Packaging Corporation of America — Q1 2023 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. PCA manufactures containerboard and corrugated packaging, communication papers, and related products, primarily in the United States.
Financial performance
Unless otherwise noted, amounts are in millions of dollars.
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $1,976.3 | $2,136.4 | Down 7.5% |
| Gross profit / margin | $431.4 / 21.8% | $533.2 / 25.0% | Down $101.8 |
| Operating income / margin | $270.7 / 13.7% | $356.5 / 16.7% | Down 24.1% |
| Net income | $190.1 | $254.2 | Down 25.2% |
| Diluted EPS | $2.11 | $2.70 | Down 21.9% |
| Operating cash flow | $280.4 | $325.3 | Down $44.9 |
| Capital expenditures | $112.4 | $213.2 | Down $100.8 |
Cash flow from operations less capital expenditures was approximately $168 million, versus $112 million in Q1 2022. This simple measure does not include other investing activity. Reported EBITDA was $400.3 million, compared with $466.2 million; EBITDA excluding special items was $404.9 million versus $467.2 million. Management reported net income excluding special items of $198.3 million, or $2.20 per diluted share, compared with $255.7 million, or $2.72 per diluted share.
Segments. Packaging sales fell 7.9% to $1,808.6 million and segment operating income declined to $268.0 million from $362.2 million. Lower volumes outweighed higher prices and mix. Paper sales declined 1.7% to $150.9 million, while segment operating income rose to $34.1 million from $22.4 million, supported by prices and mix and lower freight costs.
Balance sheet, liquidity and capital allocation
At March 31, 2023, cash and cash equivalents were $367.7 million and marketable debt securities totaled $152.5 million. PCA reported $321 million of unused revolving-credit capacity, net of letters of credit, and stated that available liquidity was adequate for foreseeable needs. Current assets were $2,585.4 million and current liabilities $828.9 million.
Long-term debt on the balance sheet was $2,474.1 million; the company reported $2,491.6 million of fixed-rate senior notes outstanding. All outstanding debt was fixed-rate. Cash and cash equivalents increased $47.7 million during the quarter. Dividends paid were $112.1 million; the quarterly dividend declared was $1.25 per share, up from $1.00 a year earlier. The company made no repurchases under its public authorization; $477.5 million remained available.
Material changes, outlook and risks
- Management attributed weaker earnings primarily to lower Packaging and Paper volumes and higher operating, depreciation, freight, logistics and converting costs. Higher prices and mix, lower scheduled maintenance expense, lower interest expense and a lower tax rate partly offset these pressures.
- Management said economic weakness continued into Q1, with higher interest rates, persistent inflation and consumer spending shifting toward services weighing on demand. Industry corrugated shipments were down 8.5%, containerboard production down 10.0%, and PCA corrugated shipments down 12.7% year over year.
- For Q2, PCA expected Packaging volume to improve despite one fewer shipping day, but expected lower prices from previously announced containerboard price decreases and lower export prices. Paper volume, price and mix were expected to be slightly lower. Higher converting costs, scheduled outage expense, depreciation and rail freight costs were expected; management anticipated Q2 earnings below Q1.
- PCA expected 2023 capital investments of approximately $475 million, including an estimated $20 million for environmental compliance.
- Special items included $9.7 million of facility and design-center closure costs and $1.2 million of Jackson mill conversion-related costs. The Jackson No. 3 machine conversion involves discontinuing certain uncoated freesheet grades and shifting production toward linerboard.
- ODP represented approximately 5% of total company sales and 64% of Paper segment sales in Q1 2023, creating customer concentration exposure.
- Litigation remains pending over the 2017 DeRidder mill incident. PCA said it could not estimate a reasonable possible loss range. The company also disclosed ordinary-course legal matters and stated it did not believe these would have a material adverse effect.
- Other risks identified include economic and industry conditions, product demand and pricing, fiber and energy costs, facility outages, and environmental or tax regulation. The filing reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
Investor verification priorities
- Confirm whether Packaging volumes, containerboard pricing and shipments stabilize, and whether Q2 earnings track management’s lower-than-Q1 outlook.
- Track the effect of cost inflation, rail rates, maintenance outages and depreciation on segment margins and cash generation.
- Compare the $475 million full-year capital spending outlook with actual spending and operating cash flow.
- Monitor ODP’s contribution to Paper sales and receivables, and the status and potential exposure from DeRidder-related litigation.
- Review reported GAAP results alongside management’s non-GAAP figures and the assumptions used to exclude special items.