PACKAGING CORPORATION OF AMERICA 
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 theSecurities 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 inNorth 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 inLake Forest, Illinois and operate primarily inthe 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
Third quarter net sales were$2.13 billion in 2022 and$2.00 billion in 2021. We reported$262 million of net income, or$2.80 per diluted share, during the third quarter of 2022, compared to$251 million , or$2.63 per diluted share, during the same period in 2021. Net income included$3 million of expense for special items in the third quarter of 2022, compared to$6 million of expense for special items in 2021 (discussed below). Excluding special items, net income was$266 million , or$2.83 per diluted share, during the third quarter of 2022, compared to$257 million , or$2.69 per diluted share, in the third quarter of 2021. The increase in net income was driven primarily by higher prices and mix in our Packaging and Paper segments, lower interest expense, and a lower tax rate. These items were partially offset by higher operating costs, lower volume in our Packaging and Paper segments, higher freight and logistics expenses, higher scheduled outage expenses, higher depreciation expense, and higher converting and other expenses. 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$359 million in the third quarter of 2022, compared to$365 million in the third quarter of 2021. Packaging segment EBITDA excluding special items was$467 million in the third quarter of 2022 and 2021. Higher prices and mix were offset by lower sales and production volumes, higher operating and converting costs, higher scheduled outage expenses, and higher freight and logistic expenses. Lower sales and production volumes were driven by lower demand, as economic conditions continued to deteriorate during the quarter. We continued to experience cost inflation across our business. Paper segment income from operations was$26 million in the third quarter of 2022, compared to$11 million in the third quarter of 2021. Paper segment EBITDA excluding special items was$33 million in the third quarter of 2022, compared to$18 million in the third quarter of 2021. The increase was due to higher prices and mix, lower freight and logistic expenses, and lower operating costs, partially offset by lower sales and production volumes and higher scheduled outage 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 theJackson 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 theJackson 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 theJackson mill are included in both the Packaging and Paper segments, as appropriate. Packaging segment income from operations was$1,141 million in the first nine months of 2022, compared to$940 million in the same period in 2021. Packaging segment EBITDA excluding special items was$1,456 million in the first nine months of 2022 compared to$1,228 million in the first nine months of 2021. The increase in EBITDA excluding special items was due primarily to higher prices and mix, partially offset by higher operating and converting costs, higher freight and logistic expenses, lower sales and production volumes, and higher scheduled outage expenses. Paper segment income from operations was$71 million in the first nine months of 2022, compared to$22 million in the first nine months of 2021. Paper segment EBITDA excluding special items was$93 million in the first nine months of 2022, compared to$46 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, higher scheduled outage expenses, and higher freight and logistic expenses. 17
--------------------------------------------------------------------------------
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 nine months endedSeptember 30, 2022 and 2021 are as follows: Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021
Earnings per diluted share, as reported
8.70 $ 6.55
Special items:
Jackson mill conversion-related
activities (a) 0.03 0.03 0.08 0.07
Acquisition-related, facilities
closure and other costs (b) - 0.02 - -
Debt refinancing (c) - 0.01 - 0.01
Total special items 0.03 0.06 0.08 0.08
Earnings per diluted share, excluding
special items $ 2.83 $ 2.69 $ 8.78 $ 6.63
(a)
For the three and nine months ended September 30, 2022 , includes $3.9 million
and $9.4 million , respectively, of charges related to the announced
discontinuation of production of uncoated freesheet 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 nine months ended September 30, 2021 ,
these amounts were $4.5 million and $9.4 million , respectively.
