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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
(Exact Name of Registrant as Specified in its Charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
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(Zip Code) |
Registrant's telephone number, including area code
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Emerging growth company |
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Non-accelerated filer |
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Smaller reporting company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of July 29, 2022 the Registrant had outstanding
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Table of Contents
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PART I |
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Item 1. |
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1 |
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Item 2. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
17 |
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Item 3. |
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27 |
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Item 4. |
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27 |
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PART II |
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Item 1. |
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28 |
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Item 1A. |
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28 |
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Item 2. |
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28 |
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Item 3. |
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28 |
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Item 4. |
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28 |
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Item 5. |
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28 |
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Item 6. |
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29 |
All reports we file with the Securities and Exchange Commission (SEC) are available free of charge via the Electronic Data Gathering Analysis and Retrieval (EDGAR) System on the SEC website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available through our website at www.packagingcorp.com as soon as reasonably practicable after filing such material with the SEC.
i
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Packaging Corporation of America
Consolidated Statements of Income and Comprehensive Income
(unaudited, dollars in millions, except per-share data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Statements of Income: |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling, general and administrative expenses |
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Other expense, net |
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( |
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( |
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( |
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Income from operations |
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Non-operating pension income |
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Interest expense, net |
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Income before taxes |
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Provision for income taxes |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Net income per common share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Dividends declared per common share |
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$ |
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$ |
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$ |
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$ |
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Statements of Comprehensive Income: |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income, net of tax: |
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Changes in unrealized losses on marketable debt securities, |
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( |
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Amortization of pension and postretirement plans actuarial loss and |
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Other comprehensive income |
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Comprehensive income |
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$ |
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$ |
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$ |
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$ |
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See accompanying condensed notes to unaudited quarterly consolidated financial statements.
1
Packaging Corporation of America
Consolidated Balance Sheets
(unaudited, dollars and shares in millions, except per-share data)
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June 30, |
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December 31, |
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2022 |
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2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term marketable debt securities |
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Accounts receivable, net of allowance for credit losses and customer deductions |
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Inventories |
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Prepaid expenses and other current assets |
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Federal and state income taxes receivable |
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Total current assets |
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Property, plant, and equipment, net |
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Goodwill |
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Other intangible assets, net |
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Operating lease right-of-use assets |
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Long-term marketable debt securities |
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Other long-term assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Operating lease obligations |
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$ |
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$ |
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Finance lease obligations |
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Accounts payable |
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Dividends payable |
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Accrued liabilities |
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Accrued interest |
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Federal and state income taxes payable |
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Total current liabilities |
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Long-term liabilities: |
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Long-term debt |
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Operating lease obligations |
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Finance lease obligations |
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Deferred income taxes |
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Compensation and benefits |
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Other long-term liabilities |
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Total long-term liabilities |
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) |
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Stockholders' equity: |
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Common stock, par value $ |
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Additional paid in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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See accompanying condensed notes to unaudited quarterly consolidated financial statements.
2
Packaging Corporation of America
Consolidated Statements of Cash Flows
(unaudited, dollars in millions)
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Six Months Ended |
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June 30, |
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2022 |
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2021 |
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Cash Flows from Operating Activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation, depletion, and amortization of intangibles |
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Amortization of deferred financing costs |
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Share-based compensation expense |
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Deferred income tax provision |
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Loss on asset disposals |
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Pension and post-retirement benefits expense, net of contributions |
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Other, net |
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Changes in operating assets and liabilities: |
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Increase in assets — |
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Accounts receivable |
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( |
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( |
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Inventories |
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( |
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( |
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Prepaid expenses and other current assets |
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( |
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Increase (decrease) in liabilities — |
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Accounts payable |
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Accrued liabilities |
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( |
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Federal and state income taxes payable / receivable |
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Net cash provided by operating activities |
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Cash Flows from Investing Activities: |
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Additions to property, plant, and equipment |
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( |
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( |
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Additions to other long-term assets |
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( |
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( |
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Proceeds from asset disposals |
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Purchases of marketable debt securities |
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( |
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( |
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Proceeds from sales of marketable debt securities |
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Proceeds from maturities of marketable debt securities |
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Other, net |
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Net cash used for investing activities |
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( |
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Cash Flows from Financing Activities: |
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Repayments of debt and finance lease obligations |
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( |
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( |
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Financing costs paid |
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( |
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Common stock dividends paid |
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( |
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( |
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Shares withheld to cover employee restricted stock taxes |
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( |
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( |
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Net cash used for financing activities |
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( |
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( |
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Net increase (decrease) in cash and cash equivalents |
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( |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period |
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$ |
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$ |
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See accompanying condensed notes to unaudited quarterly consolidated financial statements.
3
Packaging Corporation of America
Consolidated Statements of Changes in Stockholders’ Equity
(unaudited, dollars in millions and shares in thousands)
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Common Stock |
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Additional |
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Retained |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Balance at April 1, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common stock withheld and retired |
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( |
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( |
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( |
) |
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( |
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Common stock dividends declared |
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— |
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( |
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Share-based compensation and other |
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Comprehensive income |
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— |
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Balance at June 30, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Common Stock |
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Additional |
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Retained |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Balance at April 1, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common stock withheld and retired to |
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( |
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( |
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( |
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( |
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( |
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Common stock dividends declared |
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— |
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Share-based compensation and other |
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Comprehensive income |
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— |
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Balance at June 30, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common Stock |
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Additional |
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Retained |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Balance at January 1, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common stock withheld and retired to |
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( |
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( |
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( |
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( |
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Common stock dividends declared |
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— |
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( |
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Share-based compensation and other |
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Comprehensive income |
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— |
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Balance at June 30, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common Stock |
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Additional |
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Retained |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Balance at January 1, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common stock withheld and retired to |
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( |
) |
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( |
) |
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( |
) |
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( |
) |
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( |
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Common stock dividends declared |
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— |
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( |
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Share-based compensation and other |
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( |
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Comprehensive income |
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— |
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Balance at June 30, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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See accompanying condensed notes to unaudited quarterly consolidated financial statements.
4
Condensed Notes to Unaudited Quarterly Consolidated Financial Statements
1. Nature of Operations and Basis of Presentation
Packaging Corporation of America ("we," "us," "our," PCA," or the "Company") was incorporated on
We report our business in
Our Jackson, Alabama mill had historically operated as an uncoated freesheet ("UFS") paper mill, with its results of operations reported in our Paper segment. During the fourth quarter of 2020, in order to meet strong packaging demand and maintain appropriate inventory levels, we temporarily began producing linerboard on the No. 3 machine at our Jackson, Alabama mill. In the first quarter of 2021, we announced the discontinuation of production of UFS paper grades on the machine and the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities. In the third quarter of 2021, we began producing corrugating medium on the No. 1 machine at the Jackson mill (which had produced UFS paper in the past) to help satisfy our demand for containerboard, build necessary inventories, and evaluate the capability of the machine to produce containerboard on a cost-effective basis. For the periods presented in this Form 10-Q, operating results for the Jackson mill are included in both the Packaging and Paper segments, as appropriate.
The consolidated financial statements of PCA as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021 are unaudited but include all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of such financial statements. The preparation of the consolidated financial statements involves the use of estimates and accruals. Actual results may vary from those estimates. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete audited financial statements. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021.
The consolidated financial statements include the accounts of PCA and its majority-owned subsidiaries after elimination of intercompany balances and transactions.
2. New Accounting Standards
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. Under current business combination guidance in ASC 805, Business Combinations, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date, whereas the new guidance requires the acquirer to recognize such assets and liabilities as if it had originated the contracts. The ASU is effective for annual periods beginning after December 15, 2022, and interim periods within those annual periods, with early adoption permitted. The amended guidance should be applied on a prospective basis to any business combinations that occur on or after the adoption date. The Company is currently evaluating the impact of this guidance but does not expect the guidance to have a significant impact on the Company's financial position, results of operations, or cash flow.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The amendments in this Update are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, which extends some of the optional expedients under Topic 848 to include derivative contracts impacted by discounting transition. Companies can apply the ASU immediately. The ASU can be adopted on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to any new modification from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The optional guidance will only be available until December 31, 2022. While the Company’s fixed-rate outstanding debt will not be impacted by the reference rate reform, the Company is still evaluating the impact of this guidance on its revolving credit facility, as the interest rate associated with any future borrowings against the revolving credit facility is based on LIBOR. Overall, the Company does not expect the guidance to have a significant impact on its financial position or related disclosures.
There were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.
5
3. Revenue
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration expected to be received in exchange for those goods or services. Sales, value added, and other taxes collected concurrently with revenue-producing activities are excluded from revenue.
