Market Overview

Packaging Corporation of America Reports Third Quarter 2017 Results

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Packaging Corporation of America (NYSE:PKG) today reported third
quarter 2017 net income of $139 million, or $1.47 per share and $1.68
per share excluding special items. Third quarter net sales were $1.6
billion in 2017 and $1.5 billion in 2016.

 
Diluted earnings per share attributable to Packaging
Corporation of America shareholders
   
Three Months Ended
September 30
2017   2016   Change
Reported Diluted EPS $ 1.47 $ 1.26 $ 0.21
Special Items Expense (1) 0.21   0.04   0.17
Diluted EPS excluding Special items $ 1.68   $ 1.30   $ 0.38
 
(1) For descriptions and amounts of our special items see
the schedules with this release.
 

Special items expense in the third quarter of 2017 primarily includes
asset impairment and other charges related to discontinuing paper
operations associated with the previously announced conversion of the
No. 3 paper machine at the Wallula, Washington mill to linerboard.
Excluding special items, the $.38 per share increase in third quarter
2017 earnings compared to the third quarter of 2016 was driven primarily
by higher prices and mix ($.61) and sales volume ($.07) in our Packaging
segment and a partial insurance recovery related to the DeRidder Mill
incident ($.02). These items were partially offset by lower prices and
mix ($.05) and sales volume ($.02) in our Paper segment, higher input
costs ($.12), higher operating costs ($.03), higher freight ($.02) and
annual outage ($.02) expenses, and higher corporate and other costs
($.06).

Compared to third quarter guidance, results were negatively impacted by
($.02) per share due to hurricane-related items at certain mills and
corrugated products facilities, offset by a partial insurance recovery
related to the DeRidder Mill incident of $.02 per share.

Financial information by segment is summarized below and in the
schedules with this release.

  (dollars in millions)
Three Months Ended
September 30
2017   2016
Segment income (loss)
Packaging $ 261.5 $ 179.6
Paper (0.7) 44.5
Corporate and Other   (18.5)   (17.7)
$ 242.3 $ 206.4
 
Segment income (loss) excluding special items
Packaging $ 262.6 $ 184.0
Paper 24.9 45.0
Corporate and Other   (18.5)   (17.7)
$ 269.0 $ 211.3
 
EBITDA excluding special items
Packaging $ 341.3 $ 256.0
Paper 39.4 59.3
Corporate and Other   (16.8)   (16.4)
$ 363.9 $ 298.9

In the Packaging segment, total corrugated products shipments with two
less workdays were up 4.0% and shipments per day were up 7.3% over last
year's third quarter. Containerboard production was 996,000 tons, and
containerboard inventory was up 7,000 tons compared to the third quarter
of 2016 and up 20,000 tons from the second quarter of 2017. In the Paper
segment, lower volumes in the third quarter of 2017 compared to last
year were primarily due to the previously announced shutdown of market
pulp operations at the Wallula Mill.

Commenting on reported results, Mark W. Kowlzan, Chairman and CEO, said,
"Our containerboard and corrugated products price increases were
implemented as planned and we continued to have strong demand in our
packaging segment. Our containerboard mills ran very well and set an
all-time quarterly production record. We built some extra inventory to
prepare for the scheduled fourth quarter outage at our Counce Mill that
was moved from earlier in the year and begin the integration of the
Sacramento Container acquisition into our packaging business. Higher
year over year inflation came in close to where we expected, and the
employees at our mills and corrugated products facilities did an
outstanding job mitigating the negative impact of the recent hurricanes.
Additionally, we recorded impairment and other charges related to the
virgin linerboard conversion of our No. 3 paper machine at Wallula and
our preparations for this project are well under way."

"Looking ahead to the fourth quarter," Mr. Kowlzan added, "we expect
packaging segment demand to remain strong although at seasonally lower
volumes, which includes one less shipping day, as well as a seasonally
less rich mix in corrugated products, compared to the third quarter. We
will also have the addition of our newly acquired Sacramento Container
operations in the fourth quarter. In our paper segment, we have started
implementing our recently announced price increases, but expect
seasonally lower volumes and a less rich sales mix. While recycled fiber
prices should move lower, higher wood and energy costs along with higher
prices for certain key chemicals and higher freight costs are also
expected. Finally, our annual outage costs are estimated to be ($.12)
per share higher than the third quarter due to scheduled maintenance
work at four of our mills. Considering these items, we expect fourth
quarter earnings of $1.50 per share. This does not include any potential
additional costs or anticipated recoveries related to the Deridder Mill
insurance claim."

