# Packaging Corp of America: Form 10-Q for the period ended Sep 30, 2014

- Company: [Packaging Corp of America](/companies/pkg.md) (CIK 75677)
- Form: 10-Q
- Filed: 2014-11-07
- Accepted by EDGAR: Nov 6, 2014, 19:34 ET
- Period: 2014-09-30
- Accession: 0000075677-14-000040
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/75677/000007567714000040/pkg0930201410q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/75677/000007567714000040/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-07-01 to 2014-09-30 | $1.52bn | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2014-01-01 to 2014-09-30 | $4.42bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2014-07-01 to 2014-09-30 | $1.20bn | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2014-01-01 to 2014-09-30 | $3.49bn | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2014-07-01 to 2014-09-30 | $320.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2014-01-01 to 2014-09-30 | $932.5m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2014-07-01 to 2014-09-30 | $119.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2014-01-01 to 2014-09-30 | $359.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2014-07-01 to 2014-09-30 | $188.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2014-01-01 to 2014-09-30 | $529.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2014-07-01 to 2014-09-30 | $60.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2014-01-01 to 2014-09-30 | $170.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-07-01 to 2014-09-30 | $104.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2014-01-01 to 2014-09-30 | $294.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-07-01 to 2014-09-30 | $1.06 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2014-01-01 to 2014-09-30 | $2.99 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-07-01 to 2014-09-30 | $1.06 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2014-01-01 to 2014-09-30 | $2.99 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-07-01 to 2014-09-30 | 97,222,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2014-01-01 to 2014-09-30 | 97,007,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2014-01-01 to 2014-09-30 | $556.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2014-01-01 to 2014-09-30 | $254.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2014-01-01 to 2014-09-30 | $118.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2014-01-01 to 2014-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2014-09-30 | $154.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-09-30 | $1.60bn | us-gaap:AssetsCurrent |
| Total assets | at 2014-09-30 | $5.33bn | us-gaap:Assets |
| Current liabilities | at 2014-09-30 | $690.0m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2014-09-30 | $2.35bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2014-09-30 | $6.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2014-09-30 | $1.55bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,508 characters.

This management's discussion and analysis includes statements regarding our expectations with respect to our future performance, liquidity, and capital resources. Such statements, along with any other nonhistorical statements in the discussion, 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 2013 Annual Report on Form 10-K, as well as those factors listed in other documents we file with the Securities 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.

### Overview

PCA is the fourth largest producer of containerboard in the United States and the third largest producer of white papers in North America, based on production capacity. We operate eight mills and 100 corrugated products manufacturing plants. Our mills are comprised of five containerboard mills and three paper mills. 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 white papers, including both commodity and specialty papers, which may have custom or specialized features such as colors, coatings, high brightness, and recycled content. We operate primarily in the United States and have some converting operations in Europe, Mexico, and Canada.

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 with the updated 2013 Financial Statements.

### Executive Summary

In third quarter 2014, sales grew 80% to $1,518.9 million, compared with $845.4 million in third quarter 2013. We reported $104.4 million of net income, or $1.06 per diluted share during third quarter 2014, compared with $84.7 million, or $0.87 per diluted share during the same period in 2013. Excluding the special items discussed below, we recorded $123.9 million of net income, or $1.26 per diluted share during third quarter 2014, compared with $89.4 million, or $0.92 per share in 2013. Sales grew 84% in the first three quarters of 2014 to $4,418.7 million, and we reported $294.1 million of net income, or $2.99 per diluted share, compared with $213.2 million of net income, or $2.19 per diluted share in the first nine months of 2013. Excluding special items, we recorded $344.2 million of net income, or $3.50 per diluted share during the first three quarters of 2014, compared with $222.9 million, or $2.29 per diluted share in the first nine months of 2013.

During the three and nine months ended September 30, 2014, our packaging segment generated $164.7 million and $501.8 million of operating income, respectively, and $262.3 million and $765.3 million of earnings before interest, taxes, depreciation, amortization and depletion (EBITDA) excluding special items, respectively. Our paper segment, during the three and nine months ended September 30, 2014, generated $43.0 million and $104.3 million of operating income, respectively, and $55.9 million and $141.1 million of EBITDA excluding special items, respectively.

Compared with the three and nine months ended September 30, 2013, our results were positively affected by the Boise acquisition, which closed in October 2013. The acquisition was meaningfully accretive to our earnings before special items due to earnings generated by Boise as well as the synergies generated from the integration of its packaging business and operational improvements in the white papers business, which have resulted in lower costs and higher margins.

On October 17, 2014, we completed the No. 3 newsprint machine conversion at the DeRidder, Louisiana, mill to produce containerboard. In addition to providing our containerboard mill system with needed capacity, we expect to benefit from grade optimization and freight savings with the operation of the D3 machine.

