UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-15399

 

(Exact Name of Registrant as Specified in its Charter)

Delaware	36-4277050
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
1 North Field Court, Lake Forest, Illinois	60045
(Address of Principal Executive Offices)	(Zip Code)

Registrant's telephone number, including area code

(847) 482-3000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐	Emerging growth company	☐
Non-accelerated filer	☐	Smaller reporting company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 28, 2023, the Registrant had outstanding 89,932,185 shares of common stock, par value $0.01 per share.

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	PKG	New York Stock Exchange

Table of Contents

	PART I
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
	PART II
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	26

All reports we file with the Securities and Exchange Commission (SEC) are available free of charge via the Electronic Data Gathering Analysis and Retrieval (EDGAR) System on the SEC website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available through our website at www.packagingcorp.com as soon as reasonably practicable after filing such material with the SEC.

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PART I

FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Packaging Corporation of America

Consolidated Statements of Income and Comprehensive Income

(unaudited, dollars in millions, except per-share data)

	Three Months Ended
	March 31,
	2023			2022
Statements of Income:
Net sales	$	1,976.3		$	2,136.4
Cost of sales		(1,544.9	)		(1,603.2	)
Gross profit		431.4			533.2
Selling, general and administrative expenses		(148.2	)		(161.1	)
Other expense, net		(12.5	)		(15.6	)
Income from operations		270.7			356.5
Non-operating pension (expense) income		(2.0	)		3.6
Interest expense, net		(15.4	)		(19.8	)
Income before taxes		253.3			340.3
Provision for income taxes		(63.2	)		(86.1	)
Net income	$	190.1		$	254.2
Net income per common share:
Basic	$	2.12		$	2.71
Diluted	$	2.11		$	2.70
Dividends declared per common share	$	1.25		$	1.00
Statements of Comprehensive Income:
Net income	$	190.1		$	254.2
Other comprehensive income, net of tax:
Changes in unrealized gains (losses) on marketable debt securities,    net of tax of ($0.2) million and $0.4 million for 2023 and 2022,    respectively		0.5			(1.2	)
Amortization of pension and postretirement plans actuarial loss and    prior service cost, net of tax of ($0.6) million and ($0.3) million for    2023 and 2022, respectively		1.6			1.2
Other comprehensive income		2.1			—
Comprehensive income	$	192.2		$	254.2

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

1

Packaging Corporation of America

Consolidated Balance Sheets

(unaudited, dollars and shares in millions, except per-share data)

	March 31,			December 31,
	2023			2022
ASSETS
Current assets:
Cash and cash equivalents	$	367.7		$	320.0
Short-term marketable debt securities		95.6			85.2
Accounts receivable, net of allowance for credit losses and customer deductions    of $13.8 million and $19.6 million as of March 31, 2023 and December 31, 2022,    respectively		1,031.4			1,031.8
Inventories		1,003.4			977.3
Prepaid expenses and other current assets		87.3			58.3
Federal and state income taxes receivable		—			35.7
Total current assets		2,585.4			2,508.3
Property, plant, and equipment, net		3,896.6			3,900.0
Goodwill		922.4			922.4
Other intangible assets, net		258.3			267.9
Operating lease right-of-use assets		288.6			298.3
Long-term marketable debt securities		56.9			64.9
Other long-term assets		40.8			42.0
Total assets	$	8,049.0		$	8,003.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Operating lease obligations	$	72.7		$	72.2
Finance lease obligations		1.9			1.9
Accounts payable		410.5			410.4
Dividends payable		115.7			115.5
Accrued liabilities		184.7			263.7
Accrued interest		25.5			11.8
Federal and state income taxes payable		17.9			—
Total current liabilities		828.9			875.5
Long-term liabilities:
Long-term debt		2,474.1			2,473.6
Operating lease obligations		225.1			234.6
Finance lease obligations		10.3			10.8
Deferred income taxes		546.2			543.0
Compensation and benefits		148.5			141.8
Other long-term liabilities		58.2			57.4
Total long-term liabilities		3,462.4			3,461.2
Commitments and contingent liabilities (Note 19)
Stockholders' equity:
Common stock, par value $0.01 per share, 300.0 million shares authorized, 89.9 million    and 89.7 million shares issued as of March 31, 2023 and December 31, 2022,    respectively		0.9			0.9
Additional paid in capital		597.8			581.8
Retained earnings		3,259.3			3,186.8
Accumulated other comprehensive loss		(100.3	)		(102.4	)
Total stockholders' equity		3,757.7			3,667.1
Total liabilities and stockholders' equity	$	8,049.0		$	8,003.8

