PCA(PKG) - 2022 Q4 - Annual Report

Part I Business PCA is a leading North American producer of containerboard and uncoated freesheet paper, operating through three segments with extensive US facilities - PCA is the third largest producer of containerboard products and a leading producer of uncoated freesheet (UFS) paper in North America[14] - The company operates eight mills and 89 corrugated products plants and related facilities[14] Production and Shipments Summary (2020-2022) | Metric | Unit | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | :--- | | Containerboard Production | thousand tons | 4,566 | 4,887 | 4,341 | | Corrugated Products Shipments | billion sq. ft. | 63.4 | 65.7 | 62.8 | | UFS Production | thousand tons | 506 | 572 | 648 | Packaging Segment PCA's largest segment, Packaging, produces containerboard and corrugated products, generating $7.8 billion in sales in 2022, primarily serving regional customers Packaging Segment Performance 2022 | Metric | Value | | :--- | :--- | | Net Sales to Third Parties | $7.8 billion | | Containerboard Production | 4.6 million tons | | Corrugated Products Sales | 63.4 billion sq. ft. (BSF) | - The segment's total annual containerboard capacity was approximately 5.0 million tons as of December 31, 2022[21] - In 2022, usage of recycled fiber, net of internal generation, represented 17% of containerboard production. About 63% of the packaging mills' energy consumption came from mill-generated biogenic fuels[28][32] - The segment serves approximately 15,000 customers, with about 70% of sales from regional and local accounts. No single customer exceeds 10% of segment sales[37] - The primary end-use market for corrugated products is food, beverages, and agricultural products, accounting for 48% of the market[38] Paper Segment The Paper segment is a leading North American producer of uncoated freesheet paper, with a single mill and ODP as a major customer - The segment operates one paper mill in International Falls, Minnesota, with an annual production capacity of approximately 500,000 tons[42] - In 2022, about 75% of the paper mill's energy consumption was from mill-generated biogenic fuels[46] - ODP Corporation is the largest customer, representing 48% of the Paper segment's sales revenue and 4% of consolidated sales revenue in 2022. A new supply agreement with ODP is effective through December 31, 2024[49] - The segment competes in a highly competitive market against rivals like Domtar Corporation and Sylvamo Corporation, as well as foreign producers and electronic data alternatives[51] Corporate and Other Segment This segment includes corporate support, transportation assets, and a 50% owned variable interest entity, Louisiana Timber Procurement Company - This segment includes corporate support staff, transportation assets (rail cars, trucks), and assets of the 50% owned variable interest entity, Louisiana Timber Procurement Company, L.L.C. (LTP)[52] Human Capital As of December 31, 2022, PCA employed approximately 15,100 people, with 61% of hourly employees covered by collective bargaining agreements - As of December 31, 2022, PCA had approximately 15,100 employees, including 4,400 salaried and 10,700 hourly employees[59] - Approximately 61% of hourly employees are unionized. In 2022, PCA reached new six-year master labor agreements covering seven mills and 25 container plants, with no work stoppages during the year[59] - A 2022 employee engagement survey showed overall engagement levels in line with other U.S. manufacturing companies, reaffirming a strong safety culture and favorable perceptions of diversity and inclusion[58] Regulatory and Environmental Matters The company's compliance with environmental laws is a significant factor, with detailed financial impact discussed in Part II, Item 7 - A detailed discussion of the financial impact of compliance with environmental laws is located in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations"[60] Executive Officers of the Registrant This section provides brief biographical statements for PCA's executive officers as of February 23, 2023, including Mark W. Kowlzan and Robert P. Mundy - Mark W. Kowlzan, 67, has served as Chairman since January 2016 and as Chief Executive Officer since July 2010[62] - Robert P. Mundy, 61, has served as Chief Financial Officer since 2015[65] - Thomas A. Hassfurther, 67, has served as Executive Vice President - Corrugated Products since September 2009[64] Risk Factors PCA faces various risks including