# Packaging Corp of America: Form 10-Q for the period ended Sep 30, 2015

- Company: [Packaging Corp of America](/companies/pkg.md) (CIK 75677)
- Form: 10-Q
- Filed: 2015-11-06
- Accepted by EDGAR: Nov 6, 2015, 12:31 ET
- Period: 2015-09-30
- Accession: 0000075677-15-000024
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/75677/000007567715000024/pkg0930201510q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/75677/000007567715000024/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-07-01 to 2015-09-30 | $1.47bn | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2015-01-01 to 2015-09-30 | $4.35bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2015-07-01 to 2015-09-30 | $1.14bn | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2015-01-01 to 2015-09-30 | $3.43bn | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2015-07-01 to 2015-09-30 | $328.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2015-01-01 to 2015-09-30 | $922.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2015-07-01 to 2015-09-30 | $112.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2015-01-01 to 2015-09-30 | $345.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2015-07-01 to 2015-09-30 | $219.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2015-01-01 to 2015-09-30 | $574.1m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2015-07-01 to 2015-09-30 | $69.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2015-01-01 to 2015-09-30 | $178.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-07-01 to 2015-09-30 | $127.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2015-01-01 to 2015-09-30 | $332.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-07-01 to 2015-09-30 | $1.31 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2015-01-01 to 2015-09-30 | $3.39 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-07-01 to 2015-09-30 | $1.31 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2015-01-01 to 2015-09-30 | $3.39 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-07-01 to 2015-09-30 | 96,600,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2015-01-01 to 2015-09-30 | 96,900,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2015-01-01 to 2015-09-30 | $542.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2015-01-01 to 2015-09-30 | $217.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2015-01-01 to 2015-09-30 | $147.3m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2015-01-01 to 2015-09-30 | $98.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2015-09-30 | $186.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-09-30 | $1.68bn | us-gaap:AssetsCurrent |
| Total assets | at 2015-09-30 | $5.42bn | us-gaap:Assets |
| Current liabilities | at 2015-09-30 | $628.4m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2015-09-30 | $2.32bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2015-09-30 | $6.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2015-09-30 | $1.61bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,425 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 corrugated packaging products in the United States 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 Item 2 is intended to supplement, and should be read in conjunction with, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our 2014 Annual Report on Form 10-K.

### Executive Summary

We reported $127.8 million of net income, or $1.31 per diluted share during third quarter 2015, compared with $104.4 million, or $1.06 per diluted share during the same period in 2014. Excluding the special items discussed below, we recorded $122.8 million of net income, or $1.26 per diluted share during third quarter 2015, compared with $123.9 million, or $1.26 per diluted share in 2014. The flat year-over-year earnings, excluding special items, related to improved volumes in the packaging segment after completing the restructure of our DeRidder, Louisiana mill in first quarter 2015, stable corrugated products pricing, lower costs for chemicals, energy, and repairs, and a lower tax rate. These items were offset by lower paper segment prices and changes in mix, lower export containerboard prices, and higher fiber costs.

During the first nine months of 2015 we reported $332.6 million, or $3.39 per diluted share, compared with $294.1 million of net income, or $2.99 per diluted share in the first nine months of 2014. Excluding special items, we recorded $338.1 million of net income, or $3.45 per diluted share during the first nine months of 2015, compared with $344.2 million, or $3.50 per diluted share in the first nine months of 2014. Excluding special items, lower earnings were primarily attributable to lower white paper prices and mix and lower export containerboard prices, which were only partially offset by improved sales volumes and lower energy, chemical, and repair costs which are discussed further in “Operating Results” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In third quarter, we successfully completed an outage on the No. 3 paper machine at our DeRidder mill to install six additional dryers. The machine is now capable of achieving full design capacity of 1,000 tons of production per day, which puts us in position to further optimize our containerboard platform and improve our manufacturing and freight costs. It also allows us to respond quickly and efficiently to future growth in our Packaging segment and service our customers’ needs in a timely manner.

In our Paper segment, we installed and started up a 53 megawatt turbine generator to replace four older units at our International Falls, Minnesota mill. With the new turbine generator, the mill is now capable of producing 70% of its electrical power requirements compared to 38% previously.

