# Packaging Corp of America: Form 10-Q for the period ended Sep 30, 2013

- Company: [Packaging Corp of America](/companies/pkg.md) (CIK 75677)
- Form: 10-Q
- Filed: 2013-11-08
- Accepted by EDGAR: Nov 8, 2013, 12:10 ET
- Period: 2013-09-30
- Accession: 0001193125-13-434620
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/75677/000119312513434620/d594667d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/75677/000119312513434620/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-07-01 to 2013-09-30 | $845.4m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2013-01-01 to 2013-09-30 | $2.40bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2013-07-01 to 2013-09-30 | $619.6m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2013-01-01 to 2013-09-30 | $1.80bn | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2013-07-01 to 2013-09-30 | $225.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2013-01-01 to 2013-09-30 | $600.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2013-07-01 to 2013-09-30 | $56.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2013-01-01 to 2013-09-30 | $167.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2013-07-01 to 2013-09-30 | $142.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2013-01-01 to 2013-09-30 | $352.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2013-07-01 to 2013-09-30 | $45.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2013-01-01 to 2013-09-30 | $112.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-07-01 to 2013-09-30 | $84.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2013-01-01 to 2013-09-30 | $209.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-07-01 to 2013-09-30 | $0.86 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2013-01-01 to 2013-09-30 | $2.15 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-07-01 to 2013-09-30 | $0.87 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2013-01-01 to 2013-09-30 | $2.17 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-07-01 to 2013-09-30 | 97,597,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2013-01-01 to 2013-09-30 | 97,512,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2013-01-01 to 2013-09-30 | $420.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2013-01-01 to 2013-09-30 | $130.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2013-01-01 to 2013-09-30 | $69.9m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2013-01-01 to 2013-09-30 | $7.8m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2013-09-30 | $396.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-09-30 | $1.14bn | us-gaap:AssetsCurrent |
| Total assets | at 2013-09-30 | $2.66bn | us-gaap:Assets |
| Current liabilities | at 2013-09-30 | $353.9m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2013-09-30 | $767.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2013-09-30 | $15.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2013-09-30 | $1.10bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 35,366 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.

On October 25, 2013 we completed the acquisition of Boise Inc. (“Boise”), a large manufacturer of packaging and paper products with $2.6 billion in net sales for the year ended December 31, 2012, for $12.55 per share. In connection with the acquisition, PCA refinanced approximately $775.0 million of Boise’s indebtedness. The total transaction value, net of cash acquired, was approximately $1.94 billion, including the $775.0 million of Boise indebtedness. PCA incurred approximately $4.2 million in expenses relating to the transaction during the third quarter and will incur significant expenses relating to the transaction during the fourth quarter, including $55.7 million in redemption premiums paid to redeem Boise notes which will be recorded as interest expense. PCA used the proceeds of approximately $2.0 billion of new borrowings, including $1.3 billion in new term loan facilities and $700.0 million in new 4.50% ten year notes, together with cash on hand to finance the acquisition and related expenses and refinance Boise and certain PCA indebtedness.

The transaction is expected to increase PCA’s containerboard capacity to approximately 3.7 million tons from its current level of 2.6 million tons, including the announced expansion of the DeRidder, Louisiana mill, PCA’s corrugated products volume will increase by approximately 30%. As a result of the acquisition, PCA’s corrugated products presence will expand in the Pacific Northwest. In addition to the Boise packaging business, PCA also acquired the Boise paper business, a major producer of uncoated freesheet and specialty papers. The results of operations of Boise will be included in PCA’s results for periods on and after October 25, 2013.

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.

As reported by the Fibre Box Association, industry-wide shipments of corrugated products increased 0.6% for the three months ended September 30, 2013 compared to the same period in 2012. Reported industry containerboard production for the three months ended September 30, 2013 increased 3.3% compared to the same period in 2012. Trade publications reported that containerboard inventories at the end of the third quarter of 2013 were approximately 2.4 million tons compared to second quarter 2013 ending inventories of 2.2 million tons. Reported industry shipments to export markets decreased 8.7% for the third quarter of 2013 compared to last year’s third quarter. Published containerboard prices did not change during the third quarter of 2013.

