Packaging Corporation of America (NYSE: PKG) — Q1 2022 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited results; dollar amounts are in millions unless noted.
Business context
PCA manufactures corrugated packaging, containerboard and communication papers, operating primarily in the United States. It reports Packaging, Paper, and Corporate and Other segments. Packaging remained the principal business and growth driver. The December 2021 Advance Packaging acquisition was included in Packaging results.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $2,136.4 | $1,807.2 | +18.2% |
| Gross profit / margin | $533.2 / 25.0% | $403.7 / 22.3% | Margin +2.7 pts |
| Operating income / margin | $356.5 / 16.7% | $238.3 / 13.2% | +49.6% |
| Net income | $254.2 | $166.5 | +52.7% |
| Diluted EPS | $2.70 | $1.75 | +$0.95 |
| Operating cash flow | $325.3 | $191.6 | +$133.7 |
| Capital expenditures | $213.2 | $85.1 | +$128.1 |
Cash flow from operations less capital expenditures was $112.1 million, compared with $106.5 million in Q1 2021. Dividends declared were $1.00 per share, unchanged year over year. PCA reported $628.6 million of cash and cash equivalents and $149.8 million of marketable debt securities at quarter-end. Long-term debt was $2,472.0 million on the balance sheet; the company also disclosed $2,491.1 million of fixed-rate senior notes outstanding. All outstanding debt had fixed interest rates.
Current assets were $2,869.4 million and current liabilities were $967.9 million. Unused revolving-credit capacity was $321 million, net of letters of credit. Cash, marketable securities and unused capacity together provided substantial reported liquidity.
Material changes versus prior year
- Packaging sales rose 21.0% to $1,964.5 million, reflecting $268 million from higher prices and mix and $73 million from higher volume. Packaging operating income increased to $362.2 million from $257.9 million.
- Corrugated shipments increased 2.9%; shipments per day rose 1.3%, and PCA reported a quarterly shipment record. Domestic containerboard prices were 20.2% higher and export prices 42.5% higher year over year.
- Paper sales declined 6.7% to $153.5 million as lower volume more than offset improved pricing and mix. Paper operating income rose to $22.4 million from $8.7 million.
- Higher prices and mix, Packaging volume, and lower interest expense supported earnings. Inflation in energy, fiber, chemicals, labor and materials, higher freight and converting costs, depreciation, outages, lower Paper volume, and a higher tax rate were offsets.
- Operating cash flow improved, while investing cash outflow increased with higher capital spending. Cash increased by $9.9 million during the quarter.
Outlook, risks and unusual items
- Management expected strong Packaging demand and higher prices in both Packaging and Paper in Q2 2022. Despite higher scheduled mill outage costs, lower Paper volume from the planned International Falls outage, and continued cost and freight inflation, management expected Q2 earnings, excluding special items, to exceed Q1 earnings. Recycled fiber prices were expected to be slightly lower than Q1.
- Management expected approximately $800 million of capital investment in 2022, including the Jackson mill conversion; estimated environmental capital expenditures were about $17 million. The company stated operating cash flow, cash on hand, revolving capacity and capital-market access should meet foreseeable liquidity needs.
- Special items were $2.1 million before tax in Q1 2022, mainly Jackson mill conversion, facility closure and Advance Packaging acquisition/integration costs. Reported diluted EPS was $2.70; excluding special items, it was $2.72. These are company-presented non-GAAP measures.
- Inflation, freight and logistics costs, fiber and energy price volatility, facility outages, demand and pricing conditions, COVID-19 effects, acquisition integration and regulatory changes were identified as risks. PCA said there were no material changes to the risk factors in its 2021 Form 10-K.
- Litigation continues following the 2017 DeRidder mill explosion, including pending cases and ongoing EPA/DOJ enforcement discussions. The company could not estimate a reasonable possible loss range. It said other ordinary-course legal actions were not reasonably expected to have a material adverse effect.
- PCA authorized an additional $1 billion share-repurchase program in January 2022 but made no repurchases under it during the quarter. It reported no material off-balance-sheet arrangements and no material guarantee or indemnification liabilities known at quarter-end.
Important facts for investors to verify
- Whether pricing gains and strong Packaging shipments continue to offset inflation, freight costs and scheduled outages.
- Execution, timing and returns of the approximately $800 million 2022 capital program and the Jackson conversion.
- Q2 performance against management’s expectation of earnings above Q1, excluding special items.
- Cash conversion and working-capital trends, particularly receivables, inventory and payables, alongside elevated capital spending.
- Developments and potential financial exposure from the DeRidder litigation and EPA/DOJ matter; the filing provides no clear loss estimate for these proceedings.
- Integration progress and final purchase-price allocation for Advance Packaging, which remained preliminary.