Market Overview

Packaging Corporation of America Reports First Quarter 2018 Results

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Packaging Corporation of America (NYSE:PKG) today reported first
quarter 2018 net income of $140 million, or $1.48 per share and $1.55
per share excluding special items. First quarter net sales were $1.7
billion in 2018 and $1.5 billion in 2017.

 
Diluted earnings per share attributable to Packaging
Corporation of America shareholders
   
Three Months Ended
March 31
2018   2017   Change
Reported Diluted EPS $ 1.48 $ 1.24 $ 0.24
Special Items Expense (1) 0.07   0.03   0.04
Diluted EPS excluding Special items $ 1.55   $ 1.27   $ 0.28
 
(1) For descriptions and amounts of our special items,
see the schedules with this release.
 

Reported earnings include $.07 per share of special items expense in the
first quarter of 2018 and $.03 per share of special items expense in the
first quarter of 2017. Excluding special items, the $.28 per share
increase in first quarter 2018 earnings compared to first quarter 2017
was driven primarily by higher prices and mix $.39 and volumes $.19 in
our Packaging segment, higher volumes in our Paper segment $.02, and a
favorable tax rate $.19 resulting from Tax Reform changes. These items
were partially offset by lower prices and mix ($.05) in our Paper
segment, higher operating costs ($.22), higher annual outage expenses
($.11), higher freight expense ($.07), higher converting costs ($.02),
higher depreciation ($.03) and higher interest expense ($.01).

Results were $.03 above first quarter guidance of $1.52 per share
primarily due to higher volumes and prices and mix in our Packaging and
Paper segments, partially offset by higher than expected freight costs
and operating costs.

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

 
(dollars in millions)
Three Months Ended
March 31
2018   2017
Segment income (loss)
Packaging $ 224.7 $ 192.5
Paper 7.2 27.9
Corporate and Other   (19.0)   (17.0)
$ 212.9 $ 203.4
 
Segment income (loss) excluding special items
Packaging $ 224.8 $ 196.7
Paper 16.0 27.9
Corporate and Other   (18.8)   (17.7)
$ 222.0 $ 206.9
 
EBITDA excluding special items
Packaging $ 307.9 $ 273.9
Paper 31.3 41.9
Corporate and Other   (17.4)   (16.4)
$ 321.8 $ 299.4
 

In the Packaging segment, total corrugated products shipments with one
less workday were up 6.0% and shipments per day were up 7.7% over last
year's first quarter. Containerboard production was 953,000 tons, and
containerboard inventory was down 23,000 tons from the fourth quarter of
2017 and up 31,000 tons compared to the first quarter of 2017, primarily
due to the addition of recently acquired Sacramento Container. In the
Paper segment, office paper and printing and converting paper sales
volumes were up 33,000 tons compared to the first quarter of 2017, and
production volume was up 10,000 tons primarily due to no scheduled
maintenance outages in the first quarter of 2018.

Commenting on reported results, Mark W. Kowlzan, Chairman and CEO, said,
"Demand in our Packaging segment remained strong with record first
quarter sales volumes in both our containerboard mills and corrugated
products plants as well as improved prices and mix compared to the first
quarter of 2017. In our Paper segment, volumes were above year ago
levels and although prices and mix were still below last year's levels,
we began to realize some of our announced paper price increases. The
scheduled maintenance outages at three of our containerboard mills went
very well, and the production optimization work performed during the
DeRidder Mill outage was extremely successful with very strong
performance immediately after start-up. Year over year inflation in our
freight, chemicals, labor and benefits, and other operating costs came
in a bit higher than we were expecting, and we also experienced
weather-related issues that impacted costs at some of our mills and box
plants during the quarter."

"Looking ahead as we move from the first and into the second quarter,"
Mr. Kowlzan added, "we expect continued strong demand in our Packaging
segment to result in higher corrugated products and containerboard
shipments, and we will continue to implement our previously announced
Packaging segment price increases. In our Paper segment, we expect
volumes to be lower as we begin the conversion of the No. 3 machine in
our Wallula Mill from paper to linerboard, and we will continue
implementing the previously announced paper price increases. We also
anticipate continued price inflation in chemical and freight costs,
incremental wage pressure with a tighter labor market, but slightly
lower recycled fiber costs and improving energy costs as we move into
seasonally milder weather. Scheduled maintenance outage costs should
move lower and we expect a slightly lower tax rate as well. Considering
these items, we expect second quarter earnings of $1.96 per share."