During the third quarter of 2013, PCA produced approximately 671,000 tons of containerboard at our mills and sold 9.3 billion square feet (“bsf”) of corrugated products. Our corrugated products shipments for the third quarter of 2013 were up 7.8% compared to the third quarter of 2012. Containerboard volume sold to domestic and export customers for the three months ended September 30, 2013 was 12,000 tons lower than the same period in 2012 due to increased internal demand for containerboard at our box plants.

Published prices for recycled fiber were 25% higher in the third quarter of 2013 compared to the third quarter 2012 average price and were up approximately 5% compared to the second quarter of 2013. Our wood costs increased compared to last year’s third quarter due to an unusually wet third quarter in the U. S. Southeast which made it more difficult to access wood. Purchased fuel prices increased primarily due to higher prices for natural gas and coal. Our chemical costs in the third quarter of 2013 were slightly higher than the comparable period in 2012 due to higher purchase prices and usage. Transportation costs increased 3% compared to last year’s third quarter.

Excluding after-tax costs related to the Boise acquisition of $2.7 million, or $0.03 per diluted share, and a pension curtailment charge of $2.0 million, or $0.02 per diluted share, we earned net income of $89.0 million ($0.91 per diluted share) in the third quarter of 2013, compared with net income before special items of $53.3 million ($0.55 per diluted share) in the third quarter of 2012. Special items in the third quarter of 2012 included debt refinancing charges of $13.5 million, or $0.14 per diluted share. Information regarding our use of non-GAAP financial measures and reconciliations of non-GAAP measures used in this Item 2 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.”

Looking ahead to the fourth quarter, we expect seasonally lower corrugated products volume than the third quarter resulting, in part, from two less corrugated products shipping days. We also expect lower mill production and higher operating costs related to the annual maintenance outage at our Filer City, Michigan mill. We also expect fuel costs to be seasonally higher with colder weather. Considering these items and excluding any impact from the Boise acquisition, we currently expect fourth quarter earnings to be lower than the third quarter.

### Results of Operations

### Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

The historical results of operations of PCA for the three months ended September 30, 2013 and 2012 are set forth below:

*(In thousands)*

|  | Three Months Ended September 30, 2013 | 2012 | Change |
| --- | ---: | ---: | ---: |
| Net sales | $845,440 | $723,473 | $121,967 |
| Income from operations | $141,960 | $92,072 | $49,888 |
| Interest expense, net | (11,850) | (30,590) | 18,740 |
| Income before taxes | 130,110 | 61,482 | 68,628 |
| Provision for income taxes | (45,930) | (21,691) | (24,239) |
| Net income | $84,180 | $39,791 | $44,389 |

### Net Sales

Net sales increased by $122.0 million, or 16.9%, for the three months ended September 30, 2013 from the comparable period in 2012, as a result of higher sales price and improved mix ($68.9 million) and higher sales volume ($53.1 million).

Corrugated products shipments for the third quarter increased 7.8% compared to the third quarter of 2012 both on a total basis and a shipments-per-workday basis. Total corrugated products volume sold for the three months ended September 30, 2013 increased 0.7 bsf to 9.3 bsf compared to 8.6 bsf in last year’s third quarter. Both the third quarter of 2013 and 2012 contained 63 workdays, those days not falling on a weekend or holiday.

Containerboard volume sold to outside domestic and export customers for the three months ended September 30, 2013 was 12,000 tons lower than the same period in 2012. Containerboard mill production for the third quarter was 671,000 tons compared to 670,000 tons in the third quarter of 2012.

### Income from Operations

Income from operations increased $49.9 million, or 54.2%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Income from operations includes a pre-tax pension curtailment charge of $3.1 million and costs related to the Boise acquisition of $1.5 million. Excluding special items, income from operations increased $54.5 million, driven by higher pricing and improved mix ($68.9 million) and higher corrugated products volume ($8.1 million). These improvements were partially offset by higher expenses for incentive compensation ($4.7 million), labor ($4.3 million), fiber ($4.1 million), energy ($2.7 million), transportation ($1.8 million), chemicals ($1.7 million) and depreciation ($1.2 million).

Gross profit increased $63.3 million, or 38.9%, for the three months ended September 30, 2013 from the comparable period in 2012. Gross profit as a percentage of net sales increased to 26.7% for third quarter 2013 compared to 22.5% in third quarter 2012 primarily attributable to the price and volume increases previously described.

