# Packaging Corp of America: Form 10-Q for the period ended Sep 30, 2012

- Company: [Packaging Corp of America](/companies/pkg.md) (CIK 75677)
- Form: 10-Q
- Filed: 2012-11-06
- Accepted by EDGAR: Nov 6, 2012, 15:56 ET
- Period: 2012-09-30
- Accession: 0001193125-12-454441
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/75677/000119312512454441/d404242d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/75677/000119312512454441/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-07-01 to 2012-09-30 | $723.5m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2012-01-01 to 2012-09-30 | $2.11bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2012-07-01 to 2012-09-30 | $560.9m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2012-01-01 to 2012-09-30 | $1.64bn | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2012-07-01 to 2012-09-30 | $162.6m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2012-01-01 to 2012-09-30 | $465.7m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2012-07-01 to 2012-09-30 | $51.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2012-01-01 to 2012-09-30 | $156.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-07-01 to 2012-09-30 | $92.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2012-01-01 to 2012-09-30 | $345.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2012-07-01 to 2012-09-30 | $21.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2012-01-01 to 2012-09-30 | $188.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-07-01 to 2012-09-30 | $39.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2012-01-01 to 2012-09-30 | $102.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-07-01 to 2012-09-30 | $0.41 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2012-01-01 to 2012-09-30 | $1.05 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-07-01 to 2012-09-30 | $0.41 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2012-01-01 to 2012-09-30 | $1.07 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-07-01 to 2012-09-30 | 97,349,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2012-01-01 to 2012-09-30 | 97,520,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2012-01-01 to 2012-09-30 | $251.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2012-01-01 to 2012-09-30 | $94.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2012-01-01 to 2012-09-30 | $68.8m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2012-01-01 to 2012-09-30 | $41.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2012-09-30 | $140.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-09-30 | $924.8m | us-gaap:AssetsCurrent |
| Total assets | at 2012-09-30 | $2.46bn | us-gaap:Assets |
| Current liabilities | at 2012-09-30 | $307.3m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2012-09-30 | $782.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2012-09-30 | $15.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2012-09-30 | $940.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 37,286 characters.

### Overview

Packaging Corporation of America, or PCA, is the fourth largest producer of containerboard and corrugated products in the United States, based on production capacity. We produce a wide variety of corrugated products ranging from basic corrugated shipping containers to specialized packaging, such as wax-coated boxes for the agriculture industry. We also have multi-color printing capabilities to make high-impact graphics boxes and displays that offer our customers more attractive packaging. Our operating facilities and customers are located primarily in the United States.

In analyzing our operating performance, we focus on the following factors that affect our business and are important to consider when reviewing our financial and operating results:

- containerboard and corrugated products demand;
- corrugated products and containerboard pricing and mix;
- cost trends and volatility for our major costs, including wood and recycled fiber, purchased fuels, electricity, labor and fringe benefits, and transportation costs; and
- cash flow from operations and capital expenditures.

The cost to manufacture containerboard is dependent, in large part, on the costs of wood fiber, recycled fiber, purchased fuels, electricity and labor and fringe benefits. Excluding the cost of containerboard, labor and benefits costs make up the largest component of corrugated products’ manufactured costs.

The market for containerboard is generally subject to changes in the U.S. economy. Historically, supply and demand, as well as industry-wide inventory levels, have influenced prices of containerboard and corrugated products. In addition to U.S. shipments, approximately 10% of domestically produced containerboard has been exported annually for use in other countries.

### Industry Conditions

As reported by the Fibre Box Association, industry-wide shipments of corrugated products decreased 1.4% for the three months ended September 30, 2012 compared to the same period in 2011. Reported industry containerboard production for the three months ended September 30, 2012 decreased 1.3% compared to the same period in 2011, and reported industry containerboard inventories at the end of the third quarter of 2012 were approximately 2.1 million tons. Reported industry shipments to export markets increased 3.4% for the third quarter of 2012 compared to the third quarter of 2011. Published prices for containerboard reported in industry publications increased $50 per ton in September 2012.

