01—Abstract
Summary
Summary of the 10-K filed February 28, 2014. Cited figures are marked; the original filing is the authoritative source.
Packaging Corporation of America (PCA), headquartered in Lake Forest, Illinois, reported 2013 net sales of $3,665.3 milliona, up 28.9% from $2,843.9 million in 2012, and net income of $436.3 million, or $4.47 per diluted share, compared with $163.8 million, or $1.68 per share, in 2012.
Results were driven by the October 25, 2013 acquisition of Boise Inc. for $2.1 billionb, including assumed debt, which added a Paper segment and roughly two months and five days of results. Excluding special items, net income was $320.2 million, or $3.28 per diluted share. Special items in 2013 included a $166.0 million income tax benefit from the reversal of alternative energy tax credit reserves, partly offset by acquisition, integration, inventory step-up and pension curtailment costs.
The company now reports three segments: Packaging, Paper and Corporate and Other. Packaging net sales were $3,431.7 millionc, and segment income from operations was $545.9 million. Total debt rose to $2,572.7 million at December 31, 2013, from $819.5 million at year-end 2012, after $2.35 billion of new borrowings used to fund the acquisition.
Cash from operating activities was $608.2 milliond, and capital expenditures for 2014 are expected to be between $380.0 million and $400.0 million. Management also expects first-quarter 2014 earnings, excluding special items, to be comparable to fourth-quarter 2013 results. Key risks highlighted in the filing include customer concentration, since Office Depot (including OfficeMax) accounted for 38% of Paper segment sales from the acquisition date through year-end, higher leverage, pending Boiler MACT compliance spending of $38 million to $42 million over three years, and an open Sherman Act class action relating to containerboard pricing.
02—Key points
Key Highlights
- Net sales rose 28.9% to a record $3,665.3 million in 2013, aided by $439.1 million of Boise sales for the partial period and higher pricing and volumes.
- Net income was $436.3 million, or $4.47 per diluted share, including $87.4 million of net special-item income; excluding special items, EPS was $3.28 versus $2.06 in 2012.
- The $2.1 billion Boise acquisition on October 25, 2013 added the third-largest white paper capacity in North America and expanded containerboard capacity to about 3.4 million tons.
- Total debt increased to $2,572.7 million at December 31, 2013, from $819.5 million a year earlier, after $2.35 billion of new borrowings.
- Operating cash flow was $608.2 million in 2013, compared with $404.2 million in 2012.
- Quarterly dividends increased to $0.40 per share in 2013, and $98.1 million remained available under the $150.0 million repurchase authorization at year-end.
- Office Depot (including OfficeMax) represented 38% of Paper segment sales for the post-acquisition period, and the company's Paper segment supply agreement runs through December 2017.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Packaging Corp. of America kept $0.12.
- Revenue$3.67B100.0%
- Cost of revenue−$2.80B76.3%
- Gross profit$867.5M23.7%
- Operating costs−$385.6M10.5%
- Operating income$481.9M13.1%
- Interest, other & tax−$40.6M1.1%
- Net income$441.3M12.0%
Where FY2013 revenue went
$3.67B- Cost of revenue: $2.80B, 76% of revenue
- Net income: $441.3M, 12% of revenue
- R&D: $11.5M, 0.3% of revenue
- SG&A: $326.6M, 8.9% of revenue
- Other operating costs: $47.5M, 1.3% of revenue
- Interest, other & tax: $40.6M, 1.1% of revenue
Kept 12% as net incomeNet income $441.3M · 12%R&D $11.5M · 0.3%Other operating costs $47.5M · 1.3%Interest, other & tax $40.6M · 1.1%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 28, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $3.67B$2.84B | +28.9% |
| Cost of Revenue | $2.80B$2.21B | +26.6% |
| Gross Profit | $867.50M$634.70M | +36.7% |
| R&D Expenses | $11.50M$11.30M | +1.8% |
| SG&A Expenses | $326.60M$280.80M | +16.3% |
| Operating Income | $481.90M$437.60M | +10.1% |
| Net Income | $441.30M$160.20M | +175.5% |
| EPS (Basic) | $4.57$1.66 | +175.3% |
| EPS (Diluted) | $4.52$1.64 | +175.6% |
| Shares Outstanding (Basic) | 96.60M96.40M | +0.2% |
| Shares Outstanding (Diluted) | 97.50M97.50M | 0.0% |
05—Questions
Frequently Asked Questions
What drove the large increase in 2013 net income?
Net income rose to $436.3 million from $163.8 million, mainly because of a $166.0 million income tax benefit from reversing alternative energy tax credit reserves. Excluding special items, net income was $320.2 million, up from $200.8 million, reflecting higher sales prices and mix, higher volumes, and two months and five days of Boise operations.
How was the Boise Inc. acquisition financed?
PCA paid $12.55 per share, or $1.2 billion net of $121.7 million of cash acquired, and assumed Boise's debt with a fair value of $829.8 million. The company entered into $2.35 billion of new borrowings, including a $1.65 billion senior unsecured credit agreement with a $350.0 million undrawn revolver and $700.0 million of 4.50% ten-year notes, and used cash on hand.
What are the main risks to the Paper segment?
The filing says OfficeMax, now part of Office Depot after a November 2013 merger, is the Paper segment's largest customer and accounted for 38% of Paper segment sales for October 25 through December 31, 2013. PCA has an agreement to supply at least 80% of OfficeMax's commodity office paper requirements through December 2017, but the agreement could terminate earlier, and the company cannot predict how the merger will affect demand or pricing.
What capital spending is expected in 2014?
PCA expects 2014 capital investments of $380.0 million to $400.0 million, excluding acquisitions. This includes synergy capital, Boiler MACT spending of up to $31 million, and the DeRidder conversion project. The company also expects about $4 million of other environmental capital expenditures in 2014.
Is there any significant pending litigation?
Yes. PCA and eight other containerboard producers are defendants in a consolidated class action, Kleen Products LLC v Packaging Corp. of America et al., alleging Sherman Act violations and seeking treble damages for alleged price-inflating supply limits from August 2005 to October 2010. PCA believes the allegations are without merit, and the amount of reasonably possible losses cannot be estimated at this time.
06—Continue