Packaging Corporation of America — Q1 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2020, compared with the same period in 2019. PCA manufactures corrugated packaging, containerboard, and communication papers, primarily in the United States.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $1,708.7 million | $1,733.7 million | Down 1.4% |
| Gross profit / margin | $365.0 million / 21.4% | $421.4 million / 24.3% | Down $56.4 million |
| Income from operations / margin | $209.1 million / 12.2% | $275.4 million / 15.9% | Down 24.1% |
| Net income | $141.7 million | $186.8 million | Down 24.1% |
| Diluted EPS | $1.49 | $1.97 | Down $0.48 |
| Operating cash flow | $236.7 million | $236.0 million | Up $0.7 million |
| Capital expenditures | $70.5 million | $78.8 million | Down $8.3 million |
- Net income excluding special items was $142.6 million, or $1.50 per diluted share, versus $187.3 million, or $1.98, a year earlier. Consolidated EBITDA excluding special items was $310.6 million, down from $370.6 million.
- Packaging sales were $1,467.5 million and segment operating income was $199.8 million, versus $1,477.6 million and $249.6 million. Paper sales were $217.4 million and segment operating income was $32.5 million, versus $239.7 million and $45.6 million.
- At March 31, cash and cash equivalents were $764.0 million; marketable debt securities totaled $149.4 million. Unused revolver capacity, net of letters of credit, was $329 million. Long-term debt was $2,477.4 million on the balance sheet; PCA reported $2,493.2 million of fixed-rate senior notes outstanding. All outstanding debt carried fixed interest rates.
- Total assets were $7,347.6 million and stockholders’ equity was $3,149.9 million. The quarterly dividend declared remained $0.79 per share.
Material changes and management commentary
- Lower prices and product mix in Packaging and Paper were the principal earnings headwind. Management also cited lower Paper volumes, higher annual outage costs, higher depreciation and other expenses, and a higher tax rate. Higher Packaging volumes, lower operating and converting costs, reduced freight costs, and lower interest expense partly offset the declines.
- Packaging net sales fell by $10 million: lower prices and mix reduced sales by $94 million, partly offset by $84 million from higher volume. Corrugated shipments rose 5.6% overall and 3.9% per workday. Paper sales fell by $22.3 million, reflecting lower volume and prices/mix.
- Operating cash flow was nearly unchanged year over year despite lower earnings; changes in operating assets and liabilities provided a relative benefit, while cash from operations before those changes declined.
Outlook, risks, and unusual items
- PCA reported no significant operational disruption from COVID-19 through the quarter and classified its facilities as essential operations. Management said the pandemic’s future effect on demand, operations, and financial performance was uncertain. Packaging volumes had been higher than expected, but management warned that recessionary conditions could weaken demand.
- Management expected significantly lower Paper demand in Q2 and planned to halt production at its Jackson, Alabama mill during May and June, reducing production by approximately 70,000 tons and lowering Paper segment income.
- After quarter-end, PCA announced the closure of its San Lorenzo, California corrugated products facility. It estimated total charges of $23 million to $31 million, primarily in Q2 2020, including $14 million to $18 million of cash severance and shutdown costs and $9 million to $13 million of non-cash charges.
- Management forecast 2020 capital investments of $400 million to $425 million, excluding acquisitions, including approximately $10 million for environmental compliance. No specific earnings or full-year sales guidance is provided in the filing.
- Q1 special items included $0.8 million of COVID-19-related costs and $0.4 million of corrugated facility closure costs. PCA also recorded $10.0 million of other expense, including $6.0 million for asset disposals and write-offs.
- Risk factors include uncertain pandemic effects on workforce, supply availability and demand; competition and product pricing; input and energy costs; facility outages; and environmental or tax regulation. PCA cited a significant customer concentration: Office Depot represented about 5% of company sales and 43% of Paper segment sales in Q1 2020.
- Pending DeRidder mill incident lawsuits allege negligence and seek compensatory and punitive damages; PCA said it could not estimate a reasonable loss range. The claims are believed covered by insurance, subject to a $1.0 million aggregate deductible. PCA disputes an EPA Clean Air Act notice concerning its Wallula mill and stated it did not expect a material adverse effect.
Important facts for investors to verify
- Whether COVID-19-related economic conditions materially change Packaging demand, facility operations, workforce availability, or supply costs.
- The duration and earnings impact of the Jackson mill shutdown, and whether paper demand recovers as expected.
- Actual San Lorenzo closure costs and timing compared with the $23 million to $31 million estimate.
- Progress toward the $400 million to $425 million capital investment range and the effect on cash generation and liquidity.
- Developments in the DeRidder litigation and Wallula EPA matter, including any change in the company’s ability to estimate exposure.