Selling and administrative expenses increased $4.9 million, or 9.6%, for the three months ended September 30, 2013 compared to the same period in 2012, primarily as a result of increased costs for incentive compensation ($2.4 million), salaries ($1.3 million), related fringe benefits ($0.5 million), and broker commissions ($0.4 million).

Corporate overhead increased $4.2 million, or 24.4%, for the third quarter 2013 compared to third quarter 2012. Excluding the costs related to the Boise acquisition of $1.5 million, corporate overhead increased $2.7 million, primarily due to increased costs related to incentive compensation ($1.2 million), salary and fringe benefits ($0.7 million), legal matters ($0.5 million) and travel ($0.3 million).

Other expense for the three months ended September 30, 2013 increased $4.3 million or 218.3% compared to the comparable period in 2012, primarily due to the pension plan curtailment charge ($3.1 million) and increased expenses related to fixed asset disposals ($1.2 million).

### Interest Expense, Net and Income Taxes

Net interest expense decreased $18.7 million, or 61.3%, for the three months ended September 30, 2013 compared to the same period in 2012. Net interest expense in the third quarter of 2013 included a $2.7 million charge for bridge financing fees related to the Boise acquisition, and net interest expense in the third quarter of 2012 included a $21.1 million charge primarily as a result of the premium associated with the early redemption of the Company’s 5.75% notes due in 2013 in July 2012. Excluding these special items, net interest expense was $0.3 million lower for the three months ended September 30, 2013 compared to the same period in 2012.

PCA’s effective tax rate was 35.3% for the three months ended September 30, 2013 and 2012. The effective tax rate varies from the U.S. federal statutory rate of 35.0% principally due to the impact of state and local income taxes and the domestic manufacturers’ deduction. PCA had no material changes to its reserve for unrecognized tax benefits under ASC 740, “Income Taxes,” during the third quarter of 2013 but does expect a significant change by the end of the year as described in Note 14 to the condensed consolidated financial statements.

### Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

The historical results of operations of PCA for the nine months ended September 30, 2013 and 2012 are set forth below:

*(In thousands)*

|  | Nine Months Ended September 30, 2013 | 2012 | Change |
| --- | ---: | ---: | ---: |
| Net sales | $2,400,877 | $2,107,298 | $293,579 |
| Income from operations | $352,476 | $345,040 | $7,436 |
| Interest expense, net | (30,333) | (53,529) | 23,196 |
| Income before taxes | 322,143 | 291,511 | 30,632 |
| Provision for income taxes | (112,885) | (188,722) | 75,837 |
| Net income | $209,258 | $102,789 | $106,469 |

### Net Sales

Net sales increased by $293.6 million, or 13.9%, for the nine months ended September 30, 2013 from the comparable period in 2012, primarily as a result of higher sales price and mix ($144.8 million) and higher sales volume ($148.8 million).

Corrugated products shipments for the first three quarters of 2013 increased 6.7% compared to the same period in 2012 on a shipments-per-workday basis. Total corrugated products volume sold for the nine months ended September 30, 2013 increased 6.1% over the same period last year. The first nine months of 2013 contained 189 workdays, those days not falling on a weekend or holiday, compared to 190 workdays in the comparable period in 2012.

Containerboard volume sold to outside domestic and export customers decreased 22,000 tons for the nine months ended September 30, 2013 compared to the same period in 2012 primarily related to decreased export sales. Containerboard mill production during the first three quarters of 2013 was 1,945,000 tons compared to 1,948,000 tons in the comparable period of 2012.

### Income from Operations

Income from operations in the first nine months of 2013 was $352.5 million including $10.9 million of pension curtailment charges and $1.5 million of costs related to the Boise acquisition. As described in Note 14 to the condensed consolidated financial statements, PCA amended its 2009 federal tax return in February 2012 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 to $345.0 million with an offsetting amount recorded in tax expense of $118.5 million.

Excluding special items, income from operations increased $115.4 million, primarily due to increased sales price and improved mix ($144.8 million) and higher sales volume ($18.7 million). Partially offsetting these items were increased expenses related to labor and benefits ($14.1 million), energy ($10.1 million), incentive compensation ($8.9 million), wood fiber ($4.8 million), transportation ($4.6 million) and chemicals ($2.7 million).