We present various non-GAAP financial measures in this press release,
including diluted EPS excluding special items, segment income excluding
special items and EBITDA excluding special items. We provide information
regarding our use of non-GAAP financial measures and reconciliations of
historical non-GAAP financial measures presented in this press release
to the most comparable measure reported in accordance with GAAP in the
schedules to this press release. We present our earnings expectation for
the upcoming quarter excluding special items as special items are
difficult to predict and quantify and may reflect the effect of future
events. We currently expect special items in the fourth quarter to
include accounting charges, fees, and expenses related to the Wallula
Mill paper machine conversion from paper to linerboard, the Sacramento
Container Corporation acquisition and certain disposal and closure
activities at other facilities. Additional special items may arise due
to fourth quarter events.

PCA is the fourth largest producer of containerboard and corrugated
packaging products and the third largest producer of uncoated freesheet
paper in the United States. PCA operates eight mills and 94 corrugated
products plants and related facilities.

Some of the statements in this press release are forward-looking
statements. Forward-looking statements include statements about our
future earnings and financial condition, expected benefits from
acquisitions and facility closures, our industry and our business
strategy. Statements that contain words such as " will", "should",
"anticipate", "believe", "expect", "intend", "estimate", "hope" or
similar expressions, are forward-looking statements. These
forward-looking statements are based on the current expectations of PCA.
Because forward-looking statements involve inherent risks and
uncertainties, the plans, actions and actual results of PCA could differ
materially. Among the factors that could cause plans, actions and
results to differ materially from PCA's current expectations include the
following: the impact of general economic conditions; conditions in the
paper and packaging industries, including competition, product demand
and product pricing; fluctuations in wood fiber and recycled fiber
costs; fluctuations in purchased energy costs; the possibility of
unplanned outages or interruptions at our principal facilities; and
legislative or regulatory requirements, particularly concerning
environmental matters, as well as those identified under Item 1A. Risk
Factors in PCA's Annual Report on Form 10-K for the year ended December
31, 2016 filed with the Securities and Exchange Commission and available
at the SEC's website at "www.sec.gov".

 

Conference Call Information:

 

WHAT:

Packaging Corporation of America's 3rd Quarter 2017 Earnings
Conference Call
 

WHEN:

Thursday, October 26, 2017 at 9:00 a.m. Eastern Time
 

CALL-IN

(855) 730-0288 (U.S. and Canada) or (832) 412-2295 (International)

NUMBER:

Dial in by 8:45 a.m. Eastern Time
Conference Call Leader: Mr. Mark Kowlzan
 

WEBCAST:

http://www.packagingcorp.com

 

REBROADCAST DATES:

October 26, 2017 12:00 p.m. Eastern Time through November 9, 2017
11:59 p.m. Eastern Time
 

REBROADCAST NUMBERS:

(855) 859-2056 (U.S. and Canada) or (404) 537-3406 (International)
Passcode: 3729185
       
Packaging Corporation of America
Consolidated Earnings Results
Unaudited
(dollars in millions, except per-share data)
   
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Net sales $ 1,640.1 $ 1,484.0 $ 4,760.6 $ 4,302.4
Cost of sales   (1,242.8 )

(1)

  (1,154.5 )

(4)

  (3,660.1 )

(1)

  (3,353.8 )

(4)

Gross profit 397.3 329.5 1,100.5 948.6
Selling, general, and administrative expenses (130.2 ) (116.9 ) (388.9 ) (346.0 )
Other expense, net   (24.8 )

(1)

  (6.2 )

(4)

  (32.4 )

(1)(3)

  (15.2 )

(4)

Income from operations 242.3 206.4 679.2 587.4
Interest expense, net   (25.4 )   (23.4 )   (74.6 )   (67.5 )

 

Income before taxes 216.9 183.0 604.6 519.9
Provision for income taxes   (77.8 )

(2)

  (63.7 )   (204.9 )

(2)

  (181.0 )
Net income $ 139.1   $ 119.3   $ 399.7   $ 338.9  
Earnings per share:
Basic $ 1.47   $ 1.27   $ 4.24   $ 3.59  
Diluted $ 1.47   $ 1.26   $ 4.23   $ 3.58  
 
