Packaging Corporation of America — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Amounts are in millions of dollars except per-share data. PCA manufactures corrugated packaging, containerboard, and communication papers, primarily in the United States.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $1,693.7 | $1,750.7 | $4,944.0 | $5,244.3 |
| Gross profit | $345.4 | $411.4 | $1,036.1 | $1,260.7 |
| Income from operations | $209.5 | $262.8 | $534.7 | $818.6 |
| Net income | $139.1 | $179.8 | $337.4 | $560.2 |
| Diluted EPS | $1.46 | $1.89 | $3.54 | $5.91 |
| Gross margin | 20.4% | 23.5% | 20.9% | 24.0% |
| Operating margin | 12.4% | 15.0% | 10.8% | 15.6% |
Q3 net income included $10.1 million after tax of special items; excluding these items, management reported net income of $149.2 million and diluted EPS of $1.57. Nine-month adjusted net income was $423.5 million and adjusted diluted EPS was $4.45. These are non-GAAP measures.
- Segments: Q3 Packaging sales rose 0.8% to $1,501.1 million, while segment operating income declined to $222.4 million from $235.1 million. Paper sales fell 26.6% to $178.1 million; operating income declined to $7.3 million from $48.1 million. For nine months, Packaging operating income was $619.9 million versus $748.6 million; Paper posted an operating loss of $21.7 million versus income of $132.5 million.
- Cash flow: Nine-month operating cash flow was $761.7 million, down from $878.2 million. Capital expenditures were $253.5 million, yielding approximately $508.2 million of operating cash flow less capital expenditures. Cash and cash equivalents increased to $949.1 million from $679.5 million at year-end 2019.
- Liquidity and debt: At September 30, PCA reported $949.1 million cash, $146.4 million marketable debt securities, and $326 million of unused revolving-credit capacity, net of letters of credit. Long-term debt was $2,478.7 million; the company reported $2,493.5 million of fixed-rate senior notes outstanding. All outstanding debt was fixed-rate.
- Dividends: $0.79 per share was declared for Q3, unchanged from 2019; $224.6 million of dividends was paid in the first nine months.
Material changes and unusual items
- Consolidated Q3 sales declined 3.2% year over year and net income declined 22.6%. Lower prices and mix across Packaging and Paper, Paper volume weakness, higher scheduled maintenance costs, and higher freight expense weighed on results. Packaging volume and lower operating and converting costs partly offset these pressures.
- Paper demand was significantly affected by the pandemic: Q3 Paper sales were down 26.6%, and the Jackson mill was idled throughout the quarter. PCA recorded a $55.2 million non-cash, nondeductible goodwill impairment in Q2, fully impairing Paper-segment goodwill.
- Hurricane Laura disrupted production at the DeRidder mill for approximately 12 days, resulting in about 42,000 tons of lost containerboard production and $10 million of Q3 charges. PCA said it avoided customer disruptions and ended the quarter with historically low inventories measured in weeks of supply.
- Nine-month special items also included $24.1 million of facility closure and other costs, substantially related to the San Lorenzo, California facility closure, and $6.9 million of initial COVID-related costs. Management said future pandemic-related expenses would be included in normalized costs.
Outlook, risks, and contingencies
- PCA gave no specific earnings or revenue guidance. It expected 2020 capital investments of $400 million to $425 million, excluding acquisitions, including an estimated $10 million for environmental compliance.
- The company announced a $50-per-ton containerboard price increase effective November 1, 2020 and notified box customers of price increases. Management said packaging demand remained strong, but warned it could not predict the pandemic’s future effects on demand or operations.
- Management said cash from operations, cash on hand, revolving-credit availability, and capital-market access should be adequate for foreseeable liquidity and capital needs, including declared dividends. Future refinancing remains subject to economic and market conditions.
- Key risks include COVID-19 and broader economic conditions, product demand and pricing, input costs, wood and energy prices, unplanned facility outages, and environmental or tax regulation. Hurricane-related production disruption underscores operational exposure.
- Office Depot represented approximately 43% of Paper-segment sales and 5% of total company sales in the first nine months of 2020, creating customer concentration risk.
- Pending lawsuits related to the 2017 DeRidder mill explosion remain in early stages; PCA could not estimate a reasonable loss range. The EPA’s Wallula mill Clean Air Act notice of violation is disputed and under reconsideration and court review; PCA stated it does not expect a material adverse effect. The EPA investigation into the DeRidder incident was ongoing.
Important facts for investors to verify
- Whether Packaging price increases take effect as planned and offset lower pricing and mix, freight, and outage costs.
- Whether Paper demand and mill utilization recover, particularly given the Jackson mill idling and the impairment assumptions underlying the $55.2 million goodwill write-off.
- Subsequent hurricane-related production and recovery costs, inventory levels, and customer service at DeRidder.
- Capital spending against the $400 million–$425 million estimate, operating cash generation, and liquidity available after dividends and debt service.
- Developments in the DeRidder lawsuits and EPA matters, and any changes to the company’s stated assessment of potential financial exposure.