Gross profit increased $134.7 million, or 28.9%, for the nine months ended September 30, 2013 from the comparable period in 2012, primarily due to the sales price and volume increases described above. Gross profit as a percentage of net sales increased to 25.0% of net sales for the first three quarters of 2013 compared to 22.1% in the same period in 2012.

Selling and administrative expenses increased $10.7 million, or 6.8%, for the nine months ended September 30, 2013 compared to the comparable period in 2012, primarily as a result of higher costs for incentive compensation ($4.6 million), salaries ($3.1 million), related fringe benefits ($1.4 million), travel ($0.7 million) and broker commissions $(0.8 million).

Corporate overhead increased $8.2 million, or 16.0%, for the nine months ended September 30, 2013 compared to the same period in 2012, including the $1.5 million of costs related to the Boise acquisition. The remaining increase was primarily due to higher salary and fringe benefits expense ($2.2 million), incentive compensation ($1.9 million), legal costs ($1.7 million) and travel and meeting costs ($0.9 million).

Other expense for the nine months ended September 30, 2013 increased $12.8 million or 156.9% compared to the nine months ended September 30, 2012, primarily due to pension plan curtailment charges ($10.9 million), higher fixed asset disposal charges ($1.1 million) and increased expenses related to worker’s compensation ($1.0 million).

### Interest Expense, Net and Income Taxes

Net interest expense decreased $23.2 million, or 43.3%, for the nine months ended September 30, 2013 compared to the same period in 2012. The 2013 period included a $2.7 million charge for bridge financing fees related to the Boise acquisition. The 2012 period included charges of $24.8 million, 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 2012 and a $3.4 million loss from settling a treasury lock prior to its maturity. Excluding these special items, net interest expense was $1.1 million lower for the nine months ended September 30, 2013 compared to the same period in 2012. This decrease was driven by lower interest rates on PCA’s variable rate debt ($0.5 million) and higher capitalized interest ($0.4 million) in 2013 compared to 2012.

PCA’s effective tax rate was 35.0% for the nine months ended September 30, 2013. This compares to 64.7% for the nine months ended September 30, 2012, which included a 28.9% higher rate from amending our 2009 tax return in February 2012 related to the alternative energy tax credits described in Note 14 of the condensed consolidated financial statements. Excluding the amendment, the effective tax rate for the first nine months of 2012 would have been 35.8%. The effective tax rate varies from the U.S. federal statutory rate of 35.0% principally due to the impact of the alternative energy tax credits in 2012, state and local income taxes and the domestic manufacturers’ deduction.

### 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, 2013 | 2012 | Change |
| --- | ---: | ---: | ---: |
| Operating activities | $420,168 | $251,811 | $168,357 |
| Investing activities | (132,519) | (73,546) | (58,973) |
| Financing activities | (98,447) | (193,672) | 95,225 |
| Net increase (decrease) in cash and cash equivalents | $189,202 | $(15,407) | $204,609 |

### Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2013 was $420.2 million compared to $251.8 million for the nine months ended September 30, 2012, an increase of $168.4 million, or 66.9%. Cash provided by operating activities before changes in operating assets and liabilities was $451.8 million for the first nine months of 2013 compared to $357.8 million for the comparable period in 2012, an increase of $94.0 million that was driven by the stronger operations in 2013 as previously discussed and an additional $10.6 million of alternative energy tax credits used to reduce federal income tax payments during the first nine months of 2013, partially offset by higher pension contributions of $6.0 million made in 2013 compared to 2012. Cash used for operating assets and liabilities totaled $31.6 million for the nine month period ended September 30, 2013 compared to $106.0 million for the comparable period in 2012. The lower requirements for operating assets and liabilities in 2013 were driven by higher accounts payable and accrued liability levels in 2013 compared to 2012. 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, 2013 increased $59.0 million, or 80.2%, to $132.5 million, compared to the nine months ended September 30, 2012. The increase was related to the receipt of $57.4 million in grant proceeds from the U.S. Treasury in 2012 and higher additions to property, plant and equipment of $36.0 million during the first nine months of 2013 compared to the same period in 2012. This was partially offset by a $35.4 million acquisition completed in the first quarter of 2012.