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

2

Packaging Corporation of America

Consolidated Statements of Cash Flows

(unaudited, dollars in millions)

	Three Months Ended
	March 31,
	2023			2022
Cash Flows from Operating Activities:
Net income	$	190.1		$	254.2
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization of intangibles		129.5			109.7
Amortization of deferred financing costs		0.5			0.5
Share-based compensation expense		15.3			12.3
Deferred income tax provision		2.7			22.9
Net loss on asset disposals		1.8			2.8
Pension and post-retirement benefits expense, net of contributions		5.0			0.8
Other, net		6.8			3.8
Changes in operating assets and liabilities:
(Increase) decrease in assets —
Accounts receivable		0.4			(69.6	)
Inventories		(26.1	)		(38.8	)
Prepaid expenses and other current assets		(29.3	)		(30.1	)
Increase (decrease) in liabilities —
Accounts payable		(5.0	)		63.6
Accrued liabilities		(65.0	)		(52.4	)
Federal and state income taxes receivable		53.7			45.6
Net cash provided by operating activities		280.4			325.3
Cash Flows from Investing Activities:
Additions to property, plant, and equipment		(112.4	)		(213.2	)
Additions to other long-term assets		(1.6	)		(2.4	)
Proceeds from asset disposals		0.3			0.2
Purchases of marketable debt securities		(29.6	)		(36.4	)
Proceeds from sales of marketable debt securities		—			7.8
Proceeds from maturities of marketable debt securities		27.9			22.8
Net cash used for investing activities		(115.4	)		(221.2	)
Cash Flows from Financing Activities:
Repayments of debt and finance lease obligations		(0.5	)		(0.4	)
Common stock dividends paid		(112.1	)		(93.6	)
Shares withheld to cover employee restricted stock taxes		(4.7	)		(0.2	)
Net cash used for financing activities		(117.3	)		(94.2	)
Net increase in cash and cash equivalents		47.7			9.9
Cash and cash equivalents, beginning of period		320.0			618.7
Cash and cash equivalents, end of period	$	367.7		$	628.6

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

3

Packaging Corporation of America

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited, dollars in millions and shares in thousands)

	Common Stock					Additional Paid in			Retained			Accumulated Other Comprehensive			Total Stockholders'
	Shares			Amount		Capital			Earnings			Loss			Equity
Balance at January 1, 2023		89,695		$	0.9	$	581.8		$	3,186.8		$	(102.4	)	$	3,667.1
Common stock withheld and retired    to cover taxes on vested stock awards		(36	)		—		(0.3	)		(4.4	)		—			(4.7	)
Common stock dividends declared		—			—		—			(113.2	)		—			(113.2	)
Share-based compensation and other		273			—		16.3			—			—			16.3
Comprehensive income		—			—		—			190.1			2.1			192.2
Balance at March 31, 2023		89,932		$	0.9	$	597.8		$	3,259.3		$	(100.3	)	$	3,757.7
	Common Stock					Additional Paid in			Retained			Accumulated Other Comprehensive			Total Stockholders'
	Shares			Amount		Capital			Earnings			Loss			Equity
Balance at January 1, 2022		93,539		$	0.9	$	579.4		$	3,102.1		$	(75.2	)	$	3,607.2
Common stock withheld and retired to    cover taxes on vested stock awards		(1	)		—		—			(0.2	)		—			(0.2	)
Common stock dividends declared		—			—		—			(94.2	)		—			(94.2	)
Share-based compensation and other		166			—		12.3			—			—			12.3
Comprehensive income		—			—		—			254.2			—			254.2
Balance at March 31, 2022		93,704		$	0.9	$	591.7		$	3,261.9		$	(75.2	)	$	3,779.3

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

4

Condensed Notes to Unaudited Quarterly Consolidated Financial Statements

1. Nature of Operations and Basis of Presentation

Packaging Corporation of America ("we," "us," "our," PCA," or the "Company") was incorporated on January 25, 1999. In April 1999, PCA acquired the containerboard and corrugated packaging products business of Pactiv Corporation ("Pactiv"), formerly known as Tenneco Packaging, Inc. We are a large diverse manufacturer of both packaging and paper products. We are headquartered in Lake Forest, Illinois and we operate primarily in the United States.

