Packaging Corp of America 10-Q 2021-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2021

or

For the transition period from to

Commission file number 1-15399

(Exact Name of Registrant as Specified in its Charter)

Registrant's telephone number, including area code

(847) 482-3000

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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.

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 ☐ No ☒

As of October 29, 2021 the Registrant had outstanding 94,990,766 shares of common stock, par value $0.01 per share.

Securities registered pursuant to Section 12(b) of the Exchange Act:

Table of Contents

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

Packaging Corporation of America

Consolidated Statements of In****come and Comprehensive Income

(unaudited, dollars in millions, except per-share data)

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

Packaging Corporation of America

Consolidated B****alance Sheets

(unaudited, dollars and shares in millions, except per-share data)

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

Packaging Corporation of America

Consolidated Statem****ents of Cash Flows

(unaudited, dollars in millions)

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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 2020 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 uncoated freesheet paper in North America. We operate eight mills and 89 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 uncoated freesheet 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 2020 Annual Report on Form 10-K.

Executive Summary

Third quarter net sales were $2.00 billion in 2021 and $1.69 billion in 2020. We reported $251 million of net income, or $2.63 per diluted share, during the third quarter of 2021, compared to $139 million, or $1.46 per diluted share, during the same period in 2020. Net income included $6 million of expense for special items in the third quarter of 2021, compared to $10 million of expense for special items in 2020 (discussed below). Excluding special items, net income was $257 million, or $2.69 per diluted share, during the third quarter of 2021, compared to $149 million, or $1.57 per diluted share, in the third quarter of 2020. The increase in net income was driven primarily by higher prices and mix and volume in our Packaging segment, higher production volume and prices and mix in our Paper segment, lower non-operating pension expense, and lower interest expense. These items were partially offset by higher operating costs, higher freight and logistics expenses, higher converting costs, higher scheduled outage expenses, and lower sales volume in our Paper segment. 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 $365 million in the third quarter of 2021, compared to $222 million in the third quarter of 2020. Packaging segment EBITDA excluding special items was $467 million in the third quarter of 2021 compared to $324 million in the third quarter of 2020. The increase in EBITDA excluding special items was due primarily to higher prices and mix and higher sales and production volumes, partially offset by higher operating and converting costs, higher annual outage expense, and higher freight and logistic expenses. We continued to experience strong demand during the quarter, driving record volumes in terms of box shipments and record containerboard production. We also continued to experience cost inflation across our business, including in the areas of labor and benefits, recycled fiber, energy, repairs, materials, and supplies, as well as higher transportation costs, driven by higher fuel costs, tight supply, driver shortages, and higher spot prices. Our sales prices were higher as we implemented price increases on containerboard and corrugated products that we previously communicated to our customers. We continue to deploy capital to improve productivity and efficiencies at our facilities and believe that our success in doing so is helping us to manage cost inflation and better serve our customers.

Paper segment income from operations was $11 million in the third quarter of 2021, compared to $7 million in the third quarter of 2020. Paper segment EBITDA excluding special items was $18 million in the third quarter of 2021, compared to $17 million in the third quarter of 2020. The increase in EBITDA excluding special items was due to higher production volumes, higher prices and mix, and lower annual outage costs, partially offset by higher operating costs, higher freight and logistic expenses, and lower sales volume.

Sales and production volumes in the Paper segment significantly declined after the first quarter of 2020 as the COVID-19 pandemic caused lower demand for our paper products. During the second and third quarters of 2020, in response to such lower demand, we temporary idled both machines at our Jackson Alabama mill. 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 number 3 machine at the 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 uncoated freesheet paper grades on the machine and our plans to permanently convert the machine to produce linerboard in a phased approach over the next three years. Demand for paper products has improved since the beginning of the pandemic, but our sales and production in the paper segment will remain below pre-pandemic levels as we will no longer be producing paper products on the machine. In the third quarter of 2021, we began to produce corrugating medium on the number 1 machine at the Jackson mill (which had produced uncoated freesheet paper in the past) in order 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 to produce corrugating medium on the machine during the fourth quarter. Before October 2020, operating results for the Jackson mill were included in the Paper segment. Beginning in October 2020, operating results for the Jackson mill are included in both the Packaging and Paper segments.

Packaging segment income from operations was $940 million in the first nine months of 2021, compared to $620 million in the same period in 2020. Packaging segment EBITDA excluding special items was $1,228 million in the first nine months of 2021 compared to $926 million in the first nine months of 2020. The increase in EBITDA excluding special items was due primarily to higher prices and mix and higher sales and production volumes, partially offset by higher operating and converting costs, higher freight and logistic expenses, and higher annual outage expense.

Paper segment income from operations was $22 mi

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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.

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 September 30, 2021. 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 September 30, 2021.

Changes in Internal Control over Financial Reporting

There have been no 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 September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The disclosure set forth under the caption "Legal Proceedings" in Note 19, 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.

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, 2020.

Item 2. UNREGISTERED SALES OF EQUI****TY 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 September 30, 2021:

(a)

All shares were withheld from employees to cover income and payroll taxes on equity awards that vested during the period.

Item 3. DEFAULTS UPO****N SENIOR SECURITIES

None.

Item 4. MINE SAF****ETY DISCLOSURES

Not applicable.

None.

† Filed herewith.

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.

Date: November 4, 2021