filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
52K characters. Original on sec.gov · Markdown
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 2023 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 86 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 2023 Annual Report on Form 10-K.
Executive Summary
Second quarter net sales were $2.08 billion in 2024 and $1.95 billion in 2023. We reported $199 million of net income, or $2.21 per diluted share, during the second quarter of 2024, compared to $203 million, or $2.24 per diluted share, during the same period in 2023. Net income included an insignificant amount for special items in the second quarter of 2024, compared to $6 million of expense for special items in 2023 (discussed below). Excluding special items, net income was $199 million, or $2.20 per diluted share, during the second quarter of 2024, compared to $209 million, or $2.31 per diluted share, in the second quarter of 2023. The decrease in net income was driven primarily by lower prices and mix in the Packaging segment and Paper segment, higher operating costs, higher depreciation expense, and a higher tax rate. These items were partially offset by higher volume in the Packaging segment and Paper segment, lower other converting costs, lower freight and logistics expenses, and lower interest expense. 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 $280 million in the second quarter of 2024, compared to $286 million in the second quarter of 2023. Packaging segment EBITDA excluding special items was $400 million in the second quarter of 2024 compared to $405 million in the second quarter of 2023. The decrease was due to lower prices and mix, higher operating and other costs, partially offset by higher sales and production volumes, lower scheduled mill outage expenses, lower other converting costs, and lower freight and logistics expense. Strong market conditions continued in the second quarter. This drove a new all-time containerboard production record of 1.3 million tons in order to service corrugated products and containerboard demand which grew stronger each month. Corrugated products shipments per day were up 9.2% compared to the second quarter of 2023. Prices and mix moved higher from first quarter levels as we continued to implement price increases that were communicated to customers in the first and second quarters of 2024.
Paper segment income from operations was $27 million in the second quarter of 2024, compared to $29 million in the second quarter of 2023. Paper segment EBITDA excluding special items was $31 million in the second quarter of 2024, compared to $39 million in the second quarter of 2023. The decrease was due to lower prices and mix and higher scheduled mill outage expenses, partially offset by higher sales and production volumes and lower operating costs.
Packaging segment income from operations was $484 million in the first six months of 2024, compared to $554 million in the same period in 2023. Packaging segment EBITDA excluding special items was $726 million in the first six months of 2024 compared to $797 million in the first six months of 2023. The decrease in EBITDA excluding special items was due primarily to lower prices and mix, higher operating costs, higher expenses related to corrugated plant capital projects and other costs, and higher scheduled outage expenses, partially offset by higher sales and production volumes, lower other converting costs, and lower freight and logistics expenses.
Paper segment income from operations was $56 million in the first six months of 2024, compared to $63 million in the first six months of 2023. Paper segment EBITDA excluding special items was $71 million in the first six months of 2024, compared to $80 million in the same period in 2023. The decrease in EBITDA excluding special items was due to lower prices and mix and higher scheduled mill outage expenses, partially offset by higher sales and production volumes, lower operating costs, and lower 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 and six months ended June 30, 2024 and 2023 is as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Earnings per diluted share, as reported | $ | 2.21 | $ | 2.24 | $ | 3.84 | $ | 4.35 | ||||||||
| Special items: | ||||||||||||||||
| Jackson mill conversion-related activities (a) | — | 0.04 | 0.08 | 0.05 | ||||||||||||
| Facilities closure and other costs (b) | — | 0.03 | — | 0.11 | ||||||||||||
| Total special items | — | 0.07 | 0.08 | 0.16 | ||||||||||||
| Earnings per diluted share, excluding special items | $ 2.20 (c) | $ | 2.31 | $ | 3.92 | $ | 4.51 |
(a)
For the three and six months ended June 30, 2024, includes $0.6 million of income and $9.7 million of charges, respectively, related to the announced discontinuation of production of UFS paper grades on the No. 3 machine at the Jackson, Alabama mill associated with the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities. For the three and six months ended June 30, 2023, these amounts were $4.4 million and $5.7 million, respectively.