#### Special Items and Earnings per Diluted Share, Excluding Special Items

The three months ended September 30, 2015, included $8.1 million of pre-tax income ($9.9 million non-cash income and $1.8 million cash expense) for special items, compared with $30.5 million of pre-tax expense ($21.6 million non-cash and $8.9 million cash) for special items during the same period in 2014. The three months ended September 30, 2015, included a $6.7 million gain on the sale of our St. Helens paper mill site, $3.8 million of income for services and equipment received for vendor settlements at our DeRidder mill, and $2.4 of Boise acquisition integration-related and other costs. 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, 2015 and 2014, included $8.3 million ($0.1 million non-cash income and $8.4 million cash expense) and $78.9 million ($43.6 million non-cash and $35.3 million cash) of pre-tax expense for special items, respectively. The nine months ended September 30, 2015, included $9.6 million of Boise acquisition integration-related and other costs, $5.4 million of net charges related to the DeRidder mill restructuring, and a $6.7 million gain on the sale of our St. Helens paper mill site. 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, 2015 and 2014, were as follows:

|  | Three Months Ended September 30 2015 | 2014 | Nine Months Ended September 30 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Earnings per diluted share, as reported | $1.31 | $1.06 | $3.39 | $2.99 |
| Special items (a): |  |  |  |  |
| DeRidder restructuring | (0.02) | 0.17 | 0.04 | 0.31 |
| Integration-related and other costs | 0.02 | 0.03 | 0.06 | 0.09 |
| Sale of St. Helens paper mill site | (0.05) | — | (0.04) | — |
| Class action lawsuit settlement | — | — | — | 0.11 |
| Total special items | (0.05) | 0.20 | 0.06 | 0.51 |
| Earnings per diluted share, excluding special items | $1.26 | $1.26 | $3.45 | $3.50 |

(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 0.9% during third quarter 2015, compared with the same quarter in 2014, with the same number of workdays in both periods. Reported industry containerboard production was 1.5% higher than third quarter 2014, and reported containerboard export shipments were down 0.5%. Reported industry containerboard inventory at the end of third quarter 2015 was up 326,000 tons, compared with December 31, 2014 levels.

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. Trade publications reported that uncoated freesheet paper shipments were down 0.4% in third quarter 2015, compared with the same quarter in 2014. Trade publication average prices for our most common office papers decreased $35/ton, or 3.4%, in third quarter 2015, compared with third quarter 2014. Reported industry uncoated freesheet inventory at the end of third quarter 2015 was up 70,000 tons, compared with December 31, 2014 levels.

### Outlook

Looking ahead to the fourth quarter of 2015, we expect seasonally lower volumes for containerboard and corrugated products as well as a seasonally less rich mix in corrugated products, compared to the third quarter. In addition, we expect seasonally lower volumes and a less rich mix in white papers. With colder weather, wood and fuel costs are also expected to be seasonally higher. Maintenance outage costs are expected to be higher in the fourth quarter due to the planned 24-day outage at our Jackson, Alabama white papers mill for a major rebuild of the recovery boiler which will reduce production and increase costs. Considering these items, we expect fourth quarter earnings, excluding special items, to be lower than our third quarter earnings.

### Results of Operations

### Three Months Ended September 30, 2015, compared with Three Months Ended September 30, 2014

The historical results of operations of PCA for the three months ended September 30, 2015 and 2014, are set forth below (dollars in millions):

