Packaging Corporation of America (NYSE: PKG) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. PCA manufactures containerboard, corrugated packaging, and communication papers, primarily in the United States. The filing is unaudited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $1,952.1 million | $2,237.3 million | $3,928.4 million | $4,373.7 million |
| Gross profit | $444.7 million | $588.8 million | $876.1 million | $1,122.0 million |
| Income from operations | $284.4 million | $415.8 million | $555.0 million | $772.4 million |
| Net income | $202.7 million | $301.5 million | $392.8 million | $555.7 million |
| Diluted EPS | $2.24 | $3.20 | $4.35 | $5.91 |
| Operating cash flow | — | — | $640.3 million | $644.3 million |
| Capital expenditures | — | — | $238.8 million | $397.5 million |
Q2 gross margin was approximately 22.8%, versus 26.3% a year earlier; operating margin was 14.6%, versus 18.6%; net margin was 10.4%, versus 13.5%. Q2 net income excluding special items, a non-GAAP measure, was $208.9 million, or $2.31 per diluted share, compared with $303.7 million, or $3.23, in Q2 2022.
At June 30, PCA had $477.1 million in cash and cash equivalents, $152.5 million in marketable debt securities, and $323 million of unused revolving-credit capacity, net of letters of credit. Long-term debt on the balance sheet was $2,474.7 million; the company reported $2,491.8 million of fixed-rate senior notes outstanding. Total liabilities were $4,257.9 million and stockholders’ equity was $3,848.6 million. All outstanding debt was fixed rate. Dividends declared were $1.25 per share for Q2.
Changes versus the prior comparable period
- Q2 sales fell 12.7%, operating income fell 31.6%, and net income fell 32.8% year over year. For the first half, sales declined 10.2% and net income declined 29.3%.
- Packaging segment Q2 sales declined 13.4% and operating income declined from $419.8 million to $285.8 million. Lower shipment volumes and lower containerboard prices and mix were key drivers. Company corrugated shipments were down 9.8% in total and per workday.
- Paper segment Q2 sales decreased 4.7%, but operating income increased to $29.1 million from $22.7 million, supported by higher prices and mix and lower freight costs. Paper operating income also increased for the first half.
- Management attributed weaker earnings primarily to reduced volumes, lower Packaging prices and mix, higher depreciation, and higher converting costs. Lower operating costs, fewer scheduled maintenance expenses, stronger Paper pricing, and a lower tax rate partly offset these pressures.
- Cash from operations was nearly unchanged year over year despite lower earnings, with working-capital changes providing a favorable comparison. Capital spending was lower than in the first half of 2022.
Outlook, risks, and unusual items
- Management expected Q3 earnings to be lower than Q2. It anticipated improved Packaging shipments per day but lower prices, seasonally stronger Paper volume but lower prices, slightly higher operating and converting costs, higher scheduled outage expense at the International Falls mill, and slightly higher depreciation, freight expense, and tax rate.
- PCA expected 2023 capital investments of approximately $475 million, including an estimated $20 million for environmental compliance.
- The filing cites economic conditions, demand and pricing, input costs including wood and recycled fiber and energy, unplanned facility outages, and environmental or tax regulation as risks. Management reported no material changes to the risk factors in its 2022 Form 10-K.
- Q2 special items included $8.3 million of pretax expense, mainly facility closures and Jackson mill conversion activities. The Jackson, Alabama mill is converting a paper machine from uncoated freesheet production to linerboard. PCA also temporarily idled its Wallula, Washington containerboard mill during Q2 to balance production with demand.
- Litigation related to the 2017 DeRidder mill incident remains pending; PCA said it cannot estimate a reasonable possible loss range. The company reported a $2.5 million EPA/DOJ settlement penalty paid in January 2023, without admitting liability. It stated that other ordinary-course legal matters were not reasonably expected to have a material adverse effect.
- PCA said it believed cash generation, cash on hand, revolving-credit availability, and capital-market access would be adequate for foreseeable liquidity needs. It also noted future refinancing depends on economic and other conditions.
Important facts for investors to verify
- Whether Packaging demand, shipment volumes, and containerboard prices stabilized or improved after Q2, and the effect of the Wallula mill idling.
- Whether Q3 earnings tracked management’s expectation of a sequential decline, including the effects of price changes, recycled fiber and energy costs, and the International Falls maintenance outage.
- Progress and costs associated with the Jackson mill conversion and facility closures, including which charges management excludes from non-GAAP results.
- Execution of the approximately $475 million 2023 capital plan and the effect of capital spending and dividends on cash and liquidity.
- Developments in the DeRidder lawsuits and any change in the company’s assessment of potential losses or insurance coverage.
- Paper segment concentration: ODP represented approximately 63% of Paper segment sales and 5% of total company sales in the first half of 2023.