### PCA Operations Summary

During the third quarter of 2012, we produced approximately 670,000 tons of containerboard at our mills and sold about 8.6 billion square feet (“bsf”) of corrugated products. Our corrugated products shipments-per-workday for the third quarter of 2012 were up 5.7% compared to the third quarter of 2011. Containerboard volume sold to domestic and export customers for the three months ended September 30, 2012 increased 6.6% compared to the same period in 2011.

Published recycled fiber prices for old corrugated containers (OCC) reported in industry publications were down about 40% compared to the third quarter 2011 average price. Our energy, chemicals and maintenance costs in the third quarter of 2012 were lower than the comparable period in 2011 largely due to the impact of our recently completed major energy projects at our Counce, Tennessee and Valdosta, Georgia linerboard mills. Wood fiber costs increased slightly compared to both second quarter 2012 and third quarter 2011. Transportation costs were essentially unchanged compared to last year’s third quarter.

As disclosed in Note 14 to the condensed consolidated financial statements, the Company amended its 2009 federal income tax return on February 3, 2012, to reduce the gallons claimed as cellulosic biofuel producer credits previously recorded as a tax benefit and to increase the gallons claimed as alternative fuel mixture credits previously recorded as income. The total number of gallons of black liquor remained the same. The increase in gallons claimed as alternative fuel mixture credits resulted in income of $95.5 million recorded in “Alternative fuel mixture credits,” and the decrease in gallons claimed as cellulosic biofuel producer credits resulted in a decrease in tax benefits of $118.5 million recorded in “Provision for income taxes.” The net impact of these changes resulted in a non-cash, after-tax charge of $23.0 million in the first quarter of 2012.

On June 26, 2012, we issued $400.0 million of new 3.90% senior notes due 2022 in a registered public offering in order to refinance our outstanding $400.0 million of 5.75% senior notes due August 1, 2013. We completed the redemption of the old 5.75% notes on July 26, 2012 for $432.5 million (which included $11.2 million of accrued interest on the old notes through the date of redemption), using the proceeds of the offering of the new 3.90% notes and cash on hand. In connection with the refinancing, we incurred $2.5 million of after-tax refinancing charges during the second quarter primarily due to settling an interest rate protection agreement prior to its maturity. We also recorded an additional $13.5 million after-tax charge in the third quarter, primarily as a result of the premium associated with the early redemption of the old notes. We paid $65.5 million during the second quarter of 2012 to settle an interest rate protection agreement that we entered into in August 2011 relating to the ten-year treasury security. The effective portion of this settlement is recorded in “Accumulated Other Comprehensive Income (Loss)” on the balance sheet and will be amortized as interest expense over the ten-year term of the new notes. For further information, please see Notes 8 and 10 to the condensed consolidated financial statements included in this report.

Excluding debt refinancing charges of $13.5 million, or $0.14 per share, we earned net income of $53.3 million ($0.55 per diluted share) in the third quarter of 2012 compared with $42.8 million ($0.43 per diluted share) in the third quarter of 2011, excluding a charge of $1.0 million ($0.01 per diluted share) for energy project asset disposals. Management excludes special items and uses these 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. Reconciliations to the most comparable measure reported in accordance with GAAP are included elsewhere in this section under “Reconciliations of Non-GAAP Financial Measures to Reported Amounts.”

PCA implemented a $50 per ton domestic containerboard price increase during the third quarter and is currently in the process of implementing a corresponding price increase for corrugated products, which it expects to essentially complete in the fourth quarter. PCA expects higher fourth quarter earnings from our announced price increases, but an entire quarter’s earnings benefit from these price increases will not be fully realized until the first quarter of 2013. The earnings improvement from higher prices in the fourth quarter is expected to be partially offset by seasonally higher costs due, in part, to colder weather. Considering these items, we expect our fourth quarter earnings to be higher than our third quarter 2012 earnings.