### Financing Activities

Net cash used for financing activities totaled $98.4 million for the nine months ended September 30, 2013 compared to $193.7 million for the comparable period in 2012, a decrease of $95.2 million, or 49.2%. The decrease was primarily attributable to the July 2012 redemption of the Company’s 5.75% senior notes due in 2013 for $421.3 million, a $65.5 million payment to settle a treasury lock in June 2012, and lower repurchases of PCA common stock of $33.7 million in 2013. This was partially offset by $397.0 million in net proceeds received from the Company’s senior notes issuance that was completed in June 2012, lower proceeds and excess tax benefits from share-based awards of $8.8 million in 2013 and $8.2 million in bridge financing fees paid related to the Boise acquisition in 2013. Beginning in 2013, the Company began withholding shares from vesting equity awards to cover employee tax liabilities, which amounted to $10.9 million for the first nine months of 2013.

PCA’s primary sources of liquidity are net cash provided by operating activities and borrowing availability under its revolving credit facility and receivables credit facility. 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, 2013 for PCA’s senior credit facility, the receivables credit facility, and the senior notes:

*(Dollars in thousands)*

| Borrowing Arrangement | Balance at September 30, 2013 | Weighted Average Interest Rate | Projected Annual Cash Interest Payments |
| --- | ---: | ---: | ---: |
| Revolving Credit Facility | $— | N/A | N/A |
| Term Loan | 123,750 | 1.68% | $2,078 |
| Receivables Credit Facility | 109,000 | 1.03 | 1,121 |
| 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 | $782,750 | 3.65% | $28,549 |

The above table excludes the annual non-cash recorded interest expense of $5.7 million from the annual amortization of the treasury locks over the terms for both the 6.50% senior notes due 2018 and the 3.90% senior notes due 2022.

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

- enter into sale and leaseback transactions,
- incur liens or secured indebtedness,
- 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.

A failure to comply with the covenants 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 revolving credit facility. Such acceleration may also constitute events of default under the senior notes indentures and the receivables credit facility. As of September 30, 2013, PCA was in compliance with these covenants.

To finance the Boise acquisition, refinance Boise’s indebtedness and refinance the $123.8 million term loan under PCA’s old credit agreement. PCA entered into a new senior unsecured credit agreement on October 18, 2013 and issued $700.0 million of new 4.50% ten year senior notes on October 22, 2013. The new credit agreement provides for a total of $1.65 billion in financing, consisting of a $350.0 million five year revolving credit facility, a $650.0 million five year term loan facility and a $650.0 million seven year term loan facility. PCA drew down the term loans on October 25, 2013. PCA may prepay loans under the new credit agreement at any time without premium or penalty. Except for $19.0 million in letters of credit, there are no outstanding borrowings under the revolving credit facility. The new credit agreement replaced PCA’s old credit agreement dated October 11, 2011 and all amounts outstanding under the old credit agreement were repaid on October 25, 2013.

The term loans bear interest at the LIBOR rate plus a margin that is determined based on PCA’s credit rating. The credit agreement contains customary covenants, including limitations on liens, mergers and consolidations, sales of assets and subsidiary indebtedness. PCA must maintain a minimum interest coverage ratio and may not exceed the leverage ratio specified by the credit agreement.

PCA currently expects to incur normal capital expenditures of about $130.0 million in 2013, primarily for maintenance capital, cost reduction, business growth and environmental compliance, plus $75.0 million for strategic investments in our existing box plants and $10.0 million required for compliance with the Boiler MACT rules. As of September 30, 2013, PCA incurred $130.4 million of capital expenditures and had committed to an additional $75.8 million of capital expenditures for the remainder of 2013 and beyond.

PCA believes that net cash generated from operating activities, cash on hand, available borrowings under its existing 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, 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. Management presents income from operations, net income and diluted earnings per share excluding these special items to focus on PCA’s ongoing operations and assess its operating performance and believes that these measures provide useful information to investors because they enable them to perform meaningful comparisons of past and present operating results. 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, 2013 and 2012 follow:

