Packaging Corporation of America — Q1 2017 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2017, compared with the same period in 2016. PCA manufactures corrugated packaging and paper products, primarily in the United States, and reports Packaging, Paper, and Corporate and Other segments. The quarter includes results from TimBar and Columbus Container, acquired in 2016.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $1,536.5 million | $1,401.0 million |
| Gross profit / margin | $338.5 million / 22.0% | $299.0 million / 21.3% |
| Income from operations / margin | $203.1 million / 13.2% | $180.8 million / 12.9% |
| Net income | $117.4 million | $103.7 million |
| Diluted EPS | $1.24 | $1.09 |
| Operating cash flow | $164.1 million | $191.0 million |
| Capital expenditures | $57.8 million | $52.9 million |
| Cash and cash equivalents, quarter-end | $254.0 million | $239.3 million at Dec. 31, 2016 |
| Debt, excluding capital leases | $2,614.9 million | $2,645.8 million at Dec. 31, 2016 |
At March 31, PCA also reported $327 million of unused revolving-credit capacity, net of letters of credit. Dividends declared were $0.63 per share, compared with $0.55 a year earlier. The effective tax rate was 34.5%, versus 34.8%.
Changes and operating drivers
- Sales rose 9.7%, and net income increased $13.7 million. Management attributed the improvement principally to higher prices and mix, increased Packaging volumes and production, and lower wood costs, partly offset by higher recycled-fiber, energy, freight, and labor costs, lower Paper volumes, and increased depreciation and interest.
- Packaging sales increased 14.8% to $1,257.0 million; operating income rose to $190.8 million from $161.5 million. Corrugated shipments increased 10.7% and containerboard outside shipments increased 4.5% year over year. Results include contributions from the acquisitions.
- Paper sales decreased 7.5% to $259.2 million, and operating income fell to $29.8 million from $36.1 million. Lower volume and higher energy and outage costs outweighed improved price and mix and lower wood costs.
- Operating cash flow declined $26.9 million, mainly because of working-capital movements, including higher receivables. Financing cash use fell year over year, principally because PCA made no share repurchases in Q1 2017, compared with $100.3 million of repurchases in Q1 2016.
Outlook, risks, and unusual items
- Management expected Q2 2017 earnings to exceed Q1, citing continued Packaging price increases, higher corrugated shipments and acquisition contributions. It anticipated higher mill-outage costs, flat Paper volumes with lower Paper price and mix, continued inflation in recycled fiber, chemicals, and freight, and improved energy costs. This outlook excluded potential additional DeRidder costs or insurance recoveries.
- Published containerboard prices increased by $50 per ton for linerboard and corrugating medium after quarter-end. PCA expected 2017 capital investments of $310–$325 million, excluding acquisitions and other strategic activities.
- A February 8 explosion at the DeRidder, Louisiana mill caused three contractor fatalities and other injuries. PCA recorded a $5 million property-damage and business-interruption insurance deductible; management estimated total related property damage and business-interruption losses of $20–$25 million, including approximately $4 million of capital expenditures. The company intended to seek recovery above the deductible, but the claim was not yet resolved. PCA had been sued and was notified of additional claims; it could not estimate a reasonable range of possible liability losses and was cooperating with government investigations.
- Q1 reported results included $3.5 million of net pre-tax special items, primarily the DeRidder deductible and acquisition/facility-related costs, partly offset by a $2.3 million Hexacomb working-capital adjustment. Management reported adjusted diluted EPS of $1.27, versus $1.11 a year earlier; these are non-GAAP measures.
- Office Depot represented approximately 7% of total company sales and 44% of Paper segment sales in Q1 2017, creating customer-concentration exposure. Other stated risks include input-cost volatility, facility interruptions, acquisition integration, and the timing and amount of DeRidder insurance recoveries.
Important facts for investors to verify
- Progress, timing, and ultimate recoveries under the DeRidder insurance claim, as well as litigation and investigation developments.
- Whether Packaging pricing and shipment strength, including acquisition contributions, persists and offsets fiber, freight, labor, and outage costs.
- Paper segment demand and profitability, and the company’s exposure to Office Depot and declining communication-paper usage.
- Working-capital trends, cash generation, capital spending, debt repayment, and available revolver capacity.
- Final purchase-price allocations and integration outcomes for TimBar and Columbus Container; PCA noted that acquired-company controls were still being evaluated and integrated.