(b)
For the three and nine months endedSeptember 30, 2022 , includes$0.2 million of charges and$0.2 million of income, respectively, consisting of closure costs related to corrugated products facilities and acquisition and integration costs related to theDecember 2021 Advance Packaging Corporation acquisition, partially offset by a gain on sale of assets related to a corrugated products facility. For the nine months endedSeptember 30, 2022 , these costs were offset by insurance proceeds received for a natural disaster at one of the corrugated products facilities and a favorable lease buyout for a closed corrugated products facility. For the three and nine months endedSeptember 30, 2021 , includes$2.7 million and$0.1 million , respectively, of charges consisting of closure costs related to corrugated products facilities. For the nine months endedSeptember 30, 2021 , these costs are partially offset by income primarily consisting of an adjustment of the required asset retirement obligation related to the 2020 closure of theSan Lorenzo, California facility, a gain on sale of corporate assets, and insurance proceeds received for a natural disaster at one of the corrugated products facilities.
(c)
For the three and nine months ended
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 4.5% during the third quarter of 2022 compared to the same quarter of 2021. Reported industry containerboard production decreased 8.6% compared to the third quarter of 2021. Reported industry containerboard inventories at the end of the third quarter of 2022 were approximately 3.0 million tons, up 11.4% compared to the same period in 2021. Reported containerboard export shipments were down 19.2% compared to the third quarter of 2021. There were no price increases in the third quarter of 2022. Trade publications reported North American UFS paper shipments were down 2.5% in the third 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$52 per ton, or 3.7%, in the third quarter of 2022, compared to the second quarter of 2022, and higher by$272 per ton, or 23.0%, compared to the third quarter of 2021. 18
--------------------------------------------------------------------------------
Outlook
In the fourth quarter, we expect to see continued lower Packaging demand. Global and domestic economic conditions continue to be less favorable with high inflation, higher interest rates, and some continuing supply chain disruptions. Our customers are continuing to work through high inventories of their products, which is driving lower orders and demand for our products. The fourth quarter will have four less shipping days compared to the third quarter, which will result in lower total box shipments. Accordingly, we expect lower Packaging sales volumes and lower containerboard production, as we will produce containerboard to meet our expected demand. At ourJackson, Alabama mill, we expect to complete the scheduled annual maintenance outage as well as the first phase of the containerboard conversion work on the No. 3 machine. We also expect a seasonally less rich mix in corrugated products and lower average export containerboard prices. In our Paper segment, we will continue to implement our price increase that took effect in September; however, volume is expected to be lower compared to the seasonally stronger third quarter. Scheduled outage expenses are expected to be higher, and we expect higher operating costs, primarily labor and benefit expenses, along with anticipated colder weather resulting in higher energy costs. Considering these items, we expect fourth quarter earnings per share to be lower than third quarter.
Results of Operations
Three Months Ended
The historical results of operations of PCA for the three months ended
Three Months Ended
September 30,
2022 2021 Change
Packaging $ 1,940.2 $ 1,829.4 $ 110.8
Paper 165.3 150.3 15.0
Corporate and Other 63.3 61.3 2.0
Intersegment eliminations (42.9 ) (40.9 ) (2.0 )
Net sales $ 2,125.9 $ 2,000.1 $ 125.8
Packaging $ 359.2 $ 365.2 $ (6.0 )
Paper 26.1 11.0 15.1
Corporate and Other (25.0 ) (23.4 ) (1.6 )
Income from operations $ 360.3 $ 352.8 $ 7.5
Non-operating pension income 3.6 5.0 (1.4 )
Interest expense, net (16.5 ) (23.9 ) 7.4
Income before taxes 347.4 333.9 13.5
Income tax provision (84.9 ) (83.2 ) (1.7 )
Net income $ 262.5 $ 250.7 $ 11.8
Non-GAAP Measures (a)
Net income excluding special items $ 265.6 $ 256.5 $ 9.1
Consolidated EBITDA 474.3 458.4
15.9
Consolidated EBITDA excluding special items 477.1 464.0
13.1
Packaging EBITDA 464.5 461.4
3.1
Packaging EBITDA excluding special items 467.1 466.9