The three and nine months ended September 30, 2014, included $30.5 million ($21.6 million non-cash and $8.9 million cash) and $78.9 million ($43.6 million non-cash and $35.3 million cash) of pre-tax special items, respectively. The three months ended September 30, 2014, included $26.0 million of expenses related to the DeRidder mill restructuring and $4.5 million of Boise acquisition integration-related, debt-refinancing, and other costs. The nine months ended September 30, 2014, included $47.8 million of expenses related to the DeRidder mill restructuring, $17.6 million of expenses related to the settlement of a class action lawsuit, and $13.5 million of integration-related and other costs.

Earnings per diluted share, excluding special items, during the three and nine months ended September 30, 2014 and 2013, were as follows.

|  | Three Months Ended September 30 2014 (a) | 2013 | Nine Months Ended September 30 2014 (a) | 2013 |
| --- | ---: | ---: | ---: | ---: |
| Earnings per diluted share, as reported | $1.06 | $0.87 | $2.99 | $2.19 |
| Special items (b): |  |  |  |  |
| DeRidder restructuring | 0.17 | — | 0.31 | — |
| Integration-related and other costs | 0.03 | — | 0.09 | — |
| Class action lawsuit settlement | — | — | 0.11 | — |
| Pension curtailment charges | — | 0.02 | — | 0.07 |
| Acquisition-related financing costs | — | 0.02 | — | 0.02 |
| Acquisition-related costs | — | 0.01 | — | 0.01 |
| Total special items | 0.20 | 0.05 | 0.51 | 0.10 |
| Earnings per diluted share, excluding special items | $1.26 | $0.92 | $3.50 | $2.29 |

(a) On October 25, 2013, we acquired Boise Inc. (Boise). The 2014 consolidated results include Boise for the full period.

(b) See "Reconciliations of Non-GAAP Financial Measures to Reported Amounts" in this Management's Discussion and Analysis of Financial Condition and Results of Operations for more information on the special items.

Management excludes special items and uses non-GAAP measures to focus on PCA’s on-going operations and assess its operating performance and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. 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 that industry-wide corrugated products shipments increased 1.7% during third quarter 2014, compared with the same quarter in 2013. Reported industry containerboard production was 0.9% higher than third quarter 2013, with containerboard export shipments up 13.4%. In third quarter 2014, our containerboard production was 858,000 tons, up 12,000 tons compared with the second quarter, due in part to an additional production day. In third quarter 2014, our corrugated products shipments, including Boise, increased 33% over third quarter of last year and 31% per workday with one more workday in third quarter 2014. Excluding Boise shipments, corrugated products shipments increased 6.2% in total, or 4.5% per workday. The acquisition of Crockett Packaging in April 2014, contributed about 1.5% to the increase in shipments. With strong internal containerboard demand needed to supply our box plants, we reduced our outside sales of containerboard, both domestic and export, by 19,000 tons compared with last year's third quarter and we purchased 47,000 tons of containerboard from the outside market in third quarter 2014. Our domestic containerboard pricing remained steady throughout the quarter, while our export pricing decreased slightly.

The market for communication papers competes heavily with electronic data transmission and document storage alternatives. Increasing shifts to these alternatives have reduced usage of traditional print media and communication papers. In 2014, we elected to exit some business which lowered our office paper shipments. Our office paper shipments decreased 5% or 11,000 tons in third quarter 2014, compared with Boise's shipments in third quarter of last year. Our printing and converting papers and pressure sensitive papers shipments were down about 22,000 tons compared with third quarter 2013, as a result of closing two paper machines at our International Falls, Minnesota, mill in fourth quarter 2013. In third quarter 2014, our white paper mills ran well, producing 296,000 tons. Our paper inventories were up about 6,000 tons compared with the end of second quarter 2014. Our white paper prices increased in third quarter 2014 compared with third quarter 2013 due to previously announced price increases for office papers, printing and converting paper, and pressure-sensitive papers and were flat with the second quarter.

### Outlook

Looking ahead to the fourth quarter, with the completed machine conversion in DeRidder, Lousiana, we expect higher containerboard mill production, which will allow us to reduce our outside purchases of containerboard. Corrugated products shipments are expected to be lower than in the third quarter with three less shipping days and some seasonal slowdown in demand that usually occurs during the holiday season. We also expect seasonally lower white paper shipments. Amortization of annual outage repair costs will be higher than the third quarter, and we expect seasonal increases in fuel and transportation costs. Considering these items, we expect fourth quarter 2014 earnings, excluding special items, to be lower than our third quarter earnings, excluding special items.

