Market Overview

Packaging Corporation of America Reports Second Quarter 2018 Results

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Packaging Corporation of America (NYSE:PKG) today reported second
quarter 2018 net income of $187 million, or $1.97 per share and net
income of $197 million, or $2.08 per share, excluding special items.
Second quarter net sales were $1.8 billion in 2018 and $1.6 billion in
2017.

 
Diluted earnings per share attributable to Packaging
Corporation of America shareholders
 
Three Months Ended
June 30
2018   2017   Change
Reported Diluted EPS $ 1.97 $ 1.52 $ 0.45
Special Items Expense (1) 0.11   --   0.11
Diluted EPS excluding Special items $ 2.08   $ 1.52   $ 0.56
 
(1) For descriptions and amounts of our special items,
see the schedules with this release.
 

Reported earnings include $.11 per share of special items expense in the
second quarter of 2018, primarily for certain costs related to
discontinuing paper operations associated with the previously announced
conversion of the No. 3 paper machine at our Wallula, Washington mill to
linerboard, and no special items expense in the second quarter of 2017.
Excluding special items, the $.56 per share increase in second quarter
2018 earnings compared to second quarter 2017 was driven primarily by
higher prices and mix $.47 and volumes $.26 in our Packaging segment,
higher prices and mix in our Paper segment $.05, lower wood and recycled
fiber costs $.07, and a favorable tax rate $.16 primarily resulting from
Tax Reform changes. These items were partially offset by higher
operating costs ($.24), higher freight expense ($.09), Wallula No. 3
paper machine conversion-related costs ($.04), higher converting costs
($.02), higher annual outage expenses ($.01), higher depreciation
($.02), and other costs ($.03).

Results were $.12 above second quarter guidance of $1.96 per share
primarily due to higher prices and mix and higher volumes in our
Packaging and Paper segments and lower mill operating costs.

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

       
(dollars in millions)
Three Months Ended
June 30
2018   2017
Segment income (loss)
Packaging $ 273.2 $ 226.2
Paper 16.2 27.2
Corporate and Other   (19.8 )   (19.3 )
$ 269.6   $ 234.1  
 
Segment income (loss) excluding special items
Packaging $ 278.6 $ 226.7
Paper 24.4 27.2
Corporate and Other   (19.6 )   (19.3 )
$ 283.4   $ 234.6  
 
EBITDA excluding special items
Packaging $ 362.8 $ 305.0
Paper 37.7 41.2
Corporate and Other   (18.2 )   (17.9 )
$ 382.3   $ 328.3  
 

In the Packaging segment, total corrugated products shipments with one
additional workday were up 8.3% and shipments per day were up 6.6% over
last year's second quarter. Containerboard production was 1,019,000
tons, and containerboard inventory was up 8,000 tons from the first
quarter of 2018 and up 54,000 tons compared to the second quarter of
2017, partially due to the addition of recently acquired Sacramento
Container. In the Paper segment, compared to the second quarter of 2017,
office paper and printing and converting paper sales volumes were flat
and inventories were lower by 33,000 tons.

Commenting on reported results, Mark W. Kowlzan, Chairman and CEO, said,
"Packaging segment demand remained strong with all-time record sales
volumes in both our containerboard mills and corrugated products plants.
Our price increases in the Packaging segment were realized sooner than
last year's second quarter due to the index changing a month earlier
this year as well as an accelerated implementation. Additionally, our
price increases in the Paper segment were also realized more quickly
than anticipated. The benefits of these strong market conditions helped
us offset higher inflation in many of our operating and converting costs
and higher freight expenses. The scheduled maintenance outages at two of
our containerboard mills went very well, and the first phase of our
linerboard conversion work on the No. 3 paper machine at our Wallula
Mill was executed extremely well both from a ramp-up curve perspective
as well as an operating cost perspective."

"Looking ahead as we move from the second and into the third quarter,"
Mr. Kowlzan added, "we anticipate continued strong demand in our
Packaging segment, however corrugated products shipments will have one
less shipping day during the quarter. Although the majority of our
previously announced price increases were recognized in the second
quarter, we expect to implement most of the remaining portion during the
third quarter. In the Paper segment, we expect to complete the
implementation of our previously announced paper price increase,
although volumes should be lower than normal during this seasonally
stronger period as we manage our already tight inventory levels around
the scheduled outage at our Jackson Mill. Finally, we should have lower
operating costs related to the No. 3 machine at our Wallula Mill as the
first phase of the conversion is now behind us. We expect continued
inflation in most of our operating costs, including slightly higher
recycled fiber prices and incremental wage pressure with a tighter labor
market. In addition, we anticipate higher freight and logistics
expenses, higher scheduled maintenance outage costs, as well as a
slightly higher tax rate. Considering these items, we expect third
quarter earnings of $2.14 per share."

We present various non-GAAP financial measures in this press release,
including net income and 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 third
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 third quarter events.

