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
Second quarter net sales were$2.24 billion in 2022 and$1.88 billion in 2021. We reported$302 million of net income, or$3.20 per diluted share, during the second quarter of 2022, compared to$207 million , or$2.17 per diluted share, during the same period in 2021. Net income included$2 million of expense for special items in the second quarter of 2022, compared to less than$1 million of income for special items in 2021 (discussed below). Excluding special items, net income was$304 million , or$3.23 per diluted share, during the second quarter of 2022, compared to$207 million , or$2.17 per diluted share, in the second quarter of 2021. The increase in net income was driven primarily by higher prices and mix and volume in the Packaging segment, higher prices and mix in the Paper segment, lower scheduled outage expenses, lower interest expense, and other items. These items were partially offset by higher operating costs, freight and logistics expenses, converting costs, and depreciation expense, lower volume in the Paper segment, and a higher tax rate. 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$420 million in the second quarter of 2022, compared to$317 million in the second quarter of 2021. Packaging segment EBITDA excluding special items was$525 million in the second quarter of 2022 compared to$409 million in the second quarter of 2021. The increase was due primarily to higher prices and mix and higher sales and production volumes, and lower scheduled outage expenses, partially offset by higher operating and converting costs, and higher freight and logistic expenses. Demand in the Packaging segment remained strong and corrugated product shipments were flat with the prior year second quarter. Paper segment income from operations was$23 million in the second quarter of 2022, compared to$3 million in the second quarter of 2021. Paper segment EBITDA excluding special items was$32 million in the second quarter of 2022, compared to$12 million in the second quarter of 2021. The increase was due to higher prices and mix and lower operating costs, partially offset by lower sales and production volumes, and higher freight and logistic 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$782 million in the first six months of 2022, compared to$575 million in the same period in 2021. Packaging segment EBITDA excluding special items was$989 million in the first six months of 2022 compared to$761 million in the first six months of 2021. The increase in EBITDA excluding special items was due primarily to higher prices and mix and higher sales and production volumes and lower scheduled outage expenses, partially offset by higher operating and converting costs, and higher freight and logistic expenses. 17 -------------------------------------------------------------------------------- Paper segment income from operations was$45 million in the first six months of 2022, compared to$11 million in the first six months of 2021. Paper segment EBITDA excluding special items was$60 million in the first six months of 2022, compared to$27 million in the same period in 2021. The increase in EBITDA excluding special items was due to higher prices and mix and lower operating costs, partially offset by lower sales and production volumes and higher freight and logistic expenses.
Special Items and Earnings per Diluted Share, Excluding Special Items
A reconciliation of reported earnings per diluted share to earnings per diluted share, excluding special items, for the three months endedJune 30, 2022 and 2021 are as follows: Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Earnings per diluted share, as reported$ 3.20 $ 2.17 $ 5.91 $ 3.92 Special items:Jackson mill conversion-related activities (a) 0.03 0.03$ 0.04 0.04 Acquisition-related, facilities closure and other income (b) (0.01 ) (0.03 ) - (0.02 ) Total special items 0.02 - 0.04 0.02 Earnings per diluted share, excluding special items$ 3.23 (c)$ 2.17 $ 5.95 $ 3.94 (a) For the three and six months endedJune 30, 2022 , includes$3.9 million and$5.4 million , respectively, of 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. For the three and six months endedJune 30, 2021 , these amounts were$3.8 million and$4.9 million , respectively.
(b)
For the three and six months endedJune 30, 2022 , includes$0.9 million and$0.3 million , respectively, of income primarily consisting of 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, partially offset by closure costs related to corrugated products facilities and acquisition and integration costs related to theDecember 2021 Advance Packaging Corporation acquisition. For the three and six months endedJune 30, 2021 , includes$4.7 million and$2.6 million , respectively, of income primarily consisting of an adjustment for 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)
Amount may not foot due to rounding.