### Results of Operations

### Three Months Ended September 30, 2014, compared with Three Months Ended September 30, 2013

The historical results of operations of PCA for the three months ended September 30, 2014 and 2013, are set forth below (dollars in millions):

|  | Three Months Ended September 30 2014 (a) | 2013 | Change |
| --- | ---: | ---: | ---: |
| Packaging | $1,175.7 | $845.4 | $330.3 |
| Paper | 312.5 | — | 312.5 |
| Corporate and other and eliminations | 30.7 | — | 30.7 |
| Net sales | $1,518.9 | $845.4 | $673.5 |
| Packaging | $164.7 | $154.9 | $9.8 |
| Paper | 43.0 | — | 43.0 |
| Corporate and other and eliminations | (19.3) | (12.1) | (7.2) |
| Income from operations | $188.4 | $142.8 | $45.6 |
| Interest expense, net | (23.1) | (11.9) | (11.2) |
| Income before taxes | 165.3 | 130.9 | 34.4 |
| Income tax provision | (60.9) | (46.2) | (14.7) |
| Net income | $104.4 | $84.7 | $19.7 |
| Net income excluding special items (b) | $123.9 | $89.4 | $34.5 |
| Earnings, before interest, taxes, depreciation, and amortization (EBITDA) | $292.2 | $186.9 | $105.3 |
| EBITDA excluding special items (b) | $303.0 | $191.5 | $111.5 |

(a) On October 25, 2013, we acquired Boise Inc. (Boise). The 2014 consolidated results include Boise for the full period.

(b) 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 $673.5 million, or 79.7%, to $1,518.9 million during the three months ended September 30, 2014, compared with $845.4 million during the same period in 2013. The increase in third quarter 2014 related to a full quarter of Boise operations ($628.9 million) and increased sales in PCA's historical operations ($44.6 million).

*Packaging.* Sales increased $330.3 million, or 39.1%, to $1,175.7 million, compared with $845.4 million in third quarter 2013. A full quarter of Boise operations contributed $285.7 million of sales and the remaining $44.6 million increase related to higher sales volumes ($36.0 million) and higher sales price and mix ($8.6 million). In third quarter 2014, our corrugated products shipments increased 33.4% over the third quarter last year, or 31.4% per workday with one additional workday in third quarter 2014. Excluding Boise shipments, corrugated products shipments were up 6.2% compared with last year's third quarter, and increased 4.5% per workday. Our containerboard mills produced 858,000 tons, compared with 671,000 tons in third quarter 2013, prior to the acquisition of Boise.

*Paper.* Our paper segment sales include the sales for the white paper mills we acquired from Boise. Sales during the three months ended September 30, 2014, were $312.5 million. During this period, sales volumes of white paper were 287,000 tons.

### Gross Profit

Gross profit increased $92.7 million, or 40.7%, during the three months ended September 30, 2014, compared with the same period in 2013. In third quarter 2014, gross profit included $21.8 million of special items, most of which related to incremental depreciation expense related to changing the estimated useful lives of newsprint-related assets in connection with our exit from the newsprint business in September 2014. Excluding special items, gross profit increased $114.5 million primarily related to a full quarter of Boise operations ($119.8 million). Gross profit from PCA's historical packaging operations decreased $5.4 million due to increased labor and fringe benefits, depreciation, freight, energy, and wood fiber, partially offset by higher sales price, volume, and mix. During the three months ended September 30, 2014, our gross profit as a percentage of net sales decreased to 21.1% of net sales, compared with 26.9% in the same period in 2013, due primarily to the addition of the white papers business whose products generally have lower margins than the products sold in the packaging business and also due to the DeRidder restructuring charges described above.

### Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased $42.5 million, or 55.2%, during the three months ended September 30, 2014, compared with the same period in 2013. Excluding selling, general, and administrative expenses associated with the acquired Boise businesses of $39.9 million, selling, general, and administrative expenses increased $2.6 million, primarily due to increased salary and related fringe benefits expense ($2.5 million).

### Other Expense, Net

Other expense, net, during the three months ended September 30, 2014, was $12.3 million, compared with $7.7 million during the three months ended September 30, 2013. Third quarter 2014 included DeRidder restructuring charges ($4.3 million) and integration-related and other costs ($3.0 million), while third quarter 2013 included a $3.1 million pension curtailment charge and $1.5 million of Boise acquisition-related costs. We discuss these items in more detail in Note 4, Other Expense, Net of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item1. Financial Statements" of this Form 10-Q.

### Income from Operations

Income from operations increased $45.6 million, or 31.9%, during the three months ended September 30, 2014, compared with the same period in 2013. Third quarter 2014 included $29.0 million of expense from special items, including cash charges of $8.9 million and non-cash charges of $20.1 million. Third quarter 2014 special items included $26.0 million of charges related to restructuring the DeRidder mill we acquired from Boise and $3.0 million of integration-related and other costs. Third quarter 2013 income from operations included a $3.1 million pension curtailment charge and $1.5 million of Boise acquisition-related costs. Excluding these special items, income from operations increased $70.0 million during the three months ended September 30, 2014, compared with the same period in 2013. The increase in earnings, excluding special items, was driven by a full quarter of Boise operations, which contributed $77.8 million, and a $7.8 million decrease in PCA's historical earnings.