### Results of Operations

### Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

The historical results of operations of PCA for the three months ended September 30, 2012 and 2011 are set forth below:

*(In thousands)*

|  | Three Months Ended September 30, 2012 | 2011 | Change |
| --- | ---: | ---: | ---: |
| Net sales | $723,473 | $670,824 | $52,649 |
| Income from operations | $92,072 | $71,180 | $20,892 |
| Interest expense, net | (30,590 )(1) | (6,727) | (23,863) |
| Income before taxes | 61,482 | 64,453 | (2,971) |
| Provision for income taxes | (21,691) | (22,676) | 985 |
| Net income | $39,791 | $41,777 | $(1,986) |

(1) Includes $21.1 million of pre-tax debt refinancing charges.

### Net Sales

Net sales increased by $52.6 million, or 7.8%, for the three months ended September 30, 2012 from the comparable period in 2011, primarily as a result of higher sales volumes ($53.8 million), partially offset by unfavorable sales price and mix of containerboard to third parties primarily due to lower export pricing ($1.2 million).

Corrugated products shipments for the third quarter increased 5.7% compared to the third quarter of 2011 on a shipments-per-workday basis. Total corrugated products volume sold for the three months ended September 30, 2012 increased 4.0% over last year. The difference in the percentage increase between the total shipments increase and the increase on a per workday basis is that the third quarter of 2012 contained one less workday, those days not falling on a weekend or holiday, than the same period in 2011. Third quarter 2012 contained 63 workdays compared to 64 workdays in third quarter 2011.

Containerboard volume sold to outside domestic and export customers for the three months ended September 30, 2012 increased 6.6% in the third quarter of 2012 compared to the same period in 2011, reflecting increased export sales. Containerboard mill production during the third quarter was 670,000 tons compared to 650,000 tons during the third quarter of 2011.

### Income from Operations

Income from operations increased $20.9 million, or 29.4%, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011, driven by increased volume ($11.0 million) and lower costs for energy ($7.8 million), recycled fiber ($6.3 million) and chemicals ($3.0 million). These improvements were partially offset by higher expenses for labor ($1.1 million), fringe benefits including medical and pension costs ($3.3 million), depreciation ($1.8 million), and the unfavorable sales price and mix, primarily due to lower export pricing ($1.2 million). Income from operations was not impacted by any special items during the third quarter of 2012.

Gross profit increased $24.8 million, or 18.0%, for the three months ended September 30, 2012 from the comparable period in 2011. Gross profit as a percentage of net sales increased to 22.5% for third quarter 2012 compared to 20.5% in third quarter 2011 primarily attributable to the volume increases and lower energy costs previously described.

Selling and administrative expenses increased $2.6 million, or 5.3%, for the three months ended September 30, 2012 compared to the same period in 2011, primarily as a result of increased salary costs ($1.8 million) and related fringe benefits ($0.7 million).

Corporate overhead increased $0.6 million, or 3.4%, for the three months ended September 30, 2012 compared to the third quarter of 2011, primarily due to increased salary and fringe benefits expense ($0.6 million).

Other expense for the three months ended September 30, 2012 increased $0.7 million or 59.6% compared to the comparable period in 2011, primarily due to increased expenses related to the disposal of obsolete storeroom items ($0.5 million).

### Interest Expense, Net and Income Taxes

Net interest expense increased $23.9 million, from $6.7 million in the third quarter of 2011 to $30.6 million in the comparable period of 2012. This increase included a $21.1 million charge in the third quarter of 2012, primarily as a result of the premium associated with the early redemption of the Company’s 5.75% notes due in 2013 in July of 2012 (see Note 8 to the condensed consolidated financial statements). Excluding these charges, interest expense was $2.8 million higher for the three months ended September 30, 2012 compared to the same period in 2011, primarily as a result of lower capitalized interest ($2.2 million) related to the Counce and Valdosta major energy projects and additional interest expense ($0.6 million) related to PCA’s term loan borrowed in October 2011.