PCA is the third 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 2nd Quarter 2018 Earnings
Conference Call
 

WHEN:

Thursday, July 26, 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:

July 26, 2018 12:00 p.m. Eastern Time through August 9, 2018 11:59
p.m. Eastern Time
 

REBROADCAST NUMBERS:

(855) 859-2056 (U.S. and Canada) or (404) 537-3406 (International)
Passcode: 7285476
 
 
Packaging Corporation of America
Consolidated Earnings Results
Unaudited
(dollars in millions, except per-share data)
     
Three Months Ended Six Months Ended
June 30, June 30,

2018 (1)

2017 (1) 2018 (1) 2017 (1)
Net sales $ 1,767.5 $ 1,584.0 $ 3,458.1 $ 3,120.5
Cost of sales   (1,346.9 )

(2)

  (1,219.7 )   (2,681.4 )

(2)

$ (2,418.0 )
Gross profit 420.6 364.3 776.7 702.5
Selling, general, and administrative expenses (137.7 ) (129.6 ) (272.6 ) (257.4 )
Other expense, net   (13.3 )

(2)

  (0.6 )

(3)

  (21.6 )

(2)

  (7.6 )

(4)

Income from operations 269.6 234.1 482.5 437.5
Interest expense, net and other   (24.3 )   (25.5 )   (50.7 )   (49.8 )
Income before taxes 245.3 208.6 431.8 387.7
Provision for income taxes   (58.7 )   (65.4 )   (105.1 )   (127.1 )
Net income $ 186.6   $ 143.2   $ 326.7   $ 260.6  
Earnings per share:
Basic $ 1.98   $ 1.52   $ 3.46   $ 2.76  
Diluted $ 1.97   $ 1.52   $ 3.46   $ 2.76  
 
 
Computation of diluted earnings per share under the two class method:
Net income $ 186.6 $ 143.2 $ 326.7 $ 260.6
Less: Distributed and undistributed income available to
participating securities
  (1.4 )   (1.2 )   (2.5 )   (2.3 )
Net income attributable to PCA shareholders $ 185.2   $ 142.0   $ 324.2   $ 258.3  
Diluted weighted average shares outstanding   93.8     93.6     93.8     93.6  
Diluted earnings per share $ 1.97   $ 1.52   $ 3.46   $ 2.76  
 
 
Supplemental financial information:
Capital spending $ 165.9 $ 81.6 $ 273.9 $ 139.3
Cash balance $ 199.6 $ 321.0 $ 199.6 $ 321.0
 

(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 second quarter 2018 report on
Form 10-Q, which we plan to file on or about August 8, 2018.

 
(2) The three and six months ended June 30, 2018 include the following:
a. $0.2 million and $0.5 million, respectively, 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. $13.6 million and $22.4 million, respectively, 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 June 30, 2017 include $0.5 million of charges
consisting of closure costs related to corrugated products
facilities and integration costs related to the TimBar Corporation
and Columbus Container Inc. acquisitions.
 
(4) The six months ended June 30, 2017 include the following:
a. $1.3 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   Six Months Ended
June 30,   June 30,
2018 2017   2018 2017
Segment sales
Packaging $ 1,496.2 $ 1,311.5 $

2,899.1

$ 2,568.4
Paper 250.8 253.7 520.2 512.9
Corporate and Other   20.5     18.8       38.8     39.2  
$ 1,767.5   $ 1,584.0     $ 3,458.1   $ 3,120.5  
 
Segment income (loss)
Packaging $ 273.2 $ 226.2 $ 497.9 $ 418.6
Paper 16.2 27.2 23.5 55.1
Corporate and Other   (19.8 )   (19.3 )     (38.9 )   (36.2 )
Income from operations   269.6     234.1       482.5     437.5  
Interest expense, net and other   (24.3 )   (25.5 )     (50.7 )   (49.8 )
Income before taxes $ 245.3   $ 208.6     $ 431.8   $ 387.7  
 
Segment income (loss) excluding special items (1)
Packaging $ 278.6 $ 226.7 $ 503.4 $ 423.3
Paper 24.4 27.2 40.5 55.1
Corporate and Other   (19.6 )   (19.3 )     (38.5 )   (36.9 )
$ 283.4   $ 234.6     $ 505.4   $ 441.5  
 
EBITDA excluding special items (1)
Packaging $ 362.8 $ 305.0 $ 670.8 $ 578.8
Paper 37.7 41.2 69.0 83.1
Corporate and Other   (18.2 )   (17.9 )     (35.7 )   (34.2 )
$ 382.3   $ 328.3     $ 704.1   $ 627.7  
 
(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 Six Months Ended
June 30, June 30,
2018 2017   2018   2017
Packaging
Segment income $ 273.2 $ 226.2 $ 497.9 $ 418.6
Wallula mill restructuring 5.4 $ $ 5.4 $
Facilities closure, integration-related, and other costs 0.5 0.1 1.3
DeRidder mill incident 5.0
Hexacomb working capital adjustment               (1.6 )
Segment income excluding special items (1) $ 278.6   $ 226.7   $ 503.4   $ 423.3  
 
