PCA(PKG) - 2021 Q4 - Annual Report

Part I Business Packaging Corporation of America (PCA) is a leading North American producer of containerboard and uncoated freesheet paper, operating eight mills and 90 corrugated products plants - PCA is the third largest producer of containerboard products and a leading producer of uncoated freesheet (UFS) paper in North America, operating eight mills and 90 corrugated products plants[12] - The company is organized into three reportable segments: Packaging, Paper, and Corporate and Other[13] Production and Shipments Overview (2019-2021) | Metric | Unit | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | :--- | | Containerboard Production | thousand tons | 4,887 | 4,341 | 4,249 | | Corrugated Products Shipments | billion sq. ft. | 65.7 | 62.8 | 59.4 | | UFS Production | thousand tons | 572 | 648 | 947 | Packaging Segment PCA's largest segment, Packaging, produces containerboard and corrugated products, generating $7.1 billion in net sales in 2021, utilizing wood fiber and biogenic fuels Packaging Segment 2021 Performance | Metric | Value | | :--- | :--- | | Net Sales to Third Parties | $7.1 billion | | Containerboard Production | 4.9 million tons | | Corrugated Products Sales | 65.7 billion square feet (BSF) | - The Jackson, Alabama mill began converting to containerboard production in late 2020, with the No. 3 machine permanently converted in Q1 2021 and the No. 1 machine starting corrugating medium production in late 2021[23] - Fiber is the largest raw material cost, with recycled fiber usage at 18% of containerboard production in 2021; 61% of 81 million MMBTUs consumed for energy was from self-generated biogenic fuels[26][30] - The segment's primary national competitors include International Paper, WestRock Company, Georgia-Pacific LLC, and Pratt Industries[38] Paper Segment The Paper segment, a leading North American producer of uncoated freesheet, operates two mills with 602,000 tons annual capacity and faces declining demand due to electronic alternatives and competition - The segment has an annual production capacity of 602,000 tons from two mills: International Falls, MN, and Jackson, AL[40] - Office Depot, Inc. is the largest customer, representing 51% of the Paper segment's sales revenue and 4% of consolidated sales revenue in 2021; the current supply agreement runs through December 31, 2022[48][90] - The paper market is highly competitive, facing pressure from other producers (like Domtar and Sylvamo) and electronic alternatives, which are causing a decline in demand for UFS paper products[49][50][81] Human Capital As of December 31, 2021, PCA employed approximately 15,200 people, with 63% of hourly employees unionized, focusing on safety, recruitment, and diversity initiatives Employee Statistics (as of Dec 31, 2021) | Category | Number | | :--- | :--- | | Total Employees | ~15,200 | | Salaried Employees | 4,400 | | Hourly Employees | 10,800 | | Unionized Hourly Employees | ~63% | - The company has established a Diversity, Equity, and Inclusion Council and began publicly disclosing its EEO-1 report in 2021[55] - PCA experienced no work stoppages in 2021 and believes it has satisfactory labor relations[57] Risk Factors The company faces various risks including COVID-19 impacts, operational challenges, input cost volatility, customer concentration, and other external and internal factors - COVID-19 Risks: The pandemic poses uncertainty regarding future operational disruptions, workforce availability, and supply chain costs It has already caused significantly lower demand for UFS paper products[76][78] - Operational & Industry Risks: The business is subject to industry price cyclicality, intense competition, and potential increases in the cost of fiber, fuel, and chemicals A $10/ton increase in recycled fiber cost would add $8.6 million in expense[79][80][85] - Customer Concentration Risk: The Paper segment relies heavily on Office Depot, which accounted for 51% of its sales in 2021 A reduction in sales to Office Depot could significantly harm the segment's results[89][90] - Financial & Economic Risks: The business is exposed to adverse economic conditions, including high inflation A 1% increase in cash costs (COS & SG&A) would amount to a $60 million increase in expenses[101][103] Properties PCA owns all eight of its mills and corporate headquarters, along with 53 of its 90 corrugated manufacturing facilities, with the remainder leased - The company owns all eight of its mills and its corporate headquarters[111][112] - Of the 90 corrugated manufacturing operations, PCA owns 53 facilities (including 45 corrugated