Clearwater Paper Corporation — Q2 2015 Form 10-Q
Business context and reporting period. The filing covers the three and six months ended June 30, 2015. Clearwater Paper manufactures consumer and away-from-home tissue, parent-roll tissue, bleached paperboard and pulp. Its reportable segments are Consumer Products and Pulp and Paperboard. Comparisons are affected by the December 2014 sale of the specialty business and mills.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $444.6m | $498.8m | $878.6m | $983.7m |
| Operating income | $32.1m | $33.1m | $47.3m | $53.6m |
| Operating margin | 7.2% | 6.6% | 5.4% | 5.4% |
| Net earnings | $15.6m | $12.5m | $21.4m | $18.7m |
| Diluted EPS | $0.81 | $0.61 | $1.10 | $0.90 |
| Operating cash flow | Not separately reported | Not separately reported | $87.9m | $94.9m |
Q2 net sales declined 10.9% year over year; operating income fell 3.1%, while net earnings rose 25.2%. For the first half, sales declined 10.7%, operating income fell 11.7%, and net earnings increased 14.3%. Q2 net margin was 3.5% versus 2.5%; first-half net margin was 2.4% versus 1.9%. Interest expense was $7.8m in Q2 and $15.6m for the half, down from $10.7m and $21.4m, respectively.
Cash flow and investment. First-half operating cash flow was $87.9m. Investing cash outflow was $65.0m, including $55.5m of plant and equipment additions, versus $32.6m of additions in the prior-year half. Financing cash outflow was $38.7m, primarily reflecting $37.1m of share repurchases. Cash declined $15.9m to $11.5m; short-term investments were $60.0m and restricted cash was $2.3m. Cash from operations less capital additions was approximately $32.4m, a derived measure.
Balance sheet and liquidity. At June 30, 2015, total assets were $1.56bn, current assets $491.8m and current liabilities $222.6m. Long-term debt was $575m, unchanged from year-end 2014. No revolving-facility borrowings were outstanding; $6.2m supported letters of credit and $118.8m of additional availability was reported. The fixed-charge coverage ratio for the latest four quarters was 1.1-to-1.0. Senior notes include $275m of 4.5% notes due 2023 and $300m of 5.375% notes due 2025.
Material changes and segment results
- Consumer Products: Q2 sales were $239.4m versus $299.1m, while operating income rose to $17.0m from $12.7m. First-half sales were $474.6m versus $585.6m; operating income improved to $29.4m from $12.2m. Lower non-retail shipments following the divestiture reduced sales, while improved mix and higher tissue pricing supported results.
- Pulp and Paperboard: Q2 sales rose to $205.2m from $199.6m, but operating income declined to $27.8m from $33.6m. First-half sales were $404.0m versus $398.0m; operating income fell to $43.9m from $70.4m, largely due to planned maintenance outages and related costs.
- The sale of the specialty business reduced non-retail shipments and related costs. Higher retail/TAD product mix and tissue selling prices partly offset the lost sales. Paperboard shipments were essentially flat for the first half.
- Q2 cost of sales included approximately $7m of planned Arkansas maintenance costs; first-half planned maintenance costs at Idaho and Arkansas were approximately $22m. First-half 2015 capital expenditures included $17.9m of strategic projects.
Outlook, risks and unusual items
- Management expects Long Island facility consolidation and optimization to generate approximately $12m of annual savings; approximately $2m of closure costs were expected in 2015. Closure costs incurred through June 30, 2015 totaled $20.1m.
- Management stated cash from operations, cash and short-term investments, and revolving-credit availability should be adequate for the next 12 months’ debt service, operations, capital spending, repurchases and working-capital needs. This is subject to uncertainty in the company’s competitive and cyclical markets.
- Q2 SG&A benefited from a $1.5m mark-to-market benefit on director equity awards and a $1.5m gain from release of sale-related escrow cash. First-half adjusted EBITDA, a non-GAAP measure, was $88.6m versus $112.0m; Q2 was $50.7m versus $57.3m.
- The company had firm-price contracts covering about 58% of expected average monthly natural-gas requirements for the remainder of 2015. Key stated risks include competitive pricing and customer acceptance of price increases, input and energy costs, production interruptions, raw-material supply, labor, pension costs, and debt restrictions.
- Clearwater expected to pay a $0.3m EPA/DOJ fine in Q3 2015 and had already reserved for it. Management reported no material changes to previously disclosed risk factors and no material change in internal control over financial reporting.
Most important facts for investors to verify
- How much of the reported sales decline reflects the specialty-business divestiture versus underlying volume, pricing and mix trends.
- Whether tissue pricing and mix gains can persist, and whether Pulp and Paperboard profitability recovers after planned maintenance outages.
- Delivery of the projected $12m annual Long Island savings and the remaining closure costs.
- Capital-spending requirements, cash conversion and liquidity relative to the $575m debt load and repurchase authorization.
- The impact of the 1.1-to-1.0 fixed-charge coverage ratio and conditions that could trigger the revolving-credit covenant.