*(In millions, except per share amounts)*

|  | Three Months Ended September 30, 2013 Income from Operations | Net Income | Diluted EPS | 2012 Income from Operations | Net Income | Diluted EPS |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| As reported in accordance with GAAP | $142.0 | $84.2 | $0.86 | $92.1 | $39.8 | $0.41 |
| Special items: |  |  |  |  |  |  |
| Pension curtailment charge (a) | 3.1 | 2.0 | 0.02 | — | — | — |
| Acquisition costs (b) | 1.5 | 2.7 | 0.03 | — | — | — |
| Debt refinancing charges (c) | — | — | — | — | 13.5 | 0.14 |
| Total special items | 4.6 | 4.7 | 0.05 | — | 13.5 | 0.14 |
| Excluding special items | $146.6 | $88.9 | $0.91 | $92.1 | $53.3 | $0.55 |

*(In millions, except per share amounts)*

|  | Nine Months Ended September 30, 2013 Income from Operations | Net Income | Diluted EPS | 2012 Income from Operations | Net Income | Diluted EPS |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| As reported in accordance with GAAP | $352.5 | $209.3 | $2.15 | $345.0 | $102.8 | $1.05 |
| Special items: |  |  |  |  |  |  |
| Pension curtailment charge (a) | 10.9 | 7.0 | 0.07 | — | — | — |
| Acquisition costs (b) | 1.5 | 2.7 | 0.03 | — | — | — |
| Debt refinancing charges (c) | — | — | — | — | 16.0 | 0.16 |
| Biofuel energy tax credits (d) | — | — | — | (95.5) | 23.0 | 0.24 |
| Total special items | 12.4 | 9.7 | 0.10 | (95.5) | 39.0 | 0.40 |
| Excluding special items | $364.9 | $219.0 | $2.25 | $249.5 | $141.8 | $1.45 |

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

(a) Represents a pension curtailment charge of $3.1 million pre-tax less $1.1 million in taxes, or $2.0 million after-tax, recorded in the third quarter of 2013. For the nine months ended September 30, 2013, represents pension curtailment charges of $10.9 million pre-tax less $3.9 million in taxes, or $7.0 million after-tax. See Note 8 to the condensed consolidated financial statements for additional information.

(b) Represent charges of $4.2 million pre-tax ($1.5 million recorded in income from operations and $2.7 million recorded in interest expense) less $1.5 million in taxes, or $2.7 million after-tax, for costs related to the Boise acquisition.

(c) Represents debt refinancing charges of $21.1 million pre-tax less $7.6 million in taxes, or $13.5 million after-tax, recorded in the third quarter of 2012. For the nine month period ended September 30, 2012, represents debt refinancing charges of $24.8 million pre-tax less $8.8 million in taxes, or $16.0 million after-tax.

(d) Represents a charge from amending the Company’s 2009 federal income tax return to reallocate gallons between the alternative fuel mixture credits and the cellulosic biofuel producer credits as described in Note 14 to the condensed consolidated financial statements.

### 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 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 $2.3 million annually.

### 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” in our Annual Report on Form 10-K for the year ended December 31, 2012. For a discussion of PCA’s reserve for environmental matters as of September 30, 2013, please see Note 12 to the financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

### 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, 2013 and 2012.

### Off-Balance Sheet Arrangements

PCA does not have any off-balance sheet arrangements as of September 30, 2013 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, 2012, 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 2013.

### 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;
- the impact of the Boise acquisition and risks and uncertainties relating to the integration of Boise’s business into our business;
- 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, 2012.

## 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, 2013. 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, 2013.

During the quarter ended September 30, 2013, 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, 4,263 characters.

Please refer to Item 1A. in PCA’s Annual Report on Form 10-K for the year ended December 31, 2012 for a discussion of risks to which PCA’s business, financial condition, results of operations and cash flows are subject. The following are additional risk factors as a result of PCA’s acquisition of Boise, Inc., which was completed on October 25, 2013.

***OfficeMax represented a significant portion of Boise’s business and will represent a significant portion of PCA’s paper business.***

The largest customer in the paper business, OfficeMax, accounted for approximately 19% and 21% of Boise’s historical sales for the years ended December 31, 2012 and December 31, 2011, respectively, and 19% and 20% of its sales for the six months ended June 30, 2013 and June 30, 2012, respectively. The agreement with OfficeMax requires OfficeMax to buy and we to supply at least 80% of OfficeMax’s requirements for office papers through December 2017; however, there are circumstances that could cause the agreement to terminate before 2017. On February 20, 2013, OfficeMax announced it had signed a definitive merger agreement with its competitor, Office Depot. The agreement with OfficeMax provides that it would survive the merger with respect to the office paper requirements of the legacