Clearwater Paper Corp quarterly report, Q1 FY2018

Clearwater Paper Corporation — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Clearwater manufactures consumer and away-from-home tissue, parent rolls, pulp and bleached paperboard.

Financial results and liquidity

Metric	Q1 2018	Q1 2017
Net sales	$437.0 million	$437.5 million
Operating income; operating margin	$11.5 million; 2.6%	$20.5 million; 4.7%
Net earnings; diluted EPS	$2.6 million; $0.16	$7.5 million; $0.45
Operating cash flow	$30.9 million	$45.5 million
Capital expenditures	$48.4 million	$42.2 million

Cost of sales rose to 89.8% of revenue from 88.5%; SG&A rose to 7.5% from 6.8%. Interest expense was nearly unchanged at $8.0 million. Q1 2018 included a $0.4 million income tax benefit, versus $5.0 million of tax expense in Q1 2017; the filing cites the lower federal tax rate and certain tax benefits.

At March 31, cash was $12.1 million. Revolver borrowings were $168.5 million, and long-term debt was $570.7 million on the balance sheet; $7.6 million of facility capacity supported letters of credit, with a further $123.9 million available to draw. Operating cash flow less capital expenditures was approximately negative $17.6 million. Total liabilities were $1.23 billion.

Material changes and segment performance

• Consumer Products sales declined to $238.8 million from $242.4 million, and operating income fell to $1.6 million from $6.2 million. Tissue shipments declined, with lower retail pricing and higher transportation and pulp costs weighing on results.
• Pulp and Paperboard sales increased to $198.1 million from $195.1 million, while operating income declined to $26.2 million from $27.2 million. Higher paperboard prices and favorable mix were offset by lower shipments and higher wood fiber, maintenance, chemical and depreciation costs.
• Company sales were nearly flat, but operating income fell about 44%. Higher transportation, pulp, wood fiber and chemical costs contributed. Q1 2017 included $4.3 million of insurance recoveries; Q1 2018 had no such recovery.
• Q1 2018 included $5.1 million of SG&A cost-reduction and reorganization expenses. Adjusted EBITDA, a non-GAAP measure, was $39.8 million versus $49.3 million.

Outlook, risks and unusual items

• Management expects at least $20 million in annual SG&A savings beginning in 2019; the plan incurred $5.1 million of expenses in Q1 2018.
• Management expects 2018 transportation costs to be $10–$20 million higher than in 2017, and pulp and wood fiber costs to be $5–$10 million higher.
• The Shelby tissue expansion is estimated at approximately $280 million for the machine, converting equipment and buildings, plus approximately $60 million for a warehouse purchase and expansion. Construction was projected to finish in early 2019, with full operations in 2020; $38.2 million was spent on construction-related activities in Q1.
• The largest tissue customer shifted from single-source to multi-source supply beginning in Q1 2018. Clearwater does not expect to replace all lost volume during 2018. Kroger accounted for approximately 16.3% of Q1 sales, up from 14.9% a year earlier.
• At quarter-end, the consolidated leverage ratio was 4.1x against a 4.50x maximum for 2018; interest coverage was 2.5x against a 1.75x minimum. Management expected compliance but warned that weaker-than-expected conditions or results could threaten it.
• Other stated risks include competitive pricing and capacity, raw-material and energy costs, customer concentration, execution of cost savings and expansion projects, operating disruptions, and debt-service and covenant requirements. The filing reports no material change to previously disclosed risk factors and no legal proceedings expected, based on currently available information, to materially affect financial condition.

Important facts for investors to verify

• Whether cost inflation and tissue customer volume losses continue to pressure margins and cash generation.
• Progress, spending, completion timing and customer demand for the Shelby expansion.
• Delivery and timing of the planned SG&A savings relative to restructuring costs.
• Revolver availability and covenant headroom as debt and capital spending evolve.
• Whether the Q1 tax benefit and prior-year insurance recovery distort comparisons with future periods.