*Packaging.* Segment income from operations increased $9.8 million, or 6.3%, to $164.7 million, compared with $154.9 million during the three months ended September 30, 2013. Excluding special items, which included $26.0 million of DeRidder restructuring charges and $1.0 million of integration-related and other costs in third quarter 2014 and $3.1 million of pension curtailment charges in third quarter 2013, segment income increased $33.7 million to $191.7 million from $158.0 million the previous year. The increase in third quarter 2014 related to a full quarter of Boise operations ($39.1 million) and slightly lower income in PCA's pre-acquisition operations, which related to increased costs for labor and fringe benefits ($9.0 million), depreciation ($4.0 million), freight ($3.0 million), energy ($2.6 million), and wood fiber ($1.4 million), partially offset by higher sales price and mix ($8.6 million), and increased sales volumes ($6.0 million).

*Paper.* Segment income from operations was $43.0 million during the three months ended September 30, 2014.

### Interest Expense, Net, and Income Taxes

Interest expense, net, was $23.1 million during the three months ended September 30, 2014, compared with $11.9 million during the three months ended September 30, 2013. The increase in interest expense primarily related to higher average outstanding borrowings following the acquisition of Boise. In addition, in connection with our debt repayments during the three months ended September 30, 2014, we expensed $1.5 million of deferred financing costs.

During the three months ended September 30, 2014, we recorded $60.9 million of income tax expense, compared with $46.2 million of expense during the three months ended September 30, 2013. The effective tax rate for the three months ended September 30, 2014 and 2013, was 36.8% and 35.3%, respectively.

### Nine Months Ended September 30, 2014, compared with Nine Months Ended September 30, 2013

The historical results of operations of PCA for the nine months ended September 30, 2014 and 2013, are set forth below (dollars in millions):

|  | Nine Months Ended September 30 2014 (a) | 2013 | Change |
| --- | ---: | ---: | ---: |
| Packaging | $3,418.3 | $2,400.9 | $1,017.4 |
| Paper | 917.0 | — | 917.0 |
| Corporate and other and eliminations | 83.4 | — | 83.4 |
| Net sales | $4,418.7 | $2,400.9 | $2,017.8 |
| Packaging | $501.8 | $395.1 | $106.7 |
| Paper | 104.3 | — | 104.3 |
| Corporate and other and eliminations | (76.6) | (36.1) | (40.5) |
| Income from operations | $529.5 | $359.0 | $170.5 |
| Interest expense, net | (65.3) | (30.4) | (34.9) |
| Income before taxes | 464.2 | 328.6 | 135.6 |
| Income tax provision | (170.1) | (115.4) | (54.7) |
| Net income | $294.1 | $213.2 | $80.9 |
| Net income excluding special items (b) | $344.2 | $222.9 | $121.3 |
| Earnings, before interest, taxes, depreciation, and amortization (EBITDA) | $818.3 | $488.8 | $329.5 |
| EBITDA excluding special items (b) | $860.3 | $501.2 | $359.1 |

(a) On October 25, 2013, we acquired Boise Inc. (Boise). The 2014 consolidated results include Boise for the full period.

(b) 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 $2,017.8 million, or 84.0%, to $4,418.7 million during the nine months ended September 30, 2014, compared with $2,400.9 million during the same period in 2013. The increase in the first three quarters of 2014 related to a full period of Boise operations ($1,839.5 million) and increased sales in PCA's historical operations ($178.3 million), which resulted from higher sales volumes and higher sales price and mix.

*Packaging.* Sales increased $1,017.4 million, or 42.4%, to $3,418.3 million, compared with $2,400.9 million in the first three quarters of 2013. A full period of Boise operations contributed $839.1 million of sales and the remaining increase related to higher sales volumes ($108.1 million) and higher sales price and mix ($70.2 million) in PCA's historical operations. In the first three quarters of 2014, our corrugated products shipments increased 31.2% over the first three quarters of last year. Excluding Boise shipments, corrugated products shipments for the nine months ended September 30, 2014, were up 4.5% over the comparable period last year. Our containerboard mills produced 2,525,000 tons, or 1,967,000 tons excluding Boise, compared with 1,945,000 tons in 2013.

*Paper.* Our paper segment sales include the sales for the white paper mills we acquired from Boise. Sales during the nine months ended September 30, 2014, were $917.0 million. During this period, sales volumes of white paper were 847,000 tons.