economic deterioration, industry cyclicality, intense competition, rising costs, customer concentration, and labor relations - A deterioration in general economic conditions, including persistent inflation and rising interest rates, has led to lower demand for containerboard and corrugated products since mid-2022[77] - Product prices are cyclical and volatile. Published containerboard prices began decreasing in Q4 2022, which is expected to result in lower profitability[80] - The UFS paper business faces declining demand due to the increasing shift to electronic data transmission and document storage alternatives[82] - A $10 per ton increase in recycled fiber costs would result in approximately $8 million of additional annual expense, while a $0.10 per MMBTU increase in natural gas prices would add about $3 million in expense, based on 2022 consumption[86][87] - The company relies on ODP Corporation, which accounted for 48% of Paper segment sales in 2022. The loss or reduction of this business could harm the Paper segment's results[89][90] - The company's workforce is highly unionized, and failure to successfully negotiate new labor agreements could lead to work stoppages and harm the business[102] Unresolved Staff Comments The company reports that it has no unresolved staff comments - None[109] Properties PCA owns its eight mills and corporate headquarters, with a mix of owned and leased corrugated manufacturing operations, all well-maintained - The company owns the buildings and land for all eight of its mills[112] - Of the 89 corrugated manufacturing operations, buildings and land for 53 are owned, and buildings for 36 are leased[112] - The company owns its corporate headquarters building in Lake Forest, Illinois[113] Legal Proceedings Information regarding legal proceedings is detailed in Note 20 of the Notes to Consolidated Financial Statements - Information concerning legal proceedings can be found in Note 20, Commitments, Guarantees, Indemnifications, and Legal Proceedings, of the Notes to Consolidated Financial Statements[114] Mine Safety Disclosure This item is not applicable to the company - Not applicable[115] 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, and in 2022, the company repurchased 4.0 million shares for $523 million under a $1 billion program - On January 26, 2022, the Board of Directors authorized the repurchase of $1 billion of the Company's common stock[120] - During 2022, the company paid $523 million to repurchase 4.0 million shares of common stock. At December 31, 2022, $477 million remained available for repurchase[121] Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Approximate Dollar Value of Shares That May Yet Be Purchased (in millions) | | :--- | :--- | :--- | :--- | :--- | | October 1-31, 2022 | 333,321 | $118.83 | 333,200 | $818.4 | | November 1-30, 2022 | 2,073,127 | $125.70 | 2,073,127 | $557.8 | | December 1-31, 2022 | 597,185 | $134.59 | 596,700 | $477.5 | | Total | 3,003,633 | $126.70 | 3,003,027 | $477.5 | Selected Financial Data This item is reserved and contains no information - None[109] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, PCA's net sales rose to $8.5 billion and net income to $1.03 billion, driven by higher prices despite lower volumes and cost inflation Executive Summary For 2022, net sales increased to $8.5 billion and net income to $1,030 million, primarily due to higher prices and mix in both segments Financial Highlights (2022 vs. 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Sales | $8.5 billion | $7.7 billion | | Net Income | $1,030 million | $841 million | | Diluted EPS | $11.03 | $8.83 | | Diluted EPS (Excluding Special Items) | $11.14 | $9.39 | - Packaging segment EBITDA (excluding special items) increased to $1,849 million in 2022 from $1,688 million in 2021, driven by higher prices and mix, but partially offset by a 3.4% decline in corrugated products shipments for the year[131] - Paper segment EBITDA (excluding special items) increased to $132 million in 2022 from $72 million in 2021, primarily due to higher paper prices and mix[132] Industry and Business Conditions In 2022, North American corrugated products shipments declined, containerboard prices decreased in late 2022, while cut-size office paper prices significantly increased - North American industry-wide corrugated products shipments were down 3.8% in 2022 compared to 2021[136] - Containerboard prices increased in March 2022 but decreased in November and December 2022, with further decreases