Business context and reporting period
Clearwater Paper Corporation filed this unaudited Form 10-Q for the three months ended March 31, 2014. It produces private-label tissue, paperboard and pulp at 13 locations in the U.S. and Canada. Results are interim and are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $484.9 million | $460.8 million |
| Operating income | $20.5 million; 4.2% margin | $12.5 million; 2.7% margin |
| Net earnings (loss) | $6.2 million; diluted EPS $0.29 | $(0.9) million; diluted EPS $(0.04) |
| Operating cash flow | $35.3 million | $13.5 million |
| Capital spending | $14.8 million per MD&A; cash additions to plant and equipment were $16.2 million | $13.4 million per MD&A |
- Cost of sales was 88.0% of sales, versus 89.9%; net earnings margin was 1.3% versus a net loss.
- Adjusted EBITDA, a non-GAAP measure, was $54.7 million versus $38.3 million. EBITDA was $42.7 million versus $34.6 million.
- Cash was $24.0 million and short-term investments were $59.0 million at quarter-end; restricted cash was $1.5 million. Current assets were $575.6 million and current liabilities $214.2 million.
- Long-term debt was $650.0 million, unchanged from year-end. No revolving-facility borrowings were outstanding; $6.9 million supported letters of credit and approximately $118.1 million was available to draw. The four-quarter fixed-charge coverage ratio was 3.3:1.0.
Material changes versus the prior comparable period
- Sales rose 5.2%, led by paperboard volume and pricing. Paperboard and Pulp segment sales grew 12.8% and operating income increased to $36.8 million from $17.6 million.
- Consumer Products operating results fell to a $0.5 million loss from $10.1 million income. Facility-closure costs, higher energy and transportation costs, and increased packaging and pulp costs weighed on results; tissue shipments and converted cases declined.
- Energy costs increased 16.4%, with management citing higher natural gas use and pricing and severe cold weather. Cost of sales dollars rose 3.0%.
- Q1 2013 included $17.1 million of debt-retirement costs and a related tax benefit; these did not recur in Q1 2014. Interest expense was modestly lower following the 2013 refinancing.
- Operating cash flow improved by $21.8 million. Financing cash use included $29.3 million of share repurchases; Q1 2013 financing instead reflected debt issuance and repayment activity.
Outlook, risks and unusual items
- The company permanently closed its Long Island tissue converting and distribution facility in February 2014. It had incurred $8.4 million in closure costs by quarter-end; total exit costs were estimated at $12–$15 million. Management expected savings of about $6 million in 2014 and $12 million annually beginning in 2015. Thomaston closure costs totaled $6.7 million through quarter-end; related savings were expected to be fully realized beginning in Q4 2014.
- A $4.3 million non-cash impairment charge related to Long Island assets was recorded. The Consumer Products segment also incurred $9.2 million of closure costs in the quarter.
- Management believed cash, short-term investments, operating cash flow and available revolver capacity would meet debt service and operating, capital spending, repurchase and working-capital needs for the next 12 months. Estimated 2014 cash interest was $39.1 million. No formal earnings guidance is stated in the supplied filing text.
- Management expected approximately $10 million of additional qualified pension contributions during the remainder of 2014, following $4.3 million in Q1 and $4.6 million contributed in April.
- Key risks include competitive pricing and capacity, customer demand and pricing, ramp-up and optimization of the Shelby TAD operations, input and energy costs, weather or operating disruptions, pension funding, and debt covenant restrictions. Firm-price contracts covered about 10% of expected average monthly natural gas needs for the rest of 2014.
- EPA/DOJ discussions continued regarding alleged Clean Air Act violations at the Lewiston facility; the tolling agreement was set to expire July 31, 2014 unless extended. The company said other proceedings were not expected to have a material adverse effect based on information then available.
Important facts for investors to verify
- Whether paperboard strength and the Consumer Products segment’s weaker performance persisted after Q1, including the impact of pricing, shipment volumes and costs.
- Actual Long Island and Thomaston closure costs and realized savings versus management’s estimates.
- Progress and operating benefits from the Shelby TAD machine and converting lines, and related customer acceptance and demand.
- Cash generation, capital spending, pension contributions, repurchases and remaining revolver availability relative to debt-service needs.
- Outcome of the Lewiston environmental matter and completion of the IRS review; the filing expected final approval of the main tax audit without further changes.