### Gross Profit

Gross profit increased $324.5 million, or 53.4%, during the nine months ended September 30, 2014, compared with the same period in 2013. In the first nine months of 2014, gross profit included $42.1 million of special items, most of which related to incremental depreciation related to changing the estimated useful lives of newsprint-related assets in connection with our exit from the newsprint business in September 2014. Excluding special items, gross profit increased $366.6 million, due primarily to a full nine months of Boise operations ($335.4 million). Gross profit from PCA's historical packaging operations increased $31.2 million due to higher sales price, volume, and mix, partially offset by increases in labor, depreciation, energy, freight, wood fiber, and chemicals. During the nine months ended September 30, 2014, our gross profit as a percentage of net sales decreased to 21.1% of net sales, compared with 25.3% in the same period in 2013, due primarily to the addition of the white papers business whose products generally have lower margins than the products sold in the packaging business and also due to the DeRidder restructuring charges described above.

### Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased $132.4 million, or 58.4%, during the nine months ended September 30, 2014, compared with the same period in 2013. Excluding selling, general, and administrative expenses associated with the acquired Boise businesses of $120.8 million, selling, general, and administrative expenses increased $11.6 million, primarily due to increased salary and related fringe benefit expense ($9.7 million) and other increases, which were individually insignificant.

### Other Expense, Net

Other expense, net, during the nine months ended September 30, 2014, was $44.0 million, compared with $22.5 million during the nine months ended September 30, 2013. During the first nine months of 2014 we recorded costs for the settlement of the *Kleen Products LLC v Packaging Corp. of America et al* class action lawsuit ($17.6 million), integration-related and other costs ($12.0 million), and DeRidder restructuring charges ($5.7 million). During the nine months ended September 30, 2013, we recorded a $10.9 million pension curtailment charge and $1.5 million of Boise acquisition-related costs. We discuss these items in more detail in Note 4, Other Expense, Net, and Note 18, Commitments, Guarantees, Indemnifications and Legal Proceedings of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item1. Financial Statements" of this Form 10-Q.

### Income from Operations

Income from operations increased $170.5 million, or 47.5%, during the nine months ended September 30, 2014, compared with the same period in 2013. The first three quarters of 2014 included $77.4 million of expense from special items, including cash charges of $35.3 million and non-cash charges of $42.1 million. During the first nine months of 2014, special items included $47.8 million of charges related to restructuring the DeRidder mill we acquired from Boise, $17.6 million of costs incurred for the settlement of the *Kleen Products LLC v Packaging Corp. of America et al* class action lawsuit, and $12.0 million of integration-related costs. The first nine months of 2013 included $12.4 million of expense related to special items. Excluding special items, income from operations increased $235.5 million during the nine months ended September 30, 2014, compared with the same period in 2013. The increase in earnings, excluding special items, was driven by a full nine months of Boise operations, which contributed $213.0 million, and a $22.5 million improvement in PCA's historical earnings.

*Packaging.* Segment income from operations increased $106.7 million, or 27.0%, to $501.8 million, compared with $395.1 million during the nine months ended September 30, 2013. Excluding $47.8 million of special items related to the DeRidder restructuring and $5.4 million of integration-related and other costs during the first nine months of 2014, and a $10.9 million pension curtailment charge in the first nine months of 2013, segment income increased $149.0 million. The increase in the the first three quarters of 2014 related to a full period of Boise operations ($122.4 million, excluding the special items discuss above) and increased income in PCA's pre-acquisition operations, which related to higher sales price and mix ($70.2 million), higher sales volumes ($12.8 million), partially offset by increased costs for depreciation ($12.1 million), labor ($12.1 million), energy ($8.7 million), freight ($7.9 million), wood fiber ($5.1 million), chemicals ($4.4 million), repairs ($2.8 million), and incentives ($2.4 million).

*Paper.* Segment income from operations was $104.3 million during the nine months ended September 30, 2014. During this period, sales volumes of white paper were 847,000 tons.

### Interest Expense, Net, and Income Taxes

Interest expense, net, was $65.3 million during the nine months ended September 30, 2014, compared with $30.4 million during the nine months ended September 30, 2013. The increase in interest expense primarily related to higher average outstanding borrowings following the acquisition of Boise. In addition, in connection with our debt repayments during the nine months ended September 30, 2014, we expensed $1.5 million of deferred financing costs.

During the nine months ended September 30, 2014, we recorded $170.1 million of income tax expense, compared with $115.4 million of expense during the nine months ended September 30, 2013. The effective tax rate for the nine months ended September 30, 2014 and 2013, was 36.6% and 35.1%, respectively.

### 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. At September 30, 2014, we had $154.3 million of cash and $325.0 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, debt service (including voluntary payments of debt), and declared common stock dividends, which we expect to be able to fund from these sources.

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):

| Net cash provided by (used for): | Nine Months Ended September 30 2014 | 2013 | Change |
| --- | ---: | ---: | ---: |
| Operating activities | $556.7 | $420.2 | $136.5 |
| Investing activities | (283.6) | (132.5) | (151.1) |
| Financing activities | (309.8) | (98.4) | (211.4) |
| Net increase (decrease) in cash and cash equivalents | $(36.7) | $189.3 | $(226.0) |

Our foreign operations are not material to our financial position or results of operations. At September 30, 2014, we had $10.3 million of cash and short-term investments held in operations outside of the United States. We indefinitely reinvest our earnings in operations outside the United States; however, if foreign earnings were repatriated at a future date, we would need to accrue and pay taxes. It is not practical to determine the amount of unrecognized deferred tax liability on these undistributed earnings because the actual tax liability, if any, is dependent on circumstances existing when the repatriation occurs.

