Packaging Corporation of America (NYSE: PKG) — Q3 2023 Form 10-Q
Business and period: Unaudited results for the three and nine months ended September 30, 2023, compared with the same 2022 periods. PCA manufactures corrugated packaging, containerboard and communication papers, primarily in the United States. Its reportable segments are Packaging, Paper, and Corporate and Other. Amounts below are in millions except per-share data.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $1,936 | $2,126 | $5,865 | $6,500 |
| Gross profit / margin | $413 / 21.3% | $518 / 24.4% | $1,289 / 22.0% | $1,640 / 25.2% |
| Income from operations / margin | $259 / 13.4% | $360 / 16.9% | $814 / 13.9% | $1,133 / 17.4% |
| Net income | $183 | $263 | $576 | $818 |
| Diluted EPS | $2.03 | $2.80 | $6.38 | $8.70 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $980 | $1,075 |
Margins are calculated from reported sales and profit figures. Q3 2023 net income excluding special items was $185 million, or $2.05 per diluted share; nine-month adjusted net income was $592 million, or $6.56 per diluted share. These are non-GAAP measures and should be considered alongside GAAP results.
Financial position and cash flows
- At September 30, 2023, cash and cash equivalents were $573 million and marketable debt securities totaled $153 million. PCA also reported $323 million of unused revolving-credit capacity, net of letters of credit.
- Total debt was $2.492 billion, including $399.5 million classified as current and due September 2024. All outstanding debt was fixed-rate; the revolver had no balance. Long-term debt, net of current maturities and issuance costs, was $2.076 billion.
- Cash and marketable securities exceeded reported debt by approximately $1.765 billion; this calculation excludes leases and other liabilities.
- Nine-month capital expenditures were $329 million. PCA expected full-year 2023 capital investment of approximately $475 million, including about $20 million for environmental compliance.
- Nine-month cash uses included $337 million of dividends and $42 million of share repurchases. The declared quarterly dividend was $1.25 per share. Cash increased by $253 million to $573 million over the nine-month period.
Changes versus the prior comparable periods
- Q3 sales declined 8.9%, operating income 28.2%, and net income 30.2% year over year. Nine-month sales fell 9.8%, operating income 28.2%, and net income 29.6%.
- Packaging was the principal source of weakness. Q3 Packaging sales fell 9.3% and segment operating income fell to $257 million from $359 million, reflecting lower prices and mix, higher depreciation and other costs, partly offset by lower operating and converting costs and outage expense.
- Nine-month Packaging sales declined 10.3%; segment operating income was $811 million versus $1.141 billion. Lower sales and production volumes and weaker prices and mix were major factors.
- Paper segment operating income improved to $28 million from $26 million in Q3 and to $91 million from $71 million for nine months. Higher prices and mix and lower freight costs partly offset lower volume and, for the nine-month period, higher operating costs.
- Nine-month operating cash flow declined $95 million. Lower earnings reduced cash generation, partly offset by more favorable working-capital and tax-payment changes. Capital spending was substantially lower than in 2022.
- Interest expense declined, principally because higher rates on invested cash increased interest income. Non-operating pension results worsened, moving from income in 2022 to expense in 2023.
Outlook, commentary and risks
- Management expected Q4 2023 earnings to be below Q3. It anticipated higher Packaging shipments per day and less market-related downtime, but lower average prices and a less favorable seasonal mix. Paper volume, prices and mix were expected to decline seasonally.
- Management expected higher operating and converting costs from recycled fiber prices, seasonal energy costs and restarting the Wallula mill, partly offset by lower scheduled maintenance outage expense. PCA planned to restart Wallula’s No. 3 machine in Q4 to rebuild inventories; Jackson mill conversion work was also ongoing.
- Management reported improved Q3 corrugated shipment trends versus Q2, after weaker demand and customer inventory adjustments earlier in 2023. Industry and company conditions remain exposed to demand, pricing, input costs, energy, fiber costs and unplanned outages.
- ODP was a significant Paper-segment customer: it represented approximately 61% of Paper sales and 5% of total company sales in the first nine months of 2023. Receivables due from ODP were $50.2 million at quarter-end.
- Pending lawsuits related to the 2017 DeRidder mill incident remained in discovery. PCA said it could not estimate a reasonable possible loss range. The company also reported other ordinary-course legal matters, but did not believe they were reasonably likely to have a material adverse effect. It reported no material liabilities known from its guarantees and indemnifications.
- Q3 special items included approximately $2.6 million of Jackson mill conversion-related costs; nine-month special items also included $13.5 million of facility-closure and related items. A $2.5 million Clean Air Act settlement penalty related to DeRidder was paid in January 2023; PCA did not admit liability.
- Management stated liquidity sources should be adequate for foreseeable needs, while noting that future repayment, extension or replacement of debt depends on economic and financial conditions. Disclosure controls were deemed effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether Packaging volumes and pricing recover as expected, and how the Wallula restart affects utilization, inventories and costs.
- The September 2024 maturity of approximately $400 million of senior notes and PCA’s refinancing or repayment plans.
- Whether projected full-year capital spending of approximately $475 million is achieved and how it affects cash generation.
- The significance of ODP’s concentration to Paper-segment results and the collectability of its receivable balance.
- Developments in the DeRidder litigation, for which the company has not estimated a possible loss range, and any other material contingencies.