Packaging Corporation of America — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The company manufactures corrugated packaging and paper products, primarily in the United States, through Packaging, Paper, and Corporate and Other segments. Filing dated August 4, 2017.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,584.0 million | $1,417.4 million | $3,120.5 million | $2,818.4 million |
| Gross profit | $364.6 million | $320.1 million | $703.2 million | $619.1 million |
| Income from operations | $233.8 million | $200.2 million | $436.9 million | $381.0 million |
| Net income | $143.2 million | $115.9 million | $260.6 million | $219.6 million |
| Diluted EPS | $1.52 | $1.23 | $2.76 | $2.32 |
| Operating cash flow | — | $385.6 million | $376.2 million |
- Q2 sales rose 11.8%, operating income 16.8%, and net income 23.6% year over year. Approximate gross, operating, and net margins were 23.0%, 14.8%, and 9.0%, respectively, versus 22.6%, 14.1%, and 8.2% in Q2 2016.
- Six-month capital expenditures were $139.4 million, versus $121.8 million. Operating cash flow less capital expenditures was approximately $246 million, compared with $254 million in the prior-year period; this is a simple calculation, not a company-reported measure.
- At June 30, cash was $321.0 million. Current assets were $1,863.4 million and current liabilities $760.2 million. The company reported $327 million of unused revolving-credit capacity, net of letters of credit.
- Balance-sheet debt carrying value, including current maturities, was $2,613.8 million, versus $2,645.8 million at year-end 2016. Approximately 63% of debt was fixed-rate; management estimated that a one-percentage-point rise in variable rates would add about $10 million to annual interest expense.
- Quarterly dividends declared were $0.63 per share, up from $0.55. Six-month dividends paid were $118.8 million. No shares were repurchased under the announced program in the first half.
Changes and segment results
- Packaging: Q2 sales increased 16.5% to $1,311.5 million and operating income rose to $224.5 million from $192.4 million. Management attributed the improvement to higher prices and favorable mix, greater volume, and a partial DeRidder insurance recovery, offset by higher fiber, energy, labor, and freight costs. Q2 corrugated shipments rose 10.0%; containerboard outside shipments rose 3.6%.
- Packaging’s six-month operating income increased to $415.3 million from $353.9 million. Sales growth included contributions from the TimBar and Columbus Container acquisitions, completed in 2016.
- Paper: Q2 sales declined 4.9% to $253.7 million, mainly due to lower volume; operating income improved to $29.1 million from $24.4 million, principally on lower outage and fiber costs. Six-month operating income declined to $58.9 million from $60.5 million, reflecting lower volumes and higher energy and chemical costs.
- Higher containerboard and corrugated prices and volumes, acquisition contributions, and lower mill outage costs were important consolidated drivers. Higher SG&A, depreciation, interest expense, and costs for energy, fiber, labor, and freight partly offset gains. Paper prices and mix were weaker in Q2.
- Reported consolidated EBITDA was $327.5 million for Q2 and $623.1 million for the first half. Excluding special items, management reported $328.0 million and $627.1 million, respectively. These are non-GAAP measures.
Outlook, risks, and unusual items
- For Q3 2017, management expected earnings excluding special items to exceed Q2 levels, citing stronger packaging shipments and realization of most previously announced packaging price increases. It expected seasonally higher white-paper volumes but lower paper price and mix, alongside continued recycled-fiber and chemical inflation, higher freight costs, and a higher tax rate.
- Management forecast approximately $350 million of 2017 capital expenditures, excluding acquisitions and other strategic activity. It stated that cash, operating cash flow, revolver availability, and capital-market access should meet foreseeable liquidity needs.
- A February 8 explosion at the DeRidder, Louisiana mill caused three contractor fatalities and other injuries. The company faces multiple lawsuits and additional potential claims; it could not estimate a range of reasonably possible losses. Liability coverage has a $1 million deductible. Property-damage and business-interruption coverage has a $5 million deductible; the claim remained under discussion with the insurer. The incident also caused operating losses.
- Office Depot accounted for approximately 7% of total company sales and 44% of Paper segment sales in the first half. PCA disclosed the relationship as a significant customer concentration and warned that lost sales might not be fully replaced or replaced on comparable terms.
- Other special items included DeRidder insurance-deductible costs, facility closure and acquisition-integration costs, a multiemployer pension settlement, and a Hexacomb working-capital adjustment. Q2 included $0.5 million of special-item expense; first-half net special-item expense was $4.0 million before tax. Reported and adjusted results should be considered separately.
- Other sensitivities identified include demand and pricing in packaging and paper markets, fiber and energy prices, unplanned mill outages, acquisition integration, and environmental or tax regulation. The company reported no material changes to its previously disclosed risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether packaging price increases and shipment growth continued into Q3, and how much of the announced increases PCA realized.
- DeRidder investigation, litigation and claims developments, insurance recoveries, and any resulting financial exposure or operational disruption.
- Office Depot’s financial condition and purchasing trends given its substantial share of Paper segment revenue.
- Debt repayment and refinancing needs, variable-rate exposure, revolving-credit availability, and the effect of higher interest rates.
- Whether planned capital spending and integration of TimBar and Columbus Container deliver expected returns while input, freight, and labor costs remain elevated.
- Management’s adjusted earnings and EBITDA reconciliations, including the nature and recurrence of excluded special items.