Clearwater Paper Corporation — Q3 2014 Form 10-Q
Business context and period. Clearwater Paper produces private-label tissue and paperboard products at 13 U.S. and Canadian locations. This unaudited report covers the quarter and nine months ended September 30, 2014, compared with the same 2013 periods.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $511.1 million | $487.8 million | $1,494.8 million | $1,419.7 million |
| Operating income | $44.0 million | $18.8 million | $97.6 million | $61.0 million |
| Operating margin | 8.6% | 3.9% | 6.5% | 4.3% |
| Net earnings | $6.3 million | $13.3 million | $24.9 million | $24.1 million |
| Diluted EPS | $0.31 | $0.60 | $1.21 | $1.07 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $101.9 million | $91.5 million |
Q3 cost of sales was 85.0% of sales, versus 90.4% a year earlier. Nine-month cost of sales was 86.6%, versus 89.5%. Q3 net earnings included a $24.4 million debt-retirement charge; without this unusual charge, reported net earnings would have been higher, but the filing does not provide a directly comparable adjusted net-earnings figure.
Q3 Consumer Products sales rose to $306.1 million from $292.9 million, while segment operating income declined to $12.5 million from $13.4 million. Pulp and Paperboard sales increased to $205.0 million from $194.9 million, and segment operating income rose to $45.6 million from $16.3 million. For the first nine months, Consumer Products operating income fell to $24.7 million from $38.4 million; Pulp and Paperboard operating income increased to $116.0 million from $58.6 million.
Liquidity, debt and capital allocation
- At September 30, cash was $13.6 million; current assets were $508.1 million and current liabilities were $279.1 million.
- Long-term debt was $575.0 million and revolver borrowings were $47.0 million. The company reported $70.1 million of additional revolver availability, with $7.9 million of facility capacity supporting letters of credit.
- In July, Clearwater issued $300 million of 5.375% senior notes due 2025 and used the proceeds, company funds and revolver borrowing to redeem $375 million of 7.125% notes due 2018. The redemption generated the $24.4 million retirement charge. Management expects overall interest expense to decrease following the refinancing.
- Nine-month capital expenditures were $54.0 million. Financing cash outflow was $128.7 million, including $100 million of share repurchases. The $100 million repurchase program was completed; 1.575 million shares were bought back at an average $63.50 per share.
- Management stated that operating cash flow, cash on hand and available revolver capacity should fund debt service, operations, capital spending and working capital needs for the next 12 months, while noting uncertainty in future cash generation.
Material changes, outlook and risks
- Sales grew 4.8% in Q3 and 5.3% for the first nine months. Management attributed growth to higher prices and shipments, including increased sales of higher-priced TAD tissue, and stronger paperboard demand and pricing. Pulp and Paperboard benefited from the absence of prior-year maintenance downtime costs.
- Consumer Products faced facility closure costs, higher transportation, chemical and energy costs, and first-quarter weather-related costs. Operating issues at the Arkansas pulp mill continued to raise costs and reduce throughput; paper-machine issues there were resolved.
- The Long Island facility closure had incurred $15.0 million of costs through September 30. Management expected total 2014 closure costs of $17–18 million and estimated savings of about $6 million in 2014 and $12 million annually thereafter. Thomaston closure-related optimization savings were expected to be fully realized beginning in Q4 2014.
- The next planned major maintenance outage was scheduled for spring 2015. Management estimated debt-service interest cash payments of $34.4 million for 2014 and $28.6 million for 2015.
- Risks cited include competitive pricing and new industry capacity, customer demand and acceptance of TAD products, execution at the Shelby TAD facility, customer concentration, input and freight costs, operating disruptions, pension obligations, environmental exposure, and debt covenant and refinancing constraints. Natural-gas contracts covered about 69% of expected monthly requirements for the remainder of 2014 and 50% for 2015.
- Environmental matters include ongoing EPA/DOJ discussions regarding alleged Clean Air Act violations at the Lewiston facility, and an Arkansas pre-enforcement notice seeking information on air emissions. No corrective action or monetary penalty was being sought in the Arkansas notice as of the filing. The company said it was investigating.
- No specific full-year earnings guidance was provided. The filing says interim results are not necessarily indicative of full-year results. Management estimated a 2014 annual effective tax rate of about 35%, excluding the impact of discrete items.
Important facts for investors to verify
- Whether Arkansas facility operating issues are resolved and how they affect production costs and throughput.
- Whether projected savings from the Long Island and Thomaston closures are achieved and closure costs remain within estimates.
- Paperboard demand, pricing and shipments, and customer acceptance and profitability of TAD tissue products.
- Available revolver capacity, covenant compliance, and cash generation relative to debt service and capital needs.
- Developments in the Lewiston and Arkansas environmental matters, including any formal action, penalties or required remediation.
- Tax-rate assumptions and the continuing effects of the debt refinancing and share repurchases on earnings and liquidity.