# Packaging Corp of America: Form 10-Q for the period ended Mar 31, 2015

- Company: [Packaging Corp of America](/companies/pkg.md) (CIK 75677)
- Form: 10-Q
- Filed: 2015-05-08
- Accepted by EDGAR: May 8, 2015, 12:45 ET
- Period: 2015-03-31
- Accession: 0000075677-15-000011
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/75677/000007567715000011/pkg0331201510q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/75677/000007567715000011/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-01-01 to 2015-03-31 | $1.43bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2015-01-01 to 2015-03-31 | $1.15bn | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2015-01-01 to 2015-03-31 | $277.0m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2015-01-01 to 2015-03-31 | $117.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2015-01-01 to 2015-03-31 | $157.1m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2015-01-01 to 2015-03-31 | $47.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-01-01 to 2015-03-31 | $90.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-01-01 to 2015-03-31 | $0.92 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-01-01 to 2015-03-31 | $0.92 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-01-01 to 2015-03-31 | 97,200,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2015-01-01 to 2015-03-31 | $108.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2015-01-01 to 2015-03-31 | $55.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2015-01-01 to 2015-03-31 | $39.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2015-01-01 to 2015-03-31 | $7.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2015-03-31 | $126.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-03-31 | $1.61bn | us-gaap:AssetsCurrent |
| Total assets | at 2015-03-31 | $5.39bn | us-gaap:Assets |
| Current liabilities | at 2015-03-31 | $621.3m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2015-03-31 | $2.35bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2015-03-31 | $6.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2015-03-31 | $1.56bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 36,197 characters.

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 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 2014 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. Please see "Forward Looking Statements" elsewhere in this Item 2.

### Overview

PCA is the fourth largest producer of containerboard and the third largest producer of uncoated freesheet paper in North America, based on production capacity. We operate five containerboard mills, three paper mills, and 94 corrugated products manufacturing plants. 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 and distribution operations in Canada. This Form 10-Q also includes the financial results of our Hexacomb operations in Europe and Mexico which we sold on April 1, 2015.

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 our 2014 Annual Report on Form 10-K.

### Executive Summary

Net sales were $1.4 billion in both first quarter 2015 and 2014. We reported $90.8 million of net income, or $0.92 per diluted share during first quarter 2015, compared with $90.1 million, or $0.92 per diluted share during the same period in 2014. Excluding the special items discussed below, we recorded $99.6 million of net income, or $1.01 per diluted share during first quarter 2015, compared with $106.5 million, or $1.08 per diluted share in 2014.

Packaging segment earnings before interest, taxes, depreciation, amortization, and depletion (EBITDA) in the first quarter of 2015 was $219.8 million, and excluding special items, was $222.0 million with sales of $1,099.3 million compared with first quarter 2014 packaging EBITDA of $240.3 million, and excluding special items, of $244.3 million with sales of $1,097.4 million. Lower profitability was the result of this year’s extended annual outage at the DeRidder mill, which did not have an annual outage in 2014, as well as higher employee-related costs, freight, and fiber costs, and lower export containerboard prices. These items were partially offset by corrugated products volume growth, benefits from the DeRidder No. 3 machine conversion, lower energy costs, and a $3.6 million state tax credit related to investments at our DeRidder, Louisiana, mill. Corrugated products shipments per workday, including both PCA and Boise plants, were up 4.4%, with one less workday compared to the first quarter of last year, and total shipments were up 2.7%.

Paper segment EBITDA in the first quarter of 2015 increased to $49.3 million on sales of $297.3 million compared with first quarter 2014 EBITDA of $39.7 million and net sales of $309.3 million. Office paper shipments were up slightly, and printing and converting and pressure sensitive paper shipments were down 5,500 tons compared with the first quarter of last year. Improved profitability was the result of operational improvements in the white paper mills over the past year. In April, a severe thunderstorm caused a power failure and total mill outage at our Jackson, Alabama, white papers mill, resulting in damage to the steam turbine drive for the No. 1 paper machine. The machine was down about two weeks. The total cost of the outage including repairs, production losses, and additional operating costs will be covered under our property and business interruption insurance subject to a $3 million deductible.

The three months ended March 31, 2015 and 2014, included $13.8 million ($9.9 million non-cash and $3.9 million cash) and $25.7 million ($3.1 million non-cash and $22.6 million cash) of pre-tax special items, respectively. The three months ended March 31, 2015, included $10.3 million of expenses related to the DeRidder mill restructuring and $3.5 million of Boise acquisition integration-related and other costs. The three months ended March 31, 2014, included $17.6 million of expenses related to a class action lawsuit settlement, $4.1 million of integration-related and other costs, and $4.0 million related to the DeRidder mill restructuring.

