Packaging Corporation of America (NYSE: PKG) — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; it does not provide a clear set of standalone fourth-quarter financial results.
Business context
PCA is a North American producer of containerboard and corrugated packaging and a producer of uncoated freesheet (UFS) paper. It operates eight mills and 90 corrugated products plants, primarily in the United States. Reportable segments are Packaging, Paper, and Corporate and Other. In December 2021, PCA acquired Advance Packaging for approximately $195 million.
Financial results and liquidity
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Net sales | $7.730 billion | $6.658 billion |
| Gross profit | $1.873 billion | $1.369 billion |
| Income from operations | $1.241 billion | $724 million |
| Net income | $841 million | $461 million |
| Diluted EPS | $8.83 | $4.84 |
| Operating cash flow | $1.094 billion | $1.033 billion |
| Capital expenditures | $605 million | $421 million |
Revenue increased 16.1%, and net income increased 82.5%. Gross margin was approximately 24.2% versus 20.6%; operating margin was 16.1% versus 10.9%; net margin was 10.9% versus 6.9% (calculated from reported amounts). Management reported FY 2021 net income excluding special items of $894 million, or $9.39 per diluted share, compared with $550 million, or $5.78, in 2020. These are non-GAAP measures.
Packaging sales rose 19.1% to $7.053 billion, and segment operating income increased to $1.306 billion from $830 million. Paper sales declined 11.1% to $600 million; segment operating income was $39 million versus a $20 million loss. Packaging results benefited from higher prices, mix, and volumes, while inflation, outages, and freight costs offset some gains. Paper’s lower volumes reflected the Jackson machine conversion and secular demand pressures.
At year-end, PCA had $619 million cash and cash equivalents, $146 million in marketable debt securities, and $323 million of unused revolving-credit capacity—about $1.09 billion in total liquidity. Long-term debt was $2.472 billion on the balance sheet; the company reported $2.491 billion of fixed-rate senior notes outstanding before unamortized issuance costs. Cash provided by operations less capital expenditures was approximately $489 million. Dividends paid were $380 million, and PCA repurchased $193 million of stock. The board authorized a further $1 billion repurchase program in January 2022.
Material changes and unusual items
- Packaging shipment and production strength supported growth: corrugated shipments increased 4.5% and containerboard production increased to 4.887 million tons from 4.341 million.
- PCA permanently converted Jackson’s No. 3 machine from UFS paper to linerboard and began producing corrugating medium on the No. 1 machine. The conversion contributed $14 million of FY 2021 special-item expense.
- In October 2021, PCA refinanced $700 million of 4.50% notes due 2023 with $700 million of 3.05% notes due 2051. The refinancing generated $59 million of reported costs, including a redemption premium and write-off of debt issuance costs.
- FY 2020 included a $55 million noncash impairment of Paper-segment goodwill; no corresponding charge was recorded in 2021.
- Advance Packaging was acquired for approximately $195 million. Its results were included from the acquisition date; purchase-price allocations were preliminary at year-end.
Outlook, risks, and contingencies
For Q1 2022, management expected higher Packaging volume than Q4 2021, slightly higher containerboard prices and mix, and higher Paper prices and mix. A $70-per-ton containerboard price increase had been announced, but PCA did not expect significant benefit from it in Q1. Management expected persistent cost inflation, higher labor and benefits costs, and seasonal increases in energy and fiber costs to offset sequential volume and pricing benefits; excluding special items, it expected Q1 earnings below Q4 2021.
Key risks include volatile product pricing and industry cycles; continued inflation in fiber, fuel, chemicals, labor, and transportation; labor availability and COVID-19 disruptions; declining structural demand for UFS paper; and dependence on Office Depot, which represented 51% of Paper sales and 4% of consolidated sales in 2021. Its supply agreement runs through December 31, 2022, has no minimum volume commitment, and provides for a potential two-year phase-down if not renewed.
PCA cited $785 million of capital commitments at year-end and expected approximately $800 million of 2022 capital investment. Environmental reserves were $24.3 million. Litigation arising from the 2017 DeRidder mill tank explosion remained pending; PCA could not estimate a reasonable loss range. EPA/DOJ civil enforcement discussions concerning the incident were ongoing. PCA also reported an EPA notice of violation concerning its Wallula mill but said the agency would no longer pursue that enforcement action and the related litigation was to be dismissed.
Most important facts for investors to verify
- Whether Packaging pricing and demand continue to offset input-cost, freight, and labor inflation, and whether announced price increases are realized.
- Q1 2022 results against management’s expectation of lower sequential earnings, and actual 2022 capital spending versus the approximately $800 million plan and $785 million commitments.
- Renewal and volume terms of the Office Depot agreement after December 2022, given its concentration in the Paper segment.
- Progress, costs, and any production or earnings impact from the Jackson machine conversions and integration of Advance Packaging.
- Developments and potential exposure in the DeRidder litigation and EPA/DOJ discussions; the filing does not provide a clear estimated loss range for the litigation.