|  | Three Months Ended September 30 2015 | 2014 | Change |
| --- | ---: | ---: | ---: |
| Packaging | $1,144.4 | $1,175.7 | $(31.3) |
| Paper | 291.9 | 312.5 | (20.6) |
| Corporate and Other | 34.5 | 30.7 | 3.8 |
| Net sales | $1,470.8 | $1,518.9 | $(48.1) |
| Packaging | $198.2 | $164.7 | $33.5 |
| Paper | 39.5 | 43.0 | (3.5) |
| Corporate and Other | (18.3) | (19.3) | 1.0 |
| Income from operations | $219.4 | $188.4 | $31.0 |
| Interest expense, net | (21.7) | (23.1) | 1.4 |
| Income before taxes | 197.7 | 165.3 | 32.4 |
| Income tax provision | (69.9) | (60.9) | (9.0) |
| Net income | $127.8 | $104.4 | $23.4 |
| Non-GAAP Measures |  |  |  |
| Net income excluding special items (a) | $122.8 | $123.9 | $(1.1) |
| EBITDA (a) | 307.1 | 292.2 | 14.9 |
| EBITDA excluding special items (a) | 299.0 | 303.0 | (4.0) |
| Packaging EBITDA (a) | 271.7 | 253.5 | 18.2 |
| Packaging EBITDA excluding special items (a) | 267.9 | 262.3 | 5.6 |
| Paper EBITDA (a) | 52.8 | 55.9 | (3.1) |
| Paper EBITDA excluding special items (a) | 46.1 | 55.9 | (9.8) |

(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 $48.1 million, or 3%, to $1,470.8 million during the three months ended September 30, 2015, compared with $1,518.9 million during the same period in 2014.

*Packaging.* Sales decreased $31.3 million, to $1,144.4 million, compared with $1,175.7 million in third quarter 2014. Sales decreased $35.6 million due to the exit from our newsprint business in third quarter 2014 and the April 1, 2015, sale of our Hexacomb operations in Mexico and Europe. This decrease was partially offset by increased sales volumes in our remaining corrugated products business and external containerboard sales. In third quarter 2015, our containerboard production was 933,000 tons, up 75,000 tons compared with the third quarter 2014 including 70,000 tons from the converted No. 3 machine at our DeRidder, Louisiana, mill. With the No. 3 machine production at DeRidder, our outside purchases of containerboard decreased by 45,000 tons in third quarter 2015, compared with the same period in 2014. Our domestic containerboard pricing in third quarter 2015 was comparable with the same quarter last year, while our export containerboard pricing decreased.

*Paper.* Sales during the three months ended September 30, 2015, decreased $20.6 million, or 7%, to $291.9 million, compared with $312.5 million in third quarter 2014. Sales decreased due to lower sales prices and changes in mix. Office paper shipments make up approximately 70% of our total paper segment shipments. The industry price index for our most common office papers decreased $35 per ton in third quarter 2015, compared with the same quarter in 2014. Our office paper shipments decreased 2,000 tons, printing and converting shipments increased 3,000 tons, and pressure sensitive paper shipments decreased 4,000 tons in third quarter 2015, compared with third quarter 2014.

### Gross Profit

Gross profit increased $8.0 million, or 2%, during the three months ended September 30, 2015, compared with the same period in 2014. There were no special items that affected gross profit in the third quarter 2015; however, in third quarter 2014, gross profit included $21.7 million of special items, most of which related to incremental depreciation expense related to changing the estimated useful lives of assets in connection with our DeRidder mill restructuring. Gross profit excluding special items decreased $13.7 million in third quarter 2015, compared with the same quarter in 2014. The decrease was primarily due to lower white paper prices and mix, lower export containerboard prices, and higher fiber costs, partially offset by higher packaging sales volume and lower energy, chemical, and repair costs.

### Selling, General, and Administrative Expenses

Selling, general, and administrative expenses decreased $6.9 million, or 6%, during the three months ended September 30, 2015, compared with the same period in 2014. The decrease was due primarily to lower administrative employee costs from headcount reductions related to the Boise integration.

