Clearwater Paper Corporation — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014. The filing also reports fourth-quarter results. Clearwater Paper manufactures private-label tissue and bleached paperboard through its Consumer Products and Pulp and Paperboard segments.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $1,967.1 million | $1,889.8 million |
| Income from operations | $79.8 million | $99.3 million |
| Operating margin | 4.1% | 5.3% |
| Net income (loss) | $(2.3) million | $107.0 million |
| Diluted earnings (loss) per share | $(0.11) | $4.80 |
| Operating cash flow | $139.1 million | $136.4 million |
| Capital expenditures | $99.6 million | $86.5 million |
| Long-term debt | $575.0 million | $650.0 million |
| Working capital | $302.8 million | $376.0 million |
Cash was $27.3 million and short-term investments were $50.0 million at year-end. The $125 million secured revolver had no borrowings outstanding; $117.2 million was available, with $7.8 million supporting letters of credit. The company generated $35.7 million of net investing cash flow, including $107.7 million of proceeds from divested assets, and used $171.1 million in financing activities, including $100 million of share repurchases.
Fourth quarter: Net sales were $472.3 million versus $470.2 million in Q4 2013. The company recorded an operating loss of $17.8 million and a net loss of $27.2 million, compared with operating income of $38.3 million and net income of $82.9 million a year earlier. Q4 2014 included the $40.2 million loss on the specialty-business sale and a $3.1 million impairment charge.
Material changes and segment results
- Revenue increased 4.1% for the year, while operating income declined 19.6% and the company moved from net income to a small net loss. Higher sales and paperboard performance were offset by divestiture, closure, impairment, financing and tax items.
- Consumer Products: Sales rose 2.9% to $1,183.4 million. Underlying segment operating income was $34.1 million before the separately reported $40.2 million divestiture loss; including that loss, the segment reported an operating loss of $6.0 million. Sales benefited from higher tissue prices, including higher-priced TAD products, while conventional tissue shipments and pricing weakened.
- Pulp and Paperboard: Sales increased 5.9% to $783.8 million and operating income rose 50.5% to $144.2 million. Higher paperboard prices and shipments and the absence of prior-year major maintenance costs helped results; Arkansas mill operating issues and higher energy and transportation costs partly offset gains.
- Cost of sales was 86.9% of revenue versus 88.4% in 2013, but selling, general and administrative expense increased to $130.1 million from $119.1 million.
Outlook, risks and unusual items
- On December 30, 2014, Clearwater sold its specialty business and five mills for approximately $108 million net proceeds. The transaction produced a $40.2 million accounting loss, including goodwill and intangible-asset write-offs. Management said proceeds were intended to support capital projects in the core Consumer Products business.
- The Long Island converting facility closed in 2014, with $18.8 million of associated costs incurred. Management expected approximately $12 million in annual savings beginning in 2015. Thomaston closure costs totaled $7.2 million, including $1.3 million in 2014.
- Management forecast approximately $155 million of 2015 capital expenditures, including $85 million of strategic projects, and $21–$23 million of major maintenance costs. Planned mill maintenance and recovery-boiler work were scheduled for the first half of 2015.
- Management expected a 2015 effective tax rate of approximately 37% and lower purchased-pulp costs following the specialty-business sale. The 2014 tax provision was $18.6 million, an unusually high 114.3% effective rate, primarily because the divestiture loss did not generate a corresponding tax benefit. The 2013 comparison included substantial discrete tax benefits.
- Debt refinancing replaced $375 million of 7.125% notes due 2018 with $300 million of 5.375% notes due 2025; the company also had $275 million of 4.5% notes due 2023. The 2014 refinancing generated a $24.4 million debt-retirement charge. Debt covenants restrict, among other matters, dividends and additional borrowing.
- Key risks include competitive tissue supply and pricing, customer concentration, volatility in pulp, wood fiber, chemicals, energy and transportation costs, operational disruptions, and labor negotiations. Three customers represented about 20% of total sales in 2014. Two Lewiston labor agreements had expired and remained under negotiation.
- Environmental matters include ongoing federal discussions over alleged Clean Air Act violations at Lewiston and anticipated Arkansas compliance action relating to the Cypress Bend recovery boiler. The Arkansas corrective project was expected to cost about $5 million; potential penalties had not been proposed.
- Company-sponsored pension plans were underfunded by $16.9 million at year-end; 2014 qualified-plan contributions were $17.0 million. The filing also describes exposure to multiemployer-plan withdrawal liabilities, including PIUMPF’s critical status.
Most important facts for investors to verify
- Whether the planned 2015 cost savings, capital projects and post-divestiture pulp-cost reductions were achieved.
- Underlying Consumer Products profitability excluding the one-time divestiture loss, and whether tissue pricing and competitive pressures improved.
- Cash generation and liquidity after planned capital expenditures, maintenance, pension contributions and share repurchases.
- Progress and financial consequences of the Lewiston and Cypress Bend environmental matters and the recovery-boiler corrective work.
- Debt covenant headroom, refinancing needs and the company’s ability to sustain its debt service obligations.
KPMG issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2014.