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 2.3% during the second quarter of 2022 compared to the same quarter of 2021. Reported industry containerboard production increased 2.2% compared to the second quarter of 2021. Reported industry containerboard inventories at the end of the second quarter of 2022 were approximately 2.86 million tons, up 16.1% compared to the same period in 2021. Reported containerboard export shipments were up 18.7% compared to the second quarter of 2021. Prices reported by trade publications increased by$60 per ton for linerboard and$70 per ton for corrugating medium inMarch 2022 . There were no additional price increases in the second quarter of 2022. Trade publications reported North American UFS paper shipments were essentially flat, up 0.4% in the second 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$100 per ton, or 7.7%, in the second quarter of 2022, compared to the first quarter of 2022, and higher by$270 per ton, or 23.9%, compared to the second quarter of 2021. 18
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Outlook
During the third quarter, we expect higher prices in our Packaging segment as we implement the remaining portion of previously announced price increases. In our Paper segment, we expect higher prices as we will continue to implement our previously announced price increases. We notified customers of an additional$60 per ton price increase on all paper grades, effective with shipments beginningSeptember 6, 2022 . With economic conditions continuing to be negatively impacted by broad-based inflation and aggressive interest rate increases, we see corrugated products growth as softening in the quarter but demand still firm as certain end markets work through their current supply of inventory. We expect continued inflation of our operating and converting costs, including higher costs for natural gas, purchased electricity, and chemicals, along with higher labor costs. We also expect higher freight expenses, driven by continued rail service challenges and rail fuel surcharges. Maintenance outage costs will be higher because we postponed our scheduledInternational Falls mill outage from the second to the third quarter. Considering these items, and excluding the effect of any special items, we expect third quarter earnings to be lower than our earnings for the second quarter.
Results of Operations
Three Months Ended
The historical results of operations of PCA for the three months ended
Three Months Ended
June 30,
2022 2021 Change
Packaging $ 2,066.9 $ 1,718.5 $ 348.4
Paper 149.8 142.3 7.5
Corporate and Other 63.2 55.1 8.1
Intersegment eliminations (42.6 ) (36.0 ) (6.6 )
Net sales $ 2,237.3 $ 1,879.9 $ 357.4
Packaging $ 419.8 $ 317.2 $ 102.6
Paper 22.7 2.6 20.1
Corporate and Other (26.7 ) (25.2 ) (1.5 )
Income from operations $ 415.8 $ 294.6 $ 121.2
Non-operating pension income 3.6 5.0 (1.4 )
Interest expense, net (18.8 ) (24.9 ) 6.1
Income before taxes 400.6 274.7 125.9
Income tax provision (99.1 ) (67.4 ) (31.7 )
Net income $ 301.5 $ 207.3 $ 94.2
Non-GAAP Measures (a)
Net income excluding special items $ 303.7 $ 206.6 $ 97.1
Consolidated EBITDA 530.1 399.3
130.8
Consolidated EBITDA excluding special items 532.6 396.8 135.8 Packaging EBITDA
525.8 412.1 113.7
Packaging EBITDA excluding special items 525.3 408.8 116.5 Paper EBITDA
28.5 10.1 18.4
Paper EBITDA excluding special items 31.5 11.6 19.9 (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$357 million , or 19.0%, to$2,237 million during the three months endedJune 30, 2022 , compared to$1,880 million during the same period in 2021. Packaging. Net sales increased$348 million , or 20.3%, to$2,067 million , compared to$1,719 million in the second quarter of 2021 due to higher prices and mix ($286 million ) and higher containerboard and corrugated products volume ($62 million ). In the second quarter of 2022, our domestic containerboard prices were 15.3% higher, while export prices were 27.7% higher, than the same period in 2021. In the second quarter of 2022, export and domestic containerboard outside shipments increased 23.0% compared to the second quarter of 2021. Our total corrugated products shipments were flat in total and per workday, compared to the same period in 2021. Paper. Net sales increased$8 million , or 5.3%, to$150 million , compared to$142 million in the second quarter of 2021, due to higher prices and mix ($23 million ), partially offset by lower volume ($15 million ). 19
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Gross Profit
Gross profit increased$140 million during the three months endedJune 30, 2022 , compared to the same period in 2021. The increase was driven primarily by higher prices and mix and volume in the Packaging segment, higher prices and mix in the Paper segment, and lower scheduled outage expenses, partially offset by higher operating costs, higher freight and logistics expenses, higher converting costs, and lower volume in the Paper segment. In both the three month periods endedJune 30, 2022 , and 2021, gross profit included$2 million of special items. For 2022, these special items included charges primarily related toJackson mill conversion-related activities and acquisition and integration costs related toAdvance Packaging , partially offset by income related to a favorable lease buyout for a closed corrugated facility. For 2021, these special items included 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 $10 million
during the three months ended June 30, 2022 , compared to the same period in
2021. The increase was primarily due to higher information technology expenses
and employee related expenses.
