Packaging Corporation of America (PKG Quick QuotePKG - Free Report) reported relatively healthy second-quarter 2016 results with GAAP net income of $115.9 million or $1.23 per share compared with $114.0 million or $1.16 per share in the year-earlier quarter.

Shares did not show much movement following the release and was relatively flat at $73.81 at the close of trading on the following day.

Non-GAAP income for the reported quarter was a record high at $117.7 million or $1.25 per share compared with $115.6 million or $1.18 per share in the year-ago quarter, driven primarily by higher corrugated product volume. Adjusted earnings beat the Zacks Consensus Estimate by 7 cents.

Net sales for the quarter were $1,417.4 million, down from $1,454.3 million in the year-ago quarter and short of the Zacks Consensus Estimate of $1,429 million.

Segment Performance

Packaging: Sales from this segment decreased to $1,125.3 million from $1,142.2 million in the year-ago period. Segment EBITDA, excluding special items, was $266.7 million in the reported quarter compared with the prior-year figure of $267.4 million. Containerboard production was 926,000 tons, while containerboard inventory was flat year over year as well as sequentially. Corrugated products shipments were up 2.2% year over year.

Printing Papers: Sales from this segment were $266.8 million in the reported quarter versus $281.1 million in the year-earlier quarter. Segment EBITDA, excluding special items, for the second quarter increased to $38.7 million from $37.1 million a year ago. White paper sales volume was up slightly and pulp volume was lower than the second quarter of 2015. 

Balance Sheet

The company reported strong free cash flow in the quarter, with $180 million of cash generated from operating activities and free cash flow of $111 million.

During the quarter, the company paid dividends worth $52 million while it did not repurchase any shares during the quarter. At quarter end, the company had $214 million of cash on hand.

Acquisition

Subsequent to the end of the quarter, Packaging Corporation entered into a definitive agreement to acquire all of the assets of TimBar Corporation, a large independent corrugated products producer, in a cash-free, debt-free transaction worth $386 million in cash. This strategic acquisition shows that the company is focused on increasing its vertical integration of containerboard to above 90%.The company expects this acquisition to increase its containerboard integration by over 200,000 tons or 6% from its current level of 87%. The transaction will also allow for further optimization and enhancement of its mill capacity. The acquisition, expected to close in the third quarter, is likely to be accretive with immediate effect.

Moving Forward

Management expects to increase shipment of containerboard and corrugated products. Paper prices are expected to move higher reflecting continued realization of the announced price increases, while annual outage costs are expected to be lower. The company expects a lower mix of corrugated products and higher prices for recycled fiber, electricity and fuels. Considering these items, it expects third-quarter earnings of $1.30 per share.

Packaging Corporation carries a Zacks Rank #3 (Hold). Some better-ranked stocks worth a glance include Core-Mark Holding Company, Inc. , WageWorks, Inc. and Cinedigm Corp. . All three stocks carry a Zacks Rank #2 (Buy).

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