Earnings per diluted share, excluding special items, during the three months ended March 31, 2015 and 2014, were as follows.

|  | Three Months Ended March 31 2015 | 2014 |
| --- | ---: | ---: |
| Earnings per diluted share, as reported | $0.92 | $0.92 |
| Special items (a): |  |  |
| DeRidder restructuring | 0.07 | 0.02 |
| Integration-related and other costs | 0.02 | 0.03 |
| Class action lawsuit settlement | — | 0.11 |
| Total special items | 0.09 | 0.16 |
| Earnings per diluted share, excluding special items | $1.01 | $1.08 |

(a) 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 first quarter 2015, compared with the same quarter in 2014, and increased 3.4% per workday with one less workday in the first quarter of 2015. Reported industry containerboard production was 1.7% higher than first quarter 2014, and reported containerboard export shipments were up 3.0%.

In first quarter 2015, our containerboard production was 882,000 tons, up 61,000 tons compared with first quarter 2014, due primarily to additional tons produced on the newly converted No. 3 machine at our DeRidder, Louisiana, mill. In first quarter 2015, our corrugated products shipments increased 2.7% over first quarter of last year and 4.4% per workday with one less workday in first quarter 2015. Outside sales of containerboard, both domestic and export, increased by 15,000 tons compared with last year's first quarter. Our domestic containerboard pricing remained steady throughout the quarter, while our export containerboard pricing decreased during the quarter.

The market for communication papers competes heavily with electronic data transmission and document storage alternatives. While increasing shifts to these alternatives have reduced usage of traditional print media and communication papers, our office paper shipments were up slightly in first quarter 2015, compared with first quarter 2014. Our printing and converting papers and pressure sensitive papers shipments were down about 5,500 tons compared with first quarter 2014. In first quarter 2015, our white paper mills ran well, producing 288,000 tons. Our paper inventories were up about 27,000 tons compared with first quarter 2014 as we built inventories in advance of upcoming annual maintenance outages. Our white paper prices decreased in first quarter 2015 compared with first quarter 2014 as a result of lower prices reported by industry publications and also a less rich mix which was driven by timing of customer orders.

### Outlook

Looking ahead to the second quarter, compared with the first quarter, we expect improvement driven by a full quarter of operations at the DeRidder mill which will increase containerboard production and lower per-ton mill costs. We also expect seasonally higher containerboard and corrugated products shipments, some weather-related cost improvements, and lower employee-related benefit costs. Costs from annual mill outages, including amortization of annual outage repair costs, will be higher than the first quarter. We also expect a higher effective tax rate and higher depreciation expense, excluding the accelerated depreciation related to our DeRidder mill restructuring. Finally, we expect higher interest expense and we will not receive the earnings benefits of the state tax credit in the second quarter. Considering these items, we expect second quarter 2015 earnings, excluding special items, to be slightly higher than our first quarter earnings, excluding special items.

### Results of Operations

### Three Months Ended March 31, 2015, compared with Three Months Ended March 31, 2014

The historical results of operations of PCA for the three months ended March 31, 2015 and 2014, are set forth below (dollars in millions):

|  | Three Months Ended March 31 2015 | 2014 | Change |
| --- | ---: | ---: | ---: |
| Packaging | $1,099.3 | $1,097.4 | $1.9 |
| Paper | 297.3 | 309.3 | (12.0) |
| Corporate and other and eliminations | 29.1 | 24.6 | 4.5 |
| Net sales | $1,425.7 | $1,431.3 | $(5.6) |
| Packaging | $141.1 | $170.7 | $(29.6) |
| Paper | 35.6 | 27.7 | 7.9 |
| Corporate and other and eliminations | (19.6) | (37.5) | 17.9 |
| Income from operations | $157.1 | $160.9 | $(3.8) |
| Interest expense, net | (19.2) | (20.8) | 1.6 |
| Income before taxes | 137.9 | 140.1 | (2.2) |
| Income tax provision | (47.1) | (50.0) | 2.9 |
| Net income | $90.8 | $90.1 | $0.7 |
| Net income excluding special items (a) | $99.6 | $106.5 | $(6.9) |
| EBITDA (a) | $250.5 | $244.3 | $6.2 |
| EBITDA excluding special items (a) | $255.3 | $270.0 | $(14.7) |

(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 decreased $5.6 million, or 0.4%, to $1,425.7 million during the three months ended March 31, 2015, compared with $1,431.3 million during the same period in 2014.