Other Expense, Net
Other income (expense), net, for the three months ended
Three Months Ended
June 30,
2022 2021
Asset disposals and write-offs $ (13.8 ) $ (9.0 )
Jackson mill conversion-related activities (1.7 ) $ (2.4 )
Acquisition-related, facilities closure and other income 0.5 5.5
Other (1.3 ) (2.0 )
Total $ (16.3 ) $ (7.9 ) 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$121 million , or 41.1%, during the three months endedJune 30, 2022 , compared to the same period in 2021. The second quarter of 2022 included$3 million of special items expense primarily related to theJackson mill conversion-related activities, 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$1 million of special items income related to corrugated facility closures, net of costs forJackson mill conversion-related activities in the second quarter of 2021. Packaging. Packaging segment income from operations increased$103 million to$420 million , compared to$317 million during the three months endedJune 30, 2021 . The increase related primarily to higher containerboard and corrugated products prices and mix ($255 million ), higher sales and production volumes ($16 million ), lower annual outage expenses ($10 million ), and other costs ($2 million ), partially offset by higher operating and converting costs ($136 million ), higher freight expenses ($31 million ), and higher depreciation expense ($11 million ). Special items during the second quarter of 2022 included$1 million of income primarily related to storm damage insurance proceeds and a favorable lease buyout for a closed corrugated facility, net of costs forJackson mill conversion-related activities, corrugated facility closures, and Advanced Packaging acquisition and integration costs, compared to$3 million of income for special items primarily related to corrugated facility closures in the second quarter of 2021.
Paper. Paper segment income from operations increased
Non-Operating Pension Income, Interest Expense, Net and Income Taxes
Non-operating pension income decreased
Interest expense, net for the three months ended
20
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During the three months ended June 30, 2022 , we recorded $99 million of income
tax expense, compared to $67 million of expense during the three months ended
June 30, 2021 . The effective tax rate for the three months ended June 30, 2022
and 2021 was 24.7% and 24.5%, respectively. The increase in our effective tax
rate for the three months ended June 30, 2022 compared to the same period in
2021 was primarily due to higher nondeductible employee remuneration paid to
covered employees.