0.2
Paper EBITDA 32.4 18.1
14.3
Paper EBITDA excluding special items 32.6 18.1 14.5 (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
Packaging. Net sales increased$111 million , or 6.1%, to$1,940 million , compared to$1,829 million in the third quarter of 2021 due to higher prices and mix ($227 million ), partially offset by lower containerboard and corrugated products volume ($116 million ). In the third quarter of 2022, our domestic containerboard prices were 11.2% higher, while export prices were 15.8% higher, than the same period in 2021. In the third quarter of 2022, export and domestic containerboard outside shipments decreased 26.6% compared to the third quarter of 2021. Our total corrugated products shipments were down 6.0% in total and per workday, compared to the same period in 2021. Paper. Net sales increased$15 million , or 10.0%, to$165 million , compared to$150 million in the third quarter of 2021, due to higher prices and mix ($28 million ), partially offset by lower volume ($13 million ). 19
--------------------------------------------------------------------------------
Gross Profit
Gross profit increased$8 million during the three months endedSeptember 30, 2022 , compared to the same period in 2021. The increase was driven primarily by higher prices and mix in our Packaging and Paper segments, partially offset by higher operating costs, lower volume in our Packaging and Paper segments, higher freight and logistics expenses, higher scheduled outage expenses, and higher converting and other expenses. In the three months endedSeptember 30, 2022 , gross profit included$2 million of special items primarily related toJackson mill conversion-related activities and closure costs related to corrugated products facilities. In the three months endedSeptember 30, 2021 , gross profit included$3 million of special items for charges related toJackson mill conversion-related activities and corrugated facility closure costs.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses ("SG&A") increased $1 million
during the three months ended September 30, 2022 , compared to the same period in
2021. The increase was primarily due to higher information technology expenses,
partially offset by maintenance related expenses.
Other Expense, Net
Other income (expense), net, for the three months ended
Three Months Ended
September 30,
2022 2021
Asset disposals and write-offs $ (7.5 ) $ (6.4 )
Jackson mill conversion-related activities (2.7 ) (3.2 )
Acquisition-related, facilities closure and other
income (costs) 0.2 (0.7 )
Other (2.9 ) (3.1 )
Total $ (12.9 ) $ (13.4 ) 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$7 million , or 2.1%, during the three months endedSeptember 30, 2022 , compared to the same period in 2021. The third quarter of 2022 included$4 million of special items expense primarily related to theJackson mill conversion-related activities, compared to$7 million of special items expense primarily related to corrugated facility closures and costs fromJackson mill conversion-related activities in the third quarter of 2021. Packaging. Packaging segment income from operations decreased$6 million to$359 million , compared to$365 million during the three months endedSeptember 30, 2021 . The decrease related primarily to higher operating and converting costs ($99 million ), lower sales and production volumes ($67 million ), higher freight expenses ($28 million ), higher annual outage expenses ($8 million ), higher depreciation expense ($9 million ), and other costs ($3 million ), partially offset by higher containerboard and corrugated products prices and mix ($205 million ). Special items during the third quarter of 2022 included$3 million of expense primarily related toJackson mill conversion-related activities, compared to$6 million of expense forJackson mill conversion-related activities and corrugated facility closures in the third quarter of 2021. Paper. Paper segment income from operations increased$15 million to$26 million , compared to$11 million during the three months endedSeptember 30, 2021 . The increase primarily related to higher prices and mix ($29 million ), lower freight expenses ($2 million ), lower operating costs ($1 million ), and lower depreciation expenses ($1 million ), partially offset by lower sales and production volumes ($7 million ), higher annual outage expenses ($8 million ), and other costs ($2 million ). Special items during the third quarters of 2022 and 2021 included$1 million each of expense forJackson mill conversion-related activities.