*Packaging.* Sales increased $1.9 million, or 0.2%, to $1,099.3 million, compared with $1,097.4 million in first quarter 2014. In first quarter 2015, our corrugated products shipments increased 2.7% over the first quarter last year, or 4.4% per workday with one less workday in first quarter 2015. Outside export sales increased by 19,000 tons, while domestic decreased by 4,000 tons. These sales increases were mostly offset by a decrease in sales from our newsprint business, which we exited in third quarter 2014. In first quarter 2015, our containerboard production was 882,000 tons, up 61,000 tons compared with the first quarter 2014, due primarily to additional tons produced on the newly converted No. 3 machine at our DeRidder, Louisiana, mill. Corrugated product and domestic containerboard sales prices did not significantly change and export containerboard prices were lower in first quarter 2015, compared with first quarter 2014.

*Paper.* Sales during the three months ended March 31, 2015, decreased $12.0 million, or 4%, to $297.3 million, compared with $309.3 million in first quarter 2014. White papers prices decreased as a result of lower prices reported by industry publications, which were made retroactive to January 1, 2015, and also a less rich mix which was driven by timing of customer orders. Office papers sales volumes were up 400 tons, compared with first quarter 2014. Printing and converting and pressure sensitive sales volumes, combined, decreased 5,500 tons.

### Gross Profit

Gross profit decreased $24.4 million, or 8.1%, during the three months ended March 31, 2015, compared with the same period in 2014. In first quarter 2015 and 2014, gross profit included $9.0 million and $2.9 million of special items, respectively, most of which related to incremental depreciation expense related to changing the estimated useful lives of assets in connection with our DeRidder mill restructuring. Excluding special items, gross profit decreased $18.3 million, primarily related to higher employee-related costs and annual mill outage costs, lower white papers prices and changes in mix, lower export containerboard prices, and higher costs for depreciation and fiber. These items were partially offset by increased sales volume and lower costs for energy and chemicals.

### Selling, General, and Administrative Expenses

Selling, general, and administrative expenses were relatively flat, increasing $0.8 million, or 0.7%, during the three months ended March 31, 2015, compared with the same period in 2014. The slight increase was due primarily to increased salaries and benefits.

### Other Expense, Net

Other expense, net, during the three months ended March 31, 2015, was $2.6 million, compared with $24.0 million during the three months ended March 31, 2014. First quarter 2015 included $3.6 million of income from a refundable state tax credit received related to our investments at DeRidder, which was more than offset by $3.0 million of Boise integration-related and other costs, $1.2 million of DeRidder restructuring charges, and $2.0 million of asset disposals and other costs. First quarter 2014 included $17.6 million of costs accrued for the settlement of the Kleen Products LLC v Packaging Corp. of America et al class action lawsuit, $4.1 million of Boise integration-related and other costs, $1.1 million of DeRidder restructuring charges, and $1.2 million of asset disposals and other 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 decreased $3.8 million, or 2.4%, during the three months ended March 31, 2015, compared with the same period in 2014. First quarter 2015 included $13.8 million of expense from special items, compared with $25.7 million of expense from special items in first quarter 2014. First quarter 2015 special items included $10.3 million of charges related to restructuring the DeRidder mill and $3.5 million of integration-related and other costs. First quarter 2014 special items included $17.6 million of costs accrued for the settlement of a class action lawsuit, $4.1 million of integration-related and other costs, and $4.0 million related to the DeRidder restructuring. Excluding these special items, income from operations decreased $15.7 million during the three months ended March 31, 2015, compared with the same period in 2014. The decrease in income from operations, excluding special items, was driven primarily by lower gross profit as described above, partially offset by a $3.6 million state tax credit related to investments at our DeRidder, Louisiana, mill.

*Packaging.* Segment income from operations decreased $29.6 million, or 17.3%, to $141.1 million, compared with $170.7 million during the three months ended March 31, 2014. Excluding special items, which included $10.3 million of DeRidder restructuring charges and $0.9 million of integration-related and other costs in first quarter 2015 and $4.0 million of DeRidder restructuring charges in first quarter 2014, segment income decreased $22.4 million. The decrease in first quarter 2015 related primarily to increased employee-related costs, ($14.0 million), annual mill outage costs ($11.6 million), supplies and other operating costs ($3.6 million), freight ($3.0 million), fiber ($2.3 million), depreciation ($1.5 million), and chemicals ($0.9 million), and lower export containerboard prices ($2.3 million), offset partially by higher sales volumes ($7.5 million), lower costs for energy ($6.2 million), and a state tax credit related to investments at our DeRidder, Louisiana, mill ($3.6 million).