Six Months Ended
The historical results of operations of PCA for the six months ended
Six Months Ended
June 30,
2022 2021 Change
Packaging $ 4,031.3 $ 3,342.1 $ 689.2
Paper 303.3 306.8 (3.5 )
Corporate and Other 121.5 110.5 11.0
Intersegment eliminations (82.4 ) (72.4 ) (10.0 )
Net sales $ 4,373.7 $ 3,687.0 $ 686.7
Packaging $ 782.1 $ 575.1 $ 207.0
Paper 45.1 11.3 33.8
Corporate and Other (54.8 ) (53.5 ) (1.3 )
Income from operations $ 772.4 $ 532.9 $ 239.5
Non-operating pension income 7.3 9.8 (2.5 )
Interest expense, net (38.7 ) (48.4 ) 9.7
Income before taxes 741.0 494.3 246.7
Income tax provision (185.3 ) (120.5 ) (64.8 )
Net income $ 555.7 $ 373.8 $ 181.9
Non-GAAP Measures (a)
Net income excluding special items $ 559.5 $ 375.5 $ 184.0
Consolidated EBITDA 996.4 738.4
258.0
Consolidated EBITDA excluding special items 999.8 738.6 261.2 Packaging EBITDA
989.0 762.1 226.9
Packaging EBITDA excluding special items 989.2 760.9 228.3 Paper EBITDA
57.2 25.3 31.9
Paper EBITDA excluding special items 60.4 27.4 33.0 (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$687 million , or 18.6%, to$4,374 million during the six months endedJune 30, 2022 , compared to$3,687 million during the same period in 2021. Packaging. Net sales increased$689 million , or 20.6%, to$4,031 million , compared to$3,342 million in the six months endedJune 30, 2021 , due to higher containerboard and corrugated products prices and mix ($554 million ) and higher containerboard and corrugated products volume ($135 million ). In the first six months of 2022, our domestic containerboard prices were 17.8% higher, while export prices were 34.9% higher, than the same period in 2021. In the first six months of 2022, export and domestic containerboard outside shipments increased 24.5% compared to the first six months of 2021. Total corrugated products shipments were up 1.4% with one additional workday, and up 0.6% per day compared to the same period in 2021, driven by continued strong demand. Paper. Net sales during the six months endedJune 30, 2022 decreased$4 million , or 1.1%, to$303 million , compared to$307 million in the six months endedJune 30, 2021 , due to decreased volume ($46 million ), partially offset by higher prices and mix ($42 million ).
Gross Profit
Gross profit increased$270 million during the six months endedJune 30, 2022 , compared to the same period in 2021. The increase was driven primarily by higher prices and mix and volume in the Packaging segment, higher prices and mix in the Paper segment, and lower scheduled outage expenses, partially offset by higher operating costs, higher freight and logistics expenses, higher converting costs, and lower volume in the Paper segment. In both the six month periods endedJune 30, 2022 and 2021, gross profit included$3 million of special items. For 2022, these special items included charges primarily related toJackson mill conversion-related activities and acquisition and integration costs related toAdvance Packaging , partially offset by income related to a favorable lease buyout for a closed corrugated facility. For 2021, these special items included charges related toJackson mill conversion-related activities and corrugated facility closure costs. 21
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Selling, General, and Administrative Expenses
Selling, general, and administrative expenses ("SG&A") increased $26 million
during the six months ended June 30, 2022 , compared to the same period in 2021.
The increase was primarily due to employee-related expenses, information
technology expenses, and outside services.
Other Expense, Net
Other income (expense), net, for the six months ended
Six Months Ended
June 30,
2022 2021
Asset disposals and write-offs $ (26.4 ) $ (19.9 )
Jackson mill conversion-related activities (2.1 ) $ (2.9 )
Acquisition-related, facilities closure and other income 0.1 3.4
Other (3.5 ) (8.9 )
Total $ (31.9 ) $ (28.3 ) 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$240 million , or 44.9%, during the six months endedJune 30, 2022 , compared to the same period in 2021. The first six months of 2022 included$5 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$5 million of special items expense related toJackson mill conversion-related activities, partially offset by income related to facility closures in the same period of 2021. Packaging. Packaging segment income from operations increased$207 million to$782 million during the first six months of 2022, compared to the same period last year. The increase related primarily to higher containerboard and corrugated products prices and mix ($488 million ), higher sales and production volumes ($46 million ), and lower annual outage expenses ($4 million ), partially offset by higher operating and converting costs ($250 million ), higher freight expenses ($59 million ), and higher depreciation expense ($20 million ). There was no impact from special items during the first six months of 2022, compared to$2 million of income related to facility closures and$1 million of costs related toJackson mill conversation-related activities in the first six months of 2021. Paper. Paper segment income from operations increased$34 million to$45 million , compared to the six months endedJune 30, 2021 . The increase primarily related to higher prices and mix ($42 million ), lower operating costs ($16 million ), and lower depreciation expense ($2 million ), partially offset by lower sales and production volumes ($17 million ), and higher freight and other expenses ($9 million ). Special items during the first six months of 2022 included$5 million of expense related toJackson mill conversion-related activities, compared to$4 million of expense related toJackson mill conversation-related activities in the first six months of 2021.
