer Products sales fell to $231.9 million from $247.9 million and operating income to $10.5 million from $18.5 million. Pulp and Paperboard sales rose to $197.8 million from $188.8 million, while operating income declined to $21.6 million from $40.0 million.
- Cash flow, first half: Operating cash flow was $103.6 million, compared with $96.4 million. Investing cash outflow was $85.3 million, mainly reflecting $85.7 million in property, plant and equipment additions. Financing cash outflow was $32.8 million. Cash declined by $14.5 million to $8.5 million.
- Balance sheet at June 30: Total assets were $1.679 billion and stockholders’ equity $483.6 million. Revolver borrowings were $108.0 million; long-term debt carrying value was $570.1 million. The company reported $6.8 million of letters of credit and $185.2 million of additional borrowing availability under its revolving facilities.
Changes and management explanation
Sales were down modestly, but earnings and margins fell substantially. Consumer tissue shipment volumes were lower, including following the Neenah paper-machine shutdowns and the decision to redirect TAD parent rolls to internal converting. Paperboard shipments and sales benefited from the Manchester Industries acquisition, but this did not offset lower segment profitability.
Management attributed higher costs to approximately $9 million of planned Arkansas maintenance, increased transportation and energy costs, higher depreciation, Manchester Industries costs, and prior-period inventory costs flowing through first-quarter results. Savings in wages and benefits and lower wood-fiber costs partly offset these pressures. First-half operating cash flow benefited from a $23.7 million working-capital source, compared with a $13.4 million use in 2016.
Outlook, projects, risks, and unusual items
- Management said cash from operations, cash on hand, and available revolving credit were expected to be adequate for debt service, operations, capital spending, repurchases, and working capital over the next 12 months. No earnings or revenue guidance was provided.
- The Lewiston continuous pulp digester project was estimated at $148–$158 million, excluding capitalized interest; $118.2 million of project costs had been incurred by June 30. Completion was expected in Q4 2017.
- The planned Shelby, North Carolina tissue expansion was estimated at $283 million for the machine, converting equipment, and buildings, plus approximately $57 million for warehouse purchase and expansion. Construction was expected to finish in early 2019, with operations expected in 2020.
- The Oklahoma City converting facility closed March 31, 2017. First-half closure-related costs were $7.7 million, including $5.0 million of accelerated depreciation.
- Insurance settlements related to the Las Vegas and Shelby facility incidents contributed $4.3 million of recoveries recorded in first-quarter cost of sales. The filing also reports a $1.0 million first-half income-tax charge from adopting share-based-payment accounting guidance, with a stated $0.06 EPS impact.
- Key risks include competitive pricing and capacity, demand and customer concentration, raw-material, energy and transportation costs, execution and construction delays on capital projects, operating disruptions, debt covenants, and the ability to realize acquisition and efficiency benefits. Management reported no material change to previously disclosed risk factors and no material change in internal controls.
Important facts for investors to verify
- Whether consumer tissue volumes and segment operating profitability stabilize, and how shipment mix affects pricing and margins.
- Whether the Lewiston and Shelby projects meet their stated budgets and schedules, and deliver the anticipated cost and capacity benefits.
- Working-capital-driven operating cash flow sustainability relative to large planned capital expenditures and liquidity needs.
- Revolver availability, debt-service capacity, and sensitivity to floating interest rates; the filing estimates a one-percentage-point rate change would affect annual interest expense by about $1.1 million at the stated borrowing level.
- The extent to which reported results depend on non-GAAP adjustments, insurance recoveries, closure costs, and director-award mark-to-market movements.