Packaging Corporation of America — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; quarterly figures below include the fourth quarter. PCA makes corrugated packaging, containerboard, white papers and market pulp. Results include Boise, acquired October 25, 2013, so annual comparisons are materially affected by the first full year of Boise operations.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $5,852.6 million | $3,665.3 million |
| Gross profit / margin | $1,229.5 million / 21.0% | $867.5 million / 23.7% |
| Operating income | $702.7 million | $481.9 million |
| Net income | $392.6 million | $441.3 million |
| Diluted EPS | $3.99 | $4.52 |
| Operating cash flow | $736.1 million | $608.2 million |
| Capital expenditures | $420.2 million | $234.4 million |
Sales grew 59.7%, principally because 2014 included a full year of Boise versus only the post-acquisition period in 2013. Management reported net income excluding special items of $458.6 million, or $4.66 diluted EPS, versus $325.2 million, or $3.33, in 2013; these are non-GAAP measures. GAAP net income was lower year over year largely because 2013 included a $166.0 million tax benefit from reversal of reserves for alternative-energy tax credits.
Gross margin declined, reflecting the full-year contribution of the lower-margin white paper business and DeRidder restructuring charges. Excluding special items, management said operating income increased $255.6 million, with most of the increase attributable to Boise and integration synergies. FY2014 EBITDA was $1,083.7 million; EBITDA excluding special items was $1,143.6 million, both non-GAAP measures.
Fourth-quarter results
| Metric | Q4 2014 | Q4 2013 |
|---|---|---|
| Net sales | $1,434.0 million | $1,264.4 million |
| Gross profit | $297.0 million | $259.4 million |
| Operating income | $173.2 million | $122.9 million |
| Net income | $98.5 million | $228.1 million |
| Diluted EPS | $1.00 | $2.34 |
Q4 2013 net income included the large tax-reserve reversal related to alternative-energy credits; the headline quarterly net-income comparison is therefore not representative of underlying operating performance.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents were $124.9 million, long-term debt was $2,355.4 million before unamortized discounts, and capital lease obligations were $23.9 million. PCA reported $325.1 million of unused revolving-credit capacity, net of letters of credit. Total debt obligations in selected financial data were $2,379.3 million, including capital leases. Operating cash flow less capital expenditures was approximately $315.9 million, before acquisitions and other investing activity. Cash declined $66.1 million during 2014.
PCA repaid $592.5 million of debt and issued $400 million of 3.65% ten-year notes, using proceeds and operating cash to reduce variable-rate borrowings. About 70% of debt was fixed-rate; management estimated a 1 percentage-point rise in rates on variable debt would increase annual interest expense by $7.1 million. The company said cash, operating cash flow, revolver availability and capital-market access should meet foreseeable liquidity needs. It paid $157.4 million in dividends in 2014 and announced a February 2015 increase in the annualized dividend from $1.60 to $2.20 per share.
Changes, outlook and principal risks
- Packaging sales were $4,540.3 million and segment income was $663.2 million; Paper sales were $1,201.4 million and segment income was $135.4 million. Excluding Boise, corrugated shipments increased 4.7% for the year; industry shipments increased 1.2%. Domestic containerboard pricing was steady, while export pricing softened slightly.
- PCA converted DeRidder’s No. 3 newsprint machine to containerboard, starting production in October; it produced 58,000 tons in Q4. The company exited newsprint in September and recorded $65.8 million of DeRidder-related charges, including $42.0 million of incremental depreciation. Other 2014 special items included $19.9 million of integration, refinancing and other costs and a $17.6 million class-action settlement.
- Management expected Q1 2015 earnings excluding special items to be lower than Q4 2014, citing scheduled outages and about 60,000 tons of lost containerboard production, seasonally lower corrugated shipments, lower white-paper prices, colder-weather input costs, and higher labor and benefits costs; higher DeRidder No. 3 production was expected to partly offset these effects. Planned 2015 capital investments were $275–$300 million, excluding acquisitions.
- Risks include cyclical product pricing and demand, competition and input-cost volatility; secular substitution away from communication papers; Office Depot/OfficeMax customer concentration (44% of Paper segment sales in 2014) and the pending Staples acquisition; mill disruptions, labor negotiations, environmental compliance, acquisition integration, and leverage. PCA had $35.4 million of environmental reserves and estimated up to $16 million of Boiler MACT capital spending in 2015, plus about $5 million of other environmental capital spending.
- The company changed certain inventory costing from LIFO to average cost, applied retrospectively. Management stated 2014 net income would have been $1.6 million higher under the prior method and year-end inventory $69.2 million lower. PCA reported no goodwill impairment and said it was in compliance with debt covenants.
Investor verification priorities
- Separate Boise’s acquisition contribution and reported special items from organic operating trends; compare the non-GAAP reconciliations with GAAP results.
- Track Office Depot/OfficeMax purchasing, customer-credit exposure and the effect of the proposed Staples transaction on the paper supply agreement and volumes.
- Monitor DeRidder conversion performance, planned mill outages, containerboard capacity utilization and the company’s ability to sustain pricing and margins.
- Verify execution of the 2015 capital program, environmental requirements and cash generation against debt service, dividend increases and remaining liquidity.
- Review pension funding and assumptions, environmental and legal contingencies, and the $1.6 million additional 2014 fee approved for board chairman Paul Stecko in February 2015, primarily for Boise integration services.