Packaging Corporation of America — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited. PCA manufactures containerboard and corrugated packaging products, primarily in the United States.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $723.5 million | $670.8 million | $2,107.3 million | $1,965.8 million |
| Income from operations | $92.1 million | $71.2 million | $345.0 million | $204.9 million |
| Net income | $39.8 million | $41.8 million | $102.8 million | $118.6 million |
| Diluted EPS | $0.41 | $0.42 | $1.05 | $1.17 |
| Operating cash flow | Not separately stated | Not separately stated | $251.8 million | $236.8 million |
Sales rose 7.8% in Q3 and 7.2% in the first nine months. Q3 gross margin increased to 22.5% from 20.5%; nine-month gross margin rose to 22.1% from 20.7%. Q3 operating income increased 29.4%, while reported net income declined because of debt-refinancing charges. Excluding disclosed special items, Q3 net income was $53.3 million, or $0.55 diluted EPS, versus $42.8 million, or $0.43, in 2011. Nine-month net income excluding special items was $141.8 million, or $1.45 diluted EPS, versus $121.8 million, or $1.21.
Cash, debt and liquidity
- Cash and equivalents were $140.9 million at September 30, down from $156.3 million at year-end 2011. Total debt was $797.4 million, compared with $808.4 million; cash-adjusted debt was approximately $656.5 million.
- Cash from operations was $251.8 million. Investing used $73.5 million and financing used $193.7 million, resulting in a $15.4 million net decrease in cash.
- Operating cash flow benefited from stronger operations and alternative-energy credits used to reduce tax payments, while working-capital needs used $106.0 million.
- PCA reported $327.7 million of unused borrowing capacity, including $13.3 million used for letters of credit, and said it was compliant with debt covenants.
- Capital expenditures were $94.4 million through September. Management expected full-year capital spending of $110–$120 million and $50–$60 million for box plant acquisitions.
Material changes and unusual items
- Q3 corrugated shipments per workday rose 5.7%; containerboard sales to outside domestic and export customers rose 6.6%. In the first nine months, corrugated shipments per workday increased 6.8%, while outside containerboard sales declined 1.1%.
- Lower energy, recycled-fiber and chemical costs supported operating results; labor, benefits, depreciation and some other costs increased. Industry corrugated shipments fell 1.4% in Q3 year over year. Published OCC recycled-fiber prices were down about 40% from the Q3 2011 average.
- PCA issued $400 million of 3.90% senior notes due 2022 and redeemed $400 million of 5.75% notes due 2013. The refinancing extended that maturity but generated $21.1 million of Q3 pretax charges and $24.8 million for the nine-month period, including the redemption premium and treasury-lock settlement effects.
- A 2009 tax-return amendment reallocated black-liquor gallons between alternative-fuel mixture credits and cellulosic biofuel producer credits. It recorded $95.5 million of operating income and reduced tax benefits by $118.5 million, a net $23.0 million noncash after-tax charge for the first quarter.
- PCA received a $57.4 million U.S. Treasury grant for its Valdosta energy project, recorded as a reduction in related property cost. It acquired Packaging Specialists for $35.4 million in March 2012.
Outlook, risks and contingencies
Management expected Q4 earnings to exceed Q3 earnings. PCA had implemented a $50-per-ton domestic containerboard price increase and was implementing a corresponding corrugated-products increase, expected to be substantially complete in Q4. Management expected higher prices to benefit Q4 results, partly offset by seasonal costs; the full-quarter benefit was not expected until Q1 2013. This is management’s outlook, not a guarantee.
- Key business sensitivities include economic and packaging demand, product pricing and mix, wood and recycled fiber, energy, labor, transportation, and unplanned facility outages.
- The IRS review of PCA’s 2009 cellulosic biofuel credits was ongoing. The filing describes uncertainty over eligibility and taxability; PCA reported a $102.1 million cellulosic-credit reserve and as much as $78.7 million of alternative-energy credits available to offset future tax payments.
- A purported antitrust class action alleges containerboard producers conspired to restrict supply and raise prices. PCA disputes the allegations but said it could not predict the outcome or estimate reasonably possible losses.
- Environmental reserves were $11.3 million. Potential Boiler MACT requirements could require significant boiler modifications; timing and costs remained uncertain.
- Variable-rate debt was $247.8 million; a one-percentage-point rate increase would raise annual interest expense by approximately $2.5 million, before any mitigating actions.
Important facts for investors to verify
- How much of the reported nine-month operating-income increase reflects the $95.5 million tax-credit reclassification, and how do adjusted results compare with GAAP results?
- Whether the announced containerboard and corrugated price increases were completed and sustained, and whether they offset seasonal and other cost pressures.
- The status and potential financial consequences of the IRS review, uncertain credit taxability, and the antitrust litigation.
- Debt, available borrowing capacity, covenant compliance, planned capital expenditures and acquisition spending.
- Whether Boiler MACT or other environmental requirements create material future spending beyond recorded reserves.