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Packaging Corporation of America (PKG)Stock (Consumer Products Industry, Packaging & Containers Industry)
 The cost of fiber increased in 2007, with the price of recycled fiber increasing by 56%.[3] However, PCA's mills are able to use several types of fiber with little to no modification, and can easily switch between energy sources such as electricity, natural gas, oil, and coal. PCA's flexibility gives them an advantage over other corrugated products producers, many of whom are tied to certain raw materials by the machinery they use.[4][5] Since the uses of containerboard is very broad, demand for PCA's products is influenced by general consumer spending, which has been stagnant.[6] U.S. Environmental Legislation such as the Clean Air Act resulted in $19.4 million in costs in 2007.[7] The company competes with other producers of containerboard and corrugated packaging such as Weyerhaeuser Company (WY), Smurfit-Stone Container (SSCC) and Temple-Inland (TIN).
[edit] Business SegmentPCA manufactures containerboard and corrugated cardboard, which include shipping boxes, corrugated palettes, retail and produce packaging. [15] The company's gross margins have increased from 15% to 23% in the last three years.[16] PCA's mills use machinery designed to produce corrugated products out of hardwood fiber, softwood fiber, recycled fiber or almost any combination of the three with little to no modification.[17] Likewise, the company uses equipment that can switch between energy sources such as electricity, natural gas, oil and coal to produce steam to power its production lines.[18] Because PCA can switch between raw materials with little cost or labor, they are able to purchase the mix of raw materials that results in the lowest possible manufacturing costs.[19] PCA's flexibility gives them an advantage over other corrugated products producers, many of whom are tied to certain raw materials by the machinery they use.[20] PCA manufactured 2.45 million tons of containerboard and shipped 31.2 billion square feet of corrugated products in 2007.[21] PCA sells most of its corrugated products within 150 miles of the mill they were produced at because of the high cost of shipping bulky corrugated cardboard orders.[22] Two-thirds of the company's 9,600 customers are local and regional businesses while the rest are large national firms.[23] Nearly all of PCA's customers are located within the United States.[24] [edit] Business FinancialsPackaging Corporation of America Total Revenues, Operating Income and Net Income[25]
PCA's revenues, operating income and net income increased between 2006 and 2007 due primarily to increases in the price of PCA's products.[26] Between 2005 and 2006, revenues, operating income and net income increased due to higher prices and increased volume of all of PCA's products.[27] [edit] Key Trends and Forces[edit] Decreased consumer spending results in decreased volume growth for PCAWhen spending on all goods decreases, there is less demand for packaging used to deliver goods safely resulting in lower revenues for PCA. On the other hand, when spending on all goods increases, so does demand for packaging and PCA's revenues. According to an USA today poll of economists in the U.S., Q1 and Q2 2008 consumer spending growth is expected to drop to almost 0%. [28] Partially as a result of the decrease in consumer spending, the total volume of corrugated products sold by PCA increased only 0.3% in 2007.[29] Likewise, PCA's revenues grew only 6% between 2006 and 2007 compared to 10% between 2005 and 2006.[30] [edit] Environmental regulations force PCA to spend an extra $19.4 million in 2007When the U.S. government passes new laws restricting PCA's output of pollutants, PCA is forced to pay for new equipment and processes that lower their pollution output. Of all the laws affecting PCA, the Resource Conservation and Recovery Act, Clean Water Act, Clean Air Act, The Emergency Planning and Community Right-to-Know-Act, Toxic Substance Control Act and the Safe Drinking Water Act are the six most important from a cost standpoint.[31] In order to maintain compliance with these and other laws, PCA spent $19.4 million in 2007.[32] [edit] PCA's flexibility in input materials is an advantage with higher raw materials pricesWhen the price of raw materials increases, PCA can either raise prices and risk lost sales or watch their margins shrink. Between 2006 and 2007 the price per ton of the recycled fiber used by PCA increased 56%.[33] However, PCA's flexibility of production that allows it to vary the mix of fibers is an advantage when raw material prices increase.[34] For example, between Q1 2007 and Q1 2008 the price of recycled cardboard fiber increased 24% from $106 a ton to $131 a ton. PCA responded to this by using recycled fiber for only 16% of its total fiber usage. As a result, fiber costs increased by only $0.02 per share between Q1 2007 and Q1 2008.[35] [edit] Rising diesel costs decrease PCA's earnings per shareWhen the price of diesel fuel rises, it costs PCA more to transport its products from its factories to its customers. According to the U.S. Energy Information Administration average diesel prices increased 57% between Q2 2007 and Q2 2008.[36] The increase in diesel costs increased the cost of transporting raw materials to PCA's factories as well as transporting finished products to PCA's customers.[37] Higher transportation costs led to a $0.06 (14%) decrease in PCA's earnings per share between Q2 2007 and Q2 2008.[38] [edit] Key Competitors
Packaging Corporation of America and Key Competitors 2007 ($ in millions)
 Packaging Corporation of America2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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