Non-Operating Pension Income, Interest Expense, Net and Income Taxes
Non-operating pension income decreased
Interest expense, net for the three months endedSeptember 30, 2022 decreased$7 million when compared to the same period in 2021. The decrease in interest expense, net was primarily due to higher interest income due to higher rates on invested cash balances and lower interest rates on the Company's fixed-rate debt as a result of the Company's debt refinancing completed inOctober 2021 , compared to the same period in 2021. During the three months endedSeptember 30, 2022 , we recorded$85 million of income tax expense, compared to$83 million of expense during the three months endedSeptember 30, 2021 . The effective tax rate for the three months endedSeptember 30, 2022 and 2021 was 24.4% and 24.9%, respectively. The decrease in our effective tax rate for the three months endedSeptember 30, 2022 compared to the same period in 2021 was primarily due to favorable employee restricted stock and performance unit vests with higher excess tax benefits and favorable state tax law changes, partially offset by higher nondeductible employee remuneration paid to covered employees. 20
--------------------------------------------------------------------------------
Nine Months Ended
The historical results of operations of PCA for the nine months ended
Nine Months Ended
September 30,
2022 2021 Change
Packaging $ 5,971.6 $ 5,171.4 $ 800.2
Paper 468.6 457.1 11.5
Corporate and Other 184.8 171.8 13.0
Intersegment eliminations (125.4 ) (113.2 ) (12.2 )
Net sales $ 6,499.6 $ 5,687.1 $ 812.5
Packaging $ 1,141.3 $ 940.3 $ 201.0
Paper 71.2 22.3 48.9
Corporate and Other (79.8 ) (76.9 ) (2.9 )
Income from operations $ 1,132.7 $ 885.7 $ 247.0
Non-operating pension income 10.9 14.8 (3.9 )
Interest expense, net (55.3 ) (72.2 ) 16.9
Income before taxes 1,088.3 828.3 260.0
Income tax provision (270.1 ) (203.7 ) (66.4 )
Net income $ 818.2 $ 624.6 $ 193.6
Non-GAAP Measures (a)
Net income excluding special items $ 825.1 $ 632.1 $ 193.0
Consolidated EBITDA 1,470.7 1,196.7
274.0
Consolidated EBITDA excluding special items 1,476.8 1,202.6 274.2 Packaging EBITDA
1,453.5 1,223.4 230.1
Packaging EBITDA excluding special items 1,456.3 1,227.8 228.5 Paper EBITDA
89.7 43.4 46.3
Paper EBITDA excluding special items 93.0 45.5 47.5 (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
Packaging. Net sales increased$800 million , or 15.5%, to$5,972 million , compared to$5,171 million in the nine months endedSeptember 30, 2021 , due to higher containerboard and corrugated products prices and mix ($800 million ). In the first nine months of 2022, our domestic containerboard prices were 14.9% higher, while export prices were 26.4% higher, than the same period in 2021. In the first nine months of 2022, export and domestic containerboard outside shipments increased 5.3% compared to the first nine months of 2021. Total corrugated products shipments were down 1.1% with one additional workday, and down 1.6% per day compared to the same period in 2021. Paper. Net sales during the nine months endedSeptember 30, 2022 increased$12 million , or 2.5%, to$469 million , compared to$457 million in the nine months endedSeptember 30, 2021 , due to higher prices and mix ($70 million ), partially offset by decreased volume ($58 million ).
Gross Profit
Gross profit increased$277 million during the nine months endedSeptember 30, 2022 , compared to the same period in 2021. The increase was driven primarily by higher prices and mix in the Packaging and Paper segments, partially offset by higher operating and converting costs, higher freight and logistics expenses, and lower volume in the Packaging and Paper segments. In the nine months endedSeptember 30, 2022 , gross profit included$5 million of special items expense primarily related toJackson mill conversion-related activities. In the nine months endedSeptember 30, 2021 , gross profit included$6 million of special items expense forJackson mill conversion-related activities and corrugated facility closure costs.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses ("SG&A") increased $27 million
during the nine months ended September 30, 2022 , compared to the same period in
2021. The increase was primarily due to employee-related expenses, information
technology expenses, and outside services.
