Packaging Corporation of America — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; fourth-quarter results are also presented. PCA manufactures corrugated packaging, containerboard, white paper and market pulp, primarily in the United States.
Financial performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Net sales | $5,741.7 million | $5,852.6 million | Down 1.9% |
| Gross profit | $1,208.0 million | $1,229.5 million | Down 1.7% |
| Income from operations | $750.0 million | $702.7 million | Up 6.7% |
| Net income | $436.8 million | $392.6 million | Up 11.3% |
| Diluted EPS | $4.47 | $3.99 | Up 12.0% |
| Operating cash flow | $762.6 million | $736.1 million | Up $26.5 million |
| Capital expenditures | $314.5 million | $420.2 million | Down $105.7 million |
Gross margin was 21.0% in both years. Management’s non-GAAP net income excluding special items was $442.6 million ($4.53 diluted EPS), compared with $458.6 million ($4.66) in 2014. EBITDA was $1,106.5 million; EBITDA excluding special items was $1,106.2 million, down from $1,143.6 million in 2014. These are non-GAAP measures and are not substitutes for GAAP results.
Fourth quarter: Sales were $1,390.9 million versus $1,434.0 million in Q4 2014; operating income was $175.9 million versus $173.2 million; net income was $104.3 million versus $98.5 million; diluted EPS was $1.07 versus $1.00.
Segments: Packaging sales were $4,477.3 million and operating income was $714.9 million, up from $663.2 million. Paper sales were $1,143.1 million and operating income was $112.5 million, down from $135.4 million. Packaging corrugated shipments rose about 1%; containerboard production reached 3.656 million tons. White-paper prices and mix weakened.
Financial position, liquidity and capital returns
- Year-end cash was $184.2 million. PCA also had $326.5 million of unused revolving-credit capacity, net of letters of credit.
- Debt obligations were approximately $2.3 billion; balance-sheet long-term debt was $2,302.7 million, plus $6.5 million current maturities. About 70% of debt was fixed-rate. PCA reported compliance with its debt covenants.
- Net cash provided by investing activities was negative $298.1 million, including $314.5 million of capital investment. Management forecast 2016 capital expenditures of $250–$265 million, excluding acquisitions.
- Cash dividends paid were $200.8 million; PCA repurchased $154.7 million of shares in 2015. The quarterly dividend was raised to $0.55 per share. After year-end, PCA repurchased a further $93.4 million of shares and authorized an additional $200 million repurchase program.
- The filing reports no off-balance-sheet arrangements as of December 31, 2015.
Material changes, outlook and notable items
- Reported net income improved, but adjusted net income and adjusted EBITDA declined. The GAAP comparison benefited from significantly lower special-item charges in 2015 than in 2014.
- Packaging results benefited from higher volumes and lower energy costs, but faced higher labor and benefit, outage, depreciation, freight and fiber costs, as well as lower export containerboard prices. Paper results were pressured mainly by lower white-paper prices and less favorable mix.
- Sales fell partly because PCA exited newsprint in 2014 and sold its Hexacomb operations in Mexico and Europe in April 2015. The full-year comparison also reflects the completion of Boise acquisition integration.
- Management expected Q1 2016 earnings to be below Q4 2015, citing lower published domestic linerboard and medium prices, higher seasonal labor, benefits, wood and energy costs, and a higher tax rate; slightly higher shipments and production and lower scheduled outage costs were expected to partly offset these pressures.
- Industry corrugated shipments increased 1.2% in 2015, while uncoated freesheet shipments declined 1.0% and average prices fell 2.5%. In early 2016, published domestic linerboard and medium prices were reduced by $15 and $30 per ton, respectively.
- Office Depot generated 45% of Paper segment sales and 9% of company sales in 2015. Its supply agreement requires PCA to supply at least 50% of its commodity office-paper requirements through December 2017, subject to early-termination provisions. The proposed Staples acquisition and potential changes in purchasing could affect this concentrated customer exposure.
- Antidumping and countervailing duties on certain white-paper imports from Australia, Brazil, China, Indonesia and Portugal were imposed in early 2016 following agency determinations; PCA said the effect on domestic market conditions was uncertain.
- Special items included $13.4 million of integration-related and other costs, a $6.7 million gain on sale of the St. Helens site, and DeRidder restructuring activity. In 2014, special items included a $17.6 million class-action settlement and substantial DeRidder restructuring charges. PCA completed the DeRidder restructuring in Q1 2015.
- Environmental reserves were $24.3 million; PCA estimated 2016 environmental capital spending of about $8 million, including up to $3 million for Boiler MACT compliance. The company stated it believed additional environmental costs above reserves were not reasonably likely to be material, while noting regulatory and remediation uncertainty.
Most important facts for investors to verify
- Whether packaging price reductions and weaker export pricing offset continuing shipment, production and cost-efficiency gains.
- Office Depot’s purchasing needs, financial condition, the status and terms of its proposed acquisition by Staples, and the durability of PCA’s supply agreement.
- Debt maturities, covenant headroom, liquidity and the cash demands of dividends, buybacks, pension contributions and planned capital spending.
- The underlying trend in results after separating special items from GAAP earnings, and the sustainability of record operating cash flow.
- Whether environmental, pension, labor-contract and operating-disruption risks lead to costs beyond current estimates or reserves.