PCA’s effective tax rate was 35.3% for the three months ended September 30, 2012 and 35.2% for the three months ended September 30, 2011. The effective tax rate varies from the U.S. federal statutory tax rate of 35% principally due to the impact of state and local income taxes and the domestic manufacturers’ deduction.

### Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

The historical results of operations of PCA for the nine months ended September 30, 2012 and 2011 are set forth below:

*(In thousands)*

|  | Nine Months Ended September 30, 2012 |  | 2011 | Change |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $2,107,298 |  | $1,965,805 | $141,493 |
| Income from operations | $345,040 | (1) | $204,942 | $140,098 |
| Interest expense, net | (53,529 | )(2) | (19,951) | (33,578) |
| Income before taxes | 291,511 |  | 184,991 | 106,520 |
| Provision for income taxes | (188,722 | )(3) | (66,429) | (122,293) |
| Net income | $102,789 | (4) | $118,562 | $(15,773) |

(1) Includes income of $95.5 million from the amended 2009 federal income tax return that increased the gallons claimed as alternative fuel mixture credits.

(2) Includes $24.8 million of pre-tax debt refinancing charges.

(3) Includes reduced tax benefits of $118.5 million from the amended 2009 federal income tax return that decreased the gallons claimed as cellulosic biofuel producer credits.

(4) Includes the net impact of the amended 2009 federal income tax return of $23.0 million.

### Net Sales

Net sales increased by $141.5 million, or 7.2%, for the nine months ended September 30, 2012 from the comparable period in 2011, primarily as a result of higher sales volumes ($150.8 million), partially offset by unfavorable sales price and mix of containerboard and corrugated products to third parties primarily due to lower export pricing ($9.3 million).

Corrugated products shipments for the first nine months of 2012 increased 6.8% compared to the first nine months of 2011 on a shipments-per-workday basis. The first nine months of 2012 contained 190 workdays, those days not falling on a weekend or holiday, compared to the same period last year with 191 workdays. Total corrugated products shipments for the first nine months of 2012 increased 6.3% compared to the first nine months of 2011. Total corrugated products volume sold for the nine months ended September 30, 2012 increased 1.5 bsf to 25.9 bsf compared to 24.4 bsf for the nine months ended of 2011.

Containerboard volume sold to outside domestic and export customers decreased 1.1% for the nine months ended September 30, 2012 compared to the same period in 2011. Containerboard mill production during the first three quarters of 2012 was 1,948,000 tons compared to 1,858,000 tons during the first three quarters of 2011.

### Income from Operations

Income from operations increased $140.1 million, from $204.9 million in the first nine months of 2011 to $345.0 million in the comparable period of 2012. As noted in Note 14 to the condensed consolidated financial statements, PCA amended its 2009 federal tax return to reallocate gallons between the alternative fuel mixture credits and the cellulosic biofuel producer credits. As a result, income from operations was increased for the nine months ended September 30, 2012 by $95.5 million with an offsetting amount recorded in tax expense of $118.5 million.

Excluding special items (as detailed below under “Reconciliations of Non-GAAP Financial Measures to Reported Amounts”), income from operations increased $39.5 million, primarily due to higher sales volume ($35.3 million), and lower costs for energy ($22.2 million), recycled fiber ($12.1 million) and chemicals ($8.3 million). Partially offsetting these items were increased expenses related to depreciation ($11.2 million), pension ($7.2 million), medical ($6.4 million) and transportation ($6.0 million) and the unfavorable sales price and mix, primarily related to lower export sales prices ($9.3 million).

Gross profit increased $57.9 million, or 14.2%, for the nine months ended September 30, 2012 from the comparable period in 2011, primarily due to the sales volume increases and lower energy costs described above. Gross profit as a percentage of net sales increased to 22.1% of net sales for the first nine months of 2012 compared to 20.7% in the first nine months of 2011.

