Packaging Corporation of America — Q1 2019 Form 10-Q
Business context and period. The filing covers the unaudited three months ended March 31, 2019, compared with Q1 2018. PCA manufactures corrugated packaging and containerboard, communication papers, and related products, primarily in the United States. It reports Packaging, Paper, and Corporate and Other segments.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 or comparison |
|---|---|---|
| Net sales | $1,733.7 million | $1,690.6 million; up 2.5% |
| Gross profit / margin | $421.4 million / 24.3% | $356.1 million / 21.1% |
| Income from operations / margin | $275.4 million / 15.9% | $212.9 million / 12.6% |
| Net income | $186.8 million | $140.1 million |
| Diluted EPS | $1.97 | $1.48 |
| EPS excluding special items (non-GAAP) | $1.98 | $1.55 |
| Operating cash flow | $236.0 million | $202.5 million |
| Capital expenditures | $78.8 million | $108.0 million |
| Cash and cash equivalents, March 31 | $442.4 million | $361.5 million at Dec. 31, 2018 |
| Long-term debt | $2,484.6 million | $2,483.7 million at Dec. 31, 2018 |
Q1 2019 cash flow from operations less property, plant, and equipment additions was $157.2 million, calculated from reported figures. Cash increased $80.9 million during the quarter. PCA reported $328 million of unused revolving-credit capacity, net of letters of credit, and said available cash, operating cash flow, borrowings, and capital-market access should meet foreseeable liquidity needs. All outstanding debt was fixed-rate. The current ratio was approximately 3.1 at both March 31, 2019 and December 31, 2018, calculated from reported balances.
The company declared a quarterly dividend of $0.79 per share, up from $0.63 in the prior-year quarter; the Q1 dividend was paid April 15, 2019. PCA reported no repurchases under its authorization during the quarter; $193 million remained available.
Material changes versus Q1 2018
- Packaging sales rose 5.3% to $1,477.6 million, supported by higher domestic containerboard and corrugated-product prices and mix, and increased volume. Packaging operating income increased to $249.6 million from $224.7 million.
- Paper sales declined 11.0% to $239.7 million, mainly because of lower volume following the Wallula mill’s exit from certain paper grades. Paper operating income rose to $45.6 million from $7.2 million, reflecting improved prices and mix, lower operating costs, and lower depreciation.
- Management attributed the increase in consolidated earnings chiefly to higher prices and mix, Packaging volume, lower annual outage costs, and lower depreciation. Higher indirect, converting, direct-material, and fixed costs, as well as lower Paper volumes, were offsets.
- Net income excluding special items rose to $187.3 million from $146.9 million. Special items were $0.5 million after tax in Q1 2019 versus $6.8 million in Q1 2018, primarily Wallula restructuring and conversion costs.
- Operating cash flow increased $33.5 million. Capital spending was lower, and financing cash outflow fell to $75.0 million from $209.8 million, largely because the prior-year period included repayment of $150 million of 6.5% senior notes due in March 2018.
Outlook, risks, contingencies, and unusual items
For Q2 2019, management expected earnings to exceed Q1. It anticipated seasonally higher Packaging shipments but lower prices following published domestic containerboard reductions and lower export prices. Paper volume was expected to be similar to Q1, with previously announced price increases continuing; scheduled International Falls mill outage costs were expected to rise. Management also cited slightly higher freight, repairs, fixed costs, and share-based compensation, offset in part by seasonally lower energy and recycled-fiber costs and a lower effective tax rate. No numerical earnings guidance was provided.
Management forecast 2019 capital investments of $390 million to $410 million, excluding acquisitions, including an estimated $10 million for environmental compliance. PCA adopted lease accounting guidance on January 1, 2019, recording $228 million of operating lease liabilities and corresponding right-of-use assets at adoption; management said the adoption had an immaterial impact on earnings, liquidity, and debt covenants. At March 31, operating lease obligations were $222.6 million.
Industry data cited in the filing showed Q1 North American corrugated shipments down 0.5%, containerboard production down 3.9%, and containerboard inventories up 12.5% year over year; domestic linerboard and corrugating-medium price decreases were also reported. Paper shipments were down 8.3%. Office Depot represented approximately 7% of company sales and 52% of Paper segment sales in Q1 2019; receivables due from the customer were $83.6 million at March 31.
The DeRidder mill explosion lawsuits remain in early stages; the incident caused three contractor fatalities and other injuries. PCA is defending the claims, which it believes are covered by liability insurance subject to a $1 million aggregate deductible, but it cannot estimate a reasonable possible loss range. The EPA investigation remains ongoing. PCA reported no material liabilities then known from its guarantees and indemnifications, and said other ordinary-course legal actions were not reasonably expected to have a material adverse effect. Principal disclosed risks include economic and industry conditions, product pricing and demand, fiber and energy costs, facility outages, and environmental or tax regulation.
Important facts for investors to verify
- Whether Packaging pricing, shipment volumes, and margins remain resilient after the announced containerboard price reductions and weak industry export shipments.
- Whether Paper segment profitability and customer exposure—particularly Office Depot—are sustainable amid declining paper-market shipments and the Wallula product-line exit.
- Whether management’s Q2 earnings outlook and $390 million to $410 million 2019 capital-spending range are tracking as expected, including outage and environmental costs.
- Any developments in the DeRidder litigation or EPA investigation that could affect the currently unestimable contingency exposure.
- Debt, cash generation, and lease obligations: reported long-term debt was $2,484.6 million, while fixed-rate senior notes outstanding were separately stated as $2,496.5 million; confirm the applicable carrying-value and face-value details in the debt disclosures.