(b)
For the three months ended June 30, 2024, includes $0.1 million of charges consisting of closure costs related to corrugated products facilities. For the six months ended June 30, 2024, these charges were completely offset by $0.1 million of income primarily related to a favorable lease buyout for a closed corrugated products facility during the first quarter of 2024. For the three and six months ended June 30, 2023, includes $3.9 million and $13.6 million, respectively, of closure costs related to corrugated products facilities and design centers.
(c)
Amount may not foot due to rounding.
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 were up 1.1% in total and down (0.5%) per workday with one additional shipping day during the second quarter of 2024 compared to the same quarter of 2023. Reported industry containerboard production increased 7.5% compared to the second quarter of 2023. Reported industry containerboard inventories at the end of the second quarter of 2024 were approximately 2.7 million tons, up 1.6% compared to the same period in 2023. Reported containerboard export shipments were up 39.5% compared to the second quarter of 2023. In February 2024, index prices increased $40 per ton for linerboard and $60 per ton for corrugating medium, followed by an additional increase in June 2024 of $40 per ton for linerboard and corrugating medium.
The market for communication papers competes heavily with electronic data transmission and document storage alternatives. Increasing shifts to these alternatives have reduced usage of traditional print media and communication papers. Trade publications reported North American UFS paper shipments were down (2.7%) in the second quarter of 2024 compared to the same quarter of 2023. Average prices reported by a trade publication for cut size office papers were higher by $33 per ton, or 2.4% in the second quarter of 2024, compared to the first quarter of 2024, and lower by $40 per ton, or (2.7%), compared to the second quarter of 2023. In January 2024, index prices declined $40 per ton for cut size office papers and $20 per ton for offset printing papers, followed by $20 per ton price increases in April and May 2024 for both cut size office papers and offset printing papers.
Outlook
Looking ahead into the third quarter, we expect prices and mix in both our Packaging and Paper segments to improve as we continue to implement price increases previously communicated to customers along with higher containerboard export prices. Although there is one less shipping day for the corrugated business, we expect shipments-per-day to continue to strengthen, potentially setting a new third quarter record, and higher containerboard volume. With containerboard inventory below our target levels, we will attempt to build some inventory ahead of the scheduled maintenance outage at our Deridder mill in October. Paper volume is expected to be slightly lower primarily due to the timing of the back-to-school business received in the second quarter. Operating and converting costs should be higher primarily due to seasonal electricity usage and prices and slightly higher recycled fiber costs, with scheduled outage expenses expected to be slightly lower. Considering these items, we expect third quarter earnings to be higher than second quarter earnings.
Results of Operations
Three Months Ended June 30, 2024, compared to Three Months Ended June 30, 2023
The historical results of operations of PCA for the three months ended June 30, 2024 and 2023 are set forth below (dollars in millions):
| Three Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2024 | 2023 | Change | ||||||||||
| Packaging | $ | 1,908.3 | $ | 1,790.3 | $ | 118.0 | ||||||
| Paper | 150.1 | 142.8 | 7.3 | |||||||||
| Corporate and Other | 62.1 | 61.0 | 1.1 | |||||||||
| Intersegment eliminations | (45.2 | ) | (42.0 | ) | (3.2 | ) | ||||||
| Net sales | $ | 2,075.3 | $ | 1,952.1 | $ | 123.2 | ||||||
| Packaging | $ | 279.8 | $ | 285.8 | $ | (6.0 | ) | |||||
| Paper | 26.7 | 29.1 | (2.4 | ) | ||||||||
| Corporate and Other | (30.5 | ) | (30.5 | ) | — | |||||||
| Income from operations | $ | 276.0 | $ | 284.4 | $ | (8.4 | ) | |||||
| Non-operating pension income (expense) | 1.1 | (2.0 | ) | 3.1 | ||||||||
| Interest expense, net | (10.4 | ) | (14.6 | ) | 4.2 | |||||||
| Income before taxes | 266.7 | 267.8 | (1.1 | ) | ||||||||
| Income tax provision | (67.8 | ) | (65.1 | ) | (2.7 | ) | ||||||
| Net income | $ | 198.9 | $ | 202.7 | $ | (3.8 | ) | |||||
| Non-GAAP Measures (a) | ||||||||||||
| Net income excluding special items | $ | 198.6 | $ | 208.9 | $ | (10.3 | ) | |||||
| Consolidated EBITDA | 404.5 | 412.3 | (7.8 | ) | ||||||||
| Consolidated EBITDA excluding special items | 404.0 | 417.5 | (13.5 | ) | ||||||||
| Packaging EBITDA | 399.9 | 402.1 | (2.2 | ) | ||||||||
| Packaging EBITDA excluding special items | 400.0 | 405.3 | (5.3 | ) | ||||||||
| Paper EBITDA | 31.2 | 36.8 | (5.6 | ) | ||||||||
| Paper EBITDA excluding special items | 30.6 | 38.8 | (8.2 | ) |
(a)
See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 2 for a reconciliation of non-GAAP measures to the most comparable GAAP measure.