 
Computation of diluted earnings per share under the two class method:
Net income $ 139.1 $ 119.3 $ 399.7 $ 338.9
Less: Distributed and undistributed income available to
participating securities
  (1.1 )   (1.1 )   (3.4 )   (3.4 )
Net income attributable to PCA shareholders $ 138.0   $ 118.2   $ 396.3   $ 335.5  
Diluted weighted average shares outstanding   93.8     93.6     93.7     93.7  
Diluted earnings per share $ 1.47   $ 1.26   $ 4.23   $ 3.58  
 
 
Supplemental financial information:
Capital spending $ 86.9 $ 66.3 $ 226.2 $ 188.1
Cash balance $ 370.5 $ 279.8 $ 370.5 $ 279.8
 

(1)

The three and nine months ended September 30, 2017 include the
following:
a. $0.9 million and $1.9 million, respectively, of charges consisting
of closure costs related to corrugated products facilities, a paper
administration facility, and a lump sum settlement of a
multiemployer pension plan withdrawal liability for one of our
corrugated products facilities, which were recorded in "Other
expense, net".
b. $0.5 million and $0.8 million, respectively, of charges related to
the Sacramento Container Corporation acquisition and integration
costs related to other recent acquisitions, which were recorded in
"Other expense, net".
c. $25.3 million of charges related to the announced second quarter
2018 discontinuation of uncoated free sheet and coated one-side
grades at the Wallula, Washington mill associated with the
conversion of the No. 3 paper machine to a high-performance 100%
virgin kraft linerboard machine. The costs were recorded within
"Other expense, net" and "Cost of sales", as appropriate.
 

(2)

The three and nine months ended September 30, 2017 include $3.3
million of tax expense for the change in value of deferred taxes as
a result of an internal legal entity consolidation that will
simplify future operating activities.
 

(3)

The nine months ended September 30, 2017 include the following:
a. $5.0 million of costs for the property damage and business
interruption insurance deductible corresponding to the February 2017
explosion at our DeRidder, LA mill.
b. $2.3 million of income related to a working capital adjustment from
the April 2015 sale of our Hexacomb corrugated manufacturing
operations in Europe and Mexico.
 

(4)

The three and nine months ended September 30, 2016 include the
following:
a. $2.0 million and $7.4 million, respectively, of closure costs
related to corrugated products facilities and a paper products
facility and costs related to our withdrawal from a multiemployer
pension plan for one of our corrugated products facilities. The
costs were recorded within "Other expense, net" and "Cost of sales",
as appropriate.
b. $2.9 million and $3.2 million, respectively, of charges related to
the acquisition and integration of TimBar Corporation, which we
recorded in "Other expense, net" and "Cost of sales", as appropriate.
       
Packaging Corporation of America
Segment Information
Unaudited
(dollars in millions)
               
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Segment sales
Packaging $ 1,346.6 $ 1,167.1 $ 3,915.0 $ 3,387.9
Paper 271.4 292.8 784.3 840.1
Corporate and Other   22.1     24.1     61.3     74.4  
$ 1,640.1   $ 1,484.0   $ 4,760.6   $ 4,302.4  
 
Segment income (loss)
Packaging $ 261.5 $ 179.6 $ 676.8 $ 533.5
Paper (0.7 ) 44.5 58.1 105.0
Corporate and Other   (18.5 )   (17.7 )   (55.7 )   (51.1 )
Income from operations   242.3     206.4     679.2     587.4  
Interest expense, net   (25.4 )   (23.4 )   (74.6 )   (67.5 )
Income before taxes $ 216.9   $ 183.0   $ 604.6   $ 519.9  
 
Segment income (loss) excluding special items (1)
Packaging $ 262.6 $ 184.0 $ 682.6 $ 542.1
Paper 24.9 45.0 83.7 106.7
Corporate and Other   (18.5 )   (17.7 )   (56.4 )   (50.8 )
$ 269.0   $ 211.3   $ 709.9   $ 598.0  
 
EBITDA excluding special items (1)
Packaging $ 341.3 $ 256.0 $ 916.8 $ 759.4
Paper 39.4 59.3 126.2 149.1
Corporate and Other   (16.8 )   (16.4 )   (52.0 )   (47.0 )
$ 363.9   $ 298.9   $ 991.0   $ 861.5  
 
(1) Segment income (loss) excluding special items, earnings before
interest, income taxes, and depreciation, amortization, and
depletion (EBITDA), and EBITDA excluding special items are non-GAAP
financial measures. Management excludes special items as it believes
these items are not necessarily reflective of the ongoing results of
operations of our business. We present these measures because they
provide a means to evaluate the performance of our segments and our
company on an ongoing basis using the same measures that are used by
our management, because these measures assist in providing a
meaningful comparison between periods presented and because these
measures are frequently used by investors and other interested
parties in the evaluation of companies and the performance of their
segments. The tables included in "Reconciliation of Non-GAAP
Financial Measures" on the following pages reconcile the non-GAAP
measures with the most directly comparable GAAP measures. Any
analysis of non-GAAP financial measures should be done only in
conjunction with results presented in accordance with GAAP. The
non-GAAP measures are not intended to be substitutes for GAAP
financial measures and should not be used as such.
       