### Other Income (Expense), Net

Other income (expense), net, during the three months ended September 30, 2015, was income of $3.8 million, compared with expense of $12.3 million during the three months ended September 30, 2014. Third quarter 2015 included a $6.7 million gain on the sale of our St. Helens paper mill site, $3.8 million of income for services and equipment received for vendor settlements related to the DeRidder mill restructuring, offset partially by $5.0 million loss on disposals of assets and $2.4 million of integration related and other costs. Third quarter 2014 included $4.3 million of DeRidder restructuring charges, $3.0 million of integration-related and other costs, and $2.9 million loss on disposals of assets. We discuss these items in more detail in Note 4, Other Income (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 $31.0 million, or 16%, during the three months ended September 30, 2015, compared with the same period in 2014. Third quarter 2015 included $8.1 million of income from special items, compared with $29.0 million of expense from special items in third quarter 2014. The three months ended September 30, 2015, included a $6.7 million gain on the sale of our St. Helens paper mill site, $3.8 million of income for services and equipment received for vendor settlements at our DeRidder mill, and $2.4 million of Boise acquisition integration-related and other costs. The three months ended September 30, 2014, included $26.0 million of expenses related to the DeRidder mill restructuring and $3.0 million of Boise acquisition integration-related and other costs. Excluding special items, income from operations decreased $6.1 million during the three months ended September 30, 2015, compared with the same period in 2014. The decrease was primarily due to lower white paper prices and mix, lower export containerboard prices, and higher fiber costs, partially offset by higher packaging sales volume and lower energy, chemical, repair, and administrative employee costs.

*Packaging.* Segment income from operations increased $33.5 million, or 20%, to $198.2 million, compared with $164.7 million during the three months ended September 30, 2014. Excluding special items, which included $3.8 million of income for services and equipment received for vendor settlements at our DeRidder mill in third quarter 2015 and $26.0 million of DeRidder restructuring charges and $1.0 million of integration-related and other costs in third quarter 2014, segment income increased $2.7 million. The increase in third quarter 2015 related primarily to higher sales volume ($10.0 million) and lower energy costs ($4.0 million), offset partially by lower export containerboard prices ($3.8 million), higher depreciation ($2.4 million), freight ($2.3 million), wood ($1.4 million), and labor and benefit ($0.9 million) costs.

*Paper.* Segment income from operations decreased $3.5 million, or 8%, to $39.5 million, compared with $43.0 million during the three months ended September 30, 2014. Excluding the $6.7 million gain on the sale of the St. Helens paper mill site, segment income from operations decreased $10.2 million. The decrease in Paper segment income from operations is due primarily to lower white paper prices and changes in mix ($19.6 million) partially offset by lower chemical ($3.2 million), repair and maintenance ($2.7 million), freight ($1.7 million), and labor and benefit ($1.4 million) costs.

### Interest Expense, Net, and Income Taxes

Interest expense, net, was $21.7 million during the three months ended September 30, 2015, compared with $23.1 million during the three months ended September 30, 2014. Third quarter 2014 included the write-off of $1.5 million of deferred financing costs related to the debt refinancing completed in September 2014.

During the three months ended September 30, 2015, we recorded $69.9 million of income tax expense, compared with $60.9 million of expense during the three months ended September 30, 2014. The effective tax rate for the three months ended September 30, 2015 and 2014, was 35.4% and 36.8%, respectively. The decrease in our effective tax rate in third quarter 2015 was primarily due to an increased domestic manufacturing deduction resulting from less tax net operating losses remaining from the acquisition of Boise Inc.

### Nine Months Ended September 30, 2015, compared with Nine Months Ended September 30, 2014

The historical results of operations of PCA for the nine months ended September 30, 2015 and 2014, are set forth below (dollars in millions):

|  | Nine Months Ended September 30 2015 | 2014 | Change |
| --- | ---: | ---: | ---: |
| Packaging | $3,385.9 | $3,418.3 | $(32.4) |
| Paper | 870.3 | 917.0 | (46.7) |
| Corporate and other and eliminations | 94.6 | 83.4 | 11.2 |
| Net sales | $4,350.8 | $4,418.7 | $(67.9) |
| Packaging | $533.9 | $501.8 | $32.1 |
| Paper | 98.6 | 104.3 | (5.7) |
| Corporate and other and eliminations | (58.4) | (76.6) | 18.2 |
| Income from operations | $574.1 | $529.5 | $44.6 |
| Interest expense, net | (63.2) | (65.3) | 2.1 |
| Income before taxes | 510.9 | 464.2 | 46.7 |
| Income tax provision | (178.3) | (170.1) | (8.2) |
| Net income | $332.6 | $294.1 | $38.5 |
| Non-GAAP Measures |  |  |  |
| Net income excluding special items (a) | $338.1 | $344.2 | $(6.1) |
| EBITDA (a) | 842.0 | 818.3 | 23.7 |
| EBITDA excluding special items (a) | 841.3 | 860.3 | (19.0) |
| Packaging EBITDA (a) | 758.1 | 747.5 | 10.6 |
| Packaging EBITDA excluding special items (a) | 757.2 | 765.3 | (8.1) |
| Paper EBITDA (a) | 139.2 | 141.5 | (2.3) |
| Paper EBITDA excluding special items (a) | 132.5 | 141.1 | (8.6) |

