Packaging Corporation of America — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. PCA manufactures containerboard and corrugated packaging, as well as communication papers, and operates primarily in the United States. Results are unaudited; dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $1,879.9 | $1,541.6 | $3,687.0 | $3,250.3 |
| Gross profit | $448.8 | $325.8 | $852.5 | $690.7 |
| Income from operations | $294.6 | $116.1 | $532.9 | $325.2 |
| Net income | $207.3 | $56.7 | $373.8 | $198.3 |
| Diluted EPS | $2.17 | $0.59 | $3.92 | $2.08 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $419.8 | $463.5 |
Q2 gross, operating, and net margins were approximately 23.9%, 15.7%, and 11.0%, respectively, versus 21.1%, 7.5%, and 3.7% a year earlier. First-half margins were approximately 23.1%, 14.5%, and 10.1%, versus 21.3%, 10.0%, and 6.1%.
- Segment results: Q2 Packaging revenue was $1,718.5 and operating income $317.2, compared with $1,409.9 and $197.6. Paper revenue was $142.3 and operating income $2.6, versus $123.3 and an operating loss of $61.4. First-half Packaging operating income rose to $575.1 from $397.5; Paper reported $11.3 versus a $29.0 loss.
- Cash flow and investment: First-half operating cash flow declined $43.7 year over year, despite higher earnings, mainly because of working-capital changes, including higher receivables and prepaid expenses. Capital expenditures were $216.5 versus $151.2. Investing cash use was $220.2; financing cash use was $202.0, including $189.8 of dividends paid.
- Liquidity and debt: At June 30, cash and equivalents were $972.2, marketable debt securities totaled $151.6, and long-term debt was $2,479.8. Debt consisted of fixed-rate senior notes; the weighted-average stated rate was 3.77%. PCA had a new $350 revolving facility, with no borrowings outstanding and approximately $326 million available net of letters of credit. The company was in compliance with its financial covenants.
- Dividends: Dividends declared were $1.00 per share in Q2 2021 versus $0.79 in Q2 2020. First-half dividends declared were $2.00 per share versus $1.58.
Changes versus prior year
Q2 sales increased 21.9%; first-half sales rose 13.4%. Management attributed the improvement principally to higher Packaging prices and mix and stronger volumes. Q2 corrugated shipments increased 9.6%, and Packaging benefited from previously announced price increases. Higher operating, converting, outage, freight, and logistics costs partially offset gains. Paper improved from its prior-year quarterly loss, but its first-half EBITDA excluding special items declined to $27.4 from $46.7, reflecting weaker volume and price/mix.
Reported earnings comparisons also reflect unusual prior-year charges: Q2 and first-half 2020 included a $55.2 goodwill impairment in Paper, facility closure costs, and COVID-related expenses. Q2 2021 included Jackson mill conversion charges and facility-related items; management reported $206.6 of Q2 net income excluding special items versus $131.8 in Q2 2020. These are non-GAAP measures and should be considered alongside GAAP results.
Outlook, risks, and unusual items
- Outlook: Management expected Q3 earnings to exceed Q2. It forecast continued strong Packaging demand, relatively flat Paper volume, one Q3 mill outage versus four in Q2, and continued implementation of price increases. Cost inflation, freight and logistics pressures, higher seasonal energy use, and higher southern-mill wood costs were expected to continue.
- Capital spending: 2021 capital investments were forecast at $650–$675, including the phased conversion of the Jackson, Alabama No. 3 machine from uncoated freesheet to linerboard. Estimated 2021 environmental capital spending was about $20.
- Operational and market risks: Management cited inflation and constrained transportation resources. Broader disclosed risks include economic and COVID-19 effects, demand and pricing, fiber and energy costs, unplanned outages, and environmental or tax regulation. The Jackson conversion is expected to reduce Paper production below pre-pandemic levels.
- Customer concentration: Office Depot represented approximately 47% of Paper segment sales and 4% of company sales in the first half of 2021.
- Contingencies: Litigation continues following the 2017 DeRidder mill incident; PCA said it could not estimate a reasonable loss range, and EPA/DOJ enforcement discussions were ongoing. PCA also disputes an EPA Clean Air Act notice concerning its Wallula mill and stated it did not expect that matter to have a material adverse effect.
- Other: A new five-year revolving credit agreement replaced the prior facility in June 2021. The company reported effective disclosure controls and no material change in risk factors or internal control over financial reporting.
Important facts for investors to verify
- Whether Packaging price increases and strong shipment volumes persist, and whether they continue to offset inflation, freight, and outage costs.
- Progress, timing, costs, and expected production effects of the Jackson machine conversion.
- Cash conversion and working-capital trends, capital spending against the $650–$675 forecast, and dividend sustainability.
- Developments and potential financial exposure from the DeRidder litigation and Wallula EPA matter; the filing does not provide a clear estimate for the DeRidder loss range.
- Paper segment performance and its dependence on Office Depot, alongside the effect of continuing changes in paper demand.