Packaging Corporation of America — Q2 2010 Form 10-Q
Business context and period. PCA manufactures containerboard and corrugated packaging products, primarily in the United States. This unaudited filing covers the three and six months ended June 30, 2010, compared with the corresponding 2009 periods.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $615.5 million | $549.4 million | $1,166.2 million | $1,061.8 million |
| Gross profit | $131.7 million | $118.5 million | $218.5 million | $228.5 million |
| Income from operations | $67.7 million | $135.7 million | $101.4 million | $185.3 million |
| Net income | $38.0 million | $108.9 million | $57.2 million | $134.6 million |
| Diluted EPS | $0.37 | $1.07 | $0.56 | $1.32 |
| Operating cash flow | — | $108.6 million | $141.2 million |
- Q2 gross margin was approximately 21.4%; first-half gross margin was approximately 18.7%. Management separately cited first-half gross margin of 19.0% versus 21.5% after excluding energy-project asset disposals.
- First-half capital expenditures were $155.3 million. Investing cash outflow was $157.0 million, while financing cash outflow was $30.8 million. Cash declined $79.2 million to $181.5 million.
- At June 30, total debt was approximately $659 million: $400 million of 5.75% senior notes, $150 million of 6.50% senior notes, and $109 million drawn under the receivables facility. The revolving facility had no balance. PCA also reported $22.8 million of capital lease obligations.
- Unused borrowing capacity under credit agreements was $172.2 million, net of $18.8 million of letters of credit. PCA reported compliance with debt covenants.
Material changes versus prior comparable periods
- Q2 sales increased 12.0%, driven by higher volume ($47.2 million) and prices ($18.9 million). Corrugated shipments rose 8.0%, and containerboard sales volume rose 11.9%.
- Q2 operating income fell 50.1% and net income fell $70.9 million, largely because 2009 included $79.7 million of alternative fuel mixture tax-credit income that was absent in Q2 2010. Excluding that credit and specified 2010 asset-disposal costs, management said Q2 operating income increased $13.4 million, or 23.9%.
- For the first half, sales increased 9.8%, mainly on volume, while average prices were lower by $23.7 million. Operating income declined 45.3%; excluding tax credits and specified 2010 costs, management reported a $7.9 million decline, reflecting higher fiber costs and lower prices partly offset by volume growth and lower energy costs.
- First-half operating cash flow decreased 23.1%, while capital spending increased substantially, including $89.2 million for energy optimization projects. Receivables were higher with increased sales and prices.
Outlook, risks and notable items
- Management expected Q3 2010 earnings to be significantly higher than Q2, citing a full-quarter benefit from corrugated price increases, higher sales volumes and mill production, and lower recycled-fiber, wood-fiber and purchased-fuel costs. This is management guidance, not a guarantee.
- PCA expected 2010 capital expenditures of about $300 million, including up to $180 million for energy optimization at the Counce and Valdosta mills. It had spent $155.3 million by June 30 and reported $214.5 million of committed spending for the remainder of 2010 and beyond.
- PCA had earned $185.4 million of alternative fuel mixture credits for 2008–2009 and had applied $89.4 million against federal tax payments, leaving a $96.0 million receivable. The IRS’s June 2010 memorandum indicated black liquor could qualify for a separate cellulosic bio-fuel credit; PCA was evaluating whether to claim that credit, the prior credit, or a combination. The amount and timing of future tax-credit use depend partly on future taxable income.
- Risks highlighted include economic and packaging-demand conditions, product pricing and competition, fiber and energy-cost volatility, unplanned facility outages, and environmental or tax regulation. Environmental reserves were $9.1 million; management did not expect additional environmental costs above the reserve to have a material impact. Ordinary-course legal matters were not believed reasonably likely to have a material adverse effect.
- Approximately 84% of debt carried fixed interest rates. PCA estimated that a 1 percentage-point increase on variable-rate debt would raise annual interest expense by $1.1 million. It entered into $400 million of interest-rate hedges in May 2010 in connection with a contemplated future refinancing of notes due in 2013.
Investor verification points
- Track whether Q3 results reflect the projected pricing, volume, production and input-cost improvements.
- Verify the outcome and timing of PCA’s potential cellulosic bio-fuel credit claim, and the recoverability and utilization of the $96.0 million tax-credit receivable.
- Monitor energy-project execution, capital spending, operating cash flow and the company’s capacity to fund planned commitments while maintaining liquidity.
- Review refinancing plans for the $400 million senior notes due in 2013, receivables-facility renewal and ongoing covenant compliance.