Non-Operating Pension Income, Interest Expense, and Income Taxes
Non-operating pension income decreased
Interest expense, net decreased$10 million during the six months endedJune 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 half of 2022, compared to the same period in 2021. During the six months endedJune 30, 2022 , we recorded$185 million of income tax expense, compared to$121 million of expense during the six months endedJune 30, 2021 . The effective tax rate for the six months endedJune 30, 2022 and 2021 was 25.0% and 24.4%, respectively. The increase in our effective tax rate for the six months endedJune 30, 2022 compared to the same period in 2021 was primarily due to higher nondeductible employee remuneration paid to covered employees and lower net favorable state tax law changes. 22
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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. AtJune 30, 2022 , we had$667 million of cash and cash equivalents,$144 million of marketable debt securities, and$321 million of unused borrowing capacity under the revolving credit facility, net of letters of credit. Currently, our primary uses of cash are for operations, capital expenditures, acquisitions, debt service, common stock dividends, and repurchases of common stock. We believe that net cash generated from operating activities, cash on hand, available borrowings under our revolving credit facility, and available capital through access to capital markets will be adequate to meet our liquidity and capital requirements, including payments of any declared common stock dividends, for the foreseeable future. As our debt or credit facilities become due, we will need to repay, extend, or replace such facilities. Our ability to do so will be subject to future economic conditions and financial, business, and other factors, many of which are beyond our control.
Below is a summary table of our cash flows, followed by a discussion of our sources and uses of cash through operating activities, investing activities, and financing activities (dollars in millions):
Six Months Ended
June 30,
2022 2021 Change
Net cash provided by (used for): Operating activities$ 644.3 $ 419.8 $ 224.5 Investing activities (398.1 ) (220.2 ) (177.9 ) Financing activities (197.6 )
(202.0 ) 4.4
Net increase (decrease) 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 six months endedJune 30, 2022 , net cash provided by operating activities was$644 million , compared to$420 million in the same period in 2021, an increase of$224 million . Cash from operations excluding changes in cash used for operating assets and liabilities increased$221 million primarily due to higher income from operations in 2022 as discussed above. Cash from operations increased by$4 million due to changes in operating assets and liabilities, primarily due to an increase in accounts payable in the first six months of 2022 primarily due to the timing of payments. This increase was partially offset by the following:
a)
a decrease in accrued liabilities primarily in compensation and benefits liabilities in the first six months of 2022 compared to the corresponding period in 2021; and
b)
a larger increase in inventory in the first six months of 2022 as compared to 2021, primarily in the Packaging segment in supplies and materials, finished goods, and raw materials. Investing Activities We used$398 million for investing activities during the six months endedJune 30, 2022 compared to$220 million during the same period in 2021. We spent$398 million for internal capital investments during the six months endedJune 30, 2022 , compared to$217 million during the same period in 2021. We expect capital investments in 2022 to be approximately$800 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. 23
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Financing Activities
During the six months endedJune 30, 2022 , net cash used for financing activities was$198 million , compared to$202 million of net cash used for financing activities during the same period in 2021. We paid$187 million of dividends during the first six months of 2022, compared to$190 million of dividends paid during the comparable period in 2021. In addition, for the six months endedJune 30, 2021 , we paid$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.
