Clearwater Paper Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company manufactures consumer and away-from-home tissue, paperboard, and pulp. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $445.2 | $426.5 | $1,326.0 | $1,295.5 |
| Operating income (loss) | $(2.5) | $46.9 | $27.2 | $76.8 |
| Net earnings (loss) | $(11.0) | $34.4 | $(7.6) | $44.0 |
| Diluted EPS | $(0.66) | $2.08 | $(0.46) | $2.66 |
| Adjusted EBITDA | $30.9 | $50.1 | $114.7 | $135.0 |
- Sales increased 4.4% in Q3 and 2.4% year to date. Cost of sales rose to 94.1% of sales in Q3 from 88.2%; operating margin was approximately (0.6)% in Q3 and 2.1% year to date.
- Q3 operating results included no divestiture gain, compared with a $22.9 million gain on the 2018 sale of the Ladysmith facility. Excluding that gain, Q3 2018 operating income was approximately $24.0 million.
- For the first nine months, operating cash flow was $(16.2) million, versus $121.1 million in 2018. Capital expenditures were $125.8 million in cash; operating cash flow less capital expenditures was approximately $(142.0) million. Working capital changes used $98.3 million of cash.
- At September 30, cash and cash equivalents were $7.8 million, with an additional $2.5 million of restricted cash (including restricted cash in other assets). Current assets were $464.3 million and current liabilities $295.0 million. Cash, cash equivalents and restricted cash totaled $10.3 million.
- Balance-sheet debt was $924.7 million: $58.0 million short-term and $866.7 million long-term. The new facilities had $300 million outstanding under the term loan and $58 million under the ABL; the company also had $575 million principal outstanding on senior notes. Debt measures differ depending on whether carrying value or principal is used.
- Net interest expense was $13.1 million in Q3 and $32.5 million year to date, up $5.5 million and $9.2 million, respectively, from comparable periods. The company reported a $2.7 million debt retirement charge in Q3.
Material changes and segment results
- Consumer Products Q3 sales rose to $228.5 million from $211.6 million, but the segment recorded a $4.4 million operating loss. The prior-year segment result included the $22.9 million Ladysmith divestiture gain. For nine months, sales were $676.2 million and operating loss was $8.3 million, compared with operating income of $19.7 million in 2018.
- Pulp and Paperboard Q3 sales were $216.6 million, while operating income fell to $17.1 million from $38.3 million. Nine-month sales increased to $649.7 million, but operating income declined to $80.1 million from $98.6 million.
- Management attributed margin pressure to planned major maintenance at the Idaho facility, increased purchased pulp, Shelby startup costs and depreciation, and higher energy and other operating costs. Nine-month retail tissue shipments increased, while non-retail tissue shipments declined, partly reflecting the Ladysmith sale.
- Cash and cash equivalents fell from $22.5 million at December 31, 2018; total debt increased on a carrying-value basis from $792.1 million to $924.7 million. The balance sheet also reflects adoption of lease accounting, including $74.5 million of operating lease right-of-use assets and $66.6 million of operating lease liabilities.
Outlook, financing, and risks
- The Shelby, North Carolina tissue machine began production in Q2 2019. At full capacity it is expected to produce approximately 70,000–75,000 tons annually, with a full production run-rate projected for mid-2020. The project is estimated at approximately $360 million for the machine, converting equipment and buildings, plus approximately $60 million for warehouse expansion.
- Management expected Q4 2019 Arkansas major-maintenance costs of approximately $6–$7 million. It stated that cash on hand, operating cash flows and borrowing capacity were expected to fund debt service, operations, capital expenditures and working capital for the next 12 months, while acknowledging uncertainty in future cash flows.
- On July 26, 2019, Clearwater refinanced prior revolving facilities with a $300 million term loan maturing in 2026 and a $250 million asset-based revolving facility maturing in 2024. The ABL had $58 million drawn and $5.5 million of letter-of-credit usage at quarter-end. The company reported compliance with covenants; the ABL fixed-charge coverage covenant applies if availability falls below a specified threshold.
- Management identified competitive pricing and capacity, customer demand and concentration, Shelby ramp-up and product quality, raw-material and energy costs, maintenance and operating disruptions, substantial indebtedness, covenant compliance, environmental matters, and execution of cost-saving projects among key risks. A 1 percentage-point interest-rate change on assumed facility borrowings of $358 million would affect annual interest expense by approximately $3.6 million.
- Disclosure controls were not effective at quarter-end because previously reported material weaknesses in internal control over financial reporting remained. Remediation was underway, but management said additional time was needed to implement and demonstrate effectiveness. Management nevertheless concluded the financial statements fairly presented the company’s financial position, results and cash flows in all material respects.
- The filing gives no formal earnings or revenue guidance. Management noted that interim results are not necessarily indicative of full-year results. The company reported no material change to previously disclosed risk factors; it said pending legal matters were not expected, in aggregate, to materially affect financial condition based on information then available.
Important facts for investors to verify
- Whether Shelby reaches its projected mid-2020 full production run-rate, planned output, and expected costs and customer demand.
- Whether segment profitability improves after Idaho maintenance and as Shelby startup costs, depreciation and operating inefficiencies evolve.
- Cash conversion, working-capital requirements, capital spending, receivables-sale activity and the company’s continuing reliance on financing.
- Debt principal, interest expense, refinancing terms, borrowing availability and covenant headroom, including the ABL availability trigger.
- Progress in remediating the disclosed material weaknesses and whether controls are tested and shown to be effective.