Packaging Corporation of America
Reconciliation of Non-GAAP Financial Measures
Unaudited
(dollars in millions)
 
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Packaging
Segment income $ 261.5 $ 179.6 $ 676.8 $ 533.5
Facilities closure and other costs 0.6 1.5 1.6 5.7
Acquisition and integration related costs 0.5 2.9 0.8 2.9
DeRidder mill incident 5.0
Hexacomb working capital adjustment           (1.6 )    
Segment income excluding special items (1) $ 262.6   $ 184.0   $ 682.6   $ 542.1  
 
Paper
Segment income $ (0.7 ) $ 44.5 $ 58.1 $ 105.0
Wallula mill restructuring 25.3 25.3
Facilities closure and other costs   0.3     0.5     0.3     1.7  
Segment income excluding special items (1) $ 24.9   $ 45.0   $ 83.7   $ 106.7  
 
Corporate and Other
Segment loss $ (18.5 ) $ (17.7 ) $ (55.7 ) $ (51.1 )
Acquisition and integration related costs 0.3
Hexacomb working capital adjustment           (0.7 )    
Segment loss excluding special items (1) $ (18.5 ) $ (17.7 ) $ (56.4 ) $ (50.8 )
       
Income from operations $ 242.3   $ 206.4   $ 679.2   $ 587.4  
       
Income from operations, excluding special items (1) $ 269.0   $ 211.3   $ 709.9   $ 598.0  
 
(1) See footnote (1) on page 2, for a discussion of non-GAAP
financial measures.
             
Packaging Corporation of America
Reconciliation of Non-GAAP Financial Measures
Unaudited
(dollars in millions)
Net Income and EPS Excluding Special Items (1)
   
Three Months Ended September 30,
2017 2016
Income before taxes   Income Taxes   Net Income   Diluted EPS Income before taxes   Income Taxes   Net Income   Diluted EPS
As reported $ 216.9 $ (77.8 ) $ 139.1 $ 1.47 $ 183.0 $ (63.7 ) $ 119.3 $ 1.26
Special items (2):
Wallula mill restructuring 25.3 (9.8 ) 15.5 0.16
Internal legal entity consolidation 3.3 3.3 0.04
Facilities closure and other costs 0.9 (0.3 ) 0.6 0.01 2.0 (0.6 ) 1.4 0.02
Acquisition and integration related costs   0.5     (0.2 )   0.3         2.9   (1.0 )   1.9   0.02
Total special items   26.7     (7.0 )   19.7     0.21     4.9   (1.6 )   3.3   0.04
Excluding special items $ 243.6   $ (84.8 ) $ 158.8   $ 1.68   $ 187.9 $ (65.3 ) $ 122.6 $ 1.30
 
Nine Months Ended September 30,
2017 2016
Income before taxes   Income Taxes   Net Income   Diluted EPS Income before taxes   Income Taxes   Net Income   Diluted EPS
As reported $ 604.6 $ (204.9 ) $ 399.7 $ 4.23 $ 519.9 $ (181.0 ) $ 338.9 $ 3.58
Special items (2):
Wallula mill restructuring 25.3 (9.7 ) 15.6 0.16
DeRidder mill incident 5.0 (1.9 ) 3.1 0.03
Internal legal entity consolidation 3.3 3.3 0.04
Facilities closure and other costs 1.9 (0.7 ) 1.2 0.01 7.4 (2.5 ) 4.9 0.05
Acquisition and integration related costs 0.8 (0.3 ) 0.5 0.01 3.2 (1.1 ) 2.1 0.02
Hexacomb working capital adjustment   (2.3 )   0.9     (1.4 )   (0.01 )          
Total special items   30.7     (8.4 )   22.3     0.24     10.6   (3.6 )   7.0   0.07
Excluding special items $ 635.3   $ (213.3 ) $ 422.0   $ 4.47   $ 530.5 $ (184.6 ) $ 345.9 $ 3.65
 