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 six months endedJune 30, 2022 and 2021 follow (dollars in millions): Three Months Ended June 30, 2022 2021 Income Income before Income Net before Income Net Taxes Taxes Income Taxes Taxes Income As reported in accordance with GAAP$ 400.6 $ (99.1 ) $ 301.5 $ 274.7 $ (67.4 ) $ 207.3 Special items: Jackson mill conversion-related activities (a) 3.9 (1.0 ) 2.9 3.8 (1.0 ) 2.8 Acquisition-related, facilities closure and other income (b) (0.9 ) 0.2 (0.7 ) (4.7 ) 1.2 (3.5 ) Total special items 3.0 (0.8 ) 2.2 (0.9 ) 0.2 (0.7 ) Excluding special items$ 403.6 $ (99.9 ) $ 303.7 $ 273.8 $ (67.2 ) $ 206.6 Six Months Ended June 30, 2022 2021 Income Income before Income Net before Income Net Taxes Taxes Income Taxes Taxes Income As reported in accordance with GAAP$ 741.0 $ (185.3 ) $ 555.7 $ 494.3 $ (120.5 ) $ 373.8 Special items: Jackson mill conversion-related activities (a) 5.4 (1.4 ) 4.0 4.9 (1.2 ) 3.7 Acquisition-related, facilities closure and other income (b) (0.3 ) 0.1 (0.2 ) (2.6 ) 0.6 (2.0 ) Total special items 5.1 (1.3 ) 3.8
2.3 (0.6 ) 1.7
Excluding special items
(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 2022, includes income primarily consisting of 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, partially offset by closure costs related to corrugated products facilities and acquisition and integration costs related to theDecember 2021 Advance Packaging Corporation acquisition. For 2021, includes 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. 24
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The following table reconciles net income to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Net income $ 301.5 $ 207.3 $ 555.7 $ 373.8
Non-operating pension income (3.6 ) (5.0 ) (7.3 ) (9.8 )
Interest expense, net 18.8 24.9 38.7 48.4
Income tax provision 99.1 67.4 185.3 120.5
Depreciation, amortization, and
depletion 114.3 104.7 224.0 205.5
EBITDA $ 530.1 $ 399.3 $ 996.4 $ 738.4
Special items:
Jackson mill conversion-related
activities 3.4 2.5 3.7 3.1
Acquisition-related, facilities closure
and other income (0.9 ) (5.0 ) (0.3 ) (2.9 )
Total special items 2.5 (2.5 ) 3.4 0.2
EBITDA excluding special items $ 532.6 $ 396.8 $ 999.8 $ 738.6 The following table reconciles segment income (loss) to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Packaging
Segment income $ 419.8 $ 317.2 $ 782.1 $ 575.1
Depreciation, amortization, and depletion 106.0 94.9 206.9 187.0
EBITDA 525.8 412.1 989.0 762.1
Acquisition-related, facilities closure
and other income (0.9 ) (4.2 ) (0.3 ) (2.1 )
Jackson mill conversion-related
activities 0.4 0.9 0.5 0.9
EBITDA excluding special items $ 525.3 $ 408.8 $ 989.2 $ 760.9
Paper
Segment income $ 22.7 $ 2.6 $ 45.1 $ 11.3
Depreciation, amortization, and depletion 5.8 7.5 12.1 14.0
EBITDA 28.5 10.1 57.2 25.3
Jackson mill conversion-related
activities 3.0 1.5 3.2 2.1
EBITDA excluding special items $ 31.5 $ 11.6 $ 60.4 $ 27.4
Corporate and Other
Segment loss $ (26.7 ) $ (25.2 ) $ (54.8 ) $ (53.5 )
Depreciation, amortization, and depletion 2.5 2.3 5.0 4.5
EBITDA (24.2 ) (22.9 ) (49.8 ) (49.0 )
Acquisition-related, facilities closure
and other income - (0.8 ) - (0.8 )
Jackson mill conversion-related
activities - 0.1 - 0.1
EBITDA excluding special items $ (24.2 ) $ (23.6 ) $ (49.8 ) $ (49.7 )
EBITDA $ 530.1 $ 399.3 $ 996.4 $ 738.4
EBITDA excluding special items $ 532.6 $ 396.8 Market Risk and Risk Management Policies
PCA is exposed to the impact of interest rate changes and changes in the market value of its financial instruments. We periodically enter into derivatives to minimize these risks, but not for trading purposes. We were not a party to any derivatives-based arrangements atJune 30, 2022 . 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
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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 six 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
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