We report our business in three reportable segments: Packaging, Paper, and Corporate and Other. Our Packaging segment produces a wide variety of containerboard and corrugated packaging products. The Paper segment manufactures and sells a range of communication-based papers. Corporate and Other includes support staff services and related assets and liabilities, transportation assets, and activity related to other ancillary support operations. For more information about our segments, see Note 18, Segment Information.

The consolidated financial statements of PCA as of March 31, 2023 and for the three months ended March 31, 2023 and 2022 are unaudited but include all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of such financial statements. The preparation of the consolidated financial statements involves the use of estimates and accruals. Actual results may vary from those estimates. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete audited financial statements. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022.

The consolidated financial statements include the accounts of PCA and its majority-owned subsidiaries after elimination of intercompany balances and transactions.

2. New and Recently Adopted Accounting Standards

Recently Adopted Accounting Standards

Effective January 1, 2023, we adopted Accounting Standards Update ("ASU") 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. Under prior business combination guidance in ASC 805, Business Combinations, such assets and liabilities were recognized by the acquirer at fair value on the acquisition date, whereas the new guidance requires the acquirer to recognize such assets and liabilities as if it had originated the contracts. The Company will apply the amended guidance on a prospective basis to any future business combinations.

New Accounting Standards Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The amendments in this Update are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, which extends some of the optional expedients under Topic 848 to include derivative contracts impacted by discounting transition. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which further extends the relief offered in this series of ASUs through December 31, 2024. Companies can apply these ASUs immediately. The ASUs can be adopted on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to any new modification from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The Company's fixed-rate outstanding debt will not be impacted by the reference rate reform. In April 2023, we amended our Senior Unsecured Credit Agreement to formally replace the LIBOR benchmark rate with the Term SOFR rate. The amendment of this agreement and the reference rate reform will not have a significant impact on the Company's financial position or related disclosures.

There were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.

5

3. Revenue

Revenue Recognition

Revenue is recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration expected to be received in exchange for those goods or services. Sales, value added, and other taxes collected concurrently with revenue-producing activities are excluded from revenue.

The following table presents our revenues disaggregated by product line (dollars in millions):

	Three Months Ended March 31,
	2023		2022
Packaging	$	1,808.6	$	1,964.5
Paper		150.9		153.5
Corporate and Other		16.8		18.4
Total revenue	$	1,976.3	$	2,136.4

Packaging Revenue

Our containerboard mills produce linerboard and corrugating medium which are papers primarily used in the production of corrugated products. The majority of our containerboard production is used internally by our corrugated products manufacturing facilities. The remaining containerboard is sold to outside domestic and export customers. Our corrugated products manufacturing plants produce a wide variety of corrugated packaging products and retail merchandise displays. We sell corrugated products to national, regional and local accounts, which are broadly diversified across industries and geographic locations.

The Company recognizes revenue for its packaging products when performance obligations under the terms of a contract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time. Based on our express terms and conditions of the sale of products to our customers, as well as terms included in contractual arrangements with our customers, we do not have an enforceable right of payment that includes a reasonable profit throughout the duration of the contract for products that do not have an alternative use. Revenue is recognized when the product is shipped from the mill or from our manufacturing facility to our customer. Certain customers may receive volume-based incentives, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue recognized.

Certain customers receive a portion of their packaging products as consigned inventory with billing triggered once the customer uses or consumes the designated product. Prior to invoicing, these amounts are handled as unbilled receivables. Total unbilled receivables, which are immaterial in amount, are included in the accounts receivable financial statement caption.

Paper Revenue

We manufacture and sell a range of communication-based papers. Communication papers consist of cut-size office papers, and printing and converting papers.

