Packaging Corporation of America (NYSE: PKG) — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This annual filing discusses fourth-quarter operating trends but does not provide a clear standalone fourth-quarter income statement in the supplied text.
Business context
PCA is a major North American containerboard and corrugated packaging producer and a leading UFS paper producer. It operates eight mills and 86 corrugated products facilities, primarily in the United States, and reports Packaging, Paper, and Corporate and Other segments.
Financial performance and liquidity
| Metric | 2023 | 2022 |
|---|---|---|
| Net sales | $7.802 billion | $8.478 billion |
| Gross profit / margin | $1.699 billion / 21.8% | $2.091 billion / 24.7% |
| Operating income / margin | $1.075 billion / 13.8% | $1.421 billion / 16.8% |
| Net income | $765 million | $1.030 billion |
| Diluted EPS | $8.48 | $11.03 |
| Operating cash flow | $1.315 billion | $1.495 billion |
| Capital expenditures | $470 million | $824 million |
Cash from operations less capital expenditures was approximately $845 million in 2023, versus $671 million in 2022. EBITDA, a non-GAAP measure, was $1.593 billion, compared with $1.878 billion; EBITDA excluding special items was $1.604 billion versus $1.886 billion. Special-item-adjusted net income was $784 million, or $8.70 per diluted share, in 2023.
At year-end, PCA held $648 million of cash and cash equivalents and $558 million of marketable debt securities, with $323 million of unused revolver capacity after letters of credit. Total debt was $2.892 billion, all fixed-rate senior notes; $400 million was current, due in September 2024. The current ratio was approximately 2.6. The company reported compliance with debt covenants.
Changes versus 2022
- Sales fell 8.0%, net income fell 25.7%, and operating income fell 24.3%. Lower Packaging prices and mix were the principal earnings pressure; lower volumes also weighed on both Packaging and Paper.
- Packaging sales declined 8.3% to $7.136 billion and segment operating income fell to $1.074 billion. Corrugated shipments fell 4.6% for the year, while fourth-quarter shipments rose 6.9% year over year. Containerboard production was curtailed during the first three quarters as demand softened, then increased in the fourth quarter.
- Paper sales declined 4.3% to $595 million, but segment operating income increased to $119 million, mainly on higher prices and mix and lower freight costs. UFS production fell to 472,000 tons from 506,000.
- Operating cash flow decreased $180 million. Capital spending fell $355 million; dividends paid rose to $449 million, while share repurchases dropped to $42 million from $523 million.
Outlook, risks, and unusual items
- For first-quarter 2024, management expected higher corrugated shipments and slightly higher Packaging prices and mix, but lower containerboard volume because of a Jackson conversion outage and scheduled Counce maintenance. Management expected first-quarter earnings to be below fourth-quarter 2023, citing outages, higher input costs, seasonal labor and benefit costs, and restart-related costs.
- PCA announced linerboard and medium price increases effective January 1, 2024: $70 and $100 per ton, respectively. Management expected implementation to be partly offset by late-2023 published price declines.
- Management forecast 2024 capital investments of $470–$490 million, including approximately $15 million for environmental compliance.
- In November 2023, PCA issued $400 million of 5.70% notes due 2033 and invested the proceeds in time deposits, intending to use them and cash on hand to repay the 3.65% notes due September 2024. This refinances near-term debt at a higher coupon.
- ODP represented 61% of Paper segment sales and 5% of consolidated sales in 2023. An amended agreement provides for paper supply through December 31, 2025; absent renewal, ODP purchases would phase down over two years beginning in 2026.
- Special items included $14.4 million of 2023 facility-closure and related charges and $11.1 million of Jackson conversion charges. The Jackson No. 3 machine conversion to containerboard continued, with a prolonged outage planned for early 2024.
- Key risks include economic and demand weakness, volatile product prices, inflation in fiber, energy, chemicals, labor and freight, operational disruptions, environmental regulation, union negotiations, cybersecurity, and declining structural demand for UFS papers.
- Environmental reserves were $25.8 million at year-end; PCA stated additional costs above the reserve were not reasonably expected to have a material impact. Nine plaintiffs’ DeRidder mill incident lawsuits remained pending, with trial scheduled for April 2024; the company believed material losses beyond its insurance deductible were not reasonably possible. The filing also describes other ordinary-course litigation and contingencies.
- The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded internal controls were effective.
Investor verification priorities
- Track whether the announced packaging price increases are realized and whether shipment recovery continues after the 2023 downturn.
- Confirm repayment of the $400 million 2024 notes, the resulting interest cost, and continued revolver and covenant capacity.
- Assess the Jackson conversion and outage schedule, startup performance, and progress against the 2024 capital-spending range.
- Monitor ODP contract renewal, volumes, and the potential impact of any post-2025 phase-down on Paper segment economics.
- Review the outcome of the DeRidder litigation and any changes to environmental reserves, compliance spending, or emissions-related requirements.