21--------------------------------------------------------------------------------
Other Expense, Net
Other income (expense), net, for the nine months ended
Nine Months Ended
September 30,
2022 2021
Asset disposals and write-offs $ (33.9 ) $ (27.3 )
Jackson mill conversion-related activities (4.8 ) (6.1 )
Acquisition-related, facilities closure and other income 0.4 2.7
Other (6.4 ) (11.0 )
Total $ (44.7 ) $ (41.7 ) 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$247 million , or 27.9%, during the nine months endedSeptember 30, 2022 , compared to the same period in 2021. The first nine months of 2022 included$9 million of special items expense primarily related toJackson mill conversion-related costs, corrugated facility closure costs, and acquisition and integration costs related toAdvance Packaging , partially offset by income related to storm damage proceeds and a favorable lease buyout for a closed corrugated facility, compared to$10 million of special items expense related toJackson mill conversion-related activities and corrugated facilities closure costs in the same period of 2021. Packaging. Packaging segment income from operations increased$201 million to$1,141 million during the first nine months of 2022, compared to the same period last year. The increase related primarily to higher containerboard and corrugated products prices and mix ($693 million ), partially offset by higher operating and converting costs ($349 million ), higher freight expenses ($87 million ), and higher depreciation expense ($30 million ), lower sales and production volumes ($21 million ), higher annual outage expenses ($4 million ), and other costs ($4 million ). Special items during the first nine months of 2022 included$3 million of expense related toJackson mill conversion-related costs, corrugated facility closure costs, and acquisition and integration costs related toAdvance 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 costs forJackson mill conversion-related activities and corrugated facilities closures costs in the first nine months of 2021. Paper. Paper segment income from operations increased$49 million to$71 million , compared to the nine months endedSeptember 30, 2021 . The increase primarily related to higher prices and mix ($71 million ), lower operating costs ($17 million ), and lower depreciation expense ($3 million ), partially offset by lower sales and production volumes ($24 million ), higher annual outage expenses ($8 million ), and higher freight and other expenses ($8 million ). Special items during the first nine months of 2022 included$6 million of expense related toJackson mill conversion-related activities, compared to$5 million of expense related toJackson mill conversation-related activities in the first nine months of 2021.
Non-Operating Pension Income, Interest Expense, and Income Taxes
Non-operating pension income decreased
Interest expense, net decreased$17 million during the nine months endedSeptember 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 inOctober 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 nine months of 2022, compared to the same period in 2021. During the nine months endedSeptember 30, 2022 , we recorded$270 million of income tax expense, compared to$204 million of expense during the nine months endedSeptember 30, 2021 . The effective tax rate for the nine months endedSeptember 30, 2022 and 2021 was 24.8% and 24.6%, respectively. The increase in our effective tax rate for the nine months endedSeptember 30, 2022 compared to the same period in 2021 was primarily due to higher nondeductible employee remuneration paid to covered employees, partially offset by favorable employee restricted stock and performance unit vests with higher excess tax benefits. 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. AtSeptember 30, 2022 , we had$649 million of cash and cash equivalents,$145 million of marketable debt securities, and$321 million of unused borrowing capacity under the revolving credit facility, net of letters of credit. Currently, our primary uses of cash are for operations, capital expenditures, acquisitions, debt service, common stock dividends, and repurchases of common stock. We believe that net cash generated from operating activities, cash on hand, available borrowings under our revolving credit facility, and available capital through access to capital markets will be adequate to meet our liquidity and capital requirements, including payments of any declared common stock dividends, for the foreseeable future. As our debt or credit facilities become due, we will need to repay, extend, or replace such facilities. Our ability to do so will be subject to future economic conditions and financial, business, and other factors, many of which are beyond our control.