(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 $67.9 million, or 2%, to $4,350.8 million during the nine months ended September 30, 2015, compared with $4,418.7 million during the same period in 2014.

*Packaging.* Sales decreased $32.4 million to $3,385.9 million in the nine months ended September 30, 2015, compared with $3,418.3 million during the nine months ended September 30, 2014. Sales decreased $102.8 million due to the exit from our newsprint business in third quarter 2014 and the April 1, 2015, sale of our Hexacomb operations in Mexico and Europe. This decrease was partially offset by increased sales volumes in our remaining corrugated products business and external containerboard sales. In the first nine months of 2015, our containerboard production was 2,753,000 tons, up 228,000 tons compared with the first nine months of 2014 including 220,000 tons from the converted No. 3 machine at our DeRidder, Louisiana, mill. With the No. 3 machine production at DeRidder, our outside purchases of containerboard decreased by 141,000 tons in the first nine months of 2015, compared with the same period in 2014.

*Paper.* Sales during the nine months ended September 30, 2015, decreased $46.7 million, or 5%, to $870.3 million, compared with $917.0 million during the nine months ended September 30, 2014. Sales decreased due to lower sales prices and changes in mix. Office paper shipments make up approximately 70% of our total paper segment shipments. The industry price index for our most common office papers decreased $25 per ton in the first nine months 2015, compared with the same period in 2014. Our office paper shipments increased 1,000 tons, printing and converting shipments increased 15,000 tons, and pressure sensitive paper shipments decreased 23,000 tons in the first nine months of 2015, compared with the first nine months of 2014.

### Gross Profit

Gross profit decreased $9.6 million, or 1%, during the nine months ended September 30, 2015, compared with the same period in 2014. In the first nine months of 2015 and 2014, gross profit included $9.0 million and $42.1 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 $42.7 million in the first nine months of 2015, compared with the first nine months of 2014. The decrease was primarily due to lower white paper prices and changes in mix, higher labor and benefit costs, higher annual outage costs, lower export containerboard prices, and higher fiber costs, partially offset by higher packaging sales volume and lower energy, chemical, and repair costs.

### Selling, General, and Administrative Expenses

Selling, general, and administrative expenses decreased $13.1 million, during the nine months ended September 30, 2015, compared with the same period in 2014. The decrease was due primarily to lower administrative employee costs from headcount reductions related to the Boise integration.

### Other Income (Expense), Net

Other income (expense), net, during the nine months ended September 30, 2015, was expense of $2.9 million, compared with expense of $44.0 million during the nine months ended September 30, 2014. The first nine months of 2015 included $9.0 million of Boise integration-related and other costs and $9.7 million of asset disposal expense, partially offset by a $6.7 million gain on the sale of our St. Helens paper mill site, $3.6 million of income related to the DeRidder restructuring, and $3.6 million of income from a refundable state tax credit received related to our investments and the jobs retained at our DeRidder mill, among other miscellaneous income and expense items. The first nine months of 2014 included $17.6 million of costs in the Corporate and Other segment for the settlement of the Kleen Products LLC v Packaging Corp. of America et al class action lawsuit, $12.0 million of Boise integration-related and other costs, $6.9 million of asset disposal expense, and $5.7 million of DeRidder restructuring charges. We discuss these items in more detail in Note 4, Other Income (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 $44.6 million, or 8%, during the nine months ended September 30, 2015, compared with the same period in 2014. The first nine months of 2015 included $8.3 million of net expense from special items, compared with $77.4 million of net expense from special items in the first nine months 2014. Special items in the first nine months of 2015 included $9.6 million of Boise integration-related and other costs and $5.4 million of charges related to restructuring the DeRidder mill, partially offset by a $6.7 million gain on the sale of our St. Helens paper mill site. The first nine months of 2014 special items included $47.8 million related to the DeRidder restructuring, $17.6 million of costs for the settlement of a class action lawsuit, and $12.0 million of Boise integration-related and other costs. Excluding special items, income from operations decreased $24.5 million during the first nine months of 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 decrease in employee administrative costs and a $3.6 million state tax credit related to investments and jobs retained at our DeRidder mill.

