Packaging Corporation of America — Q1 2012 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 report covers the three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. Amounts below are in millions except per-share data, percentages and operating volumes.
Financial results and key metrics
| Metric | Q1 2012 | Q1 2011 / prior period |
|---|---|---|
| Net sales | $671.4 | $629.5; up 6.6% |
| Gross profit / gross margin | $145.0 / 21.6% | $133.1 / 21.2% |
| Income from operations | $169.1 reported; $73.6 excluding special items | $65.9 reported; $69.1 excluding special items |
| Net income | $17.8 reported; $40.8 excluding special items | $37.4 reported; $39.5 excluding special items |
| Diluted EPS | $0.18 reported; $0.42 excluding special items | $0.37 reported; $0.39 excluding special items |
| Operating cash flow | $34.9 | $64.0 |
| Capital expenditures | $34.8 | $64.7 |
| Cash and cash equivalents | $84.0 at March 31 | $156.3 at December 31, 2011 |
| Debt | $805.3 outstanding; $804.8 carrying value including current maturities | $808.4 carrying value at December 31, 2011 |
Cash declined $72.3 during the quarter. Net cash used in investing was $71.7, including the $35.5 acquisition of Packaging Specialists; net cash used in financing was $35.5, including dividends and share repurchases. Management reported $326.7 of unused borrowing capacity under existing credit agreements, with $14.3 of capacity used for letters of credit. PCA was in compliance with debt covenants at quarter-end.
Material changes versus the prior comparable period
- Sales rose $41.9, mainly from higher volumes ($48.8), partly offset by unfavorable pricing and mix ($6.9), primarily lower export pricing. Corrugated shipments increased 8.3% to 8.5 billion square feet; containerboard sales to outside customers were essentially flat.
- Reported operating income includes $95.5 of alternative fuel mixture credit income. A related $118.5 reduction in tax benefits produced a $23.0 non-cash, after-tax charge. Consequently, reported net income and EPS fell year over year, while management’s non-GAAP results excluding special items increased.
- Operating cash flow decreased $29.0, which management attributed principally to $29.5 more cash required by changes in operating assets and liabilities.
- Interest expense increased $2.8, mainly due to lower capitalized interest on completed energy projects and interest on the term loan. Q1 included a $35.5 acquisition; goodwill rose to $71.7 from $58.2 at year-end.
- The quarterly dividend was increased from $0.20 to $0.25 per share, beginning with the dividend paid April 13, 2012. PCA repurchased $23.2 of stock during Q1.
Outlook, commentary and risks
- For Q2 2012, management expected earnings excluding special items to exceed Q1. Annual maintenance outages at three mills were expected to reduce earnings by about $0.03 per share versus Q1 and raise outage-related costs; transportation and recycled-fiber costs were expected to be slightly higher. Higher corrugated volume and richer mix were anticipated during the seasonally stronger quarter.
- For 2012, PCA expected capital expenditures of $110.0 and pension contributions of $37.2. It had contributed $3.9 to pension plans through March 31 and spent $34.8 on capital expenditures.
- Alternative-energy tax credits remain subject to uncertainty. The IRS was reviewing PCA’s 2009 cellulosic biofuel credits; the filing reports a $102.1 reserve for uncertain tax positions and up to $144.4 of alternative-energy credits available to offset future taxes. PCA noted that potential taxation of alternative fuel mixture credits could result in tax payments and an income charge.
- A consolidated class-action lawsuit alleges containerboard price-fixing. PCA disputes the allegations, but said the case was in early discovery and it could not predict the outcome or estimate reasonably possible losses.
- PCA reported a $10.9 environmental reserve and did not expect additional remediation costs above that accrual to have a material impact. Proposed Boiler MACT regulations could require significant boiler modifications; timing and cost remained uncertain.
- Approximately 68% of debt carried fixed rates. Management estimated that a one-percentage-point increase in rates on variable-rate debt would raise annual interest expense by $2.6. A $400.0 senior-note maturity is due in August 2013; a related interest-rate protection agreement was expected to settle by year-end 2012.
- Subsequent event: PCA received a $57.4 U.S. Treasury Section 1603 energy-property grant on April 11, 2012. Management stated that available operating cash, cash on hand, committed borrowing capacity and capital-market access were expected to meet foreseeable liquidity needs.
Important facts for investors to verify
- Track the IRS review and resolution of the amended 2009 tax-credit claims, including the adequacy of the $102.1 reserve and the usability of reported credits.
- Assess underlying operating trends using reported results alongside PCA’s non-GAAP reconciliations; reported Q1 earnings were materially affected by the tax-credit reallocation.
- Monitor operating cash conversion, working-capital needs, planned capital spending and the impact of mill maintenance outages on Q2 performance.
- Review refinancing plans for the $400.0 senior notes due in 2013, interest-rate exposure, borrowing capacity and covenant compliance.
- Follow developments in the containerboard antitrust litigation and Boiler MACT regulation, whose financial effects were not quantified clearly in the filing.