Net Sales
Net sales increased $123 million, or 6.3%, to $2,075 million during the three months ended June 30, 2024, compared to $1,952 million during the same period in 2023.
Packaging. Net sales increased $118 million, or 6.6%, to $1,908 million, compared to $1,790 million in the second quarter of 2023 due to higher volume ($199 million), partially offset by lower containerboard and corrugated products prices and mix ($81 million). In the second quarter of 2024, export and domestic containerboard outside shipments increased 19.9% compared to the second quarter of 2023. Our total corrugated products shipments were up 10.9% in total and up 9.2% per workday, with one additional shipping day compared to the same period in 2023. In the second quarter of 2024, our domestic containerboard prices were (0.1%) lower, while export prices were (6.0%) lower, than the same period in 2023.
Paper. Net sales increased $7 million, or 5.1%, to $150 million, compared to $143 million in the second quarter of 2023, due to higher volume ($16 million), partially offset by lower prices and mix ($9 million).
Gross Profit
Gross profit decreased $7 million during the three months ended June 30, 2024, compared to the same period in 2023. The decrease was driven primarily by lower prices and mix in the Packaging segment and Paper segment, higher operating costs, and higher depreciation expense, partially offset by higher volume in the Packaging segment and Paper segment, lower other converting costs, and lower freight and logistics expenses. In the three months ended June 30, 2024, gross profit included no special items. In the three months ended June 30, 2023, gross profit included $3 million of special items for charges primarily related to Jackson mill conversion-related activities and closure costs related to corrugated products facilities.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) increased $4 million during the three months ended June 30, 2024, compared to the same period in 2023. The increase was primarily due to higher employee-related expenses.
Other Income (Expense), Net
Other income (expense), net, for the three months ended June 30, 2024 and 2023 are set forth below (dollars in millions):
| Three Months Ended | ||||||||
| June 30, | ||||||||
| 2024 | 2023 | |||||||
| Asset disposals and write-offs | $ | (8.0 | ) | $ | (6.6 | ) | ||
| Jackson mill conversion-related activities | 0.6 | (1.8 | ) | |||||
| Facilities closure and other costs | (0.1 | ) | (2.4 | ) | ||||
| DeRidder litigation | (2.0 | ) | — | |||||
| DeRidder litigation insurance recovery | 2.0 | — | ||||||
| Other | (4.7 | ) | (3.9 | ) | ||||
| Total | $ | (12.2 | ) | $ | (14.7 | ) |
We discuss these items in more detail in Note 5, Other Income (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 decreased $8 million, or (3.0%), during the three months ended June 30, 2024, compared to the same period in 2023. The second quarter of 2024 included an insignificant amount of special items, compared to $8 million of special items expense primarily related to closure costs related to corrugated products facilities and Jackson mill conversion-related activities in the second quarter of 2023.