*Paper.* Segment income from operations increased $7.9 million, or 29% to $35.6 million, compared with $27.7 million during the three months ended March 31, 2015. The increase in Paper segment income from operations is due primarily to lower costs for energy ($3.6 million), chemicals ($3.5 million), and freight ($3.3 million), partially offset by higher depreciation ($1.7 million) and lower prices, mix, and volume ($1.5 million).

### Interest Expense, Net, and Income Taxes

Interest expense, net, was $19.2 million during the three months ended March 31, 2015, compared with $20.8 million during the three months ended March 31, 2014. The decrease in interest expense primarily related to a higher patronage interest rebate of $4.1 million in first quarter 2015, compared with $0.8 million in first quarter 2014. Also, a lower average debt balance reduced interest by $0.6 million. These decreases were offset partially by higher interest rates on our new $400 million senior notes due 2024, compared with the floating rate term loan debt repaid in September 2014 with the proceeds of those notes.

During the three months ended March 31, 2015, we recorded $47.1 million of income tax expense, compared with $50.0 million of expense during the three months ended March 31, 2014. The effective tax rate for the three months ended March 31, 2015 and 2014, was 34.2% and 35.7%, 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 March 31, 2015, we had $126.4 million of cash and $326.5 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. 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): | Three Months Ended March 31 2015 | 2014 | Change |
| --- | ---: | ---: | ---: |
| Operating activities | $108.3 | $149.3 | $(41.0) |
| Investing activities | (57.6) | (53.6) | (4.0) |
| Financing activities | (49.2) | (101.0) | 51.8 |
| Net increase (decrease) in cash and cash equivalents | $1.5 | $(5.3) | $6.8 |

Our foreign operations are not material to our financial position or results of operations. At March 31, 2015, we had $4.4 million of cash and short-term investments held in operations outside of the United States, mostly in Mexico and Europe. On April 1, 2015, we completed the sale of our European and Mexican Hexacomb operations for net proceeds of approximately $23 million. The gain on the sale is not expected to be significant.

### Operating Activities

During the three months ended March 31, 2015, net cash provided by operating activities was $108.3 million, compared with $149.3 million in the same period in 2014, a decrease of $41.0 million. Cash provided by operating activities before changes in operating assets and liabilities decreased $4.4 million in the first quarter of 2015, compared with the first quarter of 2014, primarily due to the $3.8 million decrease in income from operations discussed above under "Results of Operations." Cash used for operating assets and liabilities totaled $91.6 million during the three months ended March 31, 2015, compared with $55.0 million during the same period in 2014. The higher cash requirements for operating assets and liabilities were driven primarily by (a) a larger decrease in accrued liabilities due primarily to a $17.6 million accrual related to a class action lawsuit in first quarter 2014, that was paid in second quarter of 2014, and higher payouts of incentives and other employee benefits in the first quarter of 2015, compared with the same quarter last year, (b) a larger decrease in accounts payable in the first quarter of 2015, due mostly to timing of payments, and (c) higher levels of inventory in anticipation of planned annual mill outages and to support our business as a result of rail and truck service and availability issues. These factors were offset partially by (1) a smaller increase in accounts receivable, and (2) a larger increase in the federal and state income taxes payable. 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 three months ended March 31, 2015, increased $4.0 million, to $57.6 million, compared with $53.6 million during the same period in 2014. We spent $55.6 million for capital investments during the three months ended March 31, 2015, compared with $50.9 million during the same period in 2014. The increase in capital spending was due primarily to additional capital investments in our corrugating locations.

We expect capital investments to be between $275 million and $300 million in 2015, including capital required to continue to achieve planned Boise acquisition synergies, Boiler MACT spending, and DeRidder restructuring investments. 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 in 2015 of approximately $16 million and we expect other environmental capital expenditures of about $5 million in 2015. 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 "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2014 Annual Report on Form 10-K.

### Financing Activities

During the three months ended March 31, 2015, we used $49.2 million for financing activities, compared with $101.0 million during the same period in 2014. The decrease in cash used for financing activities primarily relates to a decrease in debt principal payments. In the first quarter of 2015, we made $1.9 million of principal payments on long-term debt and capital leases, compared with $66.3 million in the first quarter of 2014. We paid $39.4 million of dividends during the first quarter of 2015, which is consistent with the $39.3 million of dividends paid during the first quarter of 2014. On February 26, 2015, PCA's Board of Directors approved a regular quarterly cash dividend of $0.55 per share, which was paid on April 15, 2015, to shareholders of record as of March 13, 2015, increasing the quarterly dividend payment to $54.1 million. During the three months ended March 31, 2015, we paid $7.6 million to repurchase 100,000 shares of common stock. During the three months ended March 31, 2015, we withheld shares from vesting equity awards to cover employee tax liabilities of $0.3 million, compared with $2.4 million in first quarter of 2014. Proceeds from the exercise of stock options and tax benefits from share-based awards contributed $0.3 million in the first quarter of 2015, compared with $7.0 million in the same period in 2014.