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 second quarter to
include accounting charges, fees, and expenses related to the Wallula
Mill paper machine conversion from paper to linerboard. Additional
special items may arise due to second quarter events.

PCA is the fourth largest producer of containerboard products and the
third largest producer of uncoated freesheet paper in the North America.
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 restructuring activities, 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, 2017 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 1st Quarter 2018 Earnings
Conference Call
 

WHEN:

Wednesday, April 25, 2018 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:

April 25, 2018 12:00 p.m. Eastern Time through May 9, 2018 11:59
p.m. Eastern Time
 

REBROADCAST NUMBERS:

(855) 859-2056 (U.S. and Canada) or (404) 537-3406 (International)
Passcode: 4539018
 
       
Packaging Corporation of America
Consolidated Earnings Results
Unaudited
(dollars in millions, except per-share data)
 
Three Months Ended
March 31,
2018 (1) 2017 (1)
Net sales $ 1,690.6 $ 1,536.5
Cost of sales   (1,334.5 )

(2)

  (1,198.3 )
Gross profit 356.1 338.2
Selling, general, and administrative expenses (134.9 ) (127.8 )
Other expense, net   (8.3 )

(2)

  (7.0 )

(3)

Income from operations 212.9 203.4
Interest expense, net and other   (26.3 )   (24.3 )
Income before taxes 186.6 179.1
Provision for income taxes   (46.5 )   (61.7 )
Net income $ 140.1   $ 117.4  
Earnings per share:
Basic $ 1.48   $ 1.25  
Diluted $ 1.48   $ 1.24  
 
 
Computation of diluted earnings per share under the two class method:
Net income $ 140.1 $ 117.4
Less: Distributed and undistributed income available to
participating securities
  (1.1 )   (1.0 )
Net income attributable to PCA shareholders $ 139.0   $ 116.4  
Diluted weighted average shares outstanding   93.8     93.6  
Diluted earnings per share $ 1.48   $ 1.24  
 
 
Supplemental financial information:
Capital spending $ 108.0 $ 57.8
Cash balance $ 102.4 $ 254.0
 
(1)

Effective January 1, 2018, the Company adopted ASU 2014-09 (Topic
606): Revenue from Contracts with Customers using the
modified retrospective method. The new revenue standard provides
additional clarity concerning contract fulfillment costs, which
resulted in certain costs being classified as Cost of Sales rather
than Selling, General, and Administrative expenses in the current
period reflected herein. The Company also adopted ASU 2017-07, Compensation:
Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost
on January 1, 2018 and
applied this standard retrospectively to the prior period
reflected herein. This new standard requires the presentation of
non-service cost components of net periodic pension expense to be
shown separately outside the subtotal of operating income in the
income statement. For more information, see Note 2, New and
Recently Adopted Accounting Standards, of the Condensed Notes to
Unaudited Quarterly Consolidated Financial Statements in "Part I,
Item 1. Financial Statements" of our first quarter 2018 report on
Form 10-Q, which we plan to file on or about May 9, 2018.

(2) The three months ended March 31, 2018 include the following:
a. $0.3 million of charges consisting of closure costs related to
corrugated products facilities and a corporate administration
facility, which were recorded in "Other expense, net" and "Cost of
sales", as appropriate.
b. $8.8 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.
(3) The three months ended March 31, 2017 include the following:
a. $0.8 million of charges consisting of closure costs related to
corrugated products facilities, integration costs related to the
TimBar Corporation and Columbus Container Inc. acquisitions, and
costs related to a lump sum settlement payment of a multiemployer
pension plan withdrawal liability for one of our corrugated products
facilities.
b. $5.0 million of costs for the property damage and business
interruption insurance deductible corresponding to the February 2017
explosion at our DeRidder, Louisiana mill.
c. $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.
   