Packaging. Packaging segment income from operations decreased $6 million to $280 million, compared to $286 million during the three months ended June 30, 2023. The decrease related primarily to lower containerboard and corrugated products prices and mix ($103 million), higher operating costs ($41 million), higher depreciation expense ($5 million) and other costs ($2 million), partially offset by higher sales and production volumes ($114 million), lower annual outage expenses ($10 million), lower other converting costs ($9 million), and lower freight expenses ($8 million). There was an insignificant amount of special items in the Packaging segment during the second quarter of 2024, compared to $4 million of expense primarily related to closure costs related to corrugated products facilities in the second quarter of 2023.
Paper. Paper segment income from operations decreased $2 million to $27 million, compared to $29 million during the three months ended June 30, 2023. The decrease primarily related to lower prices and mix ($9 million) and higher annual outage expenses ($9 million), partially offset by higher sales and production volumes ($8 million), lower operating costs ($2 million), and lower depreciation expense ($1 million). There was an insignificant amount of special items in the Paper segment during the second quarter of 2024, compared to $4 million of expense for Jackson mill conversion-related activities in the second quarter of 2023.
Non-Operating Pension Income, Interest Expense, Net and Income Taxes
Non-operating pension income increased $3 million during the three months ended June 30, 2024, compared to the same period in 2023. The increase in non-operating pension income was related to favorable 2023 asset performance and favorable assumption changes.
Interest expense, net for the three months ended June 30, 2024 decreased $4 million when compared to the same period in 2023. The decrease in interest expense, net was primarily due to higher interest income on invested cash in 2024 due to higher rates and higher cash balances.
During the three months ended June 30, 2024, we recorded $68 million of income tax expense, compared to $65 million of expense during the three months ended June 30, 2023. The effective tax rate for the three months ended June 30, 2024 and 2023 was 25.4% and 24.3%, respectively. The increase in our effective tax rate for the three months ended June 30, 2024 compared to the same period in 2023 was primarily due to lower excess tax benefits associated with employee restricted stock and performance unit vests as well as lower favorable state tax law changes.
Six Months Ended June 30, 2024, compared to Six Months Ended June 30, 2023
The historical results of operations of PCA for the six months ended June 30, 2024 and 2023 are set forth below (dollars in millions):
| Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2024 | 2023 | Change | ||||||||||
| Packaging | $ | 3,706.5 | $ | 3,598.9 | $ | 107.6 | ||||||
| Paper | 313.9 | 293.7 | 20.2 | |||||||||
| Corporate and Other | 123.7 | 121.6 | 2.1 | |||||||||
| Intersegment eliminations | (89.3 | ) | (85.8 | ) | (3.5 | ) | ||||||
| Net sales | $ | 4,054.8 | $ | 3,928.4 | $ | 126.4 | ||||||
| Packaging | $ | 483.6 | $ | 553.7 | $ | (70.1 | ) | |||||
| Paper | 56.4 | 63.2 | (6.8 | ) | ||||||||
| Corporate and Other | (68.0 | ) | (61.9 | ) | (6.1 | ) | ||||||
| Income from operations | $ | 472.0 | $ | 555.0 | $ | (83.0 | ) | |||||
| Non-operating pension income (expense) | 2.2 | (4.0 | ) | 6.2 | ||||||||
| Interest expense, net | (19.9 | ) | (29.9 | ) | 10.0 | |||||||
| Income before taxes | 454.3 | 521.1 | (66.8 | ) | ||||||||
| Income tax provision | (108.4 | ) | (128.3 | ) | 19.9 | |||||||
| Net income | $ | 345.9 | $ | 392.8 | $ | (46.9 | ) | |||||
| Non-GAAP Measures (a) | ||||||||||||
| Net income excluding special items | $ | 353.2 | $ | 407.3 | $ | (54.1 | ) | |||||
| Consolidated EBITDA | 728.9 | 812.5 | (83.6 | ) | ||||||||
| Consolidated EBITDA excluding special items | 737.2 | 822.4 | (85.2 | ) | ||||||||
| Packaging EBITDA | 722.2 | 788.9 | (66.7 | ) | ||||||||
| Packaging EBITDA excluding special items | 726.2 | 796.8 | (70.6 | ) | ||||||||
| Paper EBITDA | 66.9 | 77.9 | (11.0 | ) | ||||||||
| Paper EBITDA excluding special items | 71.2 | 79.9 | (8.7 | ) |
(a)
See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 2 for a reconciliation of non-GAAP measures to the most comparable GAAP measure.