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 2014 Annual Report on Form 10-K.

### 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 2014 Annual Report on Form 10-K, 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 months ended March 31, 2015 and 2014, follow (in millions, except per share amounts):

|  | Three Months Ended March 31 2015 Income from Operations | Net Income | 2014 Income from Operations | Net Income |
| --- | ---: | ---: | ---: | ---: |
| As reported in accordance with GAAP | $157.1 | $90.8 | $160.9 | $90.1 |
| Special items: |  |  |  |  |
| DeRidder restructuring (a) | 10.3 | 6.6 | 4.0 | 2.6 |
| Integration-related and other costs (b) | 3.5 | 2.2 | 4.1 | 2.6 |
| Class action lawsuit settlement (c) | — | — | 17.6 | 11.2 |
| Total special items | 13.8 | 8.8 | 25.7 | 16.4 |
| Excluding special items | $170.9 | $99.6 | $186.6 | $106.5 |

(a) The three months ended March 31, 2015 and 2014, include $10.3 million and $4.0 million, respectively, of restructuring charges at our mill in DeRidder, Louisiana. Restructuring activities included our exit from the newsprint business, the conversion of the No. 3 newsprint machine to containerboard and other improvements. The restructuring charges primarily related to accelerated depreciation and were mostly recorded in "Cost of sales".

(b) The three months ended March 31, 2015 and 2014, include $3.5 million and $4.1 million of Boise acquisition integration-related and other costs, mostly recorded in "Other expense, net". These costs primarily relate to professional fees, severance, retention, relocation, travel, and other integration-related costs.

(c) The three months ended March 31, 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 recorded in "Other expense, net".

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

|  | Three Months Ended March 31 2015 | 2014 |
| --- | ---: | ---: |
| Net income | $90.8 | $90.1 |
| Interest expense, net | 19.2 | 20.8 |
| Income tax provision | 47.1 | 50.0 |
| Depreciation, amortization, and depletion | 93.4 | 83.4 |
| EBITDA | $250.5 | $244.3 |
| Special items: |  |  |
| DeRidder restructuring | $1.3 | $4.0 |
| Integration-related and other costs | 3.5 | 4.1 |
| Class action lawsuit settlement | — | 17.6 |
| EBITDA excluding special items | $255.3 | $270.0 |

20

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

| Packaging | Three Months Ended March 31 2015 | 2014 |
| --- | ---: | ---: |
| Segment income | $141.1 | $170.7 |
| Depreciation, amortization, and depletion | 78.7 | 69.6 |
| EBITDA | 219.8 | 240.3 |
| DeRidder restructuring | 1.3 | 4.0 |
| Integration-related and other costs | 0.9 | — |
| EBITDA excluding special items | **$222.0** | **$244.3** |
| **Paper** |  |  |
| Segment income | $35.6 | $27.7 |
| Depreciation, amortization, and depletion | 13.7 | 12.0 |
| EBITDA | 49.3 | 39.7 |
| Integration-related and other costs | — | 0.7 |
| EBITDA excluding special items | **$49.3** | **$40.4** |
| **Corporate and Other** |  |  |
| Segment loss | $(19.6) | $(37.5) |
| Depreciation, amortization, and depletion | 1.0 | 1.8 |
| EBITDA | (18.6) | (35.7) |
| Integration-related and other costs | 2.6 | 3.4 |
| Class action lawsuit settlement | — | 17.6 |
| EBITDA excluding special items | **$(16.0)** | **$(14.7)** |
| **EBITDA** | **$250.5** | **$244.3** |
| **EBITDA excluding special items** | **$255.3** | **$270.0** |

### 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 March 31, 2015, we had no derivative instruments outstanding. For a discussion of derivatives and hedging activities, see Note 13, Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our 2014 Annual Report on Form 10-K.

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 March 31, 2015.

### 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 2014 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 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 pensions and other postretirement benefits, goodwill and intangible assets, long-lived asset impairment, 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 2014 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 three months of 2015.

### 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, 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; 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, 2014.

## 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, 1,622 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 March 31, 2015. 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 March 31, 2015.

During the quarter ended March 31, 2015, 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, 172 characters.

There have been no material changes to the risk factors disclosed in "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014.

Filed May 8, 2015.
Source: SEC EDGAR, the filing index for accession 0000075677-15-000011. Last ingested by Listed: Nov 12, 2026, 19:57 ET. No prices; not investment advice.