Business context and reporting period
Packaging Corporation of America (PCA) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. PCA manufactures corrugated packaging, containerboard and communication papers, and reports Packaging, Paper, and Corporate and Other segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $2,000.1 | $1,693.7 | $5,687.1 | $4,944.0 |
| Gross profit | $510.7 | $345.4 | $1,363.1 | $1,036.1 |
| Income from operations | $352.8 | $209.5 | $885.7 | $534.7 |
| Net income | $250.7 | $139.1 | $624.6 | $337.4 |
| Diluted EPS | $2.63 | $1.46 | $6.55 | $3.54 |
| Operating cash flow | Not separately presented for the quarter | $703.4 | $761.7 |
Calculated from reported figures, Q3 gross, operating and net margins were approximately 25.5%, 17.6% and 12.5%, respectively, versus 20.4%, 12.4% and 8.2% a year earlier. For the nine months, the corresponding margins were approximately 24.0%, 15.6% and 11.0%, versus 20.9%, 10.8% and 6.8%.
- Q3 adjusted net income, excluding special items, was $256.5 million, or $2.69 per diluted share, versus $149.2 million, or $1.57, in Q3 2020. Nine-month adjusted net income was $632.1 million, or $6.63 per diluted share, versus $423.5 million, or $4.45. These are non-GAAP measures.
- Cash and cash equivalents were $1,702.9 million at September 30, 2021; marketable debt securities totaled $146.1 million. PCA reported $326 million of unused revolver capacity, net of letters of credit.
- Gross debt was $3,190.4 million, comprising fixed-rate senior notes; the balance sheet classified $698.1 million as current. The new $350 million five-year revolving facility had no borrowings outstanding, and PCA was compliant with its financial covenants.
- Nine-month capital expenditures were $366.2 million. PCA expected 2021 capital investments of approximately $550 million, including Jackson mill conversion spending, and estimated environmental capital expenditures of about $20 million.
- Dividends paid during the first nine months totaled $284.8 million. A quarterly dividend of $1.00 per share was declared in August and paid October 15, 2021.
Material changes versus the prior comparable period
- Q3 sales increased 18.1% year over year; nine-month sales increased 15.0%. The improvement was concentrated in Packaging, where Q3 sales rose 21.9% and nine-month sales rose 18.1%, reflecting higher prices and mix and greater volume.
- Packaging operating income increased to $365.2 million in Q3 from $222.4 million, and to $940.3 million for the nine months from $619.9 million. Management cited higher prices, mix, sales and production volumes, partly offset by increased operating, converting, freight and outage costs.
- Paper sales declined 15.6% in Q3 and 11.9% for the nine months, chiefly because of lower volume associated with the Jackson mill’s conversion from uncoated freesheet paper toward containerboard. Nine-month Paper operating income improved to $22.3 million from a $21.7 million loss, but nine-month Paper EBITDA excluding special items declined to $45.5 million from $63.6 million.
- Operating cash flow decreased $58.3 million despite higher earnings. Management attributed the decline mainly to working-capital changes, including receivables and inventory growth, and higher tax payments.
- The prior-year comparison included a $55.2 million noncash Paper goodwill impairment, Hurricane Laura costs, COVID-19 incremental costs and facility-closure items. 2021 special items included Jackson conversion and facility-closure costs and debt-refinancing costs.
Outlook, management commentary and risks
- Management expected Q4 earnings to be lower than Q3. It anticipated continued price increases and higher average export containerboard prices, but lower Packaging volume due to three fewer shipping days and a DeRidder maintenance outage, and lower Paper volume with no uncoated grades expected from Jackson.
- Management expected higher energy costs, higher southern wood costs, continued inflation in other operating and converting costs, elevated freight and logistics expenses, and higher scheduled outage costs.
- PCA reported strong packaging demand and record Q3 box shipments and containerboard production, while noting cost inflation in labor, recycled fiber, energy, repairs, materials, supplies and transportation.
- On September 21, PCA issued $700 million of 3.05% senior notes due 2051 to refinance $700 million of 4.50% notes due 2023. The old notes were redeemed on October 8 for $769.8 million, including a $56.1 million premium and $13.7 million accrued interest; PCA used new-note proceeds and cash on hand.
- On October 22, PCA agreed to acquire substantially all assets of Advance Packaging for $189 million in cash, subject to customary closing conditions and expected to close in Q4 2021. PCA expected to fund the purchase with cash on hand.
- Pending litigation includes claims related to the 2017 DeRidder mill explosion, which caused three contractor fatalities and other injuries. PCA is defending the cases and cannot estimate a reasonable range of possible losses. EPA/DOJ enforcement discussions concerning the DeRidder facility were ongoing; no complaint had been filed as of the filing. PCA also disputes a Clean Air Act notice concerning its Wallula mill and stated it believes the matter will not materially adversely affect its financial condition, results or cash flows.
- Management identified economic conditions, COVID-19 effects, demand and pricing, fiber and energy costs, facility outages, and environmental or tax regulation among risks to forward-looking results. The filing reported no material change to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether price increases and strong Packaging demand can offset persistent input, converting and freight inflation—and the Q4 volume and outage headwinds.
- Whether working-capital demands, capital spending and dividends affect cash generation after the reported decline in nine-month operating cash flow.
- The completed refinancing’s full cash cost, including the redemption premium, and the effect of the new long-dated debt on interest expense.
- Closing, funding and integration of the Advance Packaging acquisition, and its subsequent contribution to results.
- Developments in the DeRidder litigation and EPA/DOJ discussions, and the Wallula environmental matter; the filing does not quantify potential DeRidder losses.
- Paper-segment performance and the pace, cost and operating results of the Jackson mill’s conversion to containerboard.