The following table presents our revenues disaggregated by product line (dollars in millions):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Packaging |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Paper |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Packaging Revenue
Our containerboard mills produce linerboard and corrugating medium which are papers primarily used in the production of corrugated products. The majority of our containerboard production is used internally by our corrugated products manufacturing facilities. The remaining containerboard is sold to outside domestic and export customers. Our corrugated products manufacturing plants produce a wide variety of corrugated packaging products and retail merchandise displays. We sell corrugated products to national, regional and local accounts, which are broadly diversified across industries and geographic locations.
The Company recognizes revenue for its packaging products when performance obligations under the terms of a contract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time. Based on our express terms and conditions of the sale of products to our customers, as well as terms included in contractual arrangements with our customers, we do not have an enforceable right of payment that includes a reasonable profit throughout the duration of the contract for products that do not have an alternative use. Revenue is recognized when the product is shipped from the mill or from our manufacturing facility to our customer. Certain customers may receive volume-based incentives, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue recognized.
Certain customers receive a portion of their packaging products as consigned inventory with billing triggered once the customer uses or consumes the designated product. Prior to invoicing, these amounts are handled as unbilled receivables. Total unbilled receivables, which are immaterial in amount, are included in the accounts receivable financial statement caption.
Paper Revenue
We manufacture and sell a range of communication-based papers. Communication papers consist of cut-size office papers, and printing and converting papers.
The Company recognizes revenue for its paper products when performance obligations under the terms of a contract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time. Revenue is recognized when the product is shipped from the mill or from our manufacturing facility or distribution center to our customer. Certain customers may receive volume-based incentives, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue recognized.
Corporate and Other Revenue
Revenue in this segment primarily relates to Louisiana Timber Procurement Company, L.L.C. ("LTP"), a variable-interest entity that is
The Company recognizes revenue within this segment when performance obligations under the terms of a contract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time.
Practical Expedients and Exemption
Shipping and handling fees billed to a customer are recorded on a gross basis in "Net sales" with the corresponding shipping and handling costs included in "Cost of sales" in the concurrent period as the revenue is recorded. We expense sales commissions when incurred because the amortization period is one year or less. Sales commissions are recorded in "Selling, general, and administrative expenses".
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
6
4. Acquisitions
Advance Packaging Acquisition
On
During the second quarter of 2022, we received $
The Company accounted for the Advance Packaging acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations.
|
|
12/31/2021 Allocation |
|
|
Adjustments |
|
|
Revised Allocation |
|
|||
Goodwill |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Other intangible assets |
|
|
|
|
|
( |
) |
|
|
|
||
Property, plant and equipment |
|
|
|
|
|
|
|
|
|
|||
Other net assets |
|
|
|
|
|
|
|
|
|
|||
Net assets acquired |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
The purchase price allocation above is preliminary and is subject to finalization of various valuations and assessments, primarily related to intangible assets. Our current estimates and assumptions may change as more information becomes available. We expect to finalize the valuation within the 12-month period following the acquisition date.
Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. Among the factors that contributed to the recognition of goodwill were Advance Packaging's commitment to continuous improvement and synergies, as well as the expected increases in PCA's containerboard integration levels. Goodwill is deductible for tax purposes.
Other intangible assets, primarily customer relationships, were assigned an estimated weighted average useful life of
Property, plant, and equipment were assigned estimated useful lives ranging from to.
5. Earnings Per Share
The following table sets forth the computation of basic and diluted income per common share for the periods presented (dollars and shares in millions, except per share data):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
Numerator: |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Less: Distributed and undistributed earnings allocated to participating |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net income attributable to common shareholders |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average basic common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average diluted common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic income per common share |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Diluted income per common share |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
7
6. Other Expense, Net
The components of other income (expense), net, were as follows (dollars in millions):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Asset disposals and write-offs |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Jackson mill conversion-related activities (a) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Acquisition-related, facilities closure and other income (b) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
7. Income Taxes
For the three months ended June 30, 2022 and 2021, we recorded $
For the six months ended June 30, 2022 and 2021, we recorded $
Our current effective tax rate may differ from the federal statutory income tax rate of
During the three and six months ended June 30, 2022, there were no significant changes to our uncertain tax positions. For more information, see Note 8, Income Taxes, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 2021 Annual Report on Form 10-K.
8. Inventories
We value our raw materials, work in process, and finished goods inventories using lower of cost, as determined by the average cost method, or net realizable value. Supplies and materials are valued at the first-in, first-out (FIFO) or average cost methods.
The components of inventories were as follows (dollars in millions):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
Supplies and materials |
|
|
|
|
|
|
||
Inventories |
|
$ |
|
|
$ |
|
||
8
9. Property, Plant, and Equipment
The components of property, plant, and equipment were as follows (dollars in millions):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Land and land improvements |
|
$ |
|
|
$ |
|
||
Buildings |
|
|
|
|
|
|
||
Machinery and equipment |
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Property, plant and equipment, at cost |
|
|
|
|
|
|
||
Less accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Property, plant, and equipment, net |
|
$ |
|
|
$ |
|
||
Depreciation expense for the three months ended June 30, 2022 and 2021 was $
10. Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. At June 30, 2022 and December 31, 2021 we had $
Changes in the carrying amount of our goodwill are as follows (dollars in millions):
|
|
Goodwill |
|
|
Balance at January 1, 2022 |
|
$ |
|
|
Acquisitions (a) |
|
|
( |
) |
Balance at June 30, 2022 |
|
$ |
|
|
Intangible Assets
Intangible assets are primarily comprised of customer relationships and trademarks and trade names.
The weighted average remaining useful life, gross carrying amount, and accumulated amortization of our intangible assets were as follows (dollars in millions):
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||||||||||
|
|
Weighted |
|
|
Gross |
|
|
Accumulated |
|
|
Weighted |
|
|
Gross |
|
|
Accumulated |
|
||||||
Customer relationships (b) |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
||||||
Trademarks and trade names (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total intangible assets (excluding goodwill) |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
||||||
During the six months ended June 30, 2022 and 2021, amortization expense was $
9
11. Accrued Liabilities
The components of accrued liabilities were as follows (dollars in millions):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Compensation and benefits |
|
$ |
|
|
$ |
|
||
Customer rebates and other credits |
|
|
|
|
|
|
||
Franchise, property, sales and use taxes |
|
|
|
|
|
|
||
Medical insurance and workers’ compensation |
|
|
|
|
|
|
||
Environmental liabilities and asset retirement obligations |
|
|
|
|
|
|
||
Severance, retention, and relocation |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
12. Debt
For the six months ended June 30, 2022 and 2021, cash payments for interest were $
Included in interest expense, net is the amortization of financing costs. For the three months ended June 30, 2022 and 2021, amortization of financing costs was $
At June 30, 2022, we had $
For more information on our long-term debt and interest rates on that debt, see Note 11, Debt, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our 2021 Annual Report on Form 10-K.
13. Cash, Cash Equivalents, and Marketable Debt Securities
The following table shows the Company’s cash and available-for-sale ("AFS") debt securities by major asset category at June 30, 2022 and December 31, 2021 (in millions):
|
|
June 30, 2022 |
|
|||||||||||||||||||||||||
|
|
Adjusted |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Cash and |
|
|
Short-Term |
|
|
Long-Term |
|
|||||||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Level 1 (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
U.S. Treasury securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Money market funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Subtotal |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Level 2 (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Corporate debt securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. government agency securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Certificates of deposit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Subtotal |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
10
|
|
December 31, 2021 |
|
|||||||||||||||||||||||||
|
|
Adjusted |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Cash and |
|
|
Short-Term |
|
|
Long-Term |
|
|||||||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Level 1 (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
U.S. Treasury securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Money market funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Subtotal |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Level 2 (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Corporate debt securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. government agency securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Certificates of deposit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Subtotal |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
For the three and six months ended June 30, 2022 and 2021, net realized gains and losses on the sales and maturities of certain marketable debt securities were insignificant.
The Company invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy requires securities to be investment grade and limits the amount of credit exposure to any one issuer. The maturities of the Company’s long-term marketable debt securities generally range from to
Fair values were determined for each individual marketable debt security in the investment portfolio. When evaluating a marketable debt security for impairment, PCA reviews factors such as the duration and extent to which the fair value of the marketable debt security is less than its cost, the financial condition of the issuer and any changes thereto, the general market condition in which the issuer operates, and PCA’s intent to sell, or whether it will be more likely than not be required to sell, the marketable debt security before recovery of its amortized cost basis.
