Packaging Corporation of America — Q3 2011 Form 10-Q
Business context and reporting period
PCA manufactures and sells containerboard, corrugated products, boxes and containers, primarily in the United States. This unaudited filing covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $670.8 million | $642.8 million | $1,965.8 million | $1,809.0 million |
| Gross profit; gross margin | $137.7 million; 20.5% | $166.5 million; 25.9% | $407.8 million; 20.7% | $384.9 million; 21.3% |
| Operating income (loss) | $71.2 million | $(12.3) million | $204.9 million | $89.0 million |
| Net income | $41.8 million | $93.3 million | $118.6 million | $150.5 million |
| Diluted EPS | $0.42 | $0.91 | $1.17 | $1.46 |
| Operating cash flow | — | $236.8 million | $211.0 million |
At September 30, cash was $40.1 million, versus $196.6 million at year-end 2010. Debt was $658.4 million, comprising $109.0 million under the receivables facility and $549.4 million of long-term debt; capital lease obligations were another $22.0 million. PCA reported $176.7 million of unused borrowing capacity, net of letters of credit. Nine-month capital expenditures were $215.0 million; operating cash flow less capital expenditures was approximately $21.9 million. Current assets were $669.9 million and current liabilities $422.0 million.
Material changes versus prior comparable periods
- Q3 sales rose 4.4%, mainly from volume; corrugated shipments increased 6.6% to 8.3 billion square feet. Q3 operating performance was pressured by higher transportation, recycled fiber, energy, labor and chemical costs, and unfavorable price and mix. Gross margin fell 5.4 percentage points.
- Q3 reported income comparisons are distorted by 2010 alternative-fuel and cellulosic-biofuel tax-credit accounting. Excluding special items, PCA reported Q3 2011 net income of $42.8 million and diluted EPS of $0.43, versus $61.7 million and $0.60 in Q3 2010.
- For the first nine months, sales increased 8.7%, with higher prices and volumes. Excluding special items, operating income was $210.0 million versus $200.4 million, and net income was $121.8 million versus $113.2 million. Reported net income declined largely because 2010 included substantial tax-credit benefits.
- Operating cash flow increased $25.8 million year over year, while investing outflows increased to $261.1 million, including $35.6 million for acquisitions. Financing outflows rose to $132.1 million, primarily reflecting higher share repurchases and dividends.
Outlook, commentary, risks and unusual items
- Management expected Q4 2011 earnings, excluding special items, to be below Q3. It anticipated lower seasonal shipments and mill production, four fewer shipping days, higher unit production costs and energy use, and higher interest expense. Lower recycled-fiber costs and initial benefits from energy projects were expected to partly offset these pressures.
- Major energy-optimization projects at the Counce and Valdosta mills were scheduled for completion in Q4 2011. PCA expected benefits from lower energy costs and improved production, but the amount depended on energy prices, operating rates and completion costs.
- At September 30, PCA had a $102.1 million reserve for uncertain cellulosic biofuel tax positions and reported up to $175 million of tax-credit carryforwards, subject to IRS review and use before expiration at the end of 2015. If credits are disallowed, taxable, or expire unused, PCA could incur tax payments or an income-statement charge.
- The Kleen Products purported antitrust class action alleges a containerboard supply and price conspiracy. Motions to dismiss were denied; PCA disputed the allegations but said it could not predict the outcome or estimate reasonably possible losses.
- PCA recorded a $10.2 million environmental reserve. Potential Boiler MACT requirements could require significant boiler modifications, though timing and costs remained uncertain. A Valdosta mill fire caused lost production and repair costs; PCA had received $8.0 million in insurance proceeds and expected additional proceeds as capital work was completed.
- After quarter-end, PCA borrowed $150 million under a new term loan and entered a new $250 million revolving facility maturing in 2016. It also extended and increased its receivables facility to $200 million, with a 2014 termination date. At September 30, the company was in compliance with debt covenants.
- Other notable exposures include volatile fiber, fuel, energy and transportation costs; possible facility outages; environmental regulation; and refinancing needs, including $400 million of senior notes due in 2013. The filing reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track underlying earnings and margins separately from reported results, especially the effects and resolution of the biofuel tax-credit claims and IRS review.
- Confirm Q4 performance against management’s stated expectation of lower earnings, and assess the actual cost savings and completion economics of the Counce and Valdosta projects.
- Monitor liquidity after the cash decline, capital spending, repurchases and dividends; review borrowing availability and terms under the post-quarter-end facilities.
- Follow the antitrust litigation, potential environmental compliance spending, and the 2013 senior-note refinancing plan.