Net Sales
Net sales increased $126 million, or 3.2%, to $4,055 million during the six months ended June 30, 2024, compared to $3,928 million during the same period in 2023.
Packaging. Net sales increased $108 million, or 3.0%, to $3,707 million, compared to $3,599 million in the six months ended June 30, 2023, due to higher containerboard and corrugated products volume ($357 million), partially offset by lower containerboard and corrugated products prices and mix ($249 million). In the first six months of 2024, export and domestic containerboard outside shipments increased 20.9% compared to the first six months of 2023. Total corrugated products shipments were up 10.1% in total and per workday compared to the same period in 2023. In the first six months of 2024, our domestic containerboard prices were (0.9%) lower, while export prices were (15.9%) lower, than the same period in 2023.
Paper. Net sales during the six months ended June 30, 2024 increased $20 million, or 6.9%, to $314 million, compared to $294 million in the six months ended June 30, 2023, due to higher volume ($39 million), partially offset by lower prices and mix ($19 million).
Gross Profit
Gross profit decreased $68 million during the six months ended June 30, 2024, compared to the same period in 2023. The decrease was driven primarily by lower prices and mix in the Packaging and Paper segments, higher operating costs, higher scheduled outage expenses, higher depreciation expense, and other costs, partially offset by higher volumes in the Packaging and Paper segments, lower other converting costs, and lower fright and logistic expenses. In the six months ended June 30, 2024, gross profit included $2 million of special items expense related to Jackson mill conversion-related activities. In the six months ended June 30, 2023, gross profit included $10 million of special items expense primarily related to closure costs related to corrugated products facilities and Jackson mill conversion-related activities.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) increased $7 million during the six months ended June 30, 2024, compared to the same period in 2023. The increase was primarily due to higher bad debt expense and employee-related expenses.
Other Income (Expense), Net
Other income (expense), net, for the six months ended June 30, 2024 and 2023 are set forth below (dollars in millions):
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2024 | 2023 | |||||||
| Asset disposals and write-offs | $ | (15.5 | ) | $ | (13.2 | ) | ||
| Jackson mill conversion-related activities | (7.6 | ) | (1.5 | ) | ||||
| DeRidder litigation | (125.7 | ) | — | |||||
| DeRidder litigation insurance recovery | 125.7 | — | ||||||
| Facilities closure and other costs | — | (7.1 | ) | |||||
| Other | (11.7 | ) | (5.4 | ) | ||||
| Total | $ | (34.8 | ) | $ | (27.2 | ) |
We discuss these items in more detail in Note 5, Other Income (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 decreased $83 million, or (15.0%), during the six months ended June 30, 2024, compared to the same period in 2023. The first six months of 2024 included $10 million of special items expense primarily related to Jackson mill conversion-related costs, compared to $19 million of special items expense primarily related to corrugated facility closure costs and Jackson mill conversion-related costs in the same period in 2023.
Packaging. Packaging segment income from operations decreased $70 million to $484 million during the first six months of 2024, compared to the same period last year. The decrease related primarily to lower containerboard and corrugated products prices and mix ($261 million), higher operating costs ($30 million), higher depreciation expense ($9 million), higher expenses related to corrugated plant capital projects and other costs ($8 million), and higher annual outage expenses ($2 million), partially offset by higher sales and production volumes ($201 million), lower other converting costs ($18 million), and lower freight expenses ($11 million). Special items during the first six months of 2024 included $4 million of expense related to Jackson mill conversion-related activities, compared to $13 million of expense related to corrugated facility closure costs in the same period in 2023.