 
(1) Net income and earnings per share excluding special items are
non-GAAP financial measures. Management excludes special items as it
believes these items are not necessarily reflective of the ongoing
results of operations of our business. We present these measures
because they provide a means to evaluate the performance of our
company on an ongoing basis using the same measures that are used by
our management, because these measures assist in providing a
meaningful comparison between periods presented and because these
measures are frequently used by investors and other interested
parties in the evaluation of companies and their performance. Any
analysis of non-GAAP financial measures should be done only in
conjunction with results presented in accordance with GAAP. The
non-GAAP measures are not intended to be substitutes for GAAP
financial measures and should not be used as such.
 
(2) Special items are tax-effected at a combined federal and state
income tax rate in effect for the period the special items were
recorded and this rate is adjusted for each subsequent quarter to be
consistent with the estimated annual effective tax rate, in
accordance with ASC 270, Interim Reporting, and ASC 740-270, Income
Taxes – Intra Period Tax Allocation
. For all periods presented,
income taxes on special items represent the current amount of tax.
For more information related to these items, see the footnotes to
the Consolidated Earnings Results on page 1.
       
Packaging Corporation of America
Reconciliation of Non-GAAP Financial Measures
Unaudited
(dollars in millions)
EBITDA and EBITDA Excluding Special Items (1)
 
EBITDA represents income before interest (interest expense and
interest income), income taxes, and depreciation, amortization, and
depletion. The following table reconciles net income to EBITDA and
EBITDA excluding special items:
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Net income $ 139.1 $ 119.3 $ 399.7 $ 338.9
Interest expense, net 25.4 23.4 74.6 67.5
Provision for income taxes 77.8 63.7 204.9 181.0
Depreciation, amortization, and depletion   97.5   88.0   283.7     264.3
EBITDA (1) $ 339.8 $ 294.4 $ 962.9   $ 851.7
Special items:
Wallula mill restructuring 22.7 22.7
Facilities closure and other costs 0.9 1.6 1.9 6.6
Acquisition and integration related costs 0.5 2.9 0.8 3.2
DeRidder mill incident 5.0
Hexacomb working capital adjustment       (2.3 )  
EBITDA excluding special items (1) $ 363.9 $ 298.9 $ 991.0   $ 861.5
 
(1) See footnote (1) on page 2, for a discussion of non-GAAP
financial measures.
       
Packaging Corporation of America
Reconciliation of Non-GAAP Financial Measures
Unaudited
(dollars in millions)
 
The following table reconciles segment income (loss) to EBITDA
excluding special items:
 
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Packaging
Segment income $ 261.5 $ 179.6 $ 676.8 $ 533.5
Depreciation, amortization, and depletion   78.7     72.0     234.2     217.3  
EBITDA (1)   340.2     251.6     911.0     750.8  
Facilities closure and other costs 0.6 1.5 1.6 5.7
Acquisition and integration related costs 0.5 2.9 0.8 2.9
DeRidder mill incident 5.0
Hexacomb working capital adjustment           (1.6 )    
EBITDA excluding special items (1) $ 341.3   $ 256.0   $ 916.8   $ 759.4  
 
Paper
Segment income $ (0.7 ) $ 44.5 $ 58.1 $ 105.0
Depreciation, amortization, and depletion   17.1     14.7     45.1     43.2  
EBITDA (1)   16.4     59.2     103.2     148.2  
Wallula mill restructuring 22.7 22.7
Facilities closure and other costs   0.3     0.1     0.3     0.9  
EBITDA excluding special items (1) $ 39.4   $ 59.3   $ 126.2   $ 149.1  
 
Corporate and Other
Segment loss $ (18.5 ) $ (17.7 ) $ (55.7 ) $ (51.1 )
Depreciation, amortization, and depletion   1.7     1.3     4.4     3.8  
EBITDA (1)   (16.8 )   (16.4 )   (51.3 )   (47.3 )
Hexacomb working capital adjustment (0.7 )
Acquisition and integration related costs               0.3  
EBITDA excluding special items (1) $ (16.8 ) $ (16.4 ) $ (52.0 ) $ (47.0 )
       
EBITDA excluding special items (1) $ 363.9   $ 298.9   $ 991.0   $ 861.5  
 
(1) See footnote (1) on page 2, for a discussion of non-GAAP
financial measures.

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