Packaging Corporation of America — Q2 2014 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2014. PCA operates Packaging and Paper segments, plus Corporate and Other. The October 2013 Boise acquisition materially changed the business and makes year-over-year comparisons less like-for-like; 2014 includes Boise for the full period, while 2013 does not.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $1,468.4 million | $800.2 million | $2,899.7 million | $1,555.4 million |
| Gross profit | $310.8 million | $195.3 million | $612.2 million | $380.5 million |
| Income from operations | $180.2 million | $110.2 million | $341.2 million | $216.2 million |
| Net income | $99.6 million | $66.3 million | $189.6 million | $128.5 million |
| Diluted EPS | $1.01 | $0.68 | $1.93 | $1.32 |
| Net income excluding special items | $113.8 million | $71.3 million | $220.3 million | $133.5 million |
| Diluted EPS excluding special items | $1.16 | $0.73 | $2.24 | $1.37 |
Q2 sales increased 83.5%; net income increased 50.3%. Much of the sales and earnings increase reflected Boise, while PCA also reported improvement in its historical operations. Gross margin was 21.2% versus 24.4% in Q2 2013; for the first half it was 21.1% versus 24.5%. Management attributed the lower margin primarily to the lower-margin white paper business added with Boise and DeRidder restructuring charges. Adjusted figures are non-GAAP measures and exclude specified special items.
Segments: Q2 operating income was $166.4 million in Packaging and $33.6 million in Paper. First-half operating income was $337.1 million and $61.3 million, respectively. Q2 corrugated shipments rose 30% including Boise; excluding Boise, shipments rose 3.8% (5.5% per workday). Paper shipments and pricing were affected by product mix, mill closures, and announced price increases.
Cash flow, debt and liquidity
- First-half operating cash flow was $334.1 million, versus $283.0 million. Investing cash outflow was $171.3 million, including $148.2 million of capital expenditures and $20.3 million for the Crockett Packaging acquisition. Financing cash outflow was $191.8 million; cash declined $29.0 million to $162.0 million.
- At June 30, total debt was approximately $2.432 billion, including $6.5 million of current maturities; PCA made $116.0 million of principal payments in the first half, primarily on its term loan. Debt included $1.25 billion of fixed-rate notes and $1.18 billion of variable-rate term loans.
- Cash was $162.0 million and unused revolving-credit capacity was $325.0 million, net of letters of credit. Management said available cash, operating cash flow, and borrowing capacity should fund foreseeable requirements, including declared dividends.
- Quarterly dividends declared were $0.40 per share; first-half dividends paid were $78.6 million. Management expected approximately $400 million of capital investment in 2014, including an estimated $100 million for the DeRidder conversion.
Material changes, outlook and risks
- Boise’s full-period contribution drove much of the year-over-year growth. PCA also acquired Crockett Packaging in April for $21.2 million before working-capital adjustments.
- First-half special items totaled $48.4 million pre-tax: $21.8 million for DeRidder restructuring, $17.6 million for a class-action settlement, and $9.0 million for integration and other costs. Q2 special items totaled $22.7 million. Management reported that much of the DeRidder cost was accelerated depreciation.
- The DeRidder No. 3 newsprint machine conversion to lightweight linerboard and corrugating medium was on schedule, with startup expected by November 1, 2014; the company planned to exit newsprint in September. Management expected approximately $14 million of additional incremental depreciation in Q3.
- For Q3, management expected higher sales volumes and lower operating costs from additional Boise synergies and less scheduled mill-maintenance downtime, partly offset by higher outage-cost amortization, electricity, freight, chemical, and depreciation costs. It expected Q3 earnings excluding special items to exceed Q2 earnings excluding special items.
- Risks include Boise integration and synergies, demand and pricing for packaging and white paper, fiber and energy costs, facility outages, environmental and tax regulation, and labor negotiations. Approximately 21% of employees were covered by collective bargaining agreements expiring within 12 months. Office Depot (including OfficeMax) represented 9% of company sales and 43%–45% of Paper segment sales in the reported periods.
- The $17.6 million Kleen Products class-action settlement was paid into escrow; final court approval was scheduled for September 4, 2014. PCA said other ordinary-course legal matters were not reasonably expected to have a material adverse effect.
Facts investors should verify
- How much of growth and future earnings reflects sustainable Boise synergies versus acquisition-related scale and accounting effects.
- Whether DeRidder conversion reaches planned timing, capacity, and cost targets, and how its restructuring and depreciation affect margins.
- Execution of the approximately $400 million 2014 capital program and resulting cash generation, debt reduction, and liquidity.
- Paper-segment exposure to Office Depot and developments in paper demand, pricing, and customer concentration.
- Final approval and any remaining obligations related to the class-action settlement, along with outcomes of upcoming labor negotiations.