Packaging Corporation of America — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. PCA manufactures and sells containerboard, corrugated products and related packaging; results presented for the period do not include Boise Inc., acquired October 25, 2013.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $845.4 million | $723.5 million | $2,400.9 million | $2,107.3 million |
| Gross profit | $225.8 million | $162.6 million | $600.4 million | $465.7 million |
| Gross margin | 26.7% | 22.5% | 25.0% | 22.1% |
| Operating income | $142.0 million | $92.1 million | $352.5 million | $345.0 million |
| Net income | $84.2 million | $39.8 million | $209.3 million | $102.8 million |
| Diluted EPS | $0.86 | $0.41 | $2.15 | $1.05 |
| Operating cash flow | Not presented separately | Not presented separately | $420.2 million | $251.8 million |
Q3 sales rose 16.9%, reflecting $68.9 million from higher pricing and mix and $53.1 million from volume. Corrugated shipments increased 7.8%; containerboard production was approximately 671,000 tons. For the nine months, sales grew 13.9%, with higher price/mix and volume contributing $144.8 million and $148.8 million, respectively.
For the nine months, investing cash outflow was $132.5 million, including $130.4 million of capital expenditures; financing cash outflow was $98.4 million. Cash increased $189.2 million to $396.6 million from year-end 2012. At September 30, current assets were $1.136 billion and current liabilities $353.9 million.
At September 30, debt carrying value, including current maturities, was approximately $782.4 million; the borrowing schedule reports $782.75 million excluding unamortized debt discount. PCA had no borrowings under its revolving credit facility, and $109.0 million outstanding under its receivables facility. It was in compliance with debt covenants. About 70% of debt had fixed interest rates.
Material changes and unusual items
- Q3 operating income increased 54.2%; higher pricing, mix and corrugated volume more than offset higher labor, fiber, energy, transportation and other costs. Recycled fiber prices were 25% above the prior-year quarter; wood, fuel and transportation costs also rose.
- Q3 net interest expense fell to $11.9 million from $30.6 million, partly because Q3 2012 included a $21.1 million early-debt-redemption charge. Q3 2013 included $2.7 million of Boise bridge-financing fees.
- Nine-month 2012 results included $95.5 million of alternative fuel mixture credits in operating income and a related $118.5 million tax charge. The resulting net after-tax charge was $23.0 million. This makes reported year-over-year operating and tax comparisons unusual.
- Pension curtailment charges were $3.1 million in Q3 and $10.9 million for the nine months, following labor agreements freezing pension accruals for certain represented employees. PCA contributed $30 million to pension plans in September.
Outlook, transaction and risks
Management expected Q4 earnings, excluding Boise, to be below Q3 because of seasonally lower corrugated volume, two fewer shipping days, lower mill production and higher costs from the Filer City maintenance outage and seasonal fuel use. No numerical earnings guidance was provided.
PCA completed its Boise acquisition on October 25 for $12.55 per share; transaction value net of acquired cash was approximately $1.94 billion, including $775 million of Boise debt. PCA arranged about $2.0 billion of new borrowings, including $1.3 billion in term loans and $700 million of 4.50% ten-year notes. Management expected containerboard capacity to rise from 2.6 million to approximately 3.7 million tons and corrugated volume to increase about 30%. PCA reported post-acquisition debt of approximately $2.7 billion. Boise results are included only from the acquisition date; purchase accounting and pro forma information were incomplete at filing.
- Management estimated the reserve for unrecognized tax benefits related to Filer City biofuel credits could change by $0–$105 million by year-end 2013 as the IRS audit progressed. No credits remained available to offset future tax payments.
- A consolidated antitrust class action alleges a containerboard supply and pricing conspiracy. PCA disputes the allegations but could not predict the outcome or estimate reasonably possible losses.
- Environmental reserves were $12.2 million; PCA said additional remediation costs above the accrual were not reasonably expected to have a material effect.
- Newly disclosed Boise-related risks include integration and performance uncertainty, increased leverage and OfficeMax customer concentration in Boise’s paper business. OfficeMax represented about 19% of Boise’s 2012 sales; the supply agreement generally requires at least 80% of its office-paper needs through 2017, subject to possible early termination.
- Other stated risks include economic and industry conditions, product pricing and demand, fiber and energy cost volatility, facility outages, and environmental or tax regulation. The filing reported effective disclosure controls and no material change in internal control over financial reporting during Q3.
Most important facts for investors to verify
- How the Boise acquisition affects combined earnings, integration costs, capacity utilization and the approximately $2.7 billion post-deal debt burden.
- The final IRS determination and any resulting change in the biofuel tax-credit reserve, potentially up to $105 million.
- Q4 and subsequent operating trends against management’s expectation of lower Q4 earnings excluding Boise, particularly shipment volumes, maintenance downtime and input costs.
- OfficeMax’s ongoing purchasing requirements, the effect of its announced merger, and Boise paper-business customer diversification.
- Developments in the containerboard antitrust case and any resulting financial exposure.