Packaging Corporation of America — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 6, 2020. PCA manufactures corrugated packaging, containerboard and communication papers, primarily in the United States. Results are unaudited.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,541.6 million | $1,759.9 million | $3,250.3 million | $3,493.6 million |
| Gross profit | $325.8 million | $427.9 million | $690.7 million | $849.3 million |
| Income from operations | $116.1 million | $280.4 million | $325.2 million | $555.8 million |
| Net income | $56.7 million | $193.6 million | $198.3 million | $380.4 million |
| Diluted EPS | $0.59 | $2.04 | $2.08 | $4.02 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $463.5 million | $538.4 million |
Q2 gross, operating and net margins were approximately 21.1%, 7.5% and 3.7%, respectively, versus 24.3%, 15.9% and 11.0% a year earlier. For the first half, sales fell 7.0% and net income fell 47.9% year over year. Management reported Q2 net income excluding special items of $131.8 million, or $1.38 per diluted share, and first-half adjusted net income of $274.3 million, or $2.88 per diluted share. These are non-GAAP measures.
- Packaging: Q2 sales declined 6.3% to $1,409.9 million; operating income was $197.6 million versus $263.9 million. Lower prices and mix were partly offset by increased corrugated shipments and lower operating, converting, outage and freight costs.
- Paper: Q2 sales fell 48.1% to $123.3 million; the segment recorded a $61.4 million operating loss versus $38.8 million income. Lower demand and production volumes, as well as weaker prices and mix, drove the decline.
Liquidity, debt and capital returns
At June 30, PCA had $853.3 million in cash and cash equivalents, $123.2 million in marketable debt securities and $326 million of unused revolving-credit capacity, net of letters of credit. Current assets were $2,659.0 million and current liabilities were $683.6 million. Long-term debt was $2,478.0 million; PCA also reported $2,493.4 million of fixed-rate senior notes outstanding and stated that all outstanding debt carried fixed interest rates.
First-half operating cash flow was $463.5 million, down from $538.4 million. Capital expenditures were $151.2 million; investing cash outflow was $128.8 million. Dividends paid were $149.7 million. The quarterly dividend declared remained $0.79 per share. Management said cash, operating cash generation, revolver availability and capital-market access should meet foreseeable liquidity and capital needs. Planned 2020 capital investments were $400 million to $425 million, excluding acquisitions.
Material changes, outlook and risks
- COVID-19-related deterioration in uncoated freesheet conditions prompted a $55.2 million non-cash impairment, fully writing off Paper-segment goodwill. The charge was nondeductible for tax purposes. Paper long-lived assets passed the disclosed recoverability test.
- Q2 special items also included $20.4 million of facility closure and other costs, substantially related to closing the San Lorenzo, California corrugated-products facility, and $6.1 million of incremental pandemic costs. PCA reported no significant operating disruptions from the pandemic, but said future effects on demand and operations were uncertain.
- Nationwide school and office closures reduced paper demand; the Jackson, Alabama paper mill was temporarily idled in late April and was expected to remain idle at least through August. Demand for packaging products remained strong in Q2.
- No specific earnings guidance was provided. The company highlighted economic conditions, COVID-19 impacts, product demand and pricing, input costs, facility interruptions, and environmental or tax regulation as risks to results.
- Legal matters include lawsuits related to the 2017 DeRidder mill explosion; PCA said it could not estimate a reasonable possible loss range. The EPA’s Clean Air Act notice concerning the Wallula mill remained disputed; PCA said it intended to defend its position and did not expect a material adverse effect.
Most important facts for investors to verify
- Whether packaging demand, prices and mix support a recovery in segment profitability, and how pandemic conditions affect customer demand.
- Paper-segment demand, mill utilization and the timing or consequences of resuming operations at Jackson.
- The assumptions behind the Paper goodwill impairment valuation and any further impairment indicators.
- Execution and funding of the $400–$425 million 2020 capital-investment plan alongside dividends and debt obligations.
- Developments in the DeRidder litigation and Wallula EPA matter, including any change in potential exposure.