Packaging Corporation of America — Q1 2013 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012. PCA manufactures and sells containerboard and corrugated packaging, primarily in the United States, and reports one business segment.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $755.2 million | $671.4 million |
| Gross profit / gross margin | $182.4 million / 24.2% | $145.0 million / 21.6% |
| Income from operations | $103.2 million | $169.1 million |
| Net income | $60.6 million | $17.8 million |
| Diluted EPS | $0.62 | $0.18 |
| Net cash from operating activities | $95.8 million | $34.9 million |
- Sales rose 12.5%, reflecting $34.6 million from pricing and mix and $49.3 million from volume. Corrugated shipments increased 3.8% overall, or 7.1% per workday; outside containerboard sales were essentially unchanged.
- Gross margin improved 2.6 percentage points. Operating income and margin comparisons are distorted by Q1 2012 alternative-energy tax-credit accounting. Excluding the resulting special item, Q1 2012 operating income was $73.6 million, net income $40.8 million, and diluted EPS $0.42; Q1 2013 had no special items.
- Cash from operations increased $60.8 million. Capital expenditures were $27.3 million; investing cash outflow was $29.0 million. Cash and equivalents were $268.0 million at quarter-end, versus $207.4 million at year-end 2012.
- Debt was approximately $790.3 million, including $15.0 million current maturities; reported long-term debt on the balance sheet was $774.9 million. The weighted average interest rate was 3.64%. The company reported $329.0 million of unused borrowing capacity, with $12.0 million used for letters of credit. It was in compliance with debt covenants.
- Dividends declared were $0.3125 per share, versus $0.25 a year earlier. No dividends were paid in Q1 2013 because the payment had been accelerated into 2012.
Material changes and management commentary
- Compared with Q1 2012 reported results, operating income fell $65.9 million, principally because Q1 2012 included $95.5 million of alternative fuel mixture credit income. The related tax-return amendment also reduced Q1 2012 tax benefits by $118.5 million, producing a net non-cash, after-tax charge of $23.0 million. On the company’s adjusted basis, operating income increased from $73.6 million to $103.2 million and net income from $40.8 million to $60.6 million.
- Management attributed improved underlying results to stronger pricing/mix and volume and lower recycled-fiber costs, partly offset by higher labor and benefits, transportation, energy, and other costs. Industry corrugated shipments declined 2.1% year over year, while PCA’s shipments grew.
- Management expected seasonally stronger Q2 volume and higher prices, but anticipated Q2 earnings comparable to Q1. Most benefit from the April containerboard price increase was expected in Q3 as pass-through pricing was completed. Mill maintenance outages at three of four mills were expected to reduce Q2 production by 30,000 tons and earnings by $0.08 per share versus Q1; higher transportation, recycled-fiber, and electricity costs were also expected.
- For 2013, PCA expected about $125 million of normal capital expenditures, plus $50 million for box-plant acquisitions or strategic investments and $10 million for Boiler MACT compliance. It expected pension contributions of $30.1 million.
Risks, contingencies, and unusual items
- The IRS review of 2008 and 2009 returns included the alternative-energy credits. PCA expected its $102.1 million reserve for uncertain cellulosic biofuel tax positions to change significantly by year-end 2013, estimating a possible change of $0–$105 million. After using $32.7 million of credits for its April federal tax payment, $36.7 million remained available to offset future payments. Taxability of alternative fuel mixture credits remained uncertain.
- A consolidated antitrust class action alleges containerboard supply and pricing conspiracy from August 2005 onward. PCA disputes the allegations; the case was in discovery and the company could not predict the outcome or estimate reasonably possible losses.
- PCA recorded a $12.1 million environmental reserve and said additional environmental expenditures above the accrual were not reasonably likely to have a material impact. It also cited exposure to economic and industry conditions, product pricing, fiber and energy costs, facility outages, and environmental or tax regulation.
- Approximately 70% of debt had fixed rates. Management estimated a 1% increase in rates on variable-rate debt would increase annual interest expense by $2.4 million. The filing reported no outstanding derivatives at March 31, 2013.
Important facts for investors to verify
- Track the IRS audit outcome, reserve changes, and tax-credit availability; these could materially affect taxes and cash flows.
- Assess whether Q2 maintenance outages and cost increases, and the timing of price pass-through, align with management’s earnings outlook.
- Monitor corrugated demand, pricing, shipment trends, and movements in recycled fiber, wood, energy, labor, and transportation costs.
- Review progress on the antitrust case, environmental obligations, planned capital spending, and the company’s borrowing capacity and covenant compliance.
- Compare future performance with both GAAP results and the company’s adjusted comparison, recognizing that Q1 2012 contained the unusual tax-credit item.