Packaging Corporation of America — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited. PCA manufactures corrugated packaging and paper products, primarily in the United States, and reports Packaging, Paper, and Corporate and Other segments.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1,470.8 million | $1,518.9 million | $4,350.8 million | $4,418.7 million |
| Gross profit | $328.3 million | $320.3 million | $922.9 million | $932.5 million |
| Income from operations | $219.4 million | $188.4 million | $574.1 million | $529.5 million |
| Net income | $127.8 million | $104.4 million | $332.6 million | $294.1 million |
| Diluted EPS | $1.31 | $1.06 | $3.39 | $2.99 |
Q3 gross, operating, and net margins were approximately 22.3%, 14.9%, and 8.7%, respectively, versus 21.1%, 12.4%, and 6.9% a year earlier. For the nine months, the respective margins were 21.2%, 13.2%, and 7.6%, versus 21.1%, 12.0%, and 6.7%.
- Cash flow: Nine-month operating cash flow was $542.0 million, compared with $556.7 million. Capital expenditures were $217.9 million; operating cash flow less capital expenditures was $324.1 million. Cash increased $62.0 million to $186.9 million.
- Liquidity and debt: Cash was $186.9 million and unused revolver capacity was $326.5 million at September 30. Debt totaled about $2,325.8 million, including $6.5 million current maturities; capital lease obligations were $23.0 million. Approximately 70% of debt was fixed-rate.
- Shareholder returns: PCA paid $147.3 million in dividends and repurchased $98.1 million of stock during the nine months. The quarterly dividend was raised to $0.55 per share; approximately $150 million of repurchase authorization remained at quarter-end.
Changes and operating drivers
- Q3 sales fell 3% year over year, while reported net income rose 22%. Excluding special items, Q3 net income was $122.8 million versus $123.9 million, and diluted EPS was $1.26 in both periods.
- For the first nine months, sales declined 2% and reported net income increased 13%; excluding special items, net income declined to $338.1 million from $344.2 million.
- Packaging Q3 operating income increased to $198.2 million from $164.7 million, but excluding special items the increase was $2.7 million. Higher volumes and lower energy costs were partly offset by lower export containerboard prices and higher costs.
- Paper Q3 sales declined 7%; lower white-paper prices and unfavorable mix reduced segment performance. For the nine months, Paper operating income excluding the St. Helens gain fell $12.0 million.
- Q3 results included $8.1 million of pretax special-item income, notably a $6.7 million gain on the St. Helens site sale and $3.8 million of DeRidder vendor-settlement income. The prior-year quarter included substantial DeRidder restructuring charges. Comparisons of reported earnings therefore reflect unusual items.
Outlook, risks, and contingencies
- Management expected Q4 2015 earnings excluding special items to be below Q3, citing seasonal volume and mix declines, higher cold-weather wood and fuel costs, and a planned 24-day Jackson, Alabama, recovery-boiler outage expected to reduce production and raise costs.
- PCA expected 2015 capital investment of $300–$315 million, including approximately $13 million for Boiler MACT compliance and about $5 million for other environmental projects.
- Office Depot, including OfficeMax, accounted for about 9% of company sales and 45% of Paper segment sales. Management said the pending Staples–Office Depot merger could affect purchases, pricing, and customer credit risk; the outcome was uncertain.
- Other cited risks include economic and industry conditions, product demand and pricing, fiber and energy costs, unplanned facility interruptions, Boise integration, and environmental or tax regulation. Management reported no material change to previously disclosed risk factors, no off-balance-sheet arrangements, and no legal matters it believed reasonably likely to have a material adverse effect.
- Management stated cash, operating cash flow, revolver availability, and capital-market access should meet foreseeable liquidity needs, while noting future debt refinancing depends on conditions beyond its control.
Investor verification priorities
- Assess whether underlying earnings trends are better represented by GAAP results or management’s non-GAAP figures excluding special items.
- Track Paper segment pricing, mix, customer concentration, and developments in the Staples–Office Depot transaction.
- Verify the cost, timing, and production impact of the Jackson outage and the benefits expected from the DeRidder conversion and new turbine generator.
- Monitor capital spending, cash generation, debt service, dividends, and the pace of share repurchases against liquidity needs.
- Review exposure to fiber, energy, export containerboard pricing, environmental requirements, and facility outage risks.