*Packaging.* Segment income from operations increased $32.1 million, or 6%, to $533.9 million, compared with $501.8 million during the nine months ended September 30, 2014. Excluding special items, which included $5.4 million of DeRidder restructuring charges and $2.7 million of Boise integration-related and other costs in the first nine months of 2015 and $47.8 million of DeRidder restructuring charges and $5.4 million of Boise integration-related and other costs in the first nine months of 2014, segment income decreased $13.0 million. The decrease in the first nine months of 2015 related primarily to higher labor and benefit costs ($20.9 million), higher annual outage costs due mostly to the first quarter extended annual outage at our DeRidder mill ($13.3 million), lower export containerboard prices ($10.2 million), increased freight ($8.7 million), wood ($6.8 million), and depreciation ($5.7 million) costs, partially offset by higher volumes ($33.3 million) and lower energy costs ($18.0 million).

*Paper.* Segment income from operations decreased $5.7 million, or 5%, to $98.6 million, compared with $104.3 million during the nine months ended September 30, 2014. Excluding the $6.7 million gain on the sale of the St. Helens paper mill site in the first nine months of 2015 and $0.4 million of Boise integration-related and other income in the first nine months of 2014, segment income from operations decreased $12.0 million. The decrease in Paper segment income from operations is due primarily to lower white paper prices and mix ($42.9 million), partially offset by lower chemical ($9.6 million), freight ($8.5 million), energy ($6.9 million), and pulp ($2.2 million) costs, and other costs which were individually insignificant.

### Interest Expense, Net, and Income Taxes

Interest expense, net, was $63.2 million during the nine months ended September 30, 2015, compared with $65.3 million during the nine months ended September 30, 2014. The nine months ended September 30, 2014, included the write-off of $1.5 million of deferred financing costs related to the debt refinancing completed in September 2014.

During the nine months ended September 30, 2015, we recorded $178.3 million of income tax expense, compared with $170.1 million of expense during the nine months ended September 30, 2014. The effective tax rate for the nine months ended September 30, 2015 and 2014, was 34.9% and 36.6%, respectively. The decrease in our effective tax rate in the first nine months of 2015 was primarily due to an increased domestic manufacturing deduction resulting from less tax net operating losses remaining from the acquisition of Boise Inc.

### 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, 2015, we had $186.9 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), repurchases of common stock, 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): | Nine Months Ended September 30 2015 | 2014 | Change |
| --- | ---: | ---: | ---: |
| Operating activities | $542.0 | $556.7 | $(14.7) |
| Investing activities | (202.8) | (283.6) | 80.8 |
| Financing activities | (277.2) | (309.8) | 32.6 |
| Net increase (decrease) in cash and cash equivalents | $62.0 | $(36.7) | $98.7 |

### Operating Activities

During the nine months ended September 30, 2015, net cash provided by operating activities was $542.0 million, compared with $556.7 million in the same period in 2014, a decrease of $14.7 million. The decrease was primarily due to the following: (a) higher taxes payable and required cash tax payments resulting from less net operating loss utilization, (b) a smaller increase in accrued liabilities due primarily to lower compensation and benefits accruals, and (c) a larger increase in inventories primarily in our Paper segment in anticipation of our fourth quarter extended recovery boiler outage scheduled at our Jackson, Alabama mill. These decreases were offset partially by (a) increased income from operations and (b) a smaller increase in accounts receivable related to differences in the timing of collection of receivables. 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, 2015, decreased $80.8 million, to $202.8 million, compared with $283.6 million during the same period in 2014. We spent $217.9 million for capital investments during the nine months ended September 30, 2015, compared with $254.9 million during the same period in 2014. We received $23.0 million of cash proceeds for the sale of our Hexacomb corrugated manufacturing operations in Mexico and Europe during the first nine months of 2015. In the first nine months of 2014, we paid $20.3 million to acquire the assets of Crockett Packaging, a corrugated products manufacturer.

