Clearwater Paper Corporation — FY 2018 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter filing. Clearwater Paper manufactures private-label consumer and away-from-home tissue, bleached paperboard, and pulp. Its reporting segments are Consumer Products and Pulp and Paperboard. The company sold its Ladysmith, Wisconsin tissue facility in August 2018.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $1,724.2 million | $1,730.4 million |
| Gross profit (sales less cost of sales) | $186.2 million; 10.8% margin | $200.1 million; 11.6% margin |
| Operating income (loss) | $(97.9) million; (5.7)% margin | $71.2 million; 4.1% margin |
| Net income (loss) | $(143.8) million; $(8.72) per share | $97.3 million; $5.91 per share |
| Adjusted EBITDA (non-GAAP) | $176.7 million | $189.5 million |
| Operating cash flow | $168.9 million | $178.7 million |
| Cash capital additions | $295.7 million | $199.7 million |
At year-end, cash and cash equivalents were $22.5 million, current assets were $443.9 million and current liabilities were $449.3 million, resulting in negative working capital of $5.3 million. Management reported gross debt of $795.8 million, compared with $730.0 million a year earlier; debt to total capitalization, excluding accumulated other comprehensive loss, rose to 61.6% from 53.9%. The company had $200 million outstanding under its revolving facilities and reported $192.4 million of additional borrowing capacity, after letters of credit.
Consumer Products revenue declined 6.1% to $884.8 million. Its reported operating loss was $173.9 million, including a $195.1 million goodwill impairment and a $24.0 million gain on the Ladysmith sale; excluding those items, the segment recorded a $2.8 million operating loss, versus $29.0 million of operating income in 2017. Pulp and Paperboard revenue increased 6.5% to $839.4 million, and operating income rose 34.0% to $130.4 million.
Material changes and unusual items
- Revenue was down less than 1% year over year. Lower Consumer Products shipments and retail tissue prices, plus the Ladysmith sale, were largely offset by stronger Pulp and Paperboard volumes, mix and pricing.
- The $195.1 million non-cash goodwill impairment reflected a weaker Consumer Products outlook, including expected lower tissue pricing and converted-case volumes and higher transportation and pulp costs. The impairment drove the annual operating and net losses.
- The Ladysmith sale generated approximately $71 million in net cash proceeds and a $24.0 million recorded gain, net of associated items including a $14.0 million goodwill write-off.
- The Shelby, North Carolina tissue expansion’s estimated cost increased approximately $80 million from original estimates. Management estimated total project cost at about $420 million, including warehouse expansion; $371.8 million had been incurred by year-end.
- Cost of sales increased to 89.2% of sales from 88.4%. Higher wood fiber, chemical, transportation and wage costs were partly offset by lower maintenance, energy and packaging costs. Adjusted EBITDA declined 6.7%.
- Fourth-quarter 2018 net sales were $428.7 million and net loss was $187.8 million, principally reflecting the goodwill impairment. Fourth-quarter 2017 net income of $80.9 million included a significant tax benefit.
Outlook, risks and contingencies
- Management expected the Shelby facility construction to be completed in early 2019 and the new tissue machine to be fully operational in 2020, with expected annual capacity of approximately 70,000 tons. The project experienced significant cost overruns; execution, product quality and customer demand remain key uncertainties.
- Management forecast 2019 cash capital expenditures of approximately $130–$140 million and an estimated annual effective tax rate of approximately 25%. Major maintenance shutdowns were expected at the Idaho facility in Q3 2019 and Arkansas facility in Q4 2019.
- Management expected competitive tissue market conditions to continue in 2019. Risks include excess tissue capacity, difficulty passing through input-cost increases, customer concentration and the shift by the largest tissue customer to a multisource supply model, which reduced conventional tissue volumes in 2018.
- The Lewiston continuous digester was delivering materially less financial benefit than expected. A vessel blockage in Q4 2018 disrupted pulping operations; the $4.4 million insurance claim was settled for $1.9 million after the deductible.
- Input-cost and operating risks include volatile pulp and wood fiber prices, transportation costs, chemicals and energy. Transportation costs were 11.9% of sales in 2018; management also disclosed a natural-gas price spike in the Pacific Northwest in early 2019.
- Company-sponsored pension plans were underfunded by $25.3 million at year-end, versus $6.8 million in 2017. The multiemployer PIUMPF plan was in critical and declining status; estimated withdrawal payments for a complete 2019 withdrawal were about $5.7 million annually for 20 years, with present value exceeding $78 million. No withdrawal liability was recorded because the company said it had no current withdrawal plan.
- The company disclosed material weaknesses in internal control over financial reporting, including inadequate staffing and risk assessment for unusual transactions and inadequate controls over vendor payment arrangements. Management concluded disclosure controls were ineffective at year-end, and the auditor issued an adverse opinion on internal control, while issuing an unqualified opinion on the financial statements. Certain immaterial misstatements were corrected before issuance.
- Other risks include substantial debt and covenant requirements, labor negotiations at Lewiston, environmental regulation, supply-chain concentration and customer, manufacturing, cybersecurity and pension exposures. Management stated it was in compliance with credit-facility covenants at December 31, 2018.
Important facts for investors to verify
- Whether the Shelby expansion is completed within the revised budget and schedule, and achieves expected operating capacity, product quality and customer demand.
- Whether Consumer Products pricing, volumes and margins stabilize, and whether the digester delivers its expected operational and financial benefits.
- Cash generation, capital spending, debt levels, revolver availability and covenant headroom as the company funds the expansion and manages near-term obligations.
- Progress in remediating the disclosed material weaknesses, particularly controls for non-routine transactions and vendor financing arrangements.
- Developments in PIUMPF funding and potential liabilities, pension funding status, labor negotiations, and exposure to wood fiber, pulp, transportation and energy costs.