Packaging Corporation of America
Segment Information
Unaudited
(dollars in millions)
 
Three Months Ended
March 31,
2018 2017
Segment sales
Packaging $ 1,402.9 $ 1,257.0
Paper 269.4 259.2
Corporate and Other   18.3     20.3  
$ 1,690.6   $ 1,536.5  
 
Segment income (loss)
Packaging $ 224.7 $ 192.5
Paper 7.2 27.9
Corporate and Other   (19.0 )   (17.0 )
Income from operations   212.9     203.4  
Interest expense, net and other   (26.3 )   (24.3 )
Income before taxes $ 186.6   $ 179.1  
 
Segment income (loss) excluding special items (1)
Packaging $ 224.8 $ 196.7
Paper 16.0 27.9
Corporate and Other   (18.8 )   (17.7 )
$ 222.0   $ 206.9  
 
EBITDA excluding special items (1)
Packaging $ 307.9 $ 273.9
Paper 31.3 41.9
Corporate and Other   (17.4 )   (16.4 )
$ 321.8   $ 299.4  
 
(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
March 31,
2018 2017
Packaging
Segment income $ 224.7 $ 192.5
Facilities closure, integration-related, and other costs 0.1 0.8
DeRidder mill incident 5.0
Hexacomb working capital adjustment       (1.6 )
Segment income excluding special items (1) $ 224.8   $ 196.7  
 
Paper
Segment income $ 7.2 $ 27.9
Wallula mill restructuring   8.8      
Segment income excluding special items (1) $ 16.0   $ 27.9  
 
Corporate and Other
Segment loss $ (19.0 ) $ (17.0 )
Facilities closure, integration-related, and other costs 0.2
Hexacomb working capital adjustment       (0.7 )
Segment loss excluding special items (1) $ (18.8 ) $ (17.7 )
   
Income from operations $ 212.9   $ 203.4  
   
Income from operations, excluding special items (1) $ 222.0   $ 206.9  
 
(1) See footnote (1) on page 3, 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 March 31,
2018 2017
Income Income
before Income Diluted before Income Net Diluted
taxes Taxes Net Income EPS taxes Taxes Income EPS
As reported $ 186.6 $ (46.5 ) $ 140.1 $ 1.48 $ 179.1 $ (61.7 ) $ 117.4 $ 1.24
Special items (2):
Facilities closure, integration-related, and other costs 0.3 (0.1 ) 0.2 0.8 (0.3 ) 0.5 0.01
Wallula mill restructuring 8.8 (2.2 ) 6.6 0.07
DeRidder mill incident 5.0 (1.9 ) 3.1 0.03
Hexacomb working capital settlement             (2.3 )   0.9     (1.4 )   (0.01 )
Total special items   9.1   (2.3 )   6.8   0.07   3.5     (1.3 )   2.2     0.03  
Excluding special items $ 195.7 $ (48.8 ) $ 146.9 $ 1.55 $ 182.6   $ (63.0 ) $ 119.6   $ 1.27  
 
 
(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) Pre-tax 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 pre-tax 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, income taxes, and
depreciation, amortization, and depletion. The following table
reconciles net income to EBITDA and EBITDA excluding special items:
 
Three Months Ended
March 31,
2018 2017
Net income $ 140.1 $ 117.4
Interest expense, net and other 26.3 24.3
Provision for income taxes 46.5 61.7
Depreciation, amortization, and depletion   108.1   92.5  
EBITDA (1) $ 321.0 $ 295.9  
Special items:
Facilities closure, integration-related, and other costs 0.1 0.8
Wallula mill restructuring 0.7
DeRidder mill incident 5.0
Hexacomb working capital adjustment     (2.3 )
EBITDA excluding special items (1) $ 321.8 $ 299.4  
 
(1) See footnote (1) on page 3, 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
March 31,
2018 2017
Packaging
Segment income $ 224.7 $ 192.5
Depreciation, amortization, and depletion   83.1     77.2  
EBITDA (1)   307.8     269.7  
Facilities closure, integration-related, and other costs 0.1 0.8
DeRidder mill incident 5.0
Hexacomb working capital adjustment       (1.6 )
EBITDA excluding special items (1) $ 307.9   $ 273.9  
 
Paper
Segment income $ 7.2 $ 27.9
Depreciation, amortization, and depletion   23.4     14.0  
EBITDA (1)   30.6     41.9  
Wallula mill restructuring   0.7      
EBITDA excluding special items (1) $ 31.3   $ 41.9  
 
Corporate and Other
Segment loss $ (19.0 ) $ (17.0 )
Depreciation, amortization, and depletion   1.6     1.3  
EBITDA (1)   (17.4 )   (15.7 )
Hexacomb working capital adjustment (0.7 )
EBITDA excluding special items (1) $ (17.4 ) $ (16.4 )
   
EBITDA excluding special items (1) $ 321.8   $ 299.4  
 
(1) See footnote (1) on page 3, for a discussion of non-GAAP
financial measures.

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