### Operating Activities

During the nine months ended September 30, 2014, net cash provided by operating activities was $556.7 million, compared with $420.2 million in the same period in 2013, an increase of $136.5 million. Cash provided by operating activities before changes in operating assets and liabilities increased $184.8 million in the first three quarters of 2014, compared with the first three quarters of 2013, primarily due to the increase in income from operations discussed above under "Results of Operations." Cash used for operating assets and liabilities totaled $86.3 million during the nine months ended September 30, 2014, compared with $38.1 million during the same period in 2013. The higher cash requirements for operating assets and liabilities were driven primarily by (a) higher accounts receivable due to increased sales, (b) higher levels of containerboard inventory needed to support our packaging business as a result of rail and truck service and availability issues, (c) higher deferred maintenance costs at our white paper mills related to planned annual mill outages, which are capitalized as assets and amortized over the remainder of the year, and (d) a decrease in accounts payable in the first three quarters of 2014 due to the timing of payments, compared with an increase in accounts payable in the first three quarters of 2013, partially offset by (1) an increase in accrued liabilities due primarily to higher accrued interest on our long-term debt and higher vacation accruals, and (2) an increase in federal and state income taxes payable in the first three quarters of 2014. 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.

### Investing Activities

Net cash used for investing activities during the nine months ended September 30, 2014, increased $151.1 million, to $283.6 million, compared with $132.5 million during the same period in 2013. We spent $254.9 million for capital investments during the nine months ended September 30, 2014, compared with $130.4 million during the same period in 2013. The increase in capital spending was due primarily to having a full nine months of Boise capital investments, including $79.5 million of investments related to the DeRidder conversion project discussed under "Executive Summary." On April 28, 2014, we acquired the assets of Crockett Packaging, a corrugated products manufacturer, for $21.2 million, before $0.9 million of working capital adjustments. The assets included a corrugated plant and a sheet plant in Southern California.

We expect capital investments to total about $410 million in 2014, including capital required to achieve Boise acquisition synergies, Boiler MACT spending, and the DeRidder conversion project. These expenditures could increase or decrease as a result of a number of factors, including our financial results, future economic conditions, and our regulatory compliance requirements. We currently estimate capital expenditures to comply with Boiler MACT regulations (as discussed below under "Environmental Matters") in 2014 of up to $25 million and we expect other environmental capital expenditures of about $1 million in 2014. Our estimated environmental expenditures could vary significantly depending upon the enactment of new environmental laws and regulations, including those related to greenhouse gas emissions and industrial boilers. For additional information, see "Environmental Matters" in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

### Financing Activities

During the nine months ended September 30, 2014, we used $309.8 million for financing activities, compared with $98.4 million during the same period in 2013. The increase in cash used for financing activities primarily relates to an increase in debt principal payments, net of debt issued. In the first nine months of 2014, we made $590.6 million of principal payments on long-term debt and capital leases and received $398.9 million of proceeds (net of debt discount) from long-term debt issuances, for a net reduction in debt of $191.7 million. To reduce the earnings risk of potential interest rate increases on variable interest rate debt, on September 5, 2014, we issued $400 million of ten-year notes with a fixed interest rate of 3.65% and used the proceeds to pay down a portion of our five-year, variable-rate term loan. In the first nine months of 2013, we made principal payments on long-term debt and capital leases of $12.0 million. We also had $48.1 million of increased dividend payments during the nine months ended September 30, 2014, compared with the same period in 2013. We only paid $69.9 million of dividends during the first nine months of 2013 as we accelerated payment of the dividend that would have been paid in January 2013 to December 2012. During the nine months ended September 30, 2014, we withheld 168,464 shares from vesting equity awards to cover employee tax liabilities of $12.1 million, compared with $10.9 million in first nine months of 2013. Proceeds from the exercise of stock options and tax benefits from share-based awards contributed $15.5 million in the first three quarters of 2014, compared with $10.3 million in the same period in 2013. Cash payments of financing costs decreased $5.0 million in the first nine months of 2014, compared with 2013.

For more information about our debt, see Note 8, Debt, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our updated 2013 Financial Statements.

### Contractual Obligations

There have been no material changes to the contractual obligations table disclosed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our updated 2013 Financial Statements, except as disclosed in Note 10, Debt, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item 1. Financial Statements" of this Form 10-Q.