Paper. Paper segment income from operations decreased $7 million to $56 million, compared to the six months ended June 30, 2023. The decrease primarily related to lower prices and mix ($19 million), and higher annual outage expenses ($9 million), partially offset by higher sales and production volumes ($14 million), lower operating costs ($5 million), lower depreciation ($2 million), and lower freight expenses ($1 million). For both the six month periods ended June 30, 2024 and 2023, special items included $6 million of expense related to Jackson mill conversion-related activities.
Non-Operating Pension Income, Interest Expense, and Income Taxes
Non-operating pension income increased $6 million during the six months ended June 30, 2024, compared to the same period in 2023. The increase in non-operating pension income was related to favorable 2023 asset performance and favorable assumption changes.
Interest expense, net decreased $10 million during the six months ended June 30, 2024, compared to the same period in 2023. The decrease in interest expense, net was primarily due to higher interest income on invested cash in 2024 due to higher rates and higher cash balances.
During the six months ended June 30, 2024, we recorded $108 million of income tax expense, compared to $128 million of expense during the six months ended June 30, 2023. The effective tax rate for the six months ended June 30, 2024 and 2023 was 23.9% and 24.6%, respectively. The decrease in our effective tax rate for the six months ended June 30, 2024 compared to the same period in 2023 was primarily due to higher excess tax benefits associated with employee restricted stock and performance unit vests.
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, 2024, we had $614 million of cash and cash equivalents, $559 million of marketable debt securities, and $323 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, | ||||||||||||
| 2024 | 2023 | Change | ||||||||||
| Net cash provided by (used for): | ||||||||||||
| Operating activities | $ | 538.7 | $ | 640.3 | $ | (101.6 | ) | |||||
| Investing activities | (323.8 | ) | (242.2 | ) | (81.6 | ) | ||||||
| Financing activities | (249.3 | ) | (241.0 | ) | (8.3 | ) | ||||||
| Net (decrease) increase in cash and cash equivalents | $ | (34.4 | ) | $ | 157.1 | $ | (191.5 | ) |
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, 2024, net cash provided by operating activities was $539 million, compared to $640 million in the same period in 2023, a decrease of $101 million. Cash from operations excluding changes in cash used for operating assets and liabilities decreased $36 million primarily due to lower income from operations in 2024 as discussed above. Cash from operations decreased by $65 million due to changes in operating assets and liabilities primarily due to the following:
a)
a net unfavorable change in prepaid expenses and other current assets during the first six months of 2024 compared to the same period in 2023 primarily due to the accrued receivable for the insurance recovery related to the DeRidder litigation;
b)
a net unfavorable change in accounts receivable during the first six months of 2024 compared to the same period in 2023 primarily due to an increase in accounts receivable levels for the Packaging segment in 2024 due to higher prices and sales volumes and an increase in interest receivables in the Corporate and Other segment in 2024 related to accrued interest on the proceeds received from the November 2023 debt refinancing; and
c)
a net unfavorable change in income taxes due to a smaller decrease of income tax receivables during the first six months of 2024 compared to the same period in 2023.
These unfavorable changes were partially offset by the following:
d)
a net favorable change in accrued liabilities during the first six months of 2024 compared to the same period in 2023 primarily related to the accrued liability for the DeRidder trial compensatory damages and interest recorded during the first six months of 2024; and
e)
a net favorable change in accounts payable during the first six months of 2024 compared to the same period in 2023 primarily related to an increase in accounts payable levels during the first six months of 2024 due to an increase in cost of sales in 2024 and the timing of payments.
Investing Activities
We used $324 million for investing activities during the six months ended June 30, 2024 compared to $242 million during the same period in 2023. We spent $322 million for internal capital investments during the six months ended June 30, 2024, compared to $239 million during the same period in 2023.
We expect capital investments in 2024 to be between $670 million and $690 million. 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 $15 million in 2024. 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 2023 Annual Report on Form 10-K.
