Packaging Corporation of America — FY 2013 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2013; it is an annual report, not a standalone fourth-quarter filing. PCA acquired Boise Inc. on October 25, 2013, for approximately $2.1 billion including assumed debt. Boise’s results are included only from the acquisition date, so annual comparisons are materially affected by the transaction. PCA now reports Packaging, Paper, and Corporate and Other segments.
Key financial metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $3.665 billion | $2.844 billion |
| Gross profit / margin | $859.2 million / 23.4% | $640.6 million / 22.5% |
| Operating income | $473.6 million | $443.5 million |
| Net income | $436.3 million | $163.8 million |
| Diluted EPS | $4.47 | $1.68 |
| Operating cash flow | $608.2 million | $404.2 million |
| Capital expenditures | $234.4 million | $128.5 million |
Management reported FY 2013 net income of $320.2 million, or $3.28 per diluted share, excluding special items, versus $200.8 million, or $2.06 per diluted share, in 2012. Adjusted EBITDA was $742.4 million versus $520.7 million. These are non-GAAP measures. Reported 2013 net income included a $166.0 million tax benefit from reversal of alternative-energy tax reserves; the IRS audit and Joint Committee review were completed and the claimed credits were allowed. Acquisition, integration, inventory step-up, and pension-curtailment items also affected results.
Fourth quarter: Sales were $1.264 billion, operating income $121.1 million, net income $227.0 million, and diluted EPS $2.33. The comparable 2012 quarter recorded sales of $736.6 million, operating income of $98.4 million, net income of $61.0 million, and diluted EPS of $0.63. The 2013 quarter included Boise results from October 25 and the $166.0 million tax-reserve reversal, substantially elevating reported net income.
At December 31, cash was $191.0 million and unused revolver capacity was $331.0 million, net of letters of credit. Total debt obligations, including capital leases, were approximately $2.573 billion, up from $819.5 million in 2012, principally reflecting the Boise acquisition. Debt covenants were in compliance. About 49% of debt was fixed-rate; management estimated a 1% increase in variable rates would add $13.0 million to annual interest expense. No standalone free-cash-flow figure is presented here.
Material changes versus the prior period
- Sales increased 28.9%; management attributed the increase to higher price and mix ($205.5 million), higher volume ($176.8 million), and $439.1 million of Boise sales during the partial ownership period.
- Packaging operating income rose to $545.9 million from $389.7 million. Excluding special items, management cited improved pricing, mix, volume, and partial-quarter Boise contribution, offset by higher labor, energy, transportation, fiber, and repair costs.
- The acquisition expanded containerboard capacity to approximately 3.4 million tons and added a white-paper business. Assets increased to $5.200 billion from $2.454 billion.
- Cash dividends declared per share increased to $1.51 from $1.00. PCA repurchased $7.8 million of shares in 2013, compared with $45.2 million in 2012.
Outlook, risks, and unusual items
- Management expected first-quarter 2014 earnings excluding special items to be comparable to fourth-quarter 2013 adjusted earnings. Expected benefits included a full quarter of Boise results, synergies, and lower annual mill-outage amortization; offsets included the Counce maintenance outage, cold-weather-related costs, higher labor and benefits, and a higher tax rate.
- Management forecast 2014 capital investments of $380–$400 million, including synergy, Boiler MACT, and DeRidder conversion spending. Boiler MACT compliance was estimated at $38–$42 million over three years; up to $31 million was expected in 2014, plus about $4 million of other environmental capital expenditure.
- Key risks include cyclical product pricing and demand, competition, fiber and energy cost volatility, manufacturing disruptions, acquisition integration and performance, and environmental regulation. The Office Depot/OfficeMax relationship is a concentration risk: the customer represented 38% of Paper segment sales for the post-acquisition period reported, and the supply agreement requires at least 80% of legacy OfficeMax commodity office-paper requirements through December 2017, subject to early-termination provisions.
- PCA disclosed a containerboard antitrust class action alleging a price-fixing conspiracy. The company said it was defending the case; potential losses, if any, could not be estimated. Environmental reserves were $34.1 million, and the company did not believe additional reasonably possible costs would be material.
- The 2013 purchase-price allocation for Boise remained preliminary. PCA’s management and auditor excluded Boise from their year-end internal-control assessment; Boise represented 52% of consolidated assets. The auditor issued unqualified opinions on the consolidated financial statements and PCA’s assessed internal controls.
Important facts for investors to verify
- Separate underlying operating performance from Boise’s partial-period contribution and the $166.0 million tax benefit; review the company’s non-GAAP reconciliations.
- Track post-acquisition synergies, integration spending, and whether the preliminary Boise asset and liability valuations change.
- Assess leverage, variable-rate exposure, debt maturities, covenant headroom, and cash generation against planned capital spending and dividends.
- Monitor Office Depot/OfficeMax purchasing, the supply agreement’s termination terms, and customer receivables and credit quality.
- Review Boiler MACT and other environmental spending, the antitrust litigation, and the integration of Boise’s financial controls.