Selling and administrative expenses increased $11.3 million, or 7.8%, for the nine months ended September 30, 2012 compared to the same period in 2011, primarily as a result of higher salaries ($6.6 million), related fringe benefits ($2.1 million) and depreciation ($2.6 million).

Corporate overhead increased $3.3 million, or 6.8%, for the first three quarters of 2012 compared to the first three quarters of 2011, primarily due to higher salary and fringe benefits expense ($2.0 million), depreciation ($0.8 million), and incentives ($0.3 million).

Other expense for the nine months ended September 30, 2012 decreased $1.3 million or 13.5% compared to the same period in 2011, primarily due to reduced expense related to fixed asset disposals ($0.6 million) and obsolete storeroom items ($0.6 million).

### Interest Expense, Net and Income Taxes

Net interest expense increased $33.6 million, from $20.0 million in the first nine months of 2011 to $53.5 million in the comparable period of 2012. This increase included charges of $24.8 million in 2012, primarily as a result of the $21.3 million premium associated with the early redemption of the Company’s 5.75% notes due in 2013 in July of 2012 (see Note 8 to the condensed consolidated financial statements) and a $3.4 million loss from settling the Company’s 2011 treasury lock prior to its maturity (see Note 10 to the condensed consolidated financial statements). Excluding these charges, interest expense was $8.7 million higher for the nine months ended September 30, 2012 compared to the same period in 2011, primarily as a result of lower capitalized interest ($6.1 million) related primarily to the Counce and Valdosta major energy projects and additional interest expense ($2.1 million) related to PCA’s term loan borrowed in October 2011.

PCA’s effective tax rate was 64.7% for the nine months ended September 30, 2012 and 35.9% for the comparable period in 2011. This increase was due to the February 2012 amendment of our 2009 federal income tax return to reallocate gallons of black liquor between the alternative fuel mixture credit and the cellulosic biofuel producer credit. Excluding the impact of the alternative energy tax credits, the 2012 effective rate would have been 35.8% for the nine months ended September 30, 2012. The effective tax rate varies from the U.S. federal statutory tax rate of 35% principally due to the impact of the alternative energy credits (in 2012), state and local income taxes and the domestic manufacturers’ deduction. PCA had no material changes to its uncertain tax positions under ASC 740, “Income Taxes,” during the first nine months of 2012.

### Liquidity and Capital Resources

The following table presents a summary of our cash flows for the periods presented:

*(In thousands)*

| Net cash provided by (used for): | Nine Months Ended September 30, 2012 | 2011 | Change |
| --- | ---: | ---: | ---: |
| Operating activities | $251,811 | $236,817 | $14,994 |
| Investing activities | (73,546) | (261,147) | 187,601 |
| Financing activities | (193,672) | (132,109) | (61,563) |
| Net increase (decrease) in cash and cash equivalents | $(15,407) | $(156,439) | $141,032 |

### Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2012 was $251.8 million compared to $236.8 million for the nine months ended September 30, 2011, an increase of $15.0 million, or 6.3%. Cash provided by operating activities before changes in operating assets and liabilities was $357.8 million for the first nine months of 2012 compared to $273.0 million for the comparable period in 2011, an increase of $84.8 million that was driven by the stronger operations in 2012 as previously discussed and an additional $34.6 million of alternative energy tax credits used to reduce federal income tax payments during the first nine months of 2012. Cash used for operating assets and liabilities totaled $106.0 million for the nine month period ended September 30, 2012 compared to $36.2 million for the comparable period in 2011, an increase of $69.8 million. The additional requirements for operating assets and liabilities in 2012 were driven by reduced accounts payable levels in 2012 and higher levels of accounts receivable driven by the higher sales volumes in 2012 previously described. 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 for the nine months ended September 30, 2012 decreased $187.6 million, or 71.8%, to $73.5 million, compared to the nine months ended September 30, 2011. The decrease was related to lower additions to property, plant and equipment of $120.6 million as our major energy projects were completed in 2011, the receipt of $57.4 million in grant proceeds from the U.S. Treasury in 2012 (see Note 18 to the condensed consolidated financial statements), and lower additions to long term assets of $9.8 million during the first nine months of 2012 compared to the same period in 2011.