As of June 30, 2022 and December 31, 2021, we do
The following table provides information about the Company’s marketable debt securities that have been in a continuous loss position as of June 30, 2022 and December 31, 2021 (in millions, except number of marketable debt securities in a loss position):
|
|
June 30, 2022 |
|
|||||||||||||||||||||
|
|
Fair Value of |
|
|
Number of Marketable |
|
|
Unrealized Losses |
|
|
Fair Value of |
|
|
Number of Marketable |
|
|
Unrealized Losses |
|
||||||
Corporate debt securities |
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
||||||
U.S. Treasury securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
||||||
U.S. government agency securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Certificates of deposit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
||||||
11
|
|
December 31, 2021 |
|
|||||||||
|
|
Fair Value of |
|
|
Number of Marketable |
|
|
Unrealized |
|
|||
Corporate debt securities |
|
$ |
|
|
|
|
|
$ |
|
|||
U.S. Treasury securities |
|
|
|
|
|
|
|
|
|
|||
U.S. government agency securities |
|
|
|
|
|
|
|
|
|
|||
Certificates of deposit |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
|
|
|
$ |
|
|||
14. Employee Benefit Plans and Other Postretirement Benefits
The components of net periodic benefit cost for our pension plans were as follows (dollars in millions):
|
|
Pension Plans |
|
|||||||||||||
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net amortization of unrecognized amounts |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Actuarial loss |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net periodic benefit cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
PCA makes pension plan contributions that are sufficient to fund its actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA). From time to time, PCA may make additional discretionary contributions based on the funded status of the plans, tax deductibility, income from operations, and other factors. During the three and six months ended June 30, 2022 and 2021, payments to our nonqualified pension plans were insignificant. During the three and six months ended June 30, 2022 and 2021, we did
For the three and six months ended June 30, 2022 and 2021, the net periodic benefit cost for our postretirement plans was insignificant.
15. Share-Based Compensation
The Company has a long-term equity incentive plan, which allows for grants of restricted stock, performance awards, stock appreciation rights, and stock options to directors, officers, and employees, as well as others who engage in services for PCA. On February 25, 2020, our board of directors approved and, on May 5, 2020, our stockholders approved, the amendment and restatement of the plan. The amendment extended the plan’s term to
As of June 30, 2022, assuming performance units are paid out at the target level of performance,
The following table presents restricted stock and performance unit award activity for the six months ended June 30, 2022:
|
|
Restricted Stock |
|
|
Performance Units |
|
||||||||||
|
|
Shares |
|
|
Weighted |
|
|
Shares |
|
|
Weighted |
|
||||
Outstanding at January 1, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vested (a) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Forfeitures |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Outstanding at June 30, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
12
Compensation Expense
Our share-based compensation expense is primarily recorded in "Selling, general, and administrative expenses." Compensation expense for share-based awards recognized in the Consolidated Statements of Income, net of forfeitures, was as follows (dollars in millions):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Restricted stock |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Performance units |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income tax benefit |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Share-based compensation expense, net of tax benefit |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The fair value of restricted stock is determined based on the closing price of the Company’s stock on the grant date. Compensation expense, net of estimated forfeitures, is recorded over the requisite service period. As PCA’s Board of Directors has the ability to accelerate the vesting of these awards upon an employee’s retirement, the Company accelerates the recognition of compensation expense for certain employees approaching normal retirement age.
Performance unit awards granted to certain key employees are earned based on the achievement of defined performance rankings of Return on Invested Capital (ROIC) or Total Shareholder Return (TSR) compared to ROIC and TSR for peer companies. For performance unit awards made in 2022 and 2021, in terms of grant date value,
The unrecognized compensation expense for all share-based awards at June 30, 2022 was as follows (dollars in millions):
|
|
June 30, 2022 |
|
|||||
|
|
Unrecognized |
|
|
Remaining |
|
||
Restricted stock |
|
$ |
|
|
|
|
||
Performance units |
|
|
|
|
|
|
||
Total unrecognized share-based compensation expense |
|
$ |
|
|
|
|
||
16. Stockholders' Equity
Dividends
During the six months ended June 30, 2022, we paid $
Repurchases of Common Stock
On January 26, 2022, PCA announced that its Board of Directors authorized the repurchase of an additional $
The Company did
13
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) (AOCI) by component were as follows (dollars in millions). Amounts in parentheses indicate losses:
|
|
Unrealized |
|
|
Unrealized Loss |
|
|
Unfunded |
|
|
Total |
|
||||
Balance at January 1, 2022 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income before reclassifications, |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Amounts reclassified from AOCI, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance at June 30, 2022 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Reclassifications out of AOCI were as follows (dollars in millions). Amounts in parentheses indicate expenses in the Consolidated Statements of Income:
|
|
Amounts Reclassified from AOCI |
|
|
|
|||||||||||||
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
||||||||||
Details about AOCI Components |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
||||
Unfunded employee benefit obligations (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of prior service costs |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
See (a) below |
Amortization of actuarial losses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
See (a) below |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total before tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit |
||||
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Net of tax |
17. Concentrations of Risk
Our Paper segment has a long-standing commercial and contractual relationship with Office Depot, our largest customer in the paper business. This relationship exposes us to a significant concentration of business and financial risk. Our sales to Office Depot represent approximately
Louisiana Timber Procurement Company, L.L.C. ("LTP") is a variable-interest entity that is
During the three months ended June 30, 2022 and 2021, fiber purchases from related parties were $
19. Segment Information
We report our business in
14
Our Jackson, Alabama mill had historically operated as a UFS mill, with its results of operations reported in our Paper segment. During the fourth quarter of 2020, in order to meet strong packaging demand and maintain appropriate inventory levels, we temporarily began producing linerboard on the No. 3 machine at our Jackson, Alabama mill. In the first quarter of 2021, we announced the discontinuation of production of UFS paper grades on the machine and the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities. In the third quarter of 2021, we began producing corrugating medium on the No. 1 machine at the Jackson mill (which had produced UFS paper in the past) to help satisfy our demand for containerboard, build necessary inventories, and evaluate the capability of the machine to produce containerboard on a cost-effective basis. For the periods presented, operating results for the Jackson mill are included in both the Packaging and Paper segments, as appropriate.
Each segment’s profits and losses are measured on operating profits before interest expense, net, non-operating pension income, and income taxes. For certain allocated expenses, the related assets and liabilities remain in the Corporate and Other segment.
Selected financial information by reportable segment was as follows (dollars in millions):
|
|
Sales, net |
|
|
|
|
|
||||||||||
Three Months Ended June 30, 2022 |
|
Trade |
|
|
Intersegment |
|
|
Total |
|
|
Operating Income (Loss) |
|
|
||||
Packaging |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
(a) |
||||
Paper |
|
|
|
|
|
— |
|
|
|
|
|
|
|
(a) |
|||
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|||
Intersegment eliminations |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|||
Non-operating pension income |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|||
Income before taxes |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
|
|
Sales, net |
|
|
|
|
|
||||||||||
Three Months Ended June 30, 2021 |
|
Trade |
|
|
Intersegment |
|
|
Total |
|
|
Operating Income (Loss) |
|
|
||||
Packaging |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
(b) |
||||
Paper |
|
|
|
|
|
— |
|
|
|
|
|
|
|
(b) |
|||
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
(b) |
|||
Intersegment eliminations |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|||
Non-operating pension income |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|||
Income before taxes |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
|
|
Sales, net |
|
|
|
|
|
||||||||||
Six Months Ended June 30, 2022 |
|
Trade |
|
|
Intersegment |
|
|
Total |
|
|
Operating Income (Loss) |
|
|
||||
Packaging |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
(a) |
||||
Paper |
|
|
|
|
|
— |
|
|
|
|
|
|
|
(a) |
|||
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|||
Intersegment eliminations |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|||
Non-operating pension income |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|||
Income before taxes |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
|
|
Sales, net |
|
|
|
|
|
||||||||||
Six Months Ended June 30, 2021 |
|
Trade |
|
|
Intersegment |
|
|
Total |
|
|
Operating Income (Loss) |
|
|
||||
Packaging |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
(b) |
||||
Paper |
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
||||
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
(b) |
|||
Intersegment eliminations |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|||
Non-operating pension income |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|||
Income before taxes |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
15
(a) |
The three and six months ended June 30, 2022 include the following: |
|
|
1. |
$ |
|
2. |
$ |
|
|
|
(b) |
The three and six months ended June 30, 2021 include the following: |
|
|
1. |
$ |
|
2. |
$ |
20. Commitments, Guarantees, Indemnifications and Legal Proceedings
We have financial commitments and obligations that arise in the ordinary course of our business. These include long-term debt, capital commitments, lease obligations, and purchase commitments for goods and services, and legal proceedings, all of which are discussed in Note 11, Debt, and Note 21, Commitments, Guarantees, Indemnifications, and Legal Proceedings, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our 2021 Annual Report on Form 10-K.
Guarantees and Indemnifications
We provide guarantees, indemnifications, and other assurances to third parties in the normal course of our business. These include tort indemnifications, product guarantees, environmental assurances, and representations and warranties in commercial agreements. At June 30, 2022, we are not aware of any material liabilities arising from any guarantee, indemnification, or financial assurance we have provided. If we determined such a liability was probable and subject to reasonable determination, we would accrue for it at that time.