Below is a summary table of our cash flows, followed by a discussion of our sources and uses of cash through operating activities, investing activities, and financing activities (dollars in millions):
Nine Months Ended
September 30,
2022 2021 Change
Net cash provided by (used for): Operating activities$ 1,074.9 $ 703.4 $ 371.5 Investing activities (581.9 ) (365.0 ) (216.9 ) Financing activities (463.0 ) 389.9
(852.9 )
Net increase in cash and cash equivalents
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 nine months endedSeptember 30, 2022 , net cash provided by operating activities was$1,075 million , compared to$703 million in the same period in 2021, an increase of$372 million . Cash from operations excluding changes in cash used for operating assets and liabilities increased$229 million primarily due to higher income from operations in 2022 as discussed above. Cash from operations increased by$143 million due to changes in operating assets and liabilities, primarily related to favorable changes in accounts receivable in 2022 due to lower sales volumes in the third quarter of 2022, partially offset by higher pricing in 2022 in the Packaging segment. This was partially offset by unfavorable changes in accrued liabilities primarily in compensation and benefits liabilities in the first nine months of 2022 compared to the same period in 2021.
Investing Activities
We used$582 million for investing activities during the nine months endedSeptember 30, 2022 compared to$365 million during the same period in 2021. We spent$577 million for internal capital investments during the nine months endedSeptember 30, 2022 , compared to$366 million during the same period in 2021. We expect capital investments in 2022 to be approximately$820 million , including capital spending related to the conversion of the No. 3 paper machine to containerboard at ourJackson 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. Financing Activities During the nine months endedSeptember 30, 2022 , net cash used for financing activities was$463 million , compared to$390 million of net cash provided by financing activities during the same period in 2021. We paid$304 million of dividends during the first nine months of 2022, compared to$285 million of dividends paid during the comparable period in 2021. We repurchased and retired 1.0 million shares of the Company's common stock for$142 million during the first nine months of 2022. We had no share repurchases during the same period in 2021. During the nine months endedSeptember 30, 2021 , we issued$700 million of 3.05% Senior Notes due 2051, the proceeds of which were used to redeem$700 million of 4.50% Senior Notes due 2023 inOctober 2021 . We also paid$8 million of debt issuance costs associated with theSeptember 2021 debt refinancing and$1 million of debt issuance costs related to the New Revolving Credit Agreement that was entered into onJune 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.
23--------------------------------------------------------------------------------
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 nine months endedSeptember 30, 2022 and 2021 follow (dollars in millions): Three Months Ended September 30, 2022 2021 Income Income before Income Net before Income Net Taxes Taxes Income Taxes Taxes Income As reported in accordance with GAAP$ 347.4 $ (84.9 ) $ 262.5 $ 333.9 $ (83.2 ) $ 250.7 Special items:Jackson mill conversion-related activities (a) 3.9 (1.0 ) 2.9 4.5 (1.1 ) 3.4 Acquisition-related, facilities closure and other costs (b) 0.2 - 0.2 2.7 (0.7 ) 2.0 Debt refinancing (c) - - - 0.5 (0.1 ) 0.4 Total special items 4.1 (1.0 ) 3.1 7.7 (1.9 ) 5.8 Excluding special items$ 351.5 $ (85.9 ) $ 265.6 $ 341.6 $ (85.1 ) $ 256.5 Nine Months Ended September 30, 2022 2021 Income Income before Income Net before Income Net Taxes Taxes Income Taxes Taxes Income As reported in accordance with GAAP$ 1,088.3 $ (270.1 ) $ 818.2 $ 828.3 $ (203.7 ) $ 624.6 Special items:Jackson mill conversion-related activities (a) 9.4 (2.3 ) 7.1 9.4 (2.4 ) 7.0 Acquisition-related, facilities closure and other costs (income) (b) (0.2 ) - (0.2 ) 0.1 - 0.1 Debt refinancing (c) - - - 0.5 (0.1 ) 0.4 Total special items 9.2 (2.3 ) 6.9 10.0 (2.5 ) 7.5 Excluding special items$ 1,097.5 $ (272.4 ) $ 825.1 $
838.3$ (206.2 ) $ 632.1 (a) Includes charges related to the announced discontinuation of production of UFS paper grades on the No. 3 machine at theJackson, 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 endedSeptember 30, 2022 , includes closure costs related to corrugated products facilities and acquisition and integration costs related to theDecember 2021 Advance Packaging Corporation acquisition, partially offset by a gain on sale of assets related to a corrugated products facility. For the nine months endedSeptember 30, 2022 , these costs were offset by insurance proceeds received for a natural disaster at one of the corrugated products facilities and a favorable lease buyout for a closed corrugated products facility. For the three months endedSeptember 30, 2021 , includes closure costs related to corrugated products facilities. For the nine months endedSeptember 30, 2021 , these costs are partially offset by income primarily consisting of an adjustment of the required asset retirement obligation related to the 2020 closure of theSan Lorenzo, California facility, a gain on sale of corporate assets, and insurance proceeds received for a natural disaster at one of the corrugated products facilities, partially offset by closure costs related to corrugated products facilities.
