Business Context and Reporting Period
Company: Packaging Corporation of America (PCA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: PCA is the fifth largest producer of containerboard and corrugated products in the United States. The company operates in a single segment, manufacturing packaging materials for industrial and consumer markets. Operations are primarily located in the U.S.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $512.4 million | $577.5 million |
| Gross Profit | $110.0 million | $118.2 million |
| Income from Operations | $49.6 million | $57.1 million |
| Net Income | $25.7 million | $32.1 million |
| Diluted EPS | $0.25 | $0.31 |
| Operating Cash Flow | $50.7 million | $44.6 million |
| Cash and Equivalents (End of Period) | $140.0 million | $310.4 million |
| Total Debt (Short & Long Term) | $657.5 million | $657.4 million |
| Dividends Declared per Share | $0.15 | $0.30 |
Note: Debt figures include $109.0 million in short-term debt/receivables facility and $548.5 million in long-term debt.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 11.3% ($65.1 million) primarily due to a 12.6% drop in corrugated products volume and a 31.1% drop in containerboard sales volume. This was partially offset by higher sales prices resulting from July 2008 price increases.
- Profitability: Income from operations fell 13.2% ($7.5 million). While gross margin percentage improved to 21.5% (from 20.5%) due to price increases, this was outweighed by lower volume and higher labor, fringe benefit, and chemical costs.
- Interest Expense: Net interest expense increased 38.6% ($2.4 million) due to lower interest income on cash equivalents and higher rates on senior notes issued in March 2008.
- Dividend Reduction: The quarterly dividend was cut by 50% from $0.30 to $0.15 per share, effective for the dividend payable in April 2009.
- Production: Containerboard production was 515,000 tons, down from 586,000 tons in Q1 2008, due to market-related downtime and a planned maintenance outage at the Valdosta, Georgia mill.
Guidance, Outlook, and Risks
- Q2 2009 Outlook: Management expects earnings in the second quarter to be lower than the first quarter. While corrugated shipments are expected to increase, this will be offset by published price decreases and annual maintenance outages at three mills (Counce, Tomahawk, and Filer City) reducing production by ~50,000 tons.
- Alternative Fuel Tax Credit: PCA received IRS approval on April 14, 2009, for an alternative fuel mixture tax credit ($0.50/gallon). The company is evaluating the financial reporting impact.
- Liquidity: PCA maintains $172.2 million in unused borrowing capacity under existing credit agreements. Capital expenditures for 2009 are expected to be approximately $90.0 million.
- Risks: Key risks include the severe U.S. economic downturn, volatility in wood and recycled fiber costs, energy prices, and potential unplanned facility outages. The company is currently in compliance with all debt covenants.
Investor Verification Checklist
- Volume vs. Price Mix: Verify the sustainability of the 21.5% gross margin given the 12.6% volume decline and recent industry price cuts reported in April 2009.
- Debt Servicing: Confirm the impact of the 6.5% senior notes (due 2018) on future interest expenses compared to the refinanced 4.375% notes.
- Dividend Policy: Assess the implications of the 50% dividend cut on shareholder returns and cash flow preservation strategies.
- Capital Expenditures: Monitor the $90 million 2009 capex plan, specifically the allocation between maintenance and growth projects in a downturn.
- Environmental Reserves: Review the $8.7 million environmental reserve for potential increases in remediation costs.