in January 2023[136] - Average prices for cut-size office papers increased by $259 per ton (22%) in 2022 compared to 2021[137] Results of Operations (2022 vs. 2021) Net sales for 2022 increased by 9.7% to $8.48 billion, with income from operations rising 14.4% to $1.42 billion, driven by strong pricing Consolidated Results of Operations (in millions) | Metric | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $8,478.0 | $7,730.3 | $747.7 | | Income from Operations | $1,420.7 | $1,241.4 | $179.3 | | Net Income | $1,029.8 | $841.1 | $188.7 | | EBITDA excluding special items | $1,885.5 | $1,665.4 | $220.1 | - Packaging segment sales increased by $728 million, driven by higher prices and mix ($963 million), partially offset by lower volumes ($235 million)[141] - Paper segment sales increased by $22 million, driven by higher prices and mix ($96 million), partially offset by lower volume ($74 million)[142] - Packaging operating income increased by $118 million, as higher price/mix ($842 million) was partially offset by lower volumes (-$166 million), higher operating costs (-$394 million), and higher freight expense (-$105 million)[147] Liquidity and Capital Resources PCA's 2022 operating cash flow was $1.5 billion, funding capital expenditures, dividends, and share repurchases, with $470 million cash at year-end Cash Flow Summary (in millions) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,495.0 | $1,094.1 | | Net cash used for investing activities | ($833.7) | ($794.4) | | Net cash used for financing activities | ($960.0) | ($655.6) | - Capital expenditures for property and equipment totaled $824.2 million in 2022, a substantial increase from $605.1 million in 2021[156][158] - Capital investments for 2023 are expected to be approximately $475 million[158] - In 2022, the company used $523 million to repurchase 4.0 million shares and paid $420 million in dividends[159] Commitments The company has long-term cash requirements from contractual obligations including debt, leases, and capital additions, detailed in financial statement notes - The company's cash requirements beyond twelve months stem from debt obligations, leases, asset retirement obligations, capital additions, purchase commitments, and employee benefit obligations[161][165] Inflation and Other General Cost Increases The company is subject to inflationary pressures; a 1% increase in total costs would raise expenses by $70 million, with volatile input costs like fiber and energy - A 1% increase in total company costs (Cost of Sales and SG&A) would increase costs by $70 million and cash costs by $65 million, based on 2022 figures[163] 2022 Mill Fuel and Electricity Purchases | Item | Total Purchased | Average Cost | | :--- | :--- | :--- | | Fuel (all types) | 32.3 million MMBTUs | $6.09 / MMBTU | | Electricity | 22.0 million CkWh | $6.86 / CkWh | Regulatory and Environmental Matters PCA incurred $50 million in environmental compliance costs in 2022 and aims for a 35% reduction in Scope 1 and 2 GHG emissions by 2030 - Environmental compliance spending was $50 million in 2022, up from $44 million in 2021 and 2020[170] - As of December 31, 2022, the company maintained an environmental reserve of $25.2 million for on-site landfills, surface impoundments, and remedial projects[173] - PCA has set a goal to reduce absolute Scope 1 and 2 greenhouse gas emissions by 35% by 2030 (from a 2021 baseline) and to reach net-zero carbon emissions by 2050[175] Critical Accounting Policies and Estimates Accounting for defined benefit pension plans is a critical estimate, highly sensitive to assumptions like discount rates and expected return on plan assets - The calculation of pension expense and liabilities is a critical accounting estimate, requiring significant judgment regarding assumptions for discount rates, return on plan assets, and other factors[179][180] Pension Expense Sensitivity Analysis for 2023 | Assumption Change | Impact on 2023 Pension Expense (in millions) | | :--- | :--- | | 0.25% Increase in Discount Rate | ($2.0) | | 0.25% Decrease in Discount Rate | $2.2 | | 0.25% Increase in Expected Return on Plan Assets | ($2.6) | | 0.25% Decrease in Expected Return on Plan Assets | $2.6 | Reconciliations of Non-GAAP Financial Measures This section reconciles non-GAAP measures like Net income excluding special items and EBITDA to GAAP, used by management for operational performance evaluation Reconciliation of Net Income to Net Income Excluding Special Items (2022, in millions) | Metric | Amount | | :--- | :--- | | Net Income (GAAP) | $1,029.8 | | Total Special Items Expense | $10.4 | | Net Income Excluding Special Items (Non-GAAP) | $1,040.2 | Reconciliation of Net Income to EBITDA (2022, in millions) | Metric | Amount | | :--- | :--- | | Net Income (GAAP) | $1,029.8 | | Adjustments (Interest, Taxes, D&A, etc.) | $847.7 | | EBITDA (Non-GAAP) | $1,877.5 | | Special Items | $8.0 | | EBITDA Excluding Special Items (Non-GAAP) | $1,885.5 | Quantitative and Qualitative Disclosures About Market Risk PCA is exposed to commodity price and interest rate risks, with 100% fixed-rate debt as of December 31, 2022, mitigating interest rate risk on existing debt - The company is exposed to commodity price changes, interest rate changes, and financial instrument market value changes[190] - As of December 31, 2022, 100% of PCA's outstanding debt is fixed-rate[191] Financial Statements and Supplementary Data This section contains PCA's audited consolidated financial statements for 2022, including income statements, balance sheets, cash flows, and accompanying notes Consolidated Statements of Income (in millions) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net sales | $8,478.0 | $7,730.3 | $6,658.2 | | Gross profit | $2,090.6 | $1,873.0 | $1,369.4 | | Income from operations | $1,420.7 | $1,241.4 | $723.9 | | Net income | $1,029.8 | $841.1 | $461.0 | | Diluted EPS | $11.03 | $8.83 | $4.84 | Consolidated Balance Sheets (in millions) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $2,508.3 | $2,732.7 | | Total Assets | $8,003.8 | $7,836.8 | | Total Current Liabilities | $875.5 | $884.8 | | Long-Term Debt | $2,473.6 | $2,471.5 | | Total Liabilities | $4,336.7 | $4,229.6 | | Total Stockholders' Equity | $3,667.1 | $3,607.2 | Notes to Consolidated Financial Statements The notes provide detailed information on accounting policies, revenue, leases, debt, pensions, segment performance, and legal proceedings, supplementing financial statements Changes In and Disagreements With Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[405] Controls and Procedures Management concluded PCA's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management, including the CEO and CFO, concluded that PCA's disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2022[407] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[411] Other Information The company reports that it has no other information to disclose - None[413] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - Not applicable[414] Part III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information regarding executive officers is located in Part I, Item 1 under the caption 'Executive Officers of the Registrant'[416] - Other required information concerning directors, corporate governance, and audit committee matters is incorporated by reference from the 2023 Proxy Statement[419] Executive Compensation All information regarding executive compensation is incorporated by reference from the company's 2023 Proxy Statement - Information regarding executive compensation is incorporated by reference from PCA's 2023 Proxy Statement[416] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2023 Proxy Statement, with 1,010,073 securities available for future issuance Securities Authorized for Issuance under Equity Compensation Plans (as of Dec 31, 2022) | Plan Category | Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants, and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants, and Rights | Number of Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by securityholders | — | $ — | 1,010,073 | | Equity compensation plans not approved by securityholders | N/A | N/A | N/A | | Total | — | $ — | 1,010,073 | Certain Relationships and Related Transactions, and Director Independence All information regarding related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from PCA's 2023 Proxy Statement[420] Principal Accounting Fees and Services All information regarding principal accounting fees and services is incorporated by reference from the 2023 Proxy Statement - Information regarding principal accounting fees and services is incorporated by reference from PCA's 2023 Proxy Statement[421] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report, including governing documents and certifications - This section lists all exhibits filed with the Form 10-K, including the Contribution Agreement, Indentures for various Senior Notes, Credit Agreement, and management compensatory plans[423][425][426]