We expect capital investments to be between $300 million and $315 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 $13 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 nine months ended September 30, 2015, we used $277.2 million for financing activities, compared with $309.8 million during the same period in 2014. The decrease in cash used for financing activities primarily relates to a decrease in debt principal payments, partially offset by higher dividends payments and share repurchases. In the first nine months of 2015, we made $30.7 million of principal payments on long-term debt and capital leases, compared with $191.7 million of payments, net of proceeds received, during the first nine months of 2014. We paid $147.3 million of dividends during the first nine months of 2015, compared with the $118.0 million of dividends paid during the first nine months of 2014. On February 26, 2015, PCA's Board of Directors increased the regular quarterly cash dividend to $0.55 per share from the previous $0.40 per share dividend, beginning with the dividend paid on April 15, 2015. During the nine months ended September 30, 2015, we paid $98.1 million to repurchase 1,412,394 shares of common stock, and we withheld shares from vesting equity awards to cover employee tax liabilities of $7.4 million, compared with $12.1 million in first nine months of 2014. Proceeds from the exercise of stock options and tax benefits from share-based awards contributed $5.6 million in the first nine months of 2015, compared with $15.5 million in the same period in 2014.

On July 21, 2015, PCA announced that its Board of Directors authorized the repurchase of an additional $150 million of the company’s outstanding common stock. Together with remaining authority under previously announced programs, at the time of the announcement the company was authorized to repurchase approximately $205 million of additional shares. Repurchases may be made from time to time in open market or privately negotiated transactions in accordance with applicable securities regulations. The timing and amount of repurchases will be determined by the company in its discretion based on factors such as PCA’s stock price and market and business conditions.

For more information about our debt, see Note 10, 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 and nine months ended September 30, 2015 and 2014, follow (dollars in millions):

|  | Three Months Ended September 30 2015 Income from Operations | Net Income | 2014 Income from Operations | Net Income |
| --- | ---: | ---: | ---: | ---: |
| As reported in accordance with GAAP | $219.4 | $127.8 | $188.4 | $104.4 |
| Special items: |  |  |  |  |
| Integration-related and other costs (a) | 2.4 | 1.7 | 3.0 | 2.9 |
| DeRidder restructuring (b) | (3.8) | (2.3) | 26.0 | 16.6 |
| Sale of St. Helens paper mill site (c) | (6.7) | (4.4) | — | — |
| Total special items | (8.1) | (5.0) | 29.0 | 19.5 |
| Excluding special items | $211.3 | $122.8 | $217.4 | $123.9 |

24

|  | Nine Months Ended September 30 2015 Income from Operations | Net Income | 2014 Income from Operations | Net Income |
| --- | ---: | ---: | ---: | ---: |
| As reported in accordance with GAAP | $574.1 | $332.6 | $529.5 | $294.1 |
| Special items: |  |  |  |  |
| Integration-related and other costs (a) | 9.6 | 6.3 | 12.0 | 8.5 |
| DeRidder restructuring (b) | 5.4 | 3.6 | 47.8 | 30.4 |
| Sale of St. Helens paper mill site (c) | (6.7) | (4.4) | — | — |
| Class action lawsuit settlement (d) | — | — | 17.6 | 11.2 |
| Total special items | 8.3 | 5.5 | 77.4 | 50.1 |
| Excluding special items | $582.4 | $338.1 | $606.9 | $344.2 |

(a) All periods presented include Boise acquisition integration-related and other costs, mostly recorded in "Other income (expense), net". These costs primarily relate to professional fees, severance, retention, relocation, travel, and other integration-related costs.