The Company recognizes revenue for its paper products when performance obligations under the terms of a contract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time. Revenue is recognized when the product is shipped from the mill or from our manufacturing facility or distribution center to our customer. Certain customers may receive incentives, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue recognized.

Corporate and Other Revenue

Revenue in this segment primarily relates to Louisiana Timber Procurement Company, L.L.C. ("LTP"), a variable-interest entity that is 50% owned by PCA and 50% owned by Boise Cascade Company ("Boise Cascade"). PCA is the primary beneficiary of LTP and has the power to direct the activities that most significantly affect the economic performance of LTP. Therefore, we consolidate 100% of LTP in our financial statements. See Note 17, Transactions With Related Parties, for more information related to LTP.

The Company recognizes revenue within this segment when performance obligations under the terms of a contract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time.

Practical Expedients and Exemption

Shipping and handling fees billed to a customer are recorded on a gross basis in "Net sales" with the corresponding shipping and handling costs included in "Cost of sales" in the concurrent period as the revenue is recorded. We expense sales commissions when incurred because the amortization period is one year or less. Sales commissions are recorded in "Selling, general, and administrative expenses".

We do not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.

6

4. Earnings Per Share

The following table sets forth the computation of basic and diluted income per common share for the periods presented (dollars and shares in millions, except per share data):

	Three Months Ended
	March 31,
Numerator:	2023			2022
Net income	$	190.1		$	254.2
Less: Distributed and undistributed earnings allocated to participating    securities		(1.6	)		(2.0	)
Net income attributable to common shareholders	$	188.5		$	252.2
Denominator:
Weighted average basic common shares outstanding		89.0			92.9
Effect of dilutive securities		0.4			0.4
Weighted average diluted common shares outstanding		89.4			93.3
Basic income per common share	$	2.12		$	2.71
Diluted income per common share	$	2.11		$	2.70

5. Other Income (Expense), Net

The components of other income (expense), net, were as follows (dollars in millions):

	Three Months Ended
	March 31,
	2023			2022
Asset disposals and write-offs	$	(6.6	)	$	(12.7	)
Facilities closure and other costs (a)		(4.7	)		(0.4	)
Jackson mill conversion-related activities (b)		0.3			(0.4	)
Other		(1.5	)		(2.1	)
Total	$	(12.5	)	$	(15.6	)

(a)For 2023, includes charges consisting of closure costs related to corrugated products facilities and design centers. For 2022, includes charges consisting of closure costs related to corrugated products facilities and acquisition and integration costs related to the December 2021 Advance Packaging acquisition.

(b)Includes items 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.

6. Income Taxes

For the three months ended March 31, 2023 and 2022, we recorded $63.2 million and $86.1 million of income tax expense and had an effective tax rate of 24.9% and 25.3%, respectively. The decrease in our effective tax rate for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to favorable employee performance unit vests with higher excess tax benefits partially offset by higher nondeductible employee remuneration paid to covered employees.

Our current effective tax rate is higher than the federal statutory income tax rate of 21.0% due primarily to the effect of state and local income taxes. During the three months ended March 31, 2023 and 2022, cash paid for taxes, net of refunds received, was $6.9 million and $17.6 million, respectively. The decrease in cash tax payments between the periods is primarily due to lower 2023 forecasted taxable income.

During the three months ended March 31, 2023, there were no significant changes to our uncertain tax positions. For more information, see Note 8, Income Taxes, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 2022 Annual Report on Form 10-K.

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7. Inventories

We value our raw materials, work in process, and finished goods inventories using lower of cost, as determined by the average cost method, or net realizable value. Supplies and materials are valued at the first-in, first-out (FIFO) or average cost methods.

The components of inventories were as follows (dollars in millions):

	March 31,		December 31,
	2023		2022
Raw materials	$	358.8	$	341.2
Work in process		15.8		16.0
Finished goods		201.1		198.4
Supplies and materials		427.7		421.7
Inventories	$	1,003.4	$	977.3

8. Property, Plant, and Equipment

The components of property, plant, and equipment were as follows (dollars in millions):

March 31,	December 31,
2023