Clearwater Paper Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Clearwater Paper makes consumer and away-from-home tissue, paperboard and pulp.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $428.8 million | $437.0 million |
| Operating income; margin | $14.4 million; 3.3% | $11.5 million; 2.6% |
| Net earnings; diluted EPS | $3.8 million; $0.23 | $2.6 million; $0.16 |
| Adjusted EBITDA | $39.8 million | $41.1 million |
| Operating cash flow | $(29.4) million | $30.9 million |
| Cash capital expenditures | $71.6 million | $48.4 million |
- Cost of sales was 89.6% of sales versus 89.8%; SG&A was 7.0% versus 7.5%. Net margin was 0.9% versus 0.6%.
- Q1 operating cash flow was pressured by a $62.1 million working-capital use, principally higher receivables and inventory and lower payables. Financing cash flow was $90.7 million, driven by net short-term borrowings of $91.4 million.
- At March 31, cash and cash equivalents were $12.2 million, with another $1.4 million of restricted cash. Reported short-term and long-term debt totaled $883.7 million. The company had $302.0 million outstanding under revolving credit facilities and reported $90.5 million of remaining draw capacity.
- Consumer Products sales fell to $223.3 million from $238.8 million, and operating income was $1.3 million versus $1.6 million. Tissue shipments declined; higher average selling prices and favorable mix partly offset lost volume.
- Pulp and Paperboard sales rose to $205.4 million from $198.1 million, and operating income increased to $29.4 million from $26.2 million, mainly on higher prices and lower wages, maintenance and chemical costs.
Changes, outlook and risks
- Sales declined 1.9%, as higher average tissue and paperboard prices were more than offset by lower sales volumes. Earnings increased, aided in part by lower operating costs and the absence of $5.1 million of Q1 2018 reorganization costs. Adjusted EBITDA nevertheless decreased from $41.1 million to $39.8 million.
- The Shelby, North Carolina tissue expansion was nearing completion. Management expected construction completion in Q2 2019 and full operation in 2020; planned capacity is approximately 70,000 tons annually. Estimated project cost is about $360 million for the machine, converting equipment and buildings, plus about $60 million for warehouse expansion. The company incurred $35.2 million of Shelby construction costs in Q1 and expected about $2.5 million of startup costs in Q2.
- Management expected about $5 million of unplanned Q2 maintenance, primarily for the Idaho recovery boiler, and planned major maintenance of approximately $17 million at Idaho in Q3 and $8 million at Arkansas in Q4. Natural-gas costs rose in Q1 due to a pipeline disruption, increased usage after a recovery-boiler outage, and colder weather; firm-price contracts covered about 25% of expected monthly gas requirements for the rest of 2019.
- Management believed cash, operating cash flows and revolving-credit availability would meet the next 12 months’ operating, capital and debt-service needs, but noted uncertainty in cash generation and refinancing. The company reported covenant compliance at quarter-end and expected to remain compliant, while cautioning that deterioration could jeopardize compliance. A 1 percentage-point interest-rate change on assumed $302 million facility borrowings would affect annual interest expense by about $3 million.
- Disclosure controls were ineffective as of March 31 because previously reported material weaknesses in internal control over financial reporting remained. Remediation was underway but required more time to implement and demonstrate effectiveness. Management said the financial statements fairly present the company’s results in all material respects.
- Principal stated risks include competitive pricing and customer-volume changes, project completion and product acceptance at Shelby, raw-material and energy costs, operational disruptions, pension and environmental exposures, and substantial indebtedness and covenant restrictions. The filing reported no material change to the risk factors in the 2018 Form 10-K. Management did not expect pending legal matters, in aggregate, to materially adversely affect financial condition.
Investor verification priorities
- Track working-capital movements and whether operating cash flow recovers after the Q1 cash outflow.
- Verify Shelby’s completion, total spending, startup costs, production ramp, customer acceptance and expected returns.
- Monitor short-term borrowings, remaining revolver capacity, covenant headroom and debt-service costs.
- Assess whether tissue volumes and Consumer Products profitability stabilize amid competitive pressure and the loss of a significant customer’s volume.
- Follow remediation of the disclosed internal-control material weaknesses and confirm controls become effective.
Accounting note: The filing says the estimated annual effective tax rate applied to Q1 ordinary income was approximately 6%; separately, MD&A reports a GAAP Q1 rate of approximately 16%, reflecting discrete items. The filing does not reconcile these figures further in the provided text.