### Financing Activities

Net cash used for financing activities totaled $193.7 million for the nine months ended September 30, 2012 compared to $132.1 million for the same period in 2011, an increase of $61.6 million, or 46.6 %. The increase was primarily attributable to the July 26, 2012 redemption of the Company’s 5.75% senior notes due in 2013 for $421.3 million, partially offset by $397.0 million in net proceeds received from the Company’s senior notes issuance that was completed on June 26, 2012. Additionally, the Company paid $65.5 million to settle a treasury lock on June 26, 2012, received $9.9 million in proceeds from the settlement of treasury locks in February 2011, paid higher dividends of $12.7 million and made $11.3 million in term loan principal payments during the first nine months of 2012. This was partially offset by lower repurchases of PCA common stock of $51.9 million and higher proceeds received from stock option exercises of $11.2 million during the first nine months of 2012.

On February 21, 2012, PCA announced that its board of directors authorized an increase in the quarterly dividend from $0.20 to $0.25 per share of its common stock, beginning with the dividend paid on April 13, 2012. The timing and amount of future dividends are subject to the determination of PCA’s board of directors.

PCA’s primary sources of liquidity are net cash provided by operating activities and available borrowing capacity under PCA’s credit facilities. As of September 30, 2012, PCA had $327.7 million in unused borrowing capacity under its existing credit agreements, with $13.3 million of the borrowing capacity used for outstanding letters of credit. Currently, PCA’s primary uses of cash are for operations, capital expenditures, debt service and declared common stock dividends, which it expects to be able to fund from these sources.

The following table provides the outstanding balances, excluding unamortized debt discount, and the weighted average interest rates as of September 30, 2012 for PCA’s senior credit facility, the receivables credit facility, and the senior notes:

*(In thousands)*

| Borrowing Arrangement | Balance at September 30, 2012 | Weighted Average Interest Rate | Projected Annual Cash Interest Payments |
| --- | ---: | ---: | ---: |
| Senior Credit Facility | $— | N/A | N/A |
| Term Loan | 138,750 | 1.72% | $2,381 |
| Receivables Credit Facility | 109,000 | 1.06 | 1,160 |
| 3.90% Senior Notes (due June 15, 2022) | 400,000 | 3.90 | 15,600 |
| 6.50% Senior Notes (due March 15, 2018) | 150,000 | 6.50 | 9,750 |
| Total | $797,750 | 3.62% | $28,891 |

The above table excludes from the projected annual cash interest payments the non-cash expense of $5.7 million from the annual amortization of the treasury locks related to the 6.50% senior notes due 2018 and the 3.90% senior notes due 2022. The amortization is being recognized over the terms of the 6.50% senior notes due 2018 and the 3.90% senior notes due 2022 and is included in interest expense, net.

The instruments governing PCA’s indebtedness contain financial and other covenants that limit, among other things, the ability of PCA and its subsidiaries to:

- enter into sale and leaseback transactions,
- incur liens,
- incur indebtedness at the subsidiary level,
- enter into certain transactions with affiliates, or
- merge or consolidate with any other person or sell or otherwise dispose of all or substantially all of the assets of PCA.

These limitations could limit corporate and operating activities.

In addition, PCA must maintain a minimum interest coverage ratio and a maximum leverage ratio under its senior credit facility. A failure to comply with the restrictions contained in the senior credit facility could lead to an event of default, which could result in an acceleration of any outstanding indebtedness and/or prohibit PCA from drawing on its senior credit facility. Such acceleration may also constitute events of default under the senior notes indentures and the receivables credit facility. As of September 30, 2012, PCA was in compliance with these covenants.