(b) All periods presented include amounts from restructuring activities at our mill in DeRidder, Louisiana, including costs related to the conversion of the No. 3 newsprint machine to containerboard, our exit from the newsprint business, and other improvements. The restructuring charges primarily related to accelerated depreciation and were mostly recorded in "Cost of sales". We completed the restructuring activities in first quarter 2015, but we recorded $3.8 million of income for services and equipment received for vendor settlements during the three months ended September 30, 2015. These amounts were recorded in "Other income (expense), net".

(c) In September 2015, we sold the remaining land, buildings, and equipment at our paper mill site in St. Helens, Oregon, where we ceased paper production in December 2012. We recorded a $6.7 million gain on the sale in "Other income (expense), net". In connection with the sale, we eliminated $11.2 million of asset retirement obligations that were assumed by the buyer.

(d) 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 recorded in "Other income (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 September 30 2015 | 2014 | Nine Months Ended September 30 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $127.8 | $104.4 | $332.6 | $294.1 |
| Interest expense, net | 21.7 | 23.1 | 63.2 | 65.3 |
| Income tax provision | 69.9 | 60.9 | 178.3 | 170.1 |
| Depreciation, amortization, and depletion | 87.7 | 103.8 | 267.9 | 288.8 |
| EBITDA | $307.1 | $292.2 | $842.0 | $818.3 |
| Special items: |  |  |  |  |
| Integration-related and other costs | $2.4 | $3.0 | $9.6 | $12.0 |
| DeRidder restructuring | (3.8) | 7.8 | (3.6) | 12.4 |
| Sale of St. Helens paper mill site | $(6.7) | $— | $(6.7) | $— |
| Class action lawsuit settlement | — | — | — | 17.6 |
| EBITDA excluding special items | $299.0 | $303.0 | $841.3 | $860.3 |

25

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

| Packaging | Three Months Ended September 30 2015 | 2014 | Nine Months Ended September 30 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Segment income | $198.2 | $164.7 | $533.9 | $501.8 |
| Depreciation, amortization, and depletion | 73.5 | 88.8 | 224.2 | 245.7 |
| EBITDA | 271.7 | 253.5 | 758.1 | 747.5 |
| DeRidder restructuring | (3.8) | 7.8 | (3.6) | 12.4 |
| Integration-related and other costs | — | 1.0 | 2.7 | 5.4 |
| EBITDA excluding special items | **$267.9** | **$262.3** | **$757.2** | **$765.3** |
| **Paper** |  |  |  |  |
| Segment income | $39.5 | $43.0 | $98.6 | $104.3 |
| Depreciation, amortization, and depletion | 13.3 | 12.9 | 40.6 | 37.2 |
| EBITDA | 52.8 | 55.9 | 139.2 | 141.5 |
| Integration-related and other costs | — | — | — | (0.4) |
| Sale of St. Helens paper mill site | (6.7) | — | (6.7) | — |
| EBITDA excluding special items | **$46.1** | **$55.9** | **$132.5** | **$141.1** |
| **Corporate and Other** |  |  |  |  |
| Segment loss | $(18.3) | $(19.3) | $(58.4) | $(76.6) |
| Depreciation, amortization, and depletion | 0.9 | 2.1 | 3.1 | 5.9 |
| EBITDA | (17.4) | (17.2) | (55.3) | (70.7) |
| Integration-related and other costs | 2.4 | 2.0 | 6.9 | 7.0 |
| Class action lawsuit settlement | — | — | — | 17.6 |
| EBITDA excluding special items | **$(15.0)** | **$(15.2)** | **$(48.4)** | **$(46.1)** |
| **EBITDA** | **$307.1** | **$292.2** | **$842.0** | **$818.3** |
| **EBITDA excluding special items** | **$299.0** | **$303.0** | **$841.3** | **$860.3** |

### 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, 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 approximately $7 million annually.

### Off-Balance-Sheet Activities

The Company does not have any off-balance sheet arrangements as of September 30, 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 nine 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, 1,634 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, 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 September 30, 2015.

During the quarter ended September 30, 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 Nov 6, 2015.
Source: SEC EDGAR, the filing index for accession 0000075677-15-000024. Last ingested by Listed: Nov 12, 2026, 19:57 ET. No prices; not investment advice.