plants) and leases 37 facilities (including 14 corrugated plants)[111] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities PCA's common stock trades on the NYSE, with a new $1 billion share repurchase program authorized in January 2022, and its 5-year cumulative total shareholder return was 185.17% - In January 2022, the Board of Directors authorized a new $1 billion share repurchase program[119] - In Q4 2021, PCA repurchased 1.4 million shares of common stock for $193.0 million, completing its prior authorization, with no repurchases made in 2020 or 2019[120] 5-Year Cumulative Total Shareholder Return (2016-2021) | Entity | 2016 Investment | 2021 Value | Cumulative Return | | :--- | :--- | :--- | :--- | | Packaging Corporation of America | $100.00 | $185.17 | 85.17% | | S&P 500 | $100.00 | $233.41 | 133.41% | | S&P Midcap 400 | $100.00 | $184.96 | 84.96% | | Peer Group | $100.00 | $110.53 | 10.53% | Management's Discussion and Analysis of Financial Condition and Results of Operations PCA's 2021 net sales increased to $7.73 billion and net income to $841 million, driven by Packaging segment growth and the Advance Packaging acquisition, despite cost inflation Financial Performance (2021 vs. 2020) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Sales | $7.73 billion | $6.66 billion | | Net Income | $841 million | $461 million | | Diluted EPS | $8.83 | $4.84 | | Net Income (Excluding Special Items) | $894 million | $550 million | | Diluted EPS (Excluding Special Items) | $9.39 | $5.78 | - Performance was driven by higher prices and mix in both segments and higher volumes in Packaging, partially offset by higher operating costs, converting costs, and freight expenses[130] - In December 2021, PCA acquired Advance Packaging Corporation for $195 million to further integrate its containerboard production[134] Results of Operations In 2021, net sales increased 16.1% to $7.73 billion, driven by 19.1% growth in Packaging sales to $7.05 billion, while Paper segment sales declined due to mill conversion Net Sales by Segment (2021 vs. 2020) | Segment | 2021 Net Sales (millions) | 2020 Net Sales (millions) | Change (%) | | :--- | :--- | :--- | :--- | | Packaging | $7,052.6 | $5,919.5 | +19.1% | | Paper | $599.7 | $674.8 | -11.1% | | Total | $7,730.3 | $6,658.2 | +16.1% | Income from Operations by Segment (2021 vs. 2020) | Segment | 2021 Income (millions) | 2020 Income (millions) | Change (millions) | | :--- | :--- | :--- | :--- | | Packaging | $1,306.0 | $829.5 | +$476.5 | | Paper | $39.1 | $(20.0) | +$59.1 | | Total | $1,241.4 | $723.9 | +$517.5 | - In 2020, the company recognized a non-cash goodwill impairment charge of $55 million for the Paper reporting unit, with no such charge in 2021[149] Liquidity and Capital Resources PCA's 2021 liquidity was supported by $1.09 billion in operating cash flow, with $794 million used in investing activities (including $605 million in capital expenditures and $195 million for acquisitions), and $656 million used in financing activities including debt refinancing Cash Flow Summary (in millions) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,094.1 | $1,032.8 | | Net cash used for investing activities | $(794.4) | $(426.1) | | Net cash used for financing activities | $(655.6) | $(311.6) | - Capital expenditures were $605 million in 2021 and are expected to be approximately $800 million in 2022, including spending on the Jackson mill conversion[163][165] - In 2021, the company issued $700 million of 3.05% Senior Notes due 2051 and used the proceeds and cash on hand to redeem $700 million of 4.50% Senior Notes due 2023[167] Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment in areas such as pensions, goodwill impairment testing (including a $55.2 million impairment for the Paper segment in 2020), and long-lived asset impairment reviews - Pensions: Pension expense and liabilities are sensitive to assumptions; a 0.25% decrease in the discount rate would have increased 2021 pension expense by $2.2 million, while a 0.25% decrease in the expected rate of return on assets would have increased it by $3.2 million[189] - Goodwill Impairment: A triggering event in Q2 2020 related to the Paper segment resulted in a full impairment charge of $55.2 million, while the Q4 2021 annual test for the Packaging segment indicated no impairment[193][194][198] - Long-Lived Asset Impairment: A recoverability test on the Paper segment's long-lived assets in Q2 2020 indicated they were 100% recoverable[201][202] Financial Statements and Supplementary Data This section presents PCA's audited consolidated financial statements for 2021, including the