Packaging Corporation of America — Q1 2011 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2011, compared with Q1 2010. PCA manufactures containerboard and corrugated packaging, primarily in the United States. Management said industry conditions remained favorable.
Key financial results
Amounts are in millions of dollars except per-share data, volumes, and percentages.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $629.5 | $550.7 | +14.3% |
| Gross profit / margin | $133.1 / 21.2% | $86.8 / 15.8% | Margin +5.4 pts |
| Operating income | $65.9 | $33.6 | +96.1% |
| Net income | $37.4 | $19.2 | +$18.2 |
| Diluted EPS | $0.37 | $0.19 | +$0.18 |
| Operating cash flow | $64.0 | $14.5 | +$49.4 |
| Capital expenditures | $64.7 | $63.1 | +$1.6 |
Net sales rose mainly on higher prices ($58.0 million) and volume ($20.8 million). Corrugated shipments increased 3.1%; outside containerboard sales volume increased 1.0%. Operating margin was approximately 10.5%, versus 6.1%; net margin was approximately 5.9%, versus 3.5%.
Q1 cash used in investing was $66.5 million and cash used in financing was $21.0 million. Cash declined $23.5 million to $173.0 million. Operating cash flow less property, plant and equipment additions was approximately negative $0.8 million.
At March 31, cash was $173.0 million; current assets were $772.1 million and current liabilities $387.3 million. Debt and current maturities totaled about $658.2 million, plus $22.3 million of capital leases. PCA had $172.2 million of unused borrowing capacity, net of letters of credit, and was in compliance with debt covenants. Fixed-rate debt represented approximately 84% of debt.
Material changes and unusual items
- GAAP net income increased to $37.4 million from $19.2 million. The comparison is affected by a $9.2 million alternative-fuel tax-credit reserve release recorded in Q1 2010 and by asset-disposal and facility-closure charges in both periods. Excluding disclosed special items, management reported net income of $39.5 million ($0.39 diluted EPS) in Q1 2011 versus $12.5 million ($0.12) in Q1 2010; these are non-GAAP measures.
- Costs increased for chemicals, transportation, labor and benefits, recycled fiber, and severe winter weather. Higher selling and administrative expenses and corporate overhead also partly offset operating improvement. Net interest expense declined $1.8 million, mainly due to higher capitalized interest.
- The board authorized an additional $100 million stock-repurchase program in February. PCA repurchased 618,236 shares for $17.2 million in Q1 and increased the quarterly dividend from $0.15 to $0.20 per share, beginning with the April payment.
- Debt included $400 million of 5.75% senior notes due in 2013, $150 million of 6.50% notes due in 2018, and $109 million drawn under the receivables facility, renewed through February 28, 2012.
Outlook, risks, and contingencies
- Management expected Q2 earnings, excluding special items, to be below Q1 because of planned mill downtime and inflationary cost pressure. Planned downtime and slowbacks were expected to reduce production by about 39,000 tons; corrugated shipments were expected to increase and warmer weather to reduce energy usage.
- Management forecast 2011 capital expenditures of $255 million, including $115 million for energy-optimization projects at the Counce and Valdosta mills. It expected available operating cash, cash reserves, borrowing capacity, and capital-market access to meet foreseeable liquidity needs.
- PCA recorded a $102.1 million cellulosic biofuel tax reserve. It reported as much as $206.1 million of tax credits, including the reserve, available to offset future federal taxes; the IRS notified PCA that it would review the credits claimed on its 2009 return. Credit eligibility, taxation, utilization, and expiry remain uncertainties. The IRS also planned to review the 2008 and 2009 federal returns.
- A consolidated antitrust class action alleges containerboard supply restriction and price inflation from August 2005 onward and seeks treble damages. Motions to dismiss were denied in April 2011. PCA disputes the allegations but said it could not estimate a possible loss.
- PCA reported a $10.0 million environmental reserve and did not expect additional environmental costs above that accrual to be material. Proposed Boiler MACT rules could require significant modifications and expenditures, with timing and amounts uncertain.
- After quarter-end, a fire at the Valdosta mill on April 4 was confined to the turbine generator room; an insurance claim was expected, subject to a $3.0 million deductible. PCA acquired Field Packaging Group on April 14; the acquisition was described as immaterial to pre-acquisition sales and assets.
- Other principal risks identified include economic and packaging-demand conditions, product pricing and competition, fiber and energy costs, facility outages, and environmental or tax regulation.
Important facts for investors to verify
- How Q2 and full-year performance develop against the stated downtime, cost-inflation, and capital-spending expectations; the filing provides no specific full-year earnings guidance.
- IRS review outcomes and the realizability, tax treatment, and expiration schedule of the biofuel tax credits and associated reserve.
- Progress and costs of the Counce and Valdosta energy projects, including the Valdosta fire claim and any production impact.
- Developments, potential exposure, and any eventual loss estimate in the antitrust litigation.
- Debt maturities, receivables-facility renewal, borrowing availability, and cash use for capital spending, dividends, and repurchases.