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Packaging Corp. of America Annual Report, Year Ended Dec 31, 2017

Filing Date
Filed February 28, 2018
Period End
December 31, 2017
Security
PKG
In the record · 2016–202610-K1110-Q328-K91

PKG filed 11 annual reports (10-K), 32 quarterly reports (10-Q) and 91 current reports (8-K) between 2016 and 2026.

  1. Material agreement8-K · Sep ’16Sep ’16
  2. Impairment8-K · Jul ’20Jul ’20
  3. Leadership change8-K · Feb ’22Feb ’22
  4. Leadership change8-K · Mar ’26Mar ’26

01—Abstract

Summary

Summary of the 10-K filed February 28, 2018. Cited figures are marked; the original filing is the authoritative source.

Packaging Corporation of America (PCA) reported 2017 net sales of $6.44 billiona, up from $5.78 billion in 2016, and net income of $669 million, or $7.07 per diluted share, compared with $450 million, or $4.75 per share, in 2016.

Net income included $100 millionb of income from special items, including a $122 million estimated income tax benefit from the Tax Cuts and Jobs Act (H.R.1). Excluding special items, net income was $569 million, or $6.02 per diluted share, versus $462 million, or $4.88 per share, in 2016. The Packaging segment drove the results: its income from operations rose to $944 million from $711 million, on higher containerboard and corrugated products prices and mix and higher sales and production volumes.

The Paper segment's income from operations fell to $62 millionc from $138 million, reflecting lower volumes and prices and the Wallula mill restructuring. The company is restructuring its Paper business: it will stop uncoated freesheet production at its Wallula, Washington mill in the second quarter of 2018 and convert the No. 3 paper machine to a 400,000 ton-per-year virgin kraft linerboard machine, at a total capital cost of about $150 million. In October 2017 PCA acquired Sacramento Container Corporation for $265 million in cash.

Operating cash flow was $856.1 milliond, and capital expenditures were $343.0 million. Debt totaled $2.7 billion and is entirely fixed-rate after the December 2017 issuance of $1 billion in senior notes, which repaid the term loans. Office Depot accounted for 43% of Paper segment sales revenue and 7% of consolidated sales.

The company expects continued strong Packaging demand in the first quarter of 2018, with first-quarter earnings excluding special items expected to be slightly lower than the fourth quarter of 2017. Management anticipates higher freight, labor, energy, and other costs, and a lower tax rate going forward.

02—Key points

Key Highlights

  1. Net sales rose to $6.44 billion in 2017 from $5.78 billion in 2016; net income was $668.6 million, or $7.07 per diluted share.
  2. Excluding special items, net income was $569.1 million, or $6.02 per diluted share, compared with $462.0 million, or $4.88 per diluted share, in 2016.
  3. Packaging segment income from operations increased to $943.7 million from $711.1 million; Paper segment income from operations fell to $61.5 million from $138.1 million.
  4. The 2017 income tax provision included a $122.1 million one-time net benefit from the Tax Cuts and Jobs Act, and the effective tax rate was 19.3%, versus 34.7% in 2016.
  5. Acquired Sacramento Container Corporation on October 2, 2017 for $265 million in cash; the Wallula No. 3 paper machine will be converted to kraft linerboard at a cost of about $150 million.
  6. Issued $1 billion of senior notes in December 2017 and used the proceeds to repay all variable-rate term loans, leaving all long-term debt at fixed rates; total debt was $2.7 billion at year-end.
  7. Office Depot represented 43% of Paper segment sales and 7% of consolidated sales; the supply agreement runs through December 2018.

03—Questions

Frequently Asked Questions

  1. How did Packaging Corporation of America perform in 2017?

    Net sales were $6.44 billion, and net income was $668.6 million, or $7.07 per diluted share. Excluding special items, which include the Tax Act benefit, diluted EPS was $6.02, compared with $4.88 in 2016. The increase was driven mainly by higher containerboard and corrugated products prices and mix, and by higher sales and production volumes.

  2. What is driving the Paper segment's decline?

    Paper segment income from operations fell to $61.5 million from $138.1 million. The filing cites lower sales and production volumes, lower paper prices and mix, higher energy costs, and higher annual outage expenses. The Wallula mill's planned shift away from uncoated freesheet also brought $33.4 million of restructuring charges in 2017.

  3. What is the company doing with the Wallula mill?

    PCA will discontinue uncoated freesheet and certain coated one-side grades at Wallula, Washington in the second quarter of 2018. It will convert the No. 3 paper machine into a 400,000 ton-per-year virgin kraft linerboard machine, with a total capital cost of about $150 million. Once the conversion is done, the mill will produce only containerboard.

  4. How strong is the company's cash flow and balance sheet?

    Operating activities provided $856.1 million of cash in 2017, and capital expenditures were $343.0 million. Cash and equivalents were $216.9 million at year-end, with $326.9 million of undrawn revolver capacity after letters of credit. Total debt obligations were $2,650.7 million, all at fixed rates following the December 2017 notes offering.

  5. What are the key risks highlighted for investors?

    The filing identifies industry price cyclicality, competition, rising fiber, energy, and transportation costs, and the risk of material disruption at mills, illustrated by the February 2017 DeRidder explosion. It also cites customer concentration with Office Depot, labor relations, and the decline in demand for paper caused by electronic alternatives.

04—Continue

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