Packaging Corporation of America (NYSE: PKG) — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Comparisons are with Q1 2020 unless noted. PCA manufactures corrugated packaging, containerboard and communication papers, primarily in the United States.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $1,807.2 million | $1,708.7 million | +5.7% |
| Gross profit / margin | $403.7 million / 22.3% | $365.0 million / 21.4% | Margin +0.9 percentage points |
| Operating income / margin | $238.3 million / 13.2% | $209.1 million / 12.2% | +13.9% |
| Net income | $166.5 million | $141.7 million | +17.5% |
| Diluted EPS | $1.75 | $1.49 | +17.4% |
| Operating cash flow | $191.6 million | $236.7 million | −$45.1 million |
| Capital expenditures | $85.1 million | $70.5 million | +$14.6 million |
Net margin was approximately 9.2%, versus 8.3%. Cash flow from operations less reported property, plant and equipment additions was approximately $106.5 million, compared with $166.2 million. Management attributed the lower operating cash flow primarily to a larger increase in receivables and lower accounts payable, partly reflecting sales growth and payment timing.
Packaging revenue rose 10.6% to $1,623.6 million; segment operating income increased to $257.9 million from $199.8 million. Packaging benefited from higher volume, prices and mix, and lower annual outage expense, partly offset by higher operating, converting, freight and logistics costs. Paper revenue fell 24.2% to $164.6 million and segment operating income declined to $8.7 million from $32.5 million, reflecting weak demand, lower volume and prices/mix, and higher freight expense.
At March 31, cash and cash equivalents were $983.4 million, with $149.5 million of marketable debt securities. Long-term debt on the balance sheet was $2,480.0 million; the filing separately reports $2,493.8 million of fixed-rate senior notes outstanding. Current assets were $2,856.9 million and current liabilities $805.8 million. PCA reported $325 million of unused revolving-credit capacity, net of letters of credit. All outstanding debt was fixed-rate. Quarterly dividends declared were $1.00 per share, versus $0.79 a year earlier.
Material changes and unusual items
- Packaging demand remained strong: corrugated shipments increased 6.6% overall (8.3% per workday), while domestic and export containerboard outside shipments increased 12.9%.
- Paper sales were 24% lower year over year, as COVID-19-related office and school closures continued to weigh on demand.
- Management reported $3.2 million pre-tax of special items in Q1 2021, principally corrugated-facility closure costs and Jackson mill conversion charges. Net income excluding special items was $168.9 million, or $1.77 per diluted share; these are non-GAAP measures.
- PCA announced the permanent, phased conversion over three years of the No. 3 machine at its Jackson, Alabama mill from uncoated freesheet paper to linerboard. The machine had produced linerboard temporarily since late 2020; related operating results are allocated between Packaging and Paper.
- Other expense, net, rose to $20.4 million from $10.0 million, including $14.7 million of asset disposals and write-offs, compared with $6.0 million a year earlier.
Outlook, risks and contingencies
Management said packaging demand remained strong into Q2 and that it was implementing previously announced customer price increases. It expected paper volumes to remain near Q1 levels and higher paper pricing as notified increases took effect. Management also expected higher Q2 maintenance-outage costs and continued inflation in freight and most other operating and converting costs.
PCA forecast 2021 capital investments of $650–$675 million, including the Jackson conversion, and estimated approximately $20 million for environmental-compliance capital expenditures. Management stated that operating cash generation, cash on hand, credit availability and capital-market access should meet foreseeable liquidity needs, including declared dividends.
- Legal/environmental: Litigation remains pending over the 2017 DeRidder mill explosion, which resulted in three contractor fatalities and other injuries. PCA said it could not estimate a reasonable possible loss range; it believes the suits are insured, subject to a deductible already satisfied. EPA/DOJ civil enforcement discussions began in January 2021 and were ongoing; no complaint had been filed as of the report date. PCA also disputes an EPA Clean Air Act notice concerning its Wallula mill and said it intends to defend its position.
- Concentration: Office Depot represented approximately 45% of Paper segment revenue and 4% of company revenue in Q1 2021; receivables from it were $38.8 million.
- Other risks: The filing identifies COVID-19 and economic conditions, demand and pricing, input and energy costs, facility outages, and environmental or tax regulation as factors that could affect results. PCA said there were no material changes to the risk factors in its 2020 Form 10-K.
Key investor verification points
- Track whether packaging price increases and strong demand offset inflation in freight, operating and converting costs, as well as planned outage expense.
- Monitor Paper demand, pricing and Office Depot exposure, including the effects of ongoing office and school disruption.
- Verify execution, timing, costs and capacity effects of the phased Jackson machine conversion and the $650–$675 million capital program.
- Assess operating cash conversion and working-capital movements; Q1 operating cash flow declined despite higher earnings.
- Follow developments and potential financial exposure in the DeRidder and Wallula matters; the filing does not provide a clear loss estimate for the DeRidder litigation.