DeRidder Mill Incident
On
The Company has cooperated with investigations from the U.S. Occupational Health and Safety Administration ("OSHA"), the U.S. Chemical Safety Board ("CSB") and the U.S. Environmental Protection Agency ("EPA"). The U.S. Chemical Safety Board completed its investigation and issued its report during the second quarter of 2018. The Company settled with OSHA during the second quarter of 2018 and paid approximately $
The EPA investigation is ongoing. In May 2017, the EPA conducted an on-site inspection of the facility to assess compliance with the Clean Air Act, Risk Management Program ("RMP"). The Company provided additional information to the EPA promptly after the inspection to address certain areas of concern ("AOCs") observed during the inspection. In January 2021, the EPA and U.S. Department of Justice ("DOJ") initiated civil judicial enforcement discussions with PCA. These discussions are ongoing. As of the date of filing of this report, no complaint has been filed. PCA continues to cooperate with the agencies. Since the inspection in 2017, PCA performed several voluntary activities to address the AOCs presented in the EPA’s inspection report and has removed the RMP covered process from the facility.
Legal Proceedings
We are also a party to various legal actions arising in the ordinary course of our business. These legal actions include commercial liability claims, premises liability claims, and employment-related claims, among others. As of the date of this filing, we believe it is not reasonably possible that any of the legal actions against us will, either individually or in the aggregate, have a material adverse effect on our financial condition, results of operations, or cash flows.
16
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis includes statements regarding our expectations with respect to our future performance, expected business conditions, liquidity, and capital resources. Such statements, along with any other statements that are not historical in nature, are forward-looking. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in our 2021 Annual Report on Form 10-K, as well as those factors listed in other documents we file with the Securities and Exchange Commission ("SEC"). We do not assume any obligation to update any forward-looking statement. Our actual results may differ materially from those contained in or implied by any of the forward-looking statements in this Form 10-Q. Please see “Forward Looking Statements” elsewhere in this Item 2.
Overview
PCA is the third largest producer of containerboard products and a leading producer of UFS paper in North America. We operate eight mills and 90 corrugated products manufacturing plants. Our containerboard mills produce linerboard and corrugating medium, which are papers primarily used in the production of corrugated products. Our corrugated products manufacturing plants produce a wide variety of corrugated packaging products, including conventional shipping containers used to protect and transport manufactured goods, multi-color boxes and displays with strong visual appeal that help to merchandise the packaged product in retail locations, and honeycomb protective packaging. In addition, we are a large producer of packaging for meat, fresh fruit and vegetables, processed food, beverages, and other industrial and consumer products. We also manufacture and sell UFS papers, including both commodity and specialty papers, which may have custom or specialized features such as colors, coatings, high brightness, and recycled content. We are headquartered in Lake Forest, Illinois and operate primarily in the United States.
This Item 2 is intended to supplement, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2021 Annual Report on Form 10-K.
Executive Summary
Second quarter net sales were $2.24 billion in 2022 and $1.88 billion in 2021. We reported $302 million of net income, or $3.20 per diluted share, during the second quarter of 2022, compared to $207 million, or $2.17 per diluted share, during the same period in 2021. Net income included $2 million of expense for special items in the second quarter of 2022, compared to less than $1 million of income for special items in 2021 (discussed below). Excluding special items, net income was $304 million, or $3.23 per diluted share, during the second quarter of 2022, compared to $207 million, or $2.17 per diluted share, in the second quarter of 2021. The increase in net income was driven primarily by higher prices and mix and volume in the Packaging segment, higher prices and mix in the Paper segment, lower scheduled outage expenses, lower interest expense, and other items. These items were partially offset by higher operating costs, freight and logistics expenses, converting costs, and depreciation expense, lower volume in the Paper segment, and a higher tax rate. For additional detail on special items included in reported GAAP results, as well as segment income (loss) excluding special items, earnings before non-operating pension income (expense), interest, income taxes, and depreciation, amortization, and depletion ("EBITDA"), and EBITDA excluding special items, see “Item 2. Reconciliations of Non-GAAP Financial Measures to Reported Amounts.”
Packaging segment income from operations was $420 million in the second quarter of 2022, compared to $317 million in the second quarter of 2021. Packaging segment EBITDA excluding special items was $525 million in the second quarter of 2022 compared to $409 million in the second quarter of 2021. The increase was due primarily to higher prices and mix and higher sales and production volumes, and lower scheduled outage expenses, partially offset by higher operating and converting costs, and higher freight and logistic expenses. Demand in the Packaging segment remained strong and corrugated product shipments were flat with the prior year second quarter.
Paper segment income from operations was $23 million in the second quarter of 2022, compared to $3 million in the second quarter of 2021. Paper segment EBITDA excluding special items was $32 million in the second quarter of 2022, compared to $12 million in the second quarter of 2021. The increase was due to higher prices and mix and lower operating costs, partially offset by lower sales and production volumes, and higher freight and logistic expenses.
During the fourth quarter of 2020, in order to meet strong packaging demand and maintain appropriate inventory levels in the packaging segment, we temporarily began producing linerboard on the No. 3 machine at the Jackson mill, and we have produced linerboard on the machine since that time. In the first quarter of 2021, we announced the discontinuation of production of UFS paper grades on the machine and the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities. Sales and production in the Paper segment will remain below pre-pandemic levels as we will no longer be producing paper products on the Jackson No. 3 machine. In the third quarter of 2021, we began producing corrugating medium on the No. 1 machine at the Jackson mill (which had produced UFS paper in the past) to help satisfy our demand for containerboard, build necessary inventories, and evaluate the capability of the machine to produce containerboard on a cost-effective basis. We expect to continue producing corrugating medium on the machine for the foreseeable future. For the periods presented, operating results for the Jackson mill are included in both the Packaging and Paper segments, as appropriate.
Packaging segment income from operations was $782 million in the first six months of 2022, compared to $575 million in the same period in 2021. Packaging segment EBITDA excluding special items was $989 million in the first six months of 2022 compared to $761 million in the first six months of 2021. The increase in EBITDA excluding special items was due primarily to higher prices and mix and higher sales and production volumes and lower scheduled outage expenses, partially offset by higher operating and converting costs, and higher freight and logistic expenses.
17
Paper segment income from operations was $45 million in the first six months of 2022, compared to $11 million in the first six months of 2021. Paper segment EBITDA excluding special items was $60 million in the first six months of 2022, compared to $27 million in the same period in 2021. The increase in EBITDA excluding special items was due to higher prices and mix and lower operating costs, partially offset by lower sales and production volumes and higher freight and logistic expenses.
Special Items and Earnings per Diluted Share, Excluding Special Items
A reconciliation of reported earnings per diluted share to earnings per diluted share, excluding special items, for the three months ended June 30, 2022 and 2021 are as follows:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Earnings per diluted share, as reported |
|
$ |
3.20 |
|
|
$ |
2.17 |
|
|
$ |
5.91 |
|
|
$ |
3.92 |
|
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Jackson mill conversion-related activities (a) |
|
|
0.03 |
|
|
|
0.03 |
|
|
$ |
0.04 |
|
|
|
0.04 |
|
Acquisition-related, facilities closure and other income (b) |
|
|
(0.01 |
) |
|
|
(0.03 |
) |
|
|
— |
|
|
|
(0.02 |
) |
Total special items |
|
|
0.02 |
|
|
|
— |
|
|
|
0.04 |
|
|
|
0.02 |
|
Earnings per diluted share, excluding special items |
|
$ 3.23 (c) |
|
|
$ |
2.17 |
|
|
$ |
5.95 |
|
|
$ |
3.94 |
|
|
Included in this Item 2 are various non-GAAP financial measures, including diluted EPS excluding special items, segment income excluding special items and EBITDA excluding special items. Management excludes special items as it believes these items are not necessarily reflective of the ongoing results of operations of our business. We present these measures because they provide a means to evaluate the performance of our segments and our Company on an ongoing basis using the same measures that are used by our management, because these measures assist in providing a meaningful comparison between periods presented and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. A reconciliation of diluted EPS to diluted EPS excluding special items is included above and the reconciliations of other non-GAAP measures used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, to the most comparable measure reported in accordance with GAAP, are included in Item 2 under “Reconciliations of Non-GAAP Financial Measures to Reported Amounts.” Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such.
Industry and Business Conditions
Trade publications reported North American industry-wide corrugated products shipments in total and per work day were down 2.3% during the second quarter of 2022 compared to the same quarter of 2021. Reported industry containerboard production increased 2.2% compared to the second quarter of 2021. Reported industry containerboard inventories at the end of the second quarter of 2022 were approximately 2.86 million tons, up 16.1% compared to the same period in 2021. Reported containerboard export shipments were up 18.7% compared to the second quarter of 2021. Prices reported by trade publications increased by $60 per ton for linerboard and $70 per ton for corrugating medium in March 2022. There were no additional price increases in the second quarter of 2022.
