Packaging Corporation of America (PCA) — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparisons are to the corresponding 2012 periods. Amounts are U.S. dollars; financial statement amounts are in millions unless stated otherwise. PCA manufactures and sells containerboard, corrugated packaging and related products, primarily in the United States.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $800.2 | $712.5 | $1,555.4 | $1,383.8 |
| Gross profit / margin | $192.1 / 24.0% | $158.1 / 22.2% | $374.6 / 24.1% | $303.1 / 21.9% |
| Income from operations | $107.3 | $83.9 | $210.5 | $253.0 |
| Net income | $64.5 | $45.2 | $125.1 | $63.0 |
| Diluted EPS | $0.66 | $0.46 | $1.28 | $0.65 |
- Q2 sales rose 12.3%; management attributed the increase to higher price and improved mix ($41.3 million) and higher volume ($46.5 million). Corrugated shipments rose 6.8% in total, or 5.2% per workday.
- Q2 operating income increased 27.9%. Excluding a $7.8 million pre-tax pension curtailment charge, operating income was $115.1 million; adjusted net income was $69.5 million and diluted EPS was $0.71. These are company-presented non-GAAP measures.
- First-half reported operating income was lower year over year largely because 2012 included $95.5 million of alternative fuel mixture credit income. Excluding the disclosed special items, first-half operating income was $218.3 million versus $157.5 million, net income was $130.1 million versus $88.5 million, and diluted EPS was $1.33 versus $0.91.
- Q2 operating margin was approximately 13.4% versus 11.8%; net margin was approximately 8.1% versus 6.3%. The effective tax rate was 34.2% in Q2 and 34.9% for the first half, compared with 36.0% and 72.6%, respectively, in 2012. The 2012 first-half rate reflected the alternative-energy tax-credit adjustment.
Cash flow, liquidity and debt
- First-half operating cash flow was $283.0 million, up from $150.0 million. Capital expenditures were $80.9 million; net cash used for investing was $82.9 million. Cash increased $162.7 million to $370.1 million from year-end 2012.
- At June 30, 2013, total current assets were $1,102.3 million and current liabilities were $344.2 million. Long-term debt was $771.2 million, with $15.0 million of current maturities; reported debt was approximately $786.2 million on the balance sheet. PCA reported $329 million of unused borrowing capacity under its credit facilities and was in compliance with debt covenants.
- Debt included $127.5 million under the term loan, $109.0 million under the receivables facility, $400 million of 3.90% notes due 2022 and $150 million of 6.50% notes due 2018. The company reported a 3.64% weighted-average rate and $28.7 million of projected annual cash interest payments; figures exclude non-cash treasury-lock amortization.
- Management expected approximately $130 million of normal 2013 capital expenditures, plus $75 million for box-plant acquisitions or strategic investments and $10 million for Boiler MACT compliance. $80.9 million had been spent and $76.2 million of additional capital expenditures had been committed for the remainder of 2013 and beyond.
Changes, outlook and notable items
- Higher prices, improved mix and corrugated volume supported Q2 results; higher energy and labor costs and maintenance-outage timing partly offset gains. Recycled-fiber prices were 10% lower year over year, while wood costs rose slightly and purchased fuel prices increased.
- Management expected Q3 earnings to exceed Q2, citing higher corrugated prices and sales volume, increased mill production and lower mill operating costs due to no planned annual outages. Offsets included higher summer electricity costs, higher amortization of annual outage repair costs and a higher tax rate.
- The June 2013 labor agreement froze pension accruals for certain represented corrugated-plant employees. PCA recorded a $7.8 million pre-tax curtailment charge and expected to contribute $30.1 million to pension plans in 2013.
- The IRS was reviewing PCA’s 2008 and 2009 returns and alternative-energy credits. The company estimated the reserve for uncertain tax benefits could change by $0 to $105 million by year-end 2013. The balance sheet included a $102.1 million cellulosic biofuel tax reserve. Tax treatment of alternative fuel mixture credits remained uncertain.
- A consolidated antitrust class action alleges containerboard producers conspired to limit supply and increase prices. PCA denied the allegations but said it could not predict the outcome or estimate reasonably possible losses. Environmental reserves were $12 million; PCA did not believe additional expenditures above that reserve were reasonably likely to be material.
- Key stated business risks include economic and industry conditions, product demand and pricing, fiber and energy cost fluctuations, facility outages, and environmental or tax regulation. Approximately 70% of debt was fixed-rate; a one-percentage-point rise in rates on variable-rate debt was estimated to increase annual interest expense by $2.4 million.
Important facts for investors to verify
- Progress and final resolution of the IRS audit, including any change to the $102.1 million tax reserve and the potential $0–$105 million reserve movement.
- Whether Q3 pricing, volume, production and cost expectations materialized, and the sustainability of Q2 margin improvement.
- Capital spending and strategic investment plans against cash generation, dividends and debt obligations.
- Developments in the containerboard antitrust litigation and any resulting financial exposure.
- Changes in fiber, energy, labor and transportation costs, and their impact on operating margins.