Packaging Corporation of America (NYSE: PKG) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited results; dollars in millions except per-share data. PCA manufactures containerboard, corrugated packaging and communication papers, primarily in the U.S.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $2,237.3 | $1,879.9 | $4,373.7 | $3,687.0 |
| Gross profit | $588.8 | $448.8 | $1,122.0 | $852.5 |
| Income from operations | $415.8 | $294.6 | $772.4 | $532.9 |
| Net income | $301.5 | $207.3 | $555.7 | $373.8 |
| Diluted EPS | $3.20 | $2.17 | $5.91 | $3.92 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $644.3 | $419.8 |
Q2 sales rose 19.0%, operating income 41.1% and net income 45.4% year over year. First-half sales increased 18.6%, operating income 44.9% and net income 48.7%. Calculated margins improved: Q2 gross margin was 26.3% versus 23.9%, operating margin 18.6% versus 15.7%, and net margin 13.5% versus 11.0%. First-half gross, operating and net margins were 25.7%, 17.7% and 12.7%, respectively, compared with 23.1%, 14.5% and 10.1%.
Q2 diluted EPS excluding special items was $3.23, versus $2.17 a year earlier; first-half adjusted diluted EPS was $5.95 versus $3.94. These are non-GAAP measures. PCA reported special-item expense of $2.2 in Q2 and $3.8 in the first half of 2022, primarily related to Jackson mill conversion, facility closures and Advance Packaging integration, partly offset by insurance proceeds and a favorable lease buyout.
Segments and changes versus prior period
- Packaging: Q2 revenue was $2,066.9, up 20.3%; operating income was $419.8 versus $317.2. Price and mix contributed $255 to the operating-income increase; higher operating/converting costs and freight partially offset the gains. Corrugated shipments were flat year over year, while containerboard outside shipments increased 23.0%.
- Paper: Q2 revenue was $149.8, up 5.3%, and operating income was $22.7 versus $2.6. Higher price and mix more than offset lower volume. First-half revenue declined 1.1% to $303.3 as lower volume offset improved pricing.
- Management attributed the overall profit improvement chiefly to stronger pricing and mix, higher Packaging volumes, and lower scheduled outage expenses. Higher operating, converting, freight and logistics costs, along with lower Paper volume, were offsets. Interest expense declined $6.1 in Q2 and $9.7 in the first half, largely reflecting the October 2021 debt refinancing and higher interest income.
Cash flow, debt and liquidity
- First-half operating cash flow was $644.3, up from $419.8. Capital expenditures were $397.5 versus $216.5; operating cash flow less capital expenditures was approximately $246.8 versus $203.3.
- Cash and cash equivalents were $667.3 at June 30, 2022, with $143.5 of marketable debt securities. PCA reported $321 of unused revolving-credit capacity, net of letters of credit, and stated liquidity was sufficient for foreseeable needs.
- Long-term debt carrying value was $2,472.6. PCA reported $2,491.3 of fixed-rate senior notes outstanding, with estimated fair value of $2,151.3. All outstanding debt was fixed-rate; no derivatives were outstanding.
- Total assets were $8,340.6 and stockholders’ equity was $3,964.5. The company declared a $1.25-per-share quarterly dividend, increasing its annual dividend rate from $4.00 to $5.00. It authorized an additional $1 billion in share repurchases but made no purchases under that authorization through June 30.
Outlook, risks and unusual items
- For Q3 2022, management expected earnings below Q2, excluding special items. It anticipated higher Packaging and Paper prices as announced increases were implemented, but softer corrugated growth, continued inflation in energy, chemicals, labor and converting costs, higher freight costs from rail challenges, and higher maintenance outage costs.
- Management estimated 2022 capital expenditures of approximately $800, including Jackson mill conversion spending; estimated environmental compliance capital spending was about $17. These are estimates, not guarantees.
- Industry context included a 2.3% year-over-year decline in North American corrugated shipments in Q2 and industry containerboard inventories up 16.1%. PCA said its Packaging demand remained strong, while noting that some end markets were working through inventory.
- Paper sales have concentration risk: Office Depot represented approximately 58% of Paper segment sales in the first half of 2022 and 4% of company sales.
- Litigation remains pending from the 2017 DeRidder mill incident, which caused three contractor fatalities and other injuries. PCA is defending the cases; it cannot estimate a reasonable range of possible losses. EPA and DOJ enforcement discussions related to the facility were ongoing, with no complaint filed as of the report date.
- Other stated risks include economic conditions, demand and pricing, input-cost inflation, energy and fiber costs, facility disruptions, regulation, and acquired-business integration. PCA reported no material change to its previously disclosed risk factors and no material liability known from its guarantees or indemnifications.
Important facts for investors to verify
- Whether price increases and mix can continue to offset inflation, freight costs and a potential softening in corrugated demand.
- Actual 2022 capital spending versus the approximately $800 estimate, and the returns and timing of major projects, including the Jackson conversion.
- Developments and potential financial exposure in the DeRidder litigation and EPA/DOJ discussions; the filing does not provide a loss estimate.
- Paper segment performance and Office Depot concentration, including any changes in customer relationship or demand.
- Future dividend and repurchase decisions, revolving-credit availability, and debt repayment or refinancing requirements.