01—Abstract
Summary
Summary of the 10-K filed February 24, 2021. Cited figures are marked; the original filing is the authoritative source.
Packaging Corporation of America (PCA) is the third largest producer of containerboard and the third largest producer of uncoated freesheet (UFS) paper in North America, operating six containerboard mills, two paper mills and 90 corrugated products plants.
Net sales were $6.66 billiona in 2020, down from $6.96 billion in 2019, and net income was $461 million, or $4.84 per diluted share, compared with $696 million, or $7.34 per diluted share, in 2019. Excluding special items, diluted earnings per share were $5.78 in 2020 versus $7.65 in 2019. The decline was driven primarily by lower prices and mix in the Packaging and Paper segments, lower Paper volumes, higher freight and logistics expense and higher annual outage expense, partly offset by higher Packaging volumes.
The Packaging segment was the core earnings driver, with 2020 income from operations of $830 millionb and EBITDA excluding special items of $1,229 million, while the Paper segment posted an operating loss of $20 million after a $55.2 million goodwill impairment tied to COVID-19 pressure on uncoated freesheet demand. The filing states that corrugated products shipments rose 5.8% in 2020, that demand remained strong into early 2021, and that the company notified customers of price increases on containerboard and corrugated products in the fourth quarter of 2020. Balance sheet and cash flow were solid.
The company ended 2020 with $975 millionc of cash and cash equivalents, $148 million of marketable debt securities and $326 million of unused revolver capacity, and reported $1.03 billion of operating cash flow. Total debt was $2.5 billion, all fixed-rate senior notes.
Dividends declared were $3.37d per share for 2020, and the quarterly dividend was increased to $4.00 per share annualized in December 2020. Management expects 2021 capital investments of $500 million to $525 million, excluding possible conversion of the Jackson No. 3 paper machine to containerboard.
02—Key points
Key Highlights
- Net sales of $6.66 billion in 2020, down from $6.96 billion in 2019; net income of $461 million, or $4.84 per diluted share, versus $7.34 in 2019.
- Excluding special items, diluted EPS was $5.78 in 2020 compared with $7.65 in 2019; special items totaled $0.94 per diluted share in 2020, including a $55.2 million Paper goodwill impairment.
- Packaging segment income from operations was $830 million in 2020 versus $963 million in 2019; corrugated products shipments rose 5.8% to 62.8 billion square feet.
- Paper segment posted a $20 million operating loss in 2020 versus $175 million of income in 2019, as sales fell 30% amid COVID-19 office and school closures; Paper goodwill was fully impaired.
- Operating cash flow was $1.03 billion in 2020, with $421 million of capital expenditures; year-end liquidity was $1.4 billion including revolver availability.
- Quarterly dividend was increased to an annual rate of $4.00 per share in December 2020; $193.0 million remained authorized under the share repurchase program, with no repurchases made in 2020.
- Office Depot accounted for 45% of Paper segment sales and 5% of consolidated sales in 2020; the Office Depot agreement runs through December 31, 2022.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2020, Packaging Corp. of America kept $0.07.
- Revenue$6.66B100.0%
- Cost of revenue−$5.29B79.4%
- Gross profit$1.37B20.6%
- Operating costs−$645.5M9.7%
- Operating income$723.9M10.9%
- Interest, other & tax−$262.9M3.9%
- Net income$461.0M6.9%
Where FY2020 revenue went
$6.66B- Cost of revenue: $5.29B, 79% of revenue
- Net income: $461.0M, 6.9% of revenue
- R&D: $15.5M, 0.2% of revenue
- SG&A: $539.6M, 8.1% of revenue
- Other operating costs: $90.4M, 1.4% of revenue
- Interest, other & tax: $262.9M, 3.9% of revenue
Kept 6.9% as net incomeNet income $461.0M · 6.9%R&D $15.5M · 0.2%Other operating costs $90.4M · 1.4%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2020filed February 24, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $6.66B$6.96B | −4.4% |
| Cost of Revenue | $5.29B$5.32B | −0.6% |
| Gross Profit | $1.37B$1.64B | −16.7% |
| R&D Expenses | $15.50M$16.00M | −3.1% |
| SG&A Expenses | $539.60M$557.60M | −3.2% |
| Operating Income | $723.90M$1.05B | −31.3% |
| Net Income | $461.00M$696.40M | −33.8% |
| EPS (Basic) | $4.86$7.36 | −34.0% |
| EPS (Diluted) | $4.84$7.34 | −34.1% |
| Shares Outstanding (Basic) | 94.10M93.80M | +0.3% |
| Shares Outstanding (Diluted) | 94.40M94.10M | +0.3% |
05—Questions
Frequently Asked Questions
Why did earnings decline in 2020?
The filing attributes the decline primarily to lower prices and mix in the Packaging and Paper segments, lower Paper volumes, higher freight and logistics expense and higher annual outage expense, partially offset by higher Packaging volumes and lower operating and converting costs. Net income fell to $461 million from $696 million.
How much did the Paper business affect results?
Paper segment net sales fell $289 million, or 30.0%, to $675 million, and the segment recorded a $20 million operating loss versus $175 million of income in 2019. The company recorded a $55.2 million goodwill impairment for the Paper reporting unit after COVID-19 deteriorated uncoated freesheet market conditions.
What is PCA's financial position and debt profile?
At December 31, 2020, PCA had $2.5 billion of debt, all fixed-rate senior notes, $975 million of cash and cash equivalents, $148 million of marketable debt securities and $326 million of unused revolving credit capacity net of letters of credit. The filing states the company believes operating cash flow, cash on hand and borrowings will be adequate for its liquidity needs.
What are the main risks the filing highlights?
Key risks include industry cyclicality and price volatility, competition, fiber and energy cost increases, customer concentration with Office Depot in Paper, declining demand for uncoated freesheet from electronic alternatives, COVID-19 effects on demand and operations, labor relations with a highly unionized workforce, and environmental liabilities. The filing also cites a $10 per ton recycled fiber price increase as roughly $7 million of additional expense.
What are the company's plans for 2021?
Management expects 2021 capital investments of $500 million to $525 million, excluding capital spending for a potential conversion of the No. 3 paper machine at the Jackson, Alabama mill to containerboard. The filing notes that demand in the Packaging segment is expected to remain strong into the first quarter of 2021 and that some inflation in freight, labor, energy and fiber costs is expected into that quarter.
06—Continue