### 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 and uses non-GAAP measures to focus on on-going operations and assess its operating performance and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. Additionally, EBITDA and EBITDA excluding special items 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 and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such. Reconciliations of the non-GAAP measures to the most comparable measure reported in accordance with GAAP for the three and nine months ended September 30, 2014 and 2013, follow (in millions, except per share amounts):

|  | Three Months Ended September 30 2014 (a) Income from Operations | Net Income | 2013 Income from Operations | Net Income |
| --- | ---: | ---: | ---: | ---: |
| As reported in accordance with GAAP | $188.4 | $104.4 | $142.8 | $84.7 |
| Special items: |  |  |  |  |
| DeRidder restructuring (b) | 26.0 | 16.6 | — | — |
| Integration-related and other costs (c)(d) | 3.0 | 2.9 | — | — |
| Pension curtailment charges (e) | — | — | 3.1 | 2.0 |
| Acquisition-related financing costs (f) | — | — | — | 1.7 |
| Acquisition-related costs (f) | — | — | 1.5 | 1.0 |
| Total special items | 29.0 | 19.5 | 4.6 | 4.7 |
| Excluding special items | $217.4 | $123.9 | $147.4 | $89.4 |

|  | Nine Months Ended September 30 2014 (a) Income from Operations | Net Income | 2013 Income from Operations | Net Income |
| --- | ---: | ---: | ---: | ---: |
| As reported in accordance with GAAP | $529.5 | $294.1 | $359.0 | $213.2 |
| Special items: |  |  |  |  |
| DeRidder restructuring (b) | 47.8 | 30.4 | — | — |
| Integration-related and other costs (c)(d) | 12.0 | 8.5 | — | — |
| Class action lawsuit settlement (e) | 17.6 | 11.2 | — | — |
| Pension curtailment charges (f) | — | — | 10.9 | 7.0 |
| Acquisition-related financing costs (g) | — | — | — | 1.7 |
| Acquisition-related costs (g) | — | — | 1.5 | 1.0 |
| Total special items | 77.4 | 50.1 | 12.4 | 9.7 |
| Excluding special items | $606.9 | $344.2 | $371.4 | $222.9 |

(a) On October 25, 2013, we acquired Boise Inc. (Boise). The 2014 consolidated results include Boise for the full period.

(b) Amounts relate primarily to the conversion of the Number 3 newsprint machine at our DeRidder, Louisiana, mill to produce lightweight linerboard and corrugating medium, and our exit from the newsprint business in September 2014. Most of the costs relate to accelerating the depreciation on the Number 3 newsprint machine.

(c) The three and nine months ended September 30, 2014, include $3.0 million and $12.0 million, respectively, of Boise acquisition integration-related and other costs recorded in "Other expense, net".

(d) The three and nine months ended September 30, 2014, both include $1.5 million of expense related to the write-off of deferred financing costs in connection with the debt refinancing discussed in Note 10, Debt. These costs are recorded in "Interest expense, net".

(e) The nine months ended September 30, 2014, includes $17.6 million of costs for the settlement of the *Kleen Products LLC v Packaging Corp. of America et al* class action lawsuit. See Note 18, Commitments, Guarantees, Indemnifications and Legal Proceedings, for more information. These costs are recorded in "Other expense, net".

(f) The three and nine months ended September 30, 2013, both include non-cash pension curtailment charges related to pension plan changes in which certain hourly corrugated plant and containerboard mill employees will transition from a defined benefit pension plan to a defined contribution (401k) plan. These costs are recorded in "Other expense, net".

(g) The three and nine months ended September 30, 2013, both include acquisition-related costs, primarily for professional fees related to transaction-advisory services and expenses related to financing the acquisition of Boise.

The following table reconciles net income to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):

|  | Three Months Ended September 30 2014 | 2013 | Nine Months Ended September 30 2014 | 2013 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $104.4 | $84.7 | $294.1 | $213.2 |
| Interest expense, net | 23.1 | 11.9 | 65.3 | 30.4 |
| Income tax provision | 60.9 | 46.2 | 170.1 | 115.4 |
| Depreciation, amortization, and depletion | 103.8 | 44.1 | 288.8 | 129.8 |
| EBITDA | $292.2 | $186.9 | $818.3 | $488.8 |
| Special items: |  |  |  |  |
| DeRidder restructuring | $7.8 | $— | $12.4 | $— |
| Integration-related and other costs | 3.0 | — | 12.0 | — |
| Class action lawsuit settlement | — | — | 17.6 | — |
| Pension curtailment charges | — | 3.1 | — | 10.9 |
| Acquisition-related costs | — | 1.5 | — | 1.5 |
| EBITDA excluding special items | $303.0 | $191.5 | $860.3 | $501.2 |