Trade publications reported North American UFS paper shipments were essentially flat, up 0.4% in the second quarter of 2022, compared to the same quarter of 2021. Average prices reported by a trade publication for cut size office papers were higher by $100 per ton, or 7.7%, in the second quarter of 2022, compared to the first quarter of 2022, and higher by $270 per ton, or 23.9%, compared to the second quarter of 2021.
18
Outlook
During the third quarter, we expect higher prices in our Packaging segment as we implement the remaining portion of previously announced price increases. In our Paper segment, we expect higher prices as we will continue to implement our previously announced price increases. We notified customers of an additional $60 per ton price increase on all paper grades, effective with shipments beginning September 6, 2022. With economic conditions continuing to be negatively impacted by broad-based inflation and aggressive interest rate increases, we see corrugated products growth as softening in the quarter but demand still firm as certain end markets work through their current supply of inventory. We expect continued inflation of our operating and converting costs, including higher costs for natural gas, purchased electricity, and chemicals, along with higher labor costs. We also expect higher freight expenses, driven by continued rail service challenges and rail fuel surcharges. Maintenance outage costs will be higher because we postponed our scheduled International Falls mill outage from the second to the third quarter. Considering these items, and excluding the effect of any special items, we expect third quarter earnings to be lower than our earnings for the second quarter.
Results of Operations
Three Months Ended June 30, 2022, compared to Three Months Ended June 30, 2021
The historical results of operations of PCA for the three months ended June 30, 2022 and 2021 are set forth below (dollars in millions):
|
|
Three Months Ended |
|
|
|
|
||||||
|
|
June 30, |
|
|
|
|
||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|||
Packaging |
|
$ |
2,066.9 |
|
|
$ |
1,718.5 |
|
|
$ |
348.4 |
|
Paper |
|
|
149.8 |
|
|
|
142.3 |
|
|
|
7.5 |
|
Corporate and Other |
|
|
63.2 |
|
|
|
55.1 |
|
|
|
8.1 |
|
Intersegment eliminations |
|
|
(42.6 |
) |
|
|
(36.0 |
) |
|
|
(6.6 |
) |
Net sales |
|
$ |
2,237.3 |
|
|
$ |
1,879.9 |
|
|
$ |
357.4 |
|
|
|
|
|
|
|
|
|
|
|
|||
Packaging |
|
$ |
419.8 |
|
|
$ |
317.2 |
|
|
$ |
102.6 |
|
Paper |
|
|
22.7 |
|
|
|
2.6 |
|
|
|
20.1 |
|
Corporate and Other |
|
|
(26.7 |
) |
|
|
(25.2 |
) |
|
|
(1.5 |
) |
Income from operations |
|
$ |
415.8 |
|
|
$ |
294.6 |
|
|
$ |
121.2 |
|
Non-operating pension income |
|
|
3.6 |
|
|
|
5.0 |
|
|
|
(1.4 |
) |
Interest expense, net |
|
|
(18.8 |
) |
|
|
(24.9 |
) |
|
|
6.1 |
|
Income before taxes |
|
|
400.6 |
|
|
|
274.7 |
|
|
|
125.9 |
|
Income tax provision |
|
|
(99.1 |
) |
|
|
(67.4 |
) |
|
|
(31.7 |
) |
Net income |
|
$ |
301.5 |
|
|
$ |
207.3 |
|
|
$ |
94.2 |
|
Non-GAAP Measures (a) |
|
|
|
|
|
|
|
|
|
|||
Net income excluding special items |
|
$ |
303.7 |
|
|
$ |
206.6 |
|
|
$ |
97.1 |
|
Consolidated EBITDA |
|
|
530.1 |
|
|
|
399.3 |
|
|
|
130.8 |
|
Consolidated EBITDA excluding special items |
|
|
532.6 |
|
|
|
396.8 |
|
|
|
135.8 |
|
Packaging EBITDA |
|
|
525.8 |
|
|
|
412.1 |
|
|
|
113.7 |
|
Packaging EBITDA excluding special items |
|
|
525.3 |
|
|
|
408.8 |
|
|
|
116.5 |
|
Paper EBITDA |
|
|
28.5 |
|
|
|
10.1 |
|
|
|
18.4 |
|
Paper EBITDA excluding special items |
|
|
31.5 |
|
|
|
11.6 |
|
|
|
19.9 |
|
Net Sales
Net sales increased $357 million, or 19.0%, to $2,237 million during the three months ended June 30, 2022, compared to $1,880 million during the same period in 2021.
Packaging. Net sales increased $348 million, or 20.3%, to $2,067 million, compared to $1,719 million in the second quarter of 2021 due to higher prices and mix ($286 million) and higher containerboard and corrugated products volume ($62 million). In the second quarter of 2022, our domestic containerboard prices were 15.3% higher, while export prices were 27.7% higher, than the same period in 2021. In the second quarter of 2022, export and domestic containerboard outside shipments increased 23.0% compared to the second quarter of 2021. Our total corrugated products shipments were flat in total and per workday, compared to the same period in 2021.
Paper. Net sales increased $8 million, or 5.3%, to $150 million, compared to $142 million in the second quarter of 2021, due to higher prices and mix ($23 million), partially offset by lower volume ($15 million).
19
Gross Profit
Gross profit increased $140 million during the three months ended June 30, 2022, compared to the same period in 2021. The increase was driven primarily by higher prices and mix and volume in the Packaging segment, higher prices and mix in the Paper segment, and lower scheduled outage expenses, partially offset by higher operating costs, higher freight and logistics expenses, higher converting costs, and lower volume in the Paper segment. In both the three month periods ended June 30, 2022, and 2021, gross profit included $2 million of special items. For 2022, these special items included charges primarily related to Jackson mill conversion-related activities and acquisition and integration costs related to Advance Packaging, partially offset by income related to a favorable lease buyout for a closed corrugated facility. For 2021, these special items included charges related to Jackson mill conversion-related activities and corrugated facility closure costs.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) increased $10 million during the three months ended June 30, 2022, compared to the same period in 2021. The increase was primarily due to higher information technology expenses and employee related expenses.
Other Expense, Net
Other income (expense), net, for the three months ended June 30, 2022 and 2021 are set forth below (dollars in millions):
|
|
Three Months Ended |
|
|||||
|
|
June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Asset disposals and write-offs |
|
$ |
(13.8 |
) |
|
$ |
(9.0 |
) |
Jackson mill conversion-related activities |
|
|
(1.7 |
) |
|
$ |
(2.4 |
) |
Acquisition-related, facilities closure and other income |
|
|
0.5 |
|
|
|
5.5 |
|
Other |
|
|
(1.3 |
) |
|
|
(2.0 |
) |
Total |
|
$ |
(16.3 |
) |
|
$ |
(7.9 |
) |
We discuss these items in more detail in Note 6, Other Expense, Net, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this Form 10-Q.
Income from Operations
Income from operations increased $121 million, or 41.1%, during the three months ended June 30, 2022, compared to the same period in 2021. The second quarter of 2022 included $3 million of special items expense primarily related to the Jackson mill conversion-related activities, corrugated facility closure costs, and acquisition and integration costs related to Advance Packaging, partially offset by income related to storm damage proceeds and a favorable lease buyout for a closed corrugated facility, compared to $1 million of special items income related to corrugated facility closures, net of costs for Jackson mill conversion-related activities in the second quarter of 2021.
Packaging. Packaging segment income from operations increased $103 million to $420 million, compared to $317 million during the three months ended June 30, 2021. The increase related primarily to higher containerboard and corrugated products prices and mix ($255 million), higher sales and production volumes ($16 million), lower annual outage expenses ($10 million), and other costs ($2 million), partially offset by higher operating and converting costs ($136 million), higher freight expenses ($31 million), and higher depreciation expense ($11 million). Special items during the second quarter of 2022 included $1 million of income primarily related to storm damage insurance proceeds and a favorable lease buyout for a closed corrugated facility, net of costs for Jackson mill conversion-related activities, corrugated facility closures, and Advanced Packaging acquisition and integration costs, compared to $3 million of income for special items primarily related to corrugated facility closures in the second quarter of 2021.
Paper. Paper segment income from operations increased $20 million to $23 million, compared to $3 million during the three months ended June 30, 2021. The increase primarily related to higher prices and mix ($23 million), lower operating costs ($7 million), and lower depreciation expenses ($1 million), partially offset by lower sales and production volumes ($8 million), higher freight expenses ($1 million), and other costs ($1 million). Special items during both the second quarter of 2022 and the second quarter of 2021 each included $4 million of expense for Jackson mill conversion-related activities.
