Packaging Corporation of America — Q1 2015 Form 10-Q
Business context and period: The filing reports unaudited results for the three months ended March 31, 2015, compared with the same period in 2014. PCA manufactures corrugated packaging and paper products, primarily in the United States, and reports Packaging, Paper, and Corporate and Other segments.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $1,425.7 million | $1,431.3 million |
| Gross profit | $277.0 million | $301.4 million |
| Income from operations | $157.1 million | $160.9 million |
| Net income | $90.8 million | $90.1 million |
| Diluted EPS | $0.92 | $0.92 |
| Operating cash flow | $108.3 million | $149.3 million |
| Capital expenditures | $55.6 million | $50.9 million |
Gross margin was approximately 19.4%, down from 21.1%; operating margin was approximately 11.0%, versus 11.2%. Management’s non-GAAP net income excluding special items was $99.6 million ($1.01 diluted EPS), compared with $106.5 million ($1.08) a year earlier. EBITDA was $250.5 million, compared with $244.3 million; EBITDA excluding special items was $255.3 million, versus $270.0 million.
At March 31, cash and cash equivalents were $126.4 million. Total debt was approximately $2.354 billion, comprising $1.647 billion of fixed-rate notes and $706.9 million of variable-rate term loans. PCA reported $326.5 million of unused revolving-credit capacity, net of letters of credit. Current assets were $1,614.8 million and current liabilities were $621.3 million. The company stated that cash, operating cash generation, borrowing capacity, and capital-market access should meet foreseeable liquidity needs.
Dividends declared were $0.55 per share, up from $0.40 a year earlier. PCA paid $39.4 million in dividends during the quarter and repurchased 100,000 shares for $7.6 million.
Changes versus the prior comparable period
- Sales declined $5.6 million, or 0.4%. Packaging sales rose slightly to $1,099.3 million; Paper sales fell 4% to $297.3 million.
- GAAP net income increased $0.7 million, but results excluding special items declined $6.9 million. The comparison benefited from $25.7 million of prior-year special items, including a $17.6 million class-action settlement; Q1 2015 special items were $13.8 million.
- Packaging operating income fell $29.6 million to $141.1 million. Management cited the DeRidder annual outage and restructuring, higher employee, freight and fiber costs, and lower export containerboard prices. Corrugated shipments rose 2.7% overall and 4.4% per workday.
- Paper operating income rose $7.9 million to $35.6 million, with lower energy, chemical, and freight costs; lower paper prices and weaker printing/converting and pressure-sensitive volumes were offsets.
- Operating cash flow fell $41.0 million. Working-capital uses increased, including inventory buildup ahead of mill outages and lower accrued liabilities and accounts payable.
Outlook, commentary, risks, and unusual items
- For Q2 2015, management expected earnings excluding special items to be slightly above Q1’s $1.01 per diluted share. Expected benefits included full-quarter DeRidder operations, seasonal volume, and lower employee-benefit costs; higher outage costs, depreciation, interest, and tax rate were expected offsets. PCA cautioned that actual results could differ.
- Management expected 2015 capital investments of $275–$300 million, including approximately $16 million for Boiler MACT compliance and about $5 million for other environmental expenditures.
- Office Depot, including OfficeMax, accounted for 10% of total sales and 46% of Paper segment sales in Q1 2015. PCA cited concentration risk and uncertainty about the pending Staples–Office Depot merger and its effect on purchases, pricing, and customer credit.
- Approximately 70% of debt was fixed-rate. A 1% rise in rates on variable-rate debt was estimated to increase annual interest expense by $7.1 million.
- After quarter-end, PCA sold its European and Mexican Hexacomb operations on April 1 for $23 million; the gain was not expected to be significant. An April 14 storm caused a two-week outage and turbine damage at the Jackson, Alabama, mill. The company expected property and business-interruption insurance to cover costs, subject to a $3 million deductible.
- Q1 special items included DeRidder restructuring and Boise integration costs; a $3.6 million Louisiana tax credit partially offset other expense. DeRidder restructuring included accelerated depreciation. Management reported no material change in risk factors, no material off-balance-sheet arrangements, and no known reasonably possible material adverse effect from pending legal actions.
Important facts for investors to verify
- Whether Q2 earnings and the expected DeRidder production and cost improvements materialized, and how recurring outage and restructuring costs evolve.
- Whether operating cash flow recovers as inventory, payables, and accrued-liability timing normalizes; compare capital spending with the $275–$300 million annual plan.
- Progress in the Staples–Office Depot transaction and any resulting changes to PCA’s concentrated Paper segment sales or receivables exposure.
- Insurance recovery and final costs related to the Jackson mill outage, beyond the stated $3 million deductible.
- Debt levels, variable-rate exposure, dividend affordability, and the extent to which reported and special-item-adjusted results diverge.