independent auditor's unqualified opinion on financial statements and internal controls, with detailed notes on accounting policies, acquisitions, and debt - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[215] - The audit of internal control over financial reporting excluded Advance Packaging Corporation, acquired in December 2021, which represented approximately 3% of consolidated total assets[216] - The auditor identified the evaluation of the value of the pension benefit obligation as a critical audit matter due to the specialized skills required and sensitivity to the discount rate assumption[224][225] Consolidated Financial Statements PCA's 2021 consolidated financial statements show $7,730.3 million in net sales, $841.1 million in net income, $7,836.8 million in total assets, and $1,094.1 million in operating cash flow Key Financial Statement Data (2021) | Metric | Value (millions) | | :--- | :--- | | Income Statement | | | Net Sales | $7,730.3 | | Gross Profit | $1,873.0 | | Net Income | $841.1 | | Balance Sheet (Year-End) | | | Total Assets | $7,836.8 | | Total Liabilities | $4,229.6 | | Total Stockholders' Equity | $3,607.2 | | Cash Flow Statement | | | Net Cash from Operating Activities | $1,094.1 | Notes to Consolidated Financial Statements Notes to the financial statements detail the $194.9 million Advance Packaging acquisition, $700 million debt refinancing, improved pension underfunded status to $121.1 million, and capital commitments of $784.9 million - On December 11, 2021, PCA acquired Advance Packaging for $194.9 million, allocating $60.0 million to goodwill and $50.2 million to intangible assets[323] - In 2021, the company refinanced debt by issuing $700.0 million of 3.05% senior notes due 2051 and redeeming its $700.0 million 4.50% notes due 2023[349] - The pension plans' underfunded status improved from $264.9 million in 2020 to $121.1 million in 2021, primarily due to an increase in the discount rate assumption and asset returns[368] - The company has capital commitments of approximately $784.9 million as of December 31, 2021, for facility expansion and replacement[425] Controls and Procedures Management concluded that PCA's disclosure controls and internal control over financial reporting were effective as of December 31, 2021, excluding the recently acquired Advance Packaging Corporation - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[438] - Management's assessment of internal control over financial reporting concluded that such controls were effective as of December 31, 2021[443] - The assessment of internal control over financial reporting excluded the newly acquired Advance Packaging Corporation, which accounted for approximately 3% of total assets[439][443] Part III Directors, Executive Compensation, and Other Matters This section incorporates by reference information from PCA's 2022 Proxy Statement regarding directors, executive officers, corporate governance, executive compensation, and related party transactions - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Certain Relationships and Related Transactions (Item 13), and Principal Accounting Fees and Services (Item 14) is incorporated by reference from the company's 2022 Proxy Statement[448][451][452] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference, with 1,317,879 securities remaining available for future issuance under equity compensation plans as of December 31, 2021 Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Securities to Be Issued Upon Exercise (A) | Weighted-Average Exercise Price (B) | Securities Remaining for Future Issuance (C) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by securityholders | — | $ — | 1,317,879 | | Equity compensation plans not approved by securityholders | N/A | N/A | N/A | | Total | — | $ — | 1,317,879 | - The number of securities to be issued upon exercise excludes 1,009,540 shares of unvested restricted stock and performance units[450] Part IV Exhibits, Financial Statement Schedules This section lists exhibits filed with the 10-K, including corporate documents, credit agreements, employee benefit plans, and required CEO/CFO certifications and auditor consents - Lists key agreements including the Credit Agreement dated June 8, 2021, and indentures for various senior notes with maturities ranging from 2024 to 2051[455] - Includes management compensatory plans such as the Amended and Restated 1999 Long-Term Equity Incentive Plan and the Executive Incentive Compensation Plan[455] - Contains required filings such as the Consent of KPMG LLP (auditor) and CEO/CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[457]