Non-Operating Pension Income, Interest Expense, Net and Income Taxes
Non-operating pension income decreased $1 million during the three months ended June 30, 2022, compared to the same period in 2021. The decrease in non-operating pension income was primarily related to assumption changes, partially offset by favorable 2021 asset performance.
Interest expense, net for the three months ended June 30, 2022 decreased $6 million when compared to the same period in 2021. The decrease in interest expense, net was primarily due to lower interest rates on the Company's fixed-rate debt as a result of the Company's debt refinancing completed in October 2021, higher interest income due to higher rates on invested cash balances, and higher capitalized interest related to the increase in capital investments in the second quarter of 2022, compared to the same period in 2021.
20
During the three months ended June 30, 2022, we recorded $99 million of income tax expense, compared to $67 million of expense during the three months ended June 30, 2021. The effective tax rate for the three months ended June 30, 2022 and 2021 was 24.7% and 24.5%, respectively. The increase in our effective tax rate for the three months ended June 30, 2022 compared to the same period in 2021 was primarily due to higher nondeductible employee remuneration paid to covered employees.
Six Months Ended June 30, 2022, compared to Six Months Ended June 30, 2021
The historical results of operations of PCA for the six months ended June 30, 2022 and 2021 are set forth below (dollars in millions):
|
|
Six Months Ended |
|
|
|
|
||||||
|
|
June 30, |
|
|
|
|
||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|||
Packaging |
|
$ |
4,031.3 |
|
|
$ |
3,342.1 |
|
|
$ |
689.2 |
|
Paper |
|
|
303.3 |
|
|
|
306.8 |
|
|
|
(3.5 |
) |
Corporate and Other |
|
|
121.5 |
|
|
|
110.5 |
|
|
|
11.0 |
|
Intersegment eliminations |
|
|
(82.4 |
) |
|
|
(72.4 |
) |
|
|
(10.0 |
) |
Net sales |
|
$ |
4,373.7 |
|
|
$ |
3,687.0 |
|
|
$ |
686.7 |
|
|
|
|
|
|
|
|
|
|
|
|||
Packaging |
|
$ |
782.1 |
|
|
$ |
575.1 |
|
|
$ |
207.0 |
|
Paper |
|
|
45.1 |
|
|
|
11.3 |
|
|
|
33.8 |
|
Corporate and Other |
|
|
(54.8 |
) |
|
|
(53.5 |
) |
|
|
(1.3 |
) |
Income from operations |
|
$ |
772.4 |
|
|
$ |
532.9 |
|
|
$ |
239.5 |
|
Non-operating pension income |
|
|
7.3 |
|
|
|
9.8 |
|
|
|
(2.5 |
) |
Interest expense, net |
|
|
(38.7 |
) |
|
|
(48.4 |
) |
|
|
9.7 |
|
Income before taxes |
|
|
741.0 |
|
|
|
494.3 |
|
|
|
246.7 |
|
Income tax provision |
|
|
(185.3 |
) |
|
|
(120.5 |
) |
|
|
(64.8 |
) |
Net income |
|
$ |
555.7 |
|
|
$ |
373.8 |
|
|
$ |
181.9 |
|
Non-GAAP Measures (a) |
|
|
|
|
|
|
|
|
|
|||
Net income excluding special items |
|
$ |
559.5 |
|
|
$ |
375.5 |
|
|
$ |
184.0 |
|
Consolidated EBITDA |
|
|
996.4 |
|
|
|
738.4 |
|
|
|
258.0 |
|
Consolidated EBITDA excluding special items |
|
|
999.8 |
|
|
|
738.6 |
|
|
|
261.2 |
|
Packaging EBITDA |
|
|
989.0 |
|
|
|
762.1 |
|
|
|
226.9 |
|
Packaging EBITDA excluding special items |
|
|
989.2 |
|
|
|
760.9 |
|
|
|
228.3 |
|
Paper EBITDA |
|
|
57.2 |
|
|
|
25.3 |
|
|
|
31.9 |
|
Paper EBITDA excluding special items |
|
|
60.4 |
|
|
|
27.4 |
|
|
|
33.0 |
|
Net Sales
Net sales increased $687 million, or 18.6%, to $4,374 million during the six months ended June 30, 2022, compared to $3,687 million during the same period in 2021.
Packaging. Net sales increased $689 million, or 20.6%, to $4,031 million, compared to $3,342 million in the six months ended June 30, 2021, due to higher containerboard and corrugated products prices and mix ($554 million) and higher containerboard and corrugated products volume ($135 million). In the first six months of 2022, our domestic containerboard prices were 17.8% higher, while export prices were 34.9% higher, than the same period in 2021. In the first six months of 2022, export and domestic containerboard outside shipments increased 24.5% compared to the first six months of 2021. Total corrugated products shipments were up 1.4% with one additional workday, and up 0.6% per day compared to the same period in 2021, driven by continued strong demand.
Paper. Net sales during the six months ended June 30, 2022 decreased $4 million, or 1.1%, to $303 million, compared to $307 million in the six months ended June 30, 2021, due to decreased volume ($46 million), partially offset by higher prices and mix ($42 million).
Gross Profit
Gross profit increased $270 million during the six months ended June 30, 2022, compared to the same period in 2021. The increase was driven primarily by higher prices and mix and volume in the Packaging segment, higher prices and mix in the Paper segment, and lower scheduled outage expenses, partially offset by higher operating costs, higher freight and logistics expenses, higher converting costs, and lower volume in the Paper segment. In both the six month periods ended June 30, 2022 and 2021, gross profit included $3 million of special items. For 2022, these special items included charges primarily related to Jackson mill conversion-related activities and acquisition and integration costs related to Advance Packaging, partially offset by income related to a favorable lease buyout for a closed corrugated facility. For 2021, these special items included charges related to Jackson mill conversion-related activities and corrugated facility closure costs.
21
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) increased $26 million during the six months ended June 30, 2022, compared to the same period in 2021. The increase was primarily due to employee-related expenses, information technology expenses, and outside services.
Other Expense, Net
Other income (expense), net, for the six months ended June 30, 2022 and 2021 are set forth below (dollars in millions):
|
|
Six Months Ended |
|
|||||
|
|
June 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Asset disposals and write-offs |
|
$ |
(26.4 |
) |
|
$ |
(19.9 |
) |
Jackson mill conversion-related activities |
|
|
(2.1 |
) |
|
$ |
(2.9 |
) |
Acquisition-related, facilities closure and other income |
|
|
0.1 |
|
|
|
3.4 |
|
Other |
|
|
(3.5 |
) |
|
|
(8.9 |
) |
Total |
|
$ |
(31.9 |
) |
|
$ |
(28.3 |
) |
We discuss these items in more detail in Note 6, Other Expense, Net, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this Form 10-Q.
Income from Operations
Income from operations increased $240 million, or 44.9%, during the six months ended June 30, 2022, compared to the same period in 2021. The first six months of 2022 included $5 million of special items expense primarily related to Jackson mill conversion-related costs, corrugated facility closure costs, and acquisition and integration costs related to Advance Packaging, partially offset by income related to storm damage proceeds and a favorable lease buyout for a closed corrugated facility, compared to $5 million of special items expense related to Jackson mill conversion-related activities, partially offset by income related to facility closures in the same period of 2021.
Packaging. Packaging segment income from operations increased $207 million to $782 million during the first six months of 2022, compared to the same period last year. The increase related primarily to higher containerboard and corrugated products prices and mix ($488 million), higher sales and production volumes ($46 million), and lower annual outage expenses ($4 million), partially offset by higher operating and converting costs ($250 million), higher freight expenses ($59 million), and higher depreciation expense ($20 million). There was no impact from special items during the first six months of 2022, compared to $2 million of income related to facility closures and $1 million of costs related to Jackson mill conversation-related activities in the first six months of 2021.
Paper. Paper segment income from operations increased $34 million to $45 million, compared to the six months ended June 30, 2021. The increase primarily related to higher prices and mix ($42 million), lower operating costs ($16 million), and lower depreciation expense ($2 million), partially offset by lower sales and production volumes ($17 million), and higher freight and other expenses ($9 million). Special items during the first six months of 2022 included $5 million of expense related to Jackson mill conversion-related activities, compared to $4 million of expense related to Jackson mill conversation-related activities in the first six months of 2021.
Non-Operating Pension Income, Interest Expense, and Income Taxes
Non-operating pension income decreased $3 million during the six months ended June 30, 2022, compared to the same period in 2021. The decrease in non-operating pension income was primarily related to assumption changes, partially offset by favorable 2021 asset performance.
