Packaging Corporation of America — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This annual filing also reports unaudited quarterly results, including fourth-quarter 2012.
Business context
PCA is an integrated U.S. containerboard and corrugated-packaging producer, operating four mills and 71 corrugated manufacturing operations. It produced 2.6 million tons of containerboard in 2012; about 83% was used internally. Corrugated shipments were 34.7 billion square feet. The company reported one operating segment.
Financial performance and liquidity
- Revenue: $2.844 billion, up 8.5% from $2.620 billion in 2011. Higher corrugated volume—up 6.6%—was the main driver; average selling prices also increased. External containerboard sales volume fell 6.0%.
- Profit: GAAP operating income was $443.5 million versus $272.7 million; net income was $163.8 million versus $158.0 million. Diluted EPS was $1.68 versus $1.57. Gross profit was $639.6 million, with gross margin of 22.5% versus 20.7%.
- Adjusted results: Excluding specified special items, management reported 2012 net income of $200.7 million and diluted EPS of $2.06, versus $161.8 million and $1.61 in 2011. GAAP results include a $95.5 million operating-income benefit from alternative-fuel credits, offset by related tax expense.
- Fourth quarter: Sales were $736.6 million versus $654.3 million in Q4 2011; gross profit was $174.0 million versus $134.2 million; net income was $61.0 million versus $39.5 million. Diluted EPS was $0.63; management’s adjusted Q4 EPS was $0.61.
- Cash flow: Operating cash flow was $404.2 million, compared with $345.5 million. Investing activities used $107.5 million, including $128.5 million of capital expenditures, partly offset by a $57.4 million U.S. Treasury grant. Financing activities used $245.6 million. Cash increased $51.1 million to $207.4 million.
- Debt and liquidity: Debt was $793.6 million at year-end, excluding capital leases; total debt obligations including leases were reported as $819.5 million. Cash plus unused credit-facility capacity provided substantial liquidity: $327.3 million of borrowing capacity was available, net of letters of credit. Current assets were $937.0 million and current liabilities $259.8 million. PCA reported compliance with debt covenants.
- Capital returns: 2012 dividends declared were $1.00 per share. PCA repurchased $44.1 million of shares under its then-current authorization. In January 2013, it announced an increase in the annual dividend rate to $1.25 per share.
Material changes versus 2011
- Operating performance improved with higher shipments and selling prices and lower energy and recycled-fiber costs. Management said these gains were partly offset by higher labor and benefit, transportation, depreciation and interest costs.
- Gross margin rose to 22.5% from 20.7%. Management’s adjusted operating income increased to $349.9 million from $278.6 million.
- Interest expense increased to $62.9 million from $29.2 million, including a $21.3 million premium to redeem 5.75% notes and a $3.4 million charge related to settling a treasury lock. PCA issued $400 million of 3.90% notes due 2022 and redeemed $400 million of 5.75% notes due 2013.
- Debt refinancing and completion of major energy projects reduced investing cash use substantially from 2011. Four corrugated manufacturers acquired during 2011–2012 contributed to shipment growth.
Outlook, risks and unusual items
- Management expected Q1 2013 earnings to be below Q4 2012 adjusted EPS of $0.61, citing seasonal volume weakness, fewer mill production days and maintenance downtime, higher energy, recycled-fiber and labor costs, and weather-related pressure on wood costs and availability. Full-quarter realization of Q4 price increases was expected to provide a partial offset.
- PCA expected about $125 million of 2013 capital expenditures for maintenance, cost reduction, growth and environmental compliance, plus $50 million for potential box-plant acquisitions or strategic investments.
- The January 2013 Boiler MACT rule was expected to require $45–$55 million of capital expenditures over three years; up to $10 million was estimated for 2013. The company stated it was assessing the rule’s impact.
- Alternative-energy tax-credit treatment materially affected reported earnings and taxes. 2012 included a net after-tax charge of $19.6 million for amendments to 2009 tax returns. At year-end, PCA had $111.3 million of gross unrecognized tax benefits, plus accrued interest and penalties; the IRS audit outcome could change the reserve significantly.
- A consolidated antitrust class action alleges containerboard producers conspired to restrict supply and raise prices. PCA disputes the allegations, but could not predict the outcome or estimate reasonably possible losses.
- Key operating risks include cyclical demand and pricing, competition, fiber and energy cost volatility, manufacturing disruptions, environmental requirements, labor negotiations and economic weakness. PCA disclosed no material off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile GAAP and management-adjusted earnings, especially the alternative-energy tax-credit reclassification and debt-refinancing charges.
- Monitor the IRS audit, the potential range and timing of changes to unrecognized tax benefits, and any resulting cash-tax effects.
- Track Boiler MACT compliance spending against the $45–$55 million estimate and the company’s broader 2013 capital plans.
- Review developments in the containerboard antitrust litigation and any updates to the company’s assessment of potential exposure.
- Assess whether volume, pricing and lower input costs remain sufficient to offset labor, transportation, maintenance and other cost pressures.
- Confirm debt maturities, available borrowing capacity, covenant compliance and the sustainability of dividends and repurchases. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.