Packaging Corporation of America (NYSE: PKG) — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. PCA manufactures containerboard and corrugated packaging, as well as communication papers, and operates primarily in the United States. Figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $2,125.9 | $2,000.1 | $6,499.6 | $5,687.1 |
| Gross profit | $518.4 | $510.7 | $1,640.3 | $1,363.1 |
| Income from operations | $360.3 | $352.8 | $1,132.7 | $885.7 |
| Net income | $262.5 | $250.7 | $818.2 | $624.6 |
| Diluted EPS | $2.80 | $2.63 | $8.70 | $6.55 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,074.9 | $703.4 |
- Q3 gross margin was approximately 24.4% versus 25.5% a year earlier; operating margin was approximately 17.0% versus 17.6%. For 9M, gross margin improved to approximately 25.2% from 24.0%, and operating margin to approximately 17.4% from 15.6%.
- Q3 Packaging revenue rose 6.1% to $1,940.2 million, while segment operating income fell to $359.2 million from $365.2 million. Paper revenue rose 10.0% to $165.3 million, and segment operating income increased to $26.1 million from $11.0 million.
- For 9M, Packaging revenue rose 15.5% to $5,971.6 million and segment operating income increased to $1,141.3 million from $940.3 million. Paper revenue rose 2.5% to $468.6 million and segment operating income increased to $71.2 million from $22.3 million.
- 9M capital expenditures were $577.1 million; operating cash flow less capital expenditures was approximately $497.8 million. Cash and cash equivalents were $648.7 million. Marketable debt securities totaled $144.8 million, and unused revolving-credit capacity was $321 million, net of letters of credit.
- Long-term debt on the balance sheet was $2,473.1 million; the filing reports $2,491.4 million of fixed-rate senior notes outstanding. All outstanding debt had fixed interest rates. Stockholders’ equity was $3,971.2 million.
- 9M dividends paid were $304.4 million; PCA also repurchased and retired 1.0 million shares for $142.0 million. The quarterly dividend was increased to $1.25 per share, and $858 million remained under the authorized repurchase amount.
Changes and management commentary
Q3 sales increased 6.3% and net income increased 4.7% year over year. Higher prices and mix supported results, but Q3 Packaging operating income declined as higher operating and converting costs, lower volumes, freight, outages and depreciation offset pricing gains. Management attributed weaker volumes to lower demand and customers working through elevated inventories amid deteriorating economic conditions. For the first nine months, higher prices and mix drove stronger sales and profit, partly offset by inflation and lower volumes.
Management expected Q4 diluted EPS to be lower than Q3. It anticipated continued lower Packaging demand, lower box shipments due partly to four fewer shipping days, lower containerboard production, a less favorable product mix, lower average export containerboard prices, and higher outage, labor, benefit and energy costs. Paper volume was expected to decline seasonally; a Paper price increase implemented in September was expected to continue taking effect.
Management forecast approximately $820 million of 2022 capital investments, including the Jackson mill conversion, and approximately $17 million of environmental-compliance capital expenditures. It stated that cash from operations, cash on hand, revolver availability and capital-market access should meet foreseeable liquidity needs, including declared dividends.
Risks, contingencies and unusual items
- Demand and pricing face economic uncertainty, high inflation and interest rates, supply-chain disruption, customer inventory adjustments, and industry shipment declines. PCA also identifies exposure to fiber and energy costs, facility outages, competition and environmental or tax regulation.
- The Jackson, Alabama No. 3 machine conversion from uncoated freesheet paper to containerboard continued; related charges were $3.9 million in Q3 and $9.4 million for 9M 2022. PCA also reported asset-disposal charges, facility-related items, insurance proceeds and other special items; reported 9M diluted EPS excluding special items was $8.78 versus GAAP EPS of $8.70.
- Litigation remains pending from the 2017 DeRidder mill explosion, which caused three contractor fatalities and other injuries. PCA is defending the claims, believes they are covered by insurance subject to a deductible already satisfied, and cannot estimate a reasonable possible loss range. A separate EPA/DOJ settlement would require a $2.5 million civil penalty, subject to a pending notice-and-comment period; PCA did not admit liability.
- Office Depot represented approximately 50% of Paper segment sales and 4% of total company sales for 9M 2022, creating customer concentration within Paper. PCA reported no material liabilities known from its guarantees and indemnifications and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether pricing and product mix can continue to offset cost inflation as Packaging volumes and customer orders weaken.
- Q4 execution against management’s lower-EPS outlook, including the effects of fewer shipping days, scheduled outages and Jackson conversion work.
- Capital spending and project timing versus the approximately $820 million 2022 forecast, and the resulting effect on cash generation.
- Liquidity and capital returns alongside the $2.47 billion reported long-term debt balance, including dividend and share-repurchase levels.
- Progress and potential financial exposure from the DeRidder litigation and the pending environmental settlement process.