Interest expense, net decreased $10 million during the six months ended June 30, 2022, compared to the same period in 2021. The decrease in interest expense, net was primarily due to lower interest rates on the Company's fixed-rate debt as a result of the Company's debt refinancing completed in October 2021, higher interest income due to higher rates on invested cash balances, and higher capitalized interest related to the increase in capital investments in the first half of 2022, compared to the same period in 2021.
During the six months ended June 30, 2022, we recorded $185 million of income tax expense, compared to $121 million of expense during the six months ended June 30, 2021. The effective tax rate for the six months ended June 30, 2022 and 2021 was 25.0% and 24.4%, respectively. The increase in our effective tax rate for the six months ended June 30, 2022 compared to the same period in 2021 was primarily due to higher nondeductible employee remuneration paid to covered employees and lower net favorable state tax law changes.
22
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of liquidity are net cash provided by operating activities and available borrowing capacity under our revolving credit facility. At June 30, 2022, we had $667 million of cash and cash equivalents, $144 million of marketable debt securities, and $321 million of unused borrowing capacity under the revolving credit facility, net of letters of credit. Currently, our primary uses of cash are for operations, capital expenditures, acquisitions, debt service, common stock dividends, and repurchases of common stock. We believe that net cash generated from operating activities, cash on hand, available borrowings under our revolving credit facility, and available capital through access to capital markets will be adequate to meet our liquidity and capital requirements, including payments of any declared common stock dividends, for the foreseeable future. As our debt or credit facilities become due, we will need to repay, extend, or replace such facilities. Our ability to do so will be subject to future economic conditions and financial, business, and other factors, many of which are beyond our control.
Below is a summary table of our cash flows, followed by a discussion of our sources and uses of cash through operating activities, investing activities, and financing activities (dollars in millions):
|
|
Six Months Ended |
|
|
|
|
||||||
|
|
June 30, |
|
|
|
|
||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|||
Net cash provided by (used for): |
|
|
|
|
|
|
|
|
|
|||
Operating activities |
|
$ |
644.3 |
|
|
$ |
419.8 |
|
|
$ |
224.5 |
|
Investing activities |
|
|
(398.1 |
) |
|
|
(220.2 |
) |
|
|
(177.9 |
) |
Financing activities |
|
|
(197.6 |
) |
|
|
(202.0 |
) |
|
|
4.4 |
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
48.6 |
|
|
$ |
(2.4 |
) |
|
$ |
51.0 |
|
Operating Activities
Our operating cash flow is primarily driven by our earnings and changes in operating assets and liabilities, such as accounts receivable, inventories, accounts payable and other accrued liabilities, as well as factors described below. Cash requirements for operating activities are subject to PCA’s operating needs and the timing of collection of receivables and payments of payables and expenses.
During the six months ended June 30, 2022, net cash provided by operating activities was $644 million, compared to $420 million in the same period in 2021, an increase of $224 million. Cash from operations excluding changes in cash used for operating assets and liabilities increased $221 million primarily due to higher income from operations in 2022 as discussed above. Cash from operations increased by $4 million due to changes in operating assets and liabilities, primarily due to an increase in accounts payable in the first six months of 2022 primarily due to the timing of payments. This increase was partially offset by the following:
Investing Activities
We used $398 million for investing activities during the six months ended June 30, 2022 compared to $220 million during the same period in 2021. We spent $398 million for internal capital investments during the six months ended June 30, 2022, compared to $217 million during the same period in 2021.
We expect capital investments in 2022 to be approximately $800 million, including capital spending related to the conversion of the No. 3 paper machine to containerboard at our Jackson mill. These expenditures could increase or decrease as a result of a number of factors, including our financial results, strategic opportunities, future economic conditions, and our regulatory compliance requirements. We currently estimate capital expenditures to comply with environmental regulations will be about $17 million in 2022. Our estimated environmental expenditures could vary significantly depending upon the enactment of new environmental laws and regulations. For additional information, see “Environmental Matters” in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2021 Annual Report on Form 10-K.
23
Financing Activities
During the six months ended June 30, 2022, net cash used for financing activities was $198 million, compared to $202 million of net cash used for financing activities during the same period in 2021. We paid $187 million of dividends during the first six months of 2022, compared to $190 million of dividends paid during the comparable period in 2021. In addition, for the six months ended June 30, 2021, we paid $1 million of debt issuance costs related to the New Revolving Credit Agreement that was entered into on June 8, 2021.
In addition to the items discussed in Note 12, Debt, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item 1. Financial Statements" of this Form 10-Q, see Note 11, Debt, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 2021 Annual Report on Form 10-K for more information.
Contractual Obligations
There have been no material changes to the contractual obligations disclosed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2021 Annual Report on Form 10-K.
Reconciliations of Non-GAAP Financial Measures to Reported Amounts
Income from operations excluding special items, net income excluding special items, EBITDA, and EBITDA excluding special items are non-GAAP financial measures. Management excludes special items, as it believes that these items are not necessarily reflective of the ongoing operations of our business. These measures are presented because they provide a means to evaluate the performance of our segments and our Company on an ongoing basis using the same measures that are used by our management, because these measures assist in providing a meaningful comparison between periods and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such. Reconciliations of the non-GAAP measures to the most comparable measure reported in accordance with GAAP for the three and six months ended June 30, 2022 and 2021 follow (dollars in millions):
|
|
Three Months Ended June 30, |
|
|||||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
||||||||||||||||||
|
|
Income |
|
|
Income |
|
|
Net |
|
|
Income |
|
|
Income |
|
|
Net |
|
||||||
As reported in accordance with GAAP |
|
$ |
400.6 |
|
|
$ |
(99.1 |
) |
|
$ |
301.5 |
|
|
$ |
274.7 |
|
|
$ |
(67.4 |
) |
|
$ |
207.3 |
|
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Jackson mill conversion-related activities (a) |
|
|
3.9 |
|
|
|
(1.0 |
) |
|
|
2.9 |
|
|
|
3.8 |
|
|
|
(1.0 |
) |
|
|
2.8 |
|
Acquisition-related, facilities closure and other income (b) |
|
|
(0.9 |
) |
|
|
0.2 |
|
|
|
(0.7 |
) |
|
|
(4.7 |
) |
|
|
1.2 |
|
|
|
(3.5 |
) |
Total special items |
|
|
3.0 |
|
|
|
(0.8 |
) |
|
|
2.2 |
|
|
|
(0.9 |
) |
|
|
0.2 |
|
|
|
(0.7 |
) |
Excluding special items |
|
$ |
403.6 |
|
|
$ |
(99.9 |
) |
|
$ |
303.7 |
|
|
$ |
273.8 |
|
|
$ |
(67.2 |
) |
|
$ |
206.6 |
|
|
|
Six Months Ended June 30, |
|
|||||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
||||||||||||||||||
|
|
Income |
|
|
Income |
|
|
Net |
|
|
Income |
|
|
Income |
|
|
Net |
|
||||||
As reported in accordance with GAAP |
|
$ |
741.0 |
|
|
$ |
(185.3 |
) |
|
$ |
555.7 |
|
|
$ |
494.3 |
|
|
$ |
(120.5 |
) |
|
$ |
373.8 |
|
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Jackson mill conversion-related activities (a) |
|
|
5.4 |
|
|
|
(1.4 |
) |
|
|
4.0 |
|
|
|
4.9 |
|
|
|
(1.2 |
) |
|
|
3.7 |
|
Acquisition-related, facilities closure and other income (b) |
|
|
(0.3 |
) |
|
|
0.1 |
|
|
|
(0.2 |
) |
|
|
(2.6 |
) |
|
|
0.6 |
|
|
|
(2.0 |
) |
Total special items |
|
|
5.1 |
|
|
|
(1.3 |
) |
|
|
3.8 |
|
|
|
2.3 |
|
|
|
(0.6 |
) |
|
|
1.7 |
|
Excluding special items |
|
$ |
746.1 |
|
|
$ |
(186.6 |
) |
|
$ |
559.5 |
|
|
$ |
496.6 |
|
|
$ |
(121.1 |
) |
|
$ |
375.5 |
|
24
The following table reconciles net income to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net income |
|
$ |
301.5 |
|
|
$ |
207.3 |
|
|
$ |
555.7 |
|
|
$ |
373.8 |
|
Non-operating pension income |
|
|
(3.6 |
) |
|
|
(5.0 |
) |
|
|
(7.3 |
) |
|
|
(9.8 |
) |
Interest expense, net |
|
|
18.8 |
|
|
|
24.9 |
|
|
|
38.7 |
|
|
|
48.4 |
|
Income tax provision |
|
|
99.1 |
|
|
|
67.4 |
|
|
|
185.3 |
|
|
|
120.5 |
|
Depreciation, amortization, and depletion |
|
|
114.3 |
|
|
|
104.7 |
|
|
|
224.0 |
|
|
|
205.5 |
|
EBITDA |
|
$ |
530.1 |
|
|
$ |
399.3 |
|
|
$ |
996.4 |
|
|
$ |
738.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Jackson mill conversion-related activities |
|
|
3.4 |
|
|
|
2.5 |
|
|
|
3.7 |
|
|
|
3.1 |
|