Financing Activities
During the six months ended June 30, 2024, net cash used for financing activities was $249 million, compared to $241 million of net cash used for financing activities during the same period in 2023. We paid $224 million of dividends during the first six months of 2024, compared to $225 million of dividends paid during the comparable period in 2023. In addition, we withheld shares to cover $24 million of employee restricted stock taxes during the first six months of 2024 compared to $16 million of employee restricted stock taxes withheld during the same period in 2023.
In addition to the items discussed in Note 11, 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 10, Debt, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 2023 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 2023 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, 2024 and 2023 follow (dollars in millions):
| Three Months Ended June 30, | ||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||
| Income before Taxes | Income Taxes | Net Income | Income before Taxes | Income Taxes | Net Income | |||||||||||||||||||
| As reported in accordance with GAAP | $ | 266.7 | $ | (67.8 | ) | $ | 198.9 | $ | 267.8 | $ | (65.1 | ) | $ | 202.7 | ||||||||||
| Special items: | ||||||||||||||||||||||||
| Jackson mill conversion-related activities (a) | (0.6 | ) | 0.2 | (0.4 | ) | 4.4 | (1.1 | ) | 3.3 | |||||||||||||||
| Facilities closure and other costs (b) | 0.1 | — | 0.1 | 3.9 | (1.0 | ) | 2.9 | |||||||||||||||||
| Total special items | (0.5 | ) | 0.2 | (0.3 | ) | 8.3 | (2.1 | ) | 6.2 | |||||||||||||||
| Excluding special items | $ | 266.2 | $ | (67.6 | ) | $ | 198.6 | $ | 276.1 | $ | (67.2 | ) | $ | 208.9 |
| Six Months Ended June 30, | ||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||
| Income before Taxes | Income Taxes | Net Income | Income before Taxes | Income Taxes | Net Income | |||||||||||||||||||
| As reported in accordance with GAAP | $ | 454.3 | $ | (108.4 | ) | $ | 345.9 | $ | 521.1 | $ | (128.3 | ) | $ | 392.8 | ||||||||||
| Special items: | ||||||||||||||||||||||||
| Jackson mill conversion-related activities (a) | 9.7 | (2.4 | ) | 7.3 | 5.7 | (1.4 | ) | 4.3 | ||||||||||||||||
| Facilities closure and other costs (b) | — | — | — | 13.6 | (3.4 | ) | 10.2 | |||||||||||||||||
| Total special items | 9.7 | (2.4 | ) | 7.3 | 19.3 | (4.8 | ) | 14.5 | ||||||||||||||||
| Excluding special items | $ | 464.0 | $ | (110.8 | ) | $ | 353.2 | $ | 540.4 | $ | (133.1 | ) | $ | 407.3 |
(a)
Includes items related to the announced discontinuation of production of UFS paper grades on the No. 3 machine at the Jackson, Alabama mill associated with the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities.
(b)
For the three months ended June 30, 2024, includes charges consisting of closure costs related to corrugated products facilities. For the six months ended June 30, 2024, these charges were completely offset by income primarily related to a favorable lease buyout for a closed corrugated products facility during the first quarter of 2024. For 2023, includes charges consisting of closure costs related to corrugated products facilities and design centers.
