Packaging Corporation of America — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results. PCA produces corrugated packaging and containerboard, and uncoated freesheet (UFS) paper; it operates six containerboard mills, two paper mills, and 90 corrugated-product facilities.
Financial results and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $6.658 billion | $6.964 billion |
| Gross profit / gross margin | $1.369 billion / 20.6% | $1.644 billion / 23.6% |
| Income from operations / operating margin | $724 million / 10.9% | $1.054 billion / 15.1% |
| Net income | $461 million | $696 million |
| Diluted EPS | $4.84 | $7.34 |
| Operating cash flow | $1.033 billion | $1.207 billion |
| Capital expenditures | $421 million | $400 million |
Margins are calculated from reported figures. Net income excluding special items, a non-GAAP measure, was $550 million, or $5.78 per diluted share, versus $726 million, or $7.65, in 2019. EBITDA excluding special items was $1.225 billion, down from $1.445 billion.
At year-end, cash and cash equivalents were $975 million, marketable debt securities totaled $148 million, and unused revolving-credit availability was $326 million, for approximately $1.4 billion of reported liquidity. Debt was approximately $2.5 billion, all fixed-rate senior notes; PCA reported compliance with debt covenants. The balance sheet showed $3.246 billion in stockholders’ equity. Dividends paid were $300 million; the company raised its annualized dividend rate from $3.16 to $4.00 per share in December 2020.
Fourth-quarter 2020 net sales were $1.714 billion, gross profit $333 million, operating income $189 million, net income $124 million, and diluted EPS $1.30.
Material changes versus 2019
- Consolidated sales fell 4.4% and net income fell 33.8%. Management attributed the earnings decline mainly to lower prices and mix in both segments, lower Paper volumes, higher freight and logistics expense, and higher annual outage expense; lower operating and converting costs and increased Packaging volumes partly offset the decline.
- Packaging sales were nearly flat at $5.920 billion, while segment operating income declined to $830 million from $963 million. Corrugated shipments rose 5.8% overall (5.4% per workday); containerboard production increased to 4.341 million tons from 4.249 million.
- Paper sales fell 30.0% to $675 million, and the segment moved from $175 million of operating income to a $20 million loss. UFS production declined to 648,000 tons from 947,000 tons; paper sales were down 30%, reflecting pandemic-related office and school closures and ongoing electronic substitution.
- PCA recorded a $55.2 million non-cash impairment, fully eliminating Paper-segment goodwill. Other 2020 special items included facility closures and restructuring, Hurricane Laura impacts at the DeRidder mill, and initial COVID-19 costs. Total special-item expense was $89 million after tax.
- Operating cash flow declined $174 million. Cash and cash equivalents increased to $975 million from $680 million, while capital expenditures rose by about $22 million.
Outlook, risks, and unusual items
- Management said Packaging demand remained strong and expected it to continue into the first quarter of 2021. PCA notified customers of containerboard and corrugated-product price increases during Q4 2020 and expected some freight, labor, energy, and fiber cost inflation in Q1 2021.
- Management planned $500–$525 million of 2021 capital investment, excluding spending for a potential conversion of the Jackson, Alabama No. 3 paper machine; estimated 2021 environmental capital expenditures were about $20 million. PCA began trial production of virgin kraft linerboard on that machine in Q4 2020 and expected to continue producing both containerboard and UFS paper there in Q1 2021.
- COVID-19 had not materially disrupted operations through year-end, but the filing says future effects on operations, the economy, and Packaging demand were uncertain. Paper demand was already materially weaker.
- Office Depot accounted for 45% of Paper-segment sales and 5% of consolidated sales in 2020. Its supply agreement runs through December 31, 2022, has no minimum-volume commitment, and provides for a phase-down of purchasing obligations over two years if not renewed.
- Other risks include volatile product prices and fiber, fuel, chemical, and transportation costs; manufacturing outages; union-contract negotiations; pension funding and assumptions; cybersecurity; and environmental compliance and remediation exposures.
- PCA reported a $23.6 million environmental reserve and said additional environmental spending above that reserve was not reasonably expected to materially affect results. It is contesting an EPA Clean Air Act notice involving the Wallula mill. Lawsuits remain pending following the 2017 DeRidder tank explosion; the company could not estimate a reasonable range of possible losses. In January 2021, the EPA and DOJ began civil enforcement discussions relating to the incident; no complaint had been filed by the report date.
Important facts for investors to verify
- Whether Packaging price increases and strong shipment trends persisted, and whether the expected Q1 2021 cost inflation was recovered through pricing or efficiency.
- Jackson machine conversion plans, related capital spending, production allocation, and effects on Packaging and Paper segment results.
- Paper-segment demand, utilization, and profitability, including Office Depot volumes and the agreement’s renewal or phase-down provisions.
- Cash generation relative to planned capital expenditures, dividends, pension contributions, and debt service; $304 million of capital commitments were outstanding at year-end.
- Developments and potential costs in the Wallula EPA matter, DeRidder enforcement discussions and litigation, and other environmental contingencies.
- The impact of the $89 million after-tax special items on comparisons; non-GAAP adjusted figures should be considered alongside GAAP results.
KPMG issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2020.