PCA currently expects to incur normal capital expenditures of $110.0 million to $120.0 million in 2012, primarily for maintenance capital, cost reduction, business growth and environmental compliance. The Company also expects to spend $50.0 million to $60.0 million for box plant acquisitions, some of which may be used for strategic investments in its existing box plants. As of September 30, 2012, PCA spent $94.4 million for capital expenditures and $35.4 million for box plant acquisitions, and had committed to spend an additional $29.6 million in capital expenditures for the remainder of 2012 and beyond.

PCA believes that net cash generated from operating activities, cash on hand, available borrowings under its committed credit facilities and available capital through access to capital markets will be adequate to meet its liquidity and capital requirements, including payments of any declared common stock dividends, for the foreseeable future. As its debt or credit facilities become due, PCA will need to repay, extend or replace such facilities. Its ability to do so will be subject to future economic conditions and financial, business and other factors, many of which are beyond PCA’s control.

### 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” in our Annual Report on Form 10-K for the year ended December 31, 2011, with the exception of the maturity of the $400.0 million in senior notes, which was effectively extended from August 1, 2013 to June 15, 2022 as a result of the debt refinancing completed on July 26, 2012.

### Reconciliations of Non-GAAP Financial Measures to Reported Amounts

Income from operations, net income and diluted earnings per share excluding special items are non-GAAP financial measures. Reconciliations of those non-GAAP measures to the most comparable measure reported in accordance with GAAP for the three and nine months ended September 30, 2012 and 2011 follow:

*(In millions, except per share amounts)*

|  | Three Months Ended September 30, 2012 Net Income | Diluted EPS | 2011 Net Income | Diluted EPS |
| --- | ---: | ---: | ---: | ---: |
| As reported in accordance with GAAP | $39.8 | $0.41 | $41.8 | $0.42 |
| Special items: |  |  |  |  |
| Debt refinancing charges | 13.5 | 0.14 | — | — |
| Asset disposal charges | — | — | 1.0 | 0.01 |
| Total special items | 13.5 | 0.14 | 1.0 | 0.01 |
| Excluding special items | $53.3 | $0.55 | $42.8 | $0.43 |

*(In millions, except per share amounts)*

|  | Nine Months Ended September 30, 2012 Income from Operations | Net Income | Diluted EPS | 2011 Income from Operations | Net Income | Diluted EPS |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| As reported in accordance with GAAP | $345.0 | $102.8 | $1.05 | $204.9 | $118.6 | $1.17 |
| Special items: |  |  |  |  |  |  |
| Debt refinancing charges | — | 16.0 | 0.16 | — | — | — |
| Alternative energy tax credits (a) | (95.5) | 23.0 | 0.24 | — | — | — |
| Medical benefits reserve adjustment | — | — | — | (1.6) | (1.0) | — |
| Asset disposal charges | — | — | — | 6.7 | 4.2 | 0.04 |
| Total special items | (95.5) | 39.0 | 0.40 | 5.1 | 3.2 | 0.04 |
| Excluding special items | $249.5 | $141.8 | $1.45 | $210.0 | $121.8 | $1.21 |

Note: The sum of the diluted EPS may not equal the total for the respective period’s diluted EPS due to rounding.

(a) Represents a charge from amending the Company’s 2009 federal income tax return to reduce the gallons of black liquor claimed as cellulosic biofuel producer credits previously recorded as a tax benefit, and to increase the gallons claimed for alternative fuel mixture credits previously recorded as income. The total number of gallons of black liquor remained the same. The increase in gallons claimed as alternative fuel mixture credits resulted in income of $95.5 million, and the decrease in gallons claimed as cellulosic biofuel producer credits resulted in a decrease in tax benefits of $118.5 million, for a net non-cash, after-tax charge of $23.0 million.

