Packaging Corporation of America — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 8, 2024. PCA manufactures containerboard, corrugated packaging and communication papers, operating primarily in the United States.
Key financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $1,979.5 million | $1,976.3 million | +0.2% |
| Gross profit | $370.4 million | $431.4 million | −14.1% |
| Income from operations | $196.0 million | $270.7 million | −27.6% |
| Net income | $146.9 million | $190.1 million | −22.7% |
| Diluted EPS | $1.63 | $2.11 | −22.7% |
| Operating cash flow | $260.4 million | $280.4 million | −$20.0 million |
| Capital expenditures | $76.7 million | $112.4 million | −$35.7 million |
Gross margin was approximately 18.7%, versus 21.8% a year earlier; operating margin was approximately 9.9%, versus 13.7%. Management reported adjusted net income of $154.6 million, or $1.72 per diluted share, excluding special items, compared with $198.3 million, or $2.20, in Q1 2023. Adjusted EBITDA was $333.2 million versus $404.9 million. These are non-GAAP measures.
Segments and material year-over-year changes
- Packaging: Sales decreased 0.5% to $1,798.3 million; operating income fell to $203.8 million from $268.0 million. Lower prices and mix were the principal headwind, partly offset by higher volume. Corrugated shipments rose 9.2% overall and 11.0% per workday; containerboard outside shipments increased 22.1%.
- Paper: Sales increased 8.5% to $163.8 million on higher volume, while operating income declined to $29.7 million from $34.1 million, primarily due to lower prices and mix.
- Consolidated sales were nearly flat, but profit declined amid lower prices and mix, higher scheduled mill outage costs, depreciation and corrugated plant project expenses. Lower operating/converting and freight costs, greater volume, lower interest expense and a lower tax rate partly offset these pressures.
- Q1 2024 included $10.3 million of net special-item expense, chiefly Jackson mill conversion costs; Q1 2023 included $10.9 million, mainly facility closure and conversion costs. A $123.7 million DeRidder litigation accrual and matching insurance recovery were recorded in Q1 and offset in other expense, net.
Cash, debt and liquidity
- At March 31, 2024, cash and cash equivalents were $692.4 million; marketable debt securities totaled $560.8 million. Unused revolver capacity, net of letters of credit, was $323 million.
- Balance-sheet debt was $2,872.5 million, including $399.8 million of current maturities and $2,472.7 million long-term debt. The filing separately reports $2,891.8 million of fixed-rate senior notes outstanding; all outstanding debt carried fixed rates.
- Operating, investing and financing cash flows were +$260.4 million, −$81.0 million and −$135.0 million, respectively. Cash increased $44.4 million during the quarter.
- Dividends paid were $112.0 million; the quarterly dividend declared was $1.25 per share, payable April 15, 2024. No shares were repurchased under the company’s repurchase authorization; $436.0 million remained available.
Outlook, risks and notable items
- Management expects Q2 2024 earnings to be higher than Q1. It anticipates stronger Packaging demand and shipments, with price and mix improving as announced increases and higher published containerboard indices take effect. Paper orders are expected to remain strong, but volume is expected to decline due to a scheduled International Falls mill outage; Paper prices and mix are expected to be slightly lower.
- Management expects somewhat lower operating/converting costs and scheduled outage expenses, but higher rail-related freight costs and depreciation; the tax rate is expected to rise sequentially. Planned 2024 capital investment is $470–$490 million, including an estimated $15 million for environmental compliance.
- On April 24, 2024, after quarter-end, a jury awarded plaintiffs approximately $91.8 million plus prejudgment interest in the remaining DeRidder mill lawsuit. PCA recorded a $123.7 million liability, including $31.9 million interest, and an equal insurance receivable at March 31. The verdict is within stated remaining policy limits; PCA intends to appeal and cannot predict the outcome.
- ODP is a significant Paper segment customer: it represented approximately 58% of Paper sales and 5% of total company sales in Q1 2024. PCA identifies the relationship as a concentration of business and financial risk.
- The filing reports no material changes to the risk factors from the 2023 Form 10-K, no material off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2024.
Important facts for investors to verify
- Whether announced Packaging price increases are implemented and sustain the expected Q2 improvement in price and mix.
- Actual Q2 earnings, shipment trends and the effects of the International Falls outage, rail costs and higher depreciation.
- Insurance coverage and collection for the DeRidder judgment, and the outcome of PCA’s planned appeal.
- Whether 2024 capital spending remains within the $470–$490 million outlook and how it affects cash generation.
- ODP’s continued purchasing and payment performance, given its concentration in Paper sales.
- Adjusted earnings and EBITDA reconciliations against GAAP results; management’s adjusted measures exclude items it considers not reflective of ongoing operations.