29

The following table reconciles segment income (loss) to EBITDA and EBITDA excluding special items:

| Packaging | Three Months Ended September 30 2014 | 2013 | Nine Months Ended September 30 2014 | 2013 |
| --- | ---: | ---: | ---: | ---: |
| Segment income | $164.7 | $154.9 | $501.8 | $395.1 |
| Depreciation, amortization, and depletion | 88.8 | 43.7 | 245.7 | 128.7 |
| EBITDA | 253.5 | 198.6 | 747.5 | 523.8 |
| DeRidder restructuring | 7.8 | — | 12.4 | — |
| Integration-related and other costs | 1.0 | — | 5.4 | — |
| Pension curtailment charges | — | 3.1 | — | 10.9 |
| EBITDA excluding special items | **$262.3** | **$201.7** | **$765.3** | **$534.7** |
| **Paper** |  |  |  |  |
| Segment income | $43.0 | $— | $104.3 | $— |
| Depreciation, amortization, and depletion | 12.9 | — | 37.2 | — |
| EBITDA | 55.9 | — | 141.5 | — |
| Integration-related and other costs | — | — | (0.4) | — |
| EBITDA excluding special items | **$55.9** | **$—** | **$141.1** | **$—** |
| **Corporate and Other** |  |  |  |  |
| Segment loss | $(19.3) | $(12.1) | $(76.6) | $(36.1) |
| Depreciation, amortization, and depletion | 2.1 | 0.4 | 5.9 | 1.1 |
| EBITDA | (17.2) | (11.7) | (70.7) | (35.0) |
| Integration-related and other costs | 2.0 | — | 7.0 | — |
| Class action lawsuit settlement | — | — | 17.6 | — |
| Acquisition-related costs | — | 1.5 | — | 1.5 |
| EBITDA excluding special items | **$(15.2)** | **$(10.2)** | **$(46.1)** | **$(33.5)** |
| **EBITDA** | **$292.2** | **$186.9** | **$818.3** | **$488.8** |
| **EBITDA excluding special items** | **$303.0** | **$191.5** | **$860.3** | **$501.2** |

### 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. At September 30, 2014, we had no derivative instruments outstanding. For a discussion of derivatives and hedging activities, see Note 11, Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our updated 2013 Financial Statements.

The interest rates on approximately 70% of PCA’s debt are fixed. A one percent increase in interest rates related to variable-rate debt would have resulted in an increase in interest expense and a corresponding decrease in income before taxes of $7.1 million annually.

### Off-Balance-Sheet Activities

The Company does not have any off-balance sheet arrangements as of September 30, 2014.

### 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 updated 2013 Financial Statements.

### 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 in the 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, goodwill and intangible assets, pensions and other postretirement benefits, environmental liabilities, income taxes, and long-lived asset impairment, 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 updated 2013 Financial Statements, a discussion of its critical accounting policies and estimates which require management's most difficult, subjective, or complex judgments used in the preparation of its consolidated financial statements. PCA has not had any changes to these critical accounting estimates during the first nine months of 2014.

### New and Recently Adopted Accounting Standards

For a listing of our new and recently adopted accounting standards, see Note 17, 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. 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 Boise acquisition and risks and uncertainties relating to the integration of Boise’s business into our business;
- containerboard, corrugated products, and white paper, general industry conditions, including competition, product demand and product pricing;
- fluctuations in wood fiber and recycled fiber costs;
- fluctuations in purchased energy costs;
- the possibility of unplanned outages or interruptions at our principal facilities; and
- 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 ended December 31, 2013.

## Market risk

As filed, 238 characters.

For a discussion of market risks related to PCA, see Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Risk and Risk Management Policies” in this Quarterly Report on Form 10-Q.

## Controls and procedures

As filed, 2,133 characters.

PCA maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in PCA’s filings under the Securities Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to PCA’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Prior to filing this report, PCA completed an evaluation under the supervision and with the participation of PCA’s management, including PCA’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of PCA’s disclosure controls and procedures as of September 30, 2014. The evaluation of PCA’s disclosure controls and procedures included a review of the controls’ objectives and design, PCA’s implementation of the controls, and the effect of the controls on the information generated for use in this report. Based on this evaluation, PCA’s Chief Executive Officer and Chief Financial Officer concluded that PCA’s disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2014.

### Changes in Internal Control Over Financial Reporting

On October 25, 2013, PCA acquired Boise Inc. ("Boise"). PCA is in the process of integrating Boise into its operations. PCA is analyzing, evaluating, and where necessary, implementing changes in controls and procedures relating to the Boise business as such integration proceeds. As a result, this process may result in additions or changes to PCA's internal control over financial reporting. Except as it relates to the acquisition of Boise, during the quarter ended September 30, 2014, there were no changes in internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, PCA’s internal control over financial reporting.

### PART II

### OTHER INFORMATION

## Risk factors

As filed, 162 characters.

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013.

Filed Nov 7, 2014.
Source: SEC EDGAR, the filing index for accession 0000075677-14-000040. Last ingested by Listed: Nov 5, 2026, 13:32 ET. No prices; not investment advice.