(c)
Includes costs related to the Company's
24--------------------------------------------------------------------------------
The following table reconciles net income to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net income $ 262.5 $ 250.7 $ 818.2 $ 624.6
Non-operating pension income (3.6 ) (5.0 ) (10.9 ) (14.8 )
Interest expense, net 16.5 23.9 55.3 72.2
Income tax provision 84.9 83.2 270.1 203.7
Depreciation, amortization, and
depletion 114.0 105.6 338.0 311.0
EBITDA $ 474.3 $ 458.4 $ 1,470.7 $ 1,196.7
Special items:
Jackson mill conversion-related
activities 2.7 3.3 6.4 6.4
Acquisition-related, facilities closure
and other costs (income) 0.1 2.3 (0.3 ) (0.5 )
Total special items 2.8 5.6 6.1 5.9
EBITDA excluding special items $ 477.1 $ 464.0 $ 1,476.8 $ 1,202.6 The following table reconciles segment income (loss) to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Packaging
Segment income $ 359.2 $ 365.2 $ 1,141.3 $ 940.3
Depreciation, amortization, and depletion 105.3 96.2 312.2 283.1
EBITDA 464.5 461.4 1,453.5 1,223.4
Jackson mill conversion-related activities 2.5 3.2 3.1 4.1
Acquisition-related, facilities closure
and other costs (income) 0.1 2.3 (0.3 ) 0.3
EBITDA excluding special items $ 467.1 $ 466.9 $ 1,456.3 $ 1,227.8
Paper
Segment income $ 26.1 $ 11.0 $ 71.2 $ 22.3
Depreciation, amortization, and depletion 6.3 7.1 18.5 21.1
EBITDA 32.4 18.1 89.7 43.4
Jackson mill conversion-related activities 0.2 - 3.3 2.1
EBITDA excluding special items $ 32.6 $ 18.1 $ 93.0 $ 45.5
Corporate and Other
Segment loss $ (25.0 ) $ (23.4 ) $ (79.8 ) $ (76.9 )
Depreciation, amortization, and depletion 2.4 2.3 7.3 6.8
EBITDA (22.6 ) (21.1 ) (72.5 ) (70.1 )
Acquisition-related, facilities closure
and other income - - - (0.8 )
Jackson mill conversion-related activities - 0.1 - 0.2
EBITDA excluding special items $ (22.6 ) $ (21.0 ) $ (72.5 ) $ (70.7 )
EBITDA $ 474.3 $ 458.4 $ 1,470.7 $ 1,196.7
EBITDA excluding special items $ 477.1 $ 464.0 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 ofSeptember 30, 2022 , 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 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
25--------------------------------------------------------------------------------
Off-Balance-Sheet Activities
The Company does not have any off-balance sheet arrangements as of
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 inthe 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 nine 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:
•
the impact of general economic conditions;
•
the impact of the COVID-19 pandemic on the health of our employees, on our vendors and customers and on economic conditions affecting our business;
•
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;
•
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 endedDecember 31, 2021 . 26
--------------------------------------------------------------------------------
© Edgar Online, source