### 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. PCA periodically enters into derivatives in order to minimize these risks, but not for trading purposes. For a discussion of derivatives and hedging activities, see Note 10 to PCA’s unaudited condensed consolidated financial statements included elsewhere in this report.

The interest rates on $247.8 million of PCA’s debt are based on LIBOR and are variable. 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 $2.5 million annually. In the event of a change in interest rates, management could take actions to mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in PCA’s financial structure.

### Environmental Matters

PCA is subject to, and must comply with, a variety of federal, state and local environmental laws, particularly those relating to air and water quality, waste disposal and the cleanup of contaminated soil and groundwater. The most significant of these laws affecting the Company are:

- Resource Conservation and Recovery Act (RCRA);
- Clean Water Act (CWA);
- Clean Air Act (CAA);
- The Emergency Planning and Community Right-to-Know-Act (EPCRA);
- Toxic Substance Control Act (TSCA); and
- Safe Drinking Water Act (SDWA).

PCA believes that it is currently in material compliance with these and all applicable environmental rules and regulations. Because environmental regulations are constantly evolving, the Company has incurred, and will continue to incur, costs to maintain compliance with these and other environmental laws. PCA works diligently to anticipate and budget for the impact of applicable environmental regulations, and does not currently expect that future environmental compliance obligations will materially affect its business or financial condition.

In 2004, the U.S. Environmental Protection Agency (the “EPA”) published the Boiler MACT regulations, establishing air emission standards and certain other requirements for industrial boilers. These regulations were vacated and remanded by the U.S. Court of Appeals for the D.C. Circuit in 2007. The EPA proposed final regulations in March 2011, which would require compliance in 2014. During 2011, the EPA determined that it would reconsider certain provisions of the Boiler MACT regulations and, in December 2011, the EPA published proposed rules containing changes to the March 2011 rules. The EPA may make further changes to the proposed rules. PCA is currently assessing the impact of these regulations on its operations, which could require significant modifications to certain of PCA’s boilers. Due to the complexity of these regulations, and the potential for additional future regulatory or judicial modification to these regulations, the timing and amount of expenditures to be made by PCA are uncertain, but could be significant during the period before compliance is required.

### Impact of Inflation

PCA does not believe that inflation has had a material impact on its financial position or results of operations during the three- and nine-month periods ending September 30, 2012 and 2011.

### Off-Balance Sheet Arrangements

PCA does not have any off-balance sheet arrangements as of September 30, 2012 that would require disclosure under SEC FR-67, “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.”

### Critical Accounting Policies and Estimates

Management’s discussion and analysis of PCA’s 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 the Company 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 bad debts, inventories, intangible assets, pensions and other postretirement benefits, income taxes, contingencies and litigation. 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 Annual Report on Form 10-K for the year ended December 31, 2011, a discussion of its critical accounting policies which it believes affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. PCA has not made any changes in any of these critical accounting policies during the first nine months of 2012.

### Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q, and in particular, statements found in 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;
- containerboard and corrugated products general industry conditions, including competition, product demand and product pricing;
- fluctuations in wood fiber and recycled fiber costs;
- fluctuations in purchased energy costs;
- the possibility of unplanned outages or interruptions at our principal facilities; and
- legislative or regulatory actions or requirements, particularly concerning environmental or tax matters.

Our actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do occur, what impact they will have on our results of operations or financial condition. In view of 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, 2011.

## 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, 1,633 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, 2012. 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, 2012.

During the quarter ended September 30, 2012, there were no changes in internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, PCA’s internal control over financial reporting.

### PART II

### OTHER INFORMATION

## Risk factors

As filed, 162 characters.

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011.

Filed Nov 6, 2012.
Source: SEC EDGAR, the filing index for accession 0001193125-12-454441. Last ingested by Listed: Nov 5, 2026, 13:32 ET. No prices; not investment advice.