Acquisition-related, facilities closure and other income |
|
|
(0.9 |
) |
|
|
(5.0 |
) |
|
|
(0.3 |
) |
|
|
(2.9 |
) |
Total special items |
|
|
2.5 |
|
|
|
(2.5 |
) |
|
|
3.4 |
|
|
|
0.2 |
|
EBITDA excluding special items |
|
$ |
532.6 |
|
|
$ |
396.8 |
|
|
$ |
999.8 |
|
|
$ |
738.6 |
|
The following table reconciles segment income (loss) to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Packaging |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Segment income |
|
$ |
419.8 |
|
|
$ |
317.2 |
|
|
$ |
782.1 |
|
|
$ |
575.1 |
|
Depreciation, amortization, and depletion |
|
|
106.0 |
|
|
|
94.9 |
|
|
|
206.9 |
|
|
|
187.0 |
|
EBITDA |
|
|
525.8 |
|
|
|
412.1 |
|
|
|
989.0 |
|
|
|
762.1 |
|
Acquisition-related, facilities closure and other income |
|
|
(0.9 |
) |
|
|
(4.2 |
) |
|
|
(0.3 |
) |
|
|
(2.1 |
) |
Jackson mill conversion-related activities |
|
|
0.4 |
|
|
|
0.9 |
|
|
|
0.5 |
|
|
|
0.9 |
|
EBITDA excluding special items |
|
$ |
525.3 |
|
|
$ |
408.8 |
|
|
$ |
989.2 |
|
|
$ |
760.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Paper |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Segment income |
|
$ |
22.7 |
|
|
$ |
2.6 |
|
|
$ |
45.1 |
|
|
$ |
11.3 |
|
Depreciation, amortization, and depletion |
|
|
5.8 |
|
|
|
7.5 |
|
|
|
12.1 |
|
|
|
14.0 |
|
EBITDA |
|
|
28.5 |
|
|
|
10.1 |
|
|
|
57.2 |
|
|
|
25.3 |
|
Jackson mill conversion-related activities |
|
|
3.0 |
|
|
|
1.5 |
|
|
|
3.2 |
|
|
|
2.1 |
|
EBITDA excluding special items |
|
$ |
31.5 |
|
|
$ |
11.6 |
|
|
$ |
60.4 |
|
|
$ |
27.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Segment loss |
|
$ |
(26.7 |
) |
|
$ |
(25.2 |
) |
|
$ |
(54.8 |
) |
|
$ |
(53.5 |
) |
Depreciation, amortization, and depletion |
|
|
2.5 |
|
|
|
2.3 |
|
|
|
5.0 |
|
|
|
4.5 |
|
EBITDA |
|
|
(24.2 |
) |
|
|
(22.9 |
) |
|
|
(49.8 |
) |
|
|
(49.0 |
) |
Acquisition-related, facilities closure and other income |
|
|
— |
|
|
|
(0.8 |
) |
|
|
— |
|
|
|
(0.8 |
) |
Jackson mill conversion-related activities |
|
|
— |
|
|
|
0.1 |
|
|
|
— |
|
|
|
0.1 |
|
EBITDA excluding special items |
|
$ |
(24.2 |
) |
|
$ |
(23.6 |
) |
|
$ |
(49.8 |
) |
|
$ |
(49.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
EBITDA |
|
$ |
530.1 |
|
|
$ |
399.3 |
|
|
$ |
996.4 |
|
|
$ |
738.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
EBITDA excluding special items |
|
$ |
532.6 |
|
|
$ |
396.8 |
|
|
$ |
999.8 |
|
|
$ |
738.6 |
|
Market Risk and Risk Management Policies
PCA is exposed to the impact of interest rate changes and changes in the market value of its financial instruments. We periodically enter into derivatives to minimize these risks, but not for trading purposes. We were not a party to any derivatives-based arrangements at June 30, 2022. For a discussion of derivatives and hedging activities, see Note 16, Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 2021 Annual Report on Form 10-K.
At June 30, 2022, interest rates on 100% of PCA’s outstanding debt are fixed.
25
Off-Balance-Sheet Activities
The Company does not have any off-balance sheet arrangements as of June 30, 2022.
Environmental Matters
There have been no material changes to the disclosure set forth in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters” filed with our 2021 Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, PCA evaluates its estimates, including those related to business combinations, pensions and other postretirement benefits, goodwill and intangible assets, long-lived asset impairment, environmental liabilities, and income taxes, among others. PCA bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
PCA has included in its 2021 Annual Report on Form 10-K a discussion of its critical accounting policies and estimates which require management’s most difficult, subjective, or complex judgments used in the preparation of its consolidated financial statements. PCA has not had any changes to these critical accounting estimates during the first six months of 2022.
New and Recently Adopted Accounting Standards
For a listing of our new and recently adopted accounting standards, see Note 2, New and Recently Adopted Accounting Standards, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this Form 10-Q.
Forward-Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q, and in particular, statements found in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our expectations regarding our future liquidity, earnings, expenditures, and financial condition. These statements are often identified by the words “will,” “should,” “anticipate,” “believe,” “expect,” “intend,” “estimate,” “hope,” or similar expressions. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties. There are important factors that could cause actual results to differ materially from those in forward-looking statements, many of which are beyond our control. These factors, risks and uncertainties include the following:
Our actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do occur, what impact they will have on our results of operations or financial condition. Given these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We expressly disclaim any obligation to publicly revise any forward-looking statements that have been made to reflect the occurrence of events after the date hereof. For a discussion of other factors, risks and uncertainties that may affect our business, see Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2021.
26
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of market risks related to PCA, see Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Risk and Risk Management Policies” in this Quarterly Report on Form 10-Q.
Item 4. CONTROLS AND PROCEDURES
PCA maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in PCA’s filings under the Securities Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to PCA’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Prior to filing this report, PCA completed an evaluation under the supervision and with the participation of PCA’s management, including PCA’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of PCA’s disclosure controls and procedures as of June 30, 2022. The evaluation of PCA’s disclosure controls and procedures included a review of the controls’ objectives and design, PCA’s implementation of the controls, and the effect of the controls on the information generated for use in this report. Based on this evaluation, PCA’s Chief Executive Officer and Chief Financial Officer concluded that PCA’s disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2022.
Changes in Internal Control over Financial Reporting
On December 11, 2021, PCA acquired Advance Packaging Corporation ("Advance Packaging"). We are currently in the process of evaluating and integrating Advance Packaging's controls over financial reporting which may result in changes or additions to PCA's internal control over financial reporting. Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired company. We excluded Advance Packaging from the assessment of internal control over financial reporting at June 30, 2022. Except as may relate to the integration of the Advance Packaging acquisition, there were no other changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the most recent fiscal quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As of the quarter ended June 30, 2022, Advance Packaging accounted for approximately 2% of the Company's consolidated total assets. For both the three and six months ended June 30, 2022, Advance Packaging accounted for approximately 1% of the Company's consolidated net sales.
27
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The disclosure set forth under the caption "Legal Proceedings" in Note 20, Commitments, Guarantees, Indemnifications and Legal Proceedings, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item 1. Financial Statements" of this Form 10-Q is incorporated herein by reference.
Item 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in “Part I, Item IA. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information related to our repurchases of common stock made under repurchase plans authorized by PCA's Board of Directors, and shares withheld to cover taxes on vesting of equity awards, during the three months ended June 30, 2022:
Issuer Purchases of Equity Securities |
|
|||||||||||||||
Period |
|
Total |
|
|
Average |
|
|
Total Number |
|
|
Approximate |
|
||||
April 1-30, 2022 |
|
|
154 |
|
|
$ |
155.76 |
|
|
|
— |
|
|
$ |
1,000.0 |
|
May 1-31, 2022 |
|
|
230 |
|
|
|
156.23 |
|
|
|
— |
|
|
|
1,000.0 |
|
June 1-30, 2022 |
|
|
65,429 |
|
|
|
141.69 |
|
|
|
— |
|
|
|
1,000.0 |
|
Total |
|
|
65,813 |
|
|
$ |
141.77 |
|
|
|
— |
|
|
$ |
1,000.0 |
|
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
None.
28
Item 6. EXHIBITS
Exhibit Number |
|
Description |
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32 |
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. † |
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document. † |
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. † |
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. † |
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document. † |
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. † |
|
|
|
104 |
|
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). † |
† Filed herewith.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Packaging Corporation of America |
|
|
|
|
|
/s/ PAMELA A. BARNES |
|
|
Pamela A. Barnes Senior Vice President, Finance and Controller |
|
|
|
Date: August 4, 2022
30
