Business Context and Reporting Period
Company: Packaging Corporation of America (PCA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: PCA is the fifth largest producer of containerboard and corrugated products in the United States. The company operates integrated mills and corrugated plants, producing packaging materials for industrial and consumer markets. Operations are primarily located in the U.S.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2009 |
|---|---|---|
| Net Sales | $549,381 | $1,061,759 |
| Gross Profit | $118,499 | $228,507 |
| Income from Operations | $135,717 | $185,324 |
| Net Income | $108,881 | $134,557 |
| Diluted EPS | $1.07 | $1.32 |
| Cash and Equivalents | $192,944 (as of June 30, 2009) | |
| Total Debt (Short + Long Term) | $657,575 (as of June 30, 2009) | |
| Operating Cash Flow (6mo) | $141,248 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 10.8% ($66.8 million) in Q2 2009 and 11.0% ($131.9 million) for the six months ended June 30, 2009, compared to the prior year. This was driven primarily by decreased sales volume of corrugated products and containerboard due to weak economic conditions, partially offset by price increases in early 2009 followed by price decreases later in the period.
- Profitability Surge: Despite lower sales, Net Income increased 209% in Q2 and 100% for the six-month period. This dramatic increase is primarily attributable to a one-time Alternative Fuel Mixture Tax Credit of $79.7 million recorded in Q2 2009.
- Operating Income: Income from operations increased 111.5% in Q2. Excluding the tax credit, operating income would have been $8.2 million lower than the prior year due to volume declines and higher labor costs, partially offset by lower raw material (recycled fiber) and energy costs.
- Dividends: The quarterly dividend was reduced from $0.30 to $0.15 per share, effective for the dividend payable in April 2009.
Guidance, Outlook, and Risks
- Outlook: Management expects Q3 2009 earnings to be lower than Q2 2009. This is due to the absence of the alternative fuel tax credit (which expires Dec 31, 2009), lower selling prices, and expected increases in recycled fiber costs, despite anticipated volume improvements.
- Capital Expenditures: PCA expects to incur approximately $100 million in capital expenditures for 2009, primarily for maintenance, cost reduction, and environmental compliance. $50.3 million was spent in the first half of 2009.
- Liquidity: The company maintains $172.2 million in unused borrowing capacity under existing credit agreements. Management believes cash flow from operations and available credit will meet liquidity needs.
- Risks: Key risks include general economic downturns affecting demand, volatility in wood fiber and energy costs, and the expiration of the alternative fuel tax credit. The company is also subject to environmental regulations and potential remediation costs, though current reserves are deemed adequate.
- Subsequent Event: On July 2, 2009, PCA acquired a specialty sheet plant in Chicago for approximately $3.5 million.
Investor Verification Checklist
- Tax Credit Sustainability: Verify the status of the $79.7 million alternative fuel mixture tax credit and its expiration date (Dec 31, 2009) to understand the non-recurring nature of current earnings.
- Volume Trends: Monitor industry-wide corrugated product shipments and containerboard inventory levels, as PCA's volume is highly correlated with the broader U.S. economy.
- Cost Inflation: Track prices for recycled fiber, wood, and energy, which are major cost drivers and are expected to rise in Q3 2009.
- Debt Covenants: Confirm continued compliance with debt covenants regarding net worth, debt-to-capitalization, and interest coverage ratios.
- Dividend Policy: Assess the impact of the dividend reduction on shareholder returns and future cash flow allocation.