Paper
Segment income $ 16.2 $ 27.2 $ 23.5 $ 55.1
Wallula mill restructuring   8.2         17.0      
Segment income excluding special items (1) $ 24.4   $ 27.2   $ 40.5   $ 55.1  
 
Corporate and Other
Segment loss $ (19.8 ) $ (19.3 ) $ (38.9 ) $ (36.2 )
Facilities closure, integration-related, and other costs 0.2 0.4
Hexacomb working capital adjustment               (0.7 )
Segment loss excluding special items (1) $ (19.6 ) $ (19.3 ) $ (38.5 ) $ (36.9 )
 
Income from operations $ 269.6   $ 234.1   $ 482.5   $ 437.5  
 
Income from operations, excluding special items (1) $ 283.4   $ 234.6   $ 505.4   $ 441.5  
 
(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 June 30,
2018 2017
Income before taxes Income Taxes Net Income Diluted EPS Income before taxes Income Taxes Net Income Diluted EPS
As reported $ 245.3 $ (58.7 ) $ 186.6 $ 1.97 $ 208.6 $ (65.4 ) $ 143.2 $ 1.52
Special items (2):
Wallula mill restructuring 13.6 (3.4 ) 10.2 0.11
Facilities closure, integration-related, and other costs   0.2       0.2     0.5     (0.1 )   0.4      
Total special items   13.8   (3.4 )   10.4   0.11   0.5     (0.1 )   0.4      
Excluding special items $ 259.1 $ (62.1 ) $ 197.0 $ 2.08 $ 209.1   $ (65.5 ) $ 143.6   $ 1.52  
 
Six Months Ended June 30,
2018 2017
Income before taxes Income Taxes Net Income Diluted EPS   Income before taxes Income Taxes Net Income Diluted EPS
As reported $ 431.8 $ (105.1 ) $ 326.7 $ 3.46 $ 387.7 $ (127.1 ) $ 260.6 $ 2.76
Special items (2):
Wallula mill restructuring 22.4 (5.6 ) 16.8 0.18
Facilities closure, integration-related, and other costs 0.5 (0.1 ) 0.4 1.3 (0.4 ) 0.9 0.01
DeRidder mill incident 5.0 (1.7 ) 3.3 0.03
Hexacomb working capital settlement             (2.3 )   0.8     (1.5 )   (0.01 )
Total special items   22.9   (5.7 )   17.2   0.18   4.0     (1.3 )   2.7     0.03  
Excluding special items $ 454.7 $ (110.8 ) $ 343.9 $ 3.64 $ 391.7   $ (128.4 ) $ 263.3   $ 2.79  
 
 
(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 Six Months Ended
June 30, June 30,
2018 2017 2018 2017
Net income $ 186.6 $ 143.2 $ 326.7 $ 260.6
Interest expense, net and other 24.3 25.5 50.7 49.8
Provision for income taxes 58.7 65.4 105.1 127.1
Depreciation, amortization, and depletion   104.1   93.7   212.2   186.2  
EBITDA (1) $ 373.7 $ 327.8 $ 694.7 $ 623.7  
Special items:
Wallula mill restructuring 8.6 9.3
Facilities closure, integration-related, and other costs 0.5 0.1 1.3
DeRidder mill incident 5.0
Hexacomb working capital adjustment         (2.3 )
EBITDA excluding special items (1) $ 382.3 $ 328.3 $ 704.1 $ 627.7  
 
(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 Six Months Ended
June 30, June 30,
2018 2017 2018 2017
Packaging
Segment income $ 273.2 $ 226.2 $ 497.9 $ 418.6
Depreciation, amortization, and depletion   84.5     78.3     167.7     155.5  
EBITDA (1)   357.7     304.5     665.6     574.1  
Wallula mill restructuring 5.1 5.1
Facilities closure, integration-related, and other costs 0.5 0.1 1.3
Expiration of timberland repurchase option
DeRidder mill incident 5.0
Hexacomb working capital adjustment               (1.6 )
EBITDA excluding special items (1) $ 362.8   $ 305.0   $ 670.8   $ 578.8  
 
Paper
Segment income $ 16.2 $ 27.2 $ 23.5 $ 55.1
Depreciation, amortization, and depletion   18.0     14.0     41.3     28.0  
EBITDA (1)   34.2     41.2     64.8     83.1  
Wallula mill restructuring   3.5         4.2      
EBITDA excluding special items (1) $ 37.7   $ 41.2   $ 69.0   $ 83.1  
 
Corporate and Other
Segment loss $ (19.8 ) $ (19.3 ) $ (38.9 ) $ (36.2 )
Depreciation, amortization, and depletion   1.6     1.4     3.2     2.7  
EBITDA (1)   (18.2 )   (17.9 )   (35.7 )  

(33.5

)

Hexacomb working capital adjustment               (0.7 )
EBITDA excluding special items (1) $ (18.2 ) $ (17.9 ) $ (35.7 ) $ (34.2 )
 
EBITDA excluding special items (1) $ 382.3   $ 328.3   $ 704.1   $ 627.7  
 
(1) See footnote (1) on page 3, for a discussion of non-GAAP
financial measures.

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