Packaging Corporation of America (NYSE: PKG) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This annual filing includes fourth-quarter results but is not a standalone quarterly filing. PCA operates six containerboard mills, two uncoated freesheet (UFS) paper mills and 95 corrugated-products manufacturing plants, primarily in the United States.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $6.964 billion | $7.015 billion |
| Gross profit / margin | $1.644 billion / 23.6% | $1.645 billion / 23.5% |
| Income from operations / margin | $1.054 billion / 15.1% | $1.068 billion / 15.2% |
| Net income | $696.4 million | $738.0 million |
| Diluted earnings per share | $7.34 | $7.80 |
| Operating cash flow | $1.207 billion | $1.180 billion |
| Capital expenditures | $399.5 million | $551.4 million |
| EBITDA, excluding special items | $1.445 billion | $1.497 billion |
Reported net income included $29.1 million of after-tax special-item expense in 2019, versus $22.4 million in 2018. Excluding special items, net income was $725.5 million, or $7.65 per diluted share, compared with $760.4 million, or $8.03, in 2018. Approximate margins are calculated from reported figures.
Segments and fourth quarter
- Packaging: 2019 sales were $5.932 billion, essentially flat year over year; operating income fell to $963.4 million from $1.045 billion. Lower domestic and export containerboard prices and mix, and higher operating and converting costs, outweighed volume gains and lower outage and freight costs. Containerboard production rose to 4.249 million tons from 4.081 million; corrugated shipments increased 0.9% to 59.4 billion square feet.
- Paper: Sales declined 3.8% to $964.3 million as lower volumes more than offset higher prices and mix. Operating income increased to $175.4 million from $97.7 million, helped by pricing, lower operating costs and freight. UFS production fell to 947,000 tons from 1.017 million.
- Fourth quarter: Sales were $1.720 billion, gross profit $383.3 million, operating income $235.1 million and net income $136.2 million; diluted EPS was $1.43. In Q4 2018, the comparable figures were $1.747 billion, $425.4 million, $286.7 million, $204.6 million and $2.16, respectively.
Cash, debt and liquidity
- Operating cash flow was $1.207 billion. Cash and cash equivalents ended the year at $679.5 million; marketable debt securities totaled $146.0 million.
- Long-term debt was $2.493 billion gross principal, consisting of fixed-rate senior notes; the balance-sheet carrying value was $2.477 billion after unamortized issuance costs. The weighted average stated rate was 3.77%. PCA had $329.2 million of unused revolving-credit capacity, net of letters of credit, and reported compliance with its debt covenants.
- In November–December 2019, PCA issued $900 million of notes due 2029 and 2049 and redeemed $900 million principal of notes due 2020 and 2022. The refinancing generated $38.7 million of charges, including redemption premiums and write-offs.
- Dividends paid were $298.7 million; dividends declared were $3.16 per share for the year. No shares were repurchased under the board program during 2019.
Changes, outlook and risks
- Year-over-year sales decreased 0.7%; net income declined 5.6% and diluted EPS declined 5.9%. Management attributed the earnings decline mainly to lower Packaging prices and mix, weaker Paper volumes, and higher operating and converting costs, partly offset by Packaging volume growth and improved Paper pricing.
- Industry-reported corrugated shipments were flat in 2019, while UFS shipments fell 10.9%. Containerboard and paper price movements were mixed, with containerboard price reductions during 2019 and further published index reductions in January 2020.
- For Q1 2020, management expected earnings below Q4 2019, citing lower containerboard and export prices, scheduled maintenance outages, higher outage expense, and higher freight, labor, energy, wood and other input costs. It expected higher corrugated shipments but lower containerboard and Paper volumes.
- Expected 2020 capital investment was $400–$425 million, including about $10 million for environmental compliance. Capital commitments at year-end were $212.6 million.
- Key exposures include industry cyclicality and pricing, fiber and energy cost volatility, transportation availability and cost, mill disruptions, environmental regulation, pension funding and union negotiations. Office Depot represented 50% of Paper-segment sales and 7% of consolidated sales in 2019; its revised supply agreement runs through 2022, has no minimum volume commitment, and provides for a phase-down of purchases if not renewed.
- PCA disclosed an EPA notice of violation concerning alleged Clean Air Act violations at its Wallula mill; the company disputes the allegations and said it did not expect a material adverse effect. Lawsuits arising from the 2017 DeRidder mill explosion remain ongoing; PCA could not estimate a reasonable loss range, and stated the claims were covered by insurance subject to a $1 million aggregate deductible. Environmental reserves were $24.6 million.
- The auditor issued unqualified opinions on the financial statements and internal controls; management also concluded internal controls were effective. The filing identifies pension-obligation valuation as a critical audit matter.
Important facts for investors to verify
- Whether containerboard pricing and export demand stabilize, and whether higher input and outage costs pressure margins in 2020.
- Office Depot’s purchasing volumes and the terms or renewal of its paper-supply agreement after 2022.
- Progress and eventual costs, if any, relating to the Wallula EPA notice and DeRidder litigation.
- Execution and funding of the $400–$425 million 2020 capital plan, alongside dividends, pension contributions and debt service.
- Quarterly results against management’s stated expectation that Q1 2020 earnings would be below Q4 2019.