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, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net income | $ | 198.9 | $ | 202.7 | $ | 345.9 | $ | 392.8 | ||||||||
| Non-operating pension (income) expense | (1.1 | ) | 2.0 | (2.2 | ) | 4.0 | ||||||||||
| Interest expense, net | 10.4 | 14.6 | 19.9 | 29.9 | ||||||||||||
| Income tax provision | 67.8 | 65.1 | 108.4 | 128.3 | ||||||||||||
| Depreciation, amortization, and depletion | 128.5 | 127.9 | 256.9 | 257.5 | ||||||||||||
| EBITDA | $ | 404.5 | $ | 412.3 | $ | 728.9 | $ | 812.5 | ||||||||
| Special items: | ||||||||||||||||
| Jackson mill conversion-related activities | (0.6 | ) | 2.0 | 8.3 | 1.7 | |||||||||||
| Facilities closure and other costs | 0.1 | 3.2 | — | 8.2 | ||||||||||||
| Total special items | (0.5 | ) | 5.2 | 8.3 | 9.9 | |||||||||||
| EBITDA excluding special items | $ | 404.0 | $ | 417.5 | $ | 737.2 | $ | 822.4 |
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, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Packaging | ||||||||||||||||
| Segment income | $ | 279.8 | $ | 285.8 | $ | 483.6 | $ | 553.7 | ||||||||
| Depreciation, amortization, and depletion | 120.1 | 116.3 | 238.6 | 235.2 | ||||||||||||
| EBITDA | 399.9 | 402.1 | 722.2 | 788.9 | ||||||||||||
| Facilities closure and other costs | 0.1 | 3.2 | — | 8.2 | ||||||||||||
| Jackson mill conversion-related activities | — | — | 4.0 | (0.3 | ) | |||||||||||
| EBITDA excluding special items | $ | 400.0 | $ | 405.3 | $ | 726.2 | $ | 796.8 | ||||||||
| Paper | ||||||||||||||||
| Segment income | $ | 26.7 | $ | 29.1 | $ | 56.4 | $ | 63.2 | ||||||||
| Depreciation, amortization, and depletion | 4.5 | 7.7 | 10.5 | 14.7 | ||||||||||||
| EBITDA | 31.2 | 36.8 | 66.9 | 77.9 | ||||||||||||
| Jackson mill conversion-related activities | (0.6 | ) | 2.0 | 4.3 | 2.0 | |||||||||||
| EBITDA excluding special items | $ | 30.6 | $ | 38.8 | $ | 71.2 | $ | 79.9 | ||||||||
| Corporate and Other | ||||||||||||||||
| Segment loss | $ | (30.5 | ) | $ | (30.5 | ) | $ | (68.0 | ) | $ | (61.9 | ) | ||||
| Depreciation, amortization, and depletion | 3.9 | 3.9 | 7.8 | 7.6 | ||||||||||||
| EBITDA | (26.6 | ) | (26.6 | ) | (60.2 | ) | (54.3 | ) | ||||||||
| EBITDA excluding special items | $ | (26.6 | ) | $ | (26.6 | ) | $ | (60.2 | ) | $ | (54.3 | ) | ||||
| EBITDA | $ | 404.5 | $ | 412.3 | $ | 728.9 | $ | 812.5 | ||||||||
| EBITDA excluding special items | $ | 404.0 | $ | 417.5 | $ | 737.2 | $ | 822.4 |
Market Risk and Risk Management Policies
PCA is exposed to the impact of commodity price changes, interest rate changes, and changes in the market value of its financial instruments. To manage these risks, we may from time to time enter into transactions, including certain physical commodity transactions, that are determined to be derivatives. As of June 30, 2024, we are party to certain physical commodity transactions related to natural gas supply contracts. These contracts qualify for the normal purchase normal sale ("NPNS") exception, and we have elected that exception. For a discussion of derivatives and hedging activities, see Note 2, Summary of Significant Account Policies, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 2023 Annual Report on Form 10-K.
At June 30, 2024, interest rates on 100% of PCA’s outstanding debt are fixed.
Off-Balance-Sheet Activities
The Company does not have any off-balance sheet arrangements as of June 30, 2024.
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 2023 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 2023 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 2024.
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:
the impact of general economic conditions;
the impact of acquired businesses and risks and uncertainties regarding operation, expected benefits and integration of such businesses;
containerboard, corrugated products, and white paper general industry conditions, including competition, product demand, product pricing, and input costs;
fluctuations in wood fiber and recycled fiber costs;
fluctuations in purchased energy costs;
the possibility of unplanned outages or interruptions at our principal facilities; and
legislative or regulatory actions or requirements, particularly concerning environmental or tax matters.
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, 2023.
Previous: Item 1. FINANCIAL STATEMENTS · Next: Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK