Packaging Corporation of America — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with the three months ended March 31, 2015. PCA manufactures corrugated packaging and paper products, primarily in the United States, and reports Packaging, Paper, and Corporate and Other segments.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $1,401.0 million | $1,425.7 million | Down 1.8% |
| Gross profit | $298.6 million | $277.0 million | Up 7.9% |
| Income from operations | $180.8 million | $157.1 million | Up 15.3% |
| Net income | $103.7 million | $90.8 million | Up 14.2% |
| Diluted EPS | $1.09 | $0.92 | Up $0.17 |
| Operating cash flow | $191.0 million | $108.3 million | Up $82.7 million |
Gross margin was approximately 21.3%, compared with 19.4%; operating margin was approximately 12.9%, compared with 11.0%. Management reported adjusted net income of $106 million and adjusted diluted EPS of $1.11, excluding $3 million of pretax special items; the comparable 2015 figures were $100 million and $1.01, excluding $14 million of special items. These are non-GAAP measures.
- Segments: Packaging sales were $1,095 million and operating income was $160 million, versus $1,099 million and $141 million. Paper sales were $281 million and operating income was $36 million, versus $298 million and $36 million. Corporate and Other recorded an operating loss of $15 million, compared with a $20 million loss.
- Cash and investment: Cash was $162.3 million at March 31, 2016, versus $184.2 million at year-end 2015. Capital expenditures were $52.9 million; operating cash flow less capital expenditures was approximately $138 million. Cash declined $21.9 million during the quarter.
- Debt and liquidity: Long-term debt, including current maturities, totaled approximately $2,295.8 million; capital lease obligations totaled $22.5 million. PCA reported $326 million of unused revolver capacity, net of letters of credit. Approximately 70% of debt was fixed-rate.
- Capital returns: PCA paid $53.1 million in dividends and repurchased $100.3 million of stock during the quarter. It authorized a further $200 million repurchase program in February; $193 million remained available at March 31. The quarterly dividend declared was $0.55 per share.
Material changes and management commentary
Despite lower sales, profit increased, chiefly because of higher packaging volumes and lower maintenance, fiber, and energy costs. Lower prices and mix in white paper, containerboard, and corrugated products partly offset those benefits. Packaging corrugated shipments rose 3.4%, while containerboard outside shipments fell 1.2%. Paper sales declined primarily on weaker price and mix and lower volume. Interest expense rose to $21.6 million from $19.2 million, mainly because of lower interest rebate income. The effective tax rate was 34.8%, compared with 34.2%.
Operating cash flow improved partly because of receivables collection timing and higher taxes payable; these working-capital effects may not recur. Special items included 2016 facility closure costs; Q1 2015 included DeRidder mill restructuring and Boise integration costs, as well as a state tax credit.
Outlook, risks, and contingencies
For Q2 2016, management expected seasonally higher containerboard and corrugated volumes and lower energy costs, partly offset by higher maintenance outage costs from four planned mill outages and lower containerboard prices. PCA expected Q2 earnings excluding special items to exceed Q1. It announced $60-per-ton increases for printing and converting grades and cut-size office papers for Q2, while expecting most of the benefit in Q3. PCA forecast 2016 capital investments of $250–$265 million, excluding acquisitions and other strategic activity.
- Office Depot represented approximately 9% of total Q1 2016 sales and 44% of Paper segment sales. Its proposed acquisition by Staples created uncertainty regarding future demand, pricing, competition, and collections; PCA said lost sales might not be fully replaced.
- Industry conditions included lower published containerboard prices and lower office-paper prices. Longer-term risks include competition, demand and input-cost changes, facility outages, environmental or tax regulation, and Boise integration.
- PCA said it had no derivative instruments outstanding at quarter-end; a 1% increase in variable interest rates would increase annual interest expense by approximately $7 million. It reported no material change in contractual obligations, no material guarantee liabilities known, and no legal proceedings expected to materially harm results.
Important facts for investors to verify
- Whether packaging volume growth and cost savings can offset ongoing price and mix pressure.
- Whether announced paper price increases take effect as expected, and how much benefit is realized in Q3.
- Whether Office Depot’s proposed Staples transaction changes PCA’s significant Paper-segment customer exposure.
- Whether working-capital timing effects explain the unusually strong operating cash flow and how much cash remains after planned capital spending, dividends, and repurchases.
- Whether planned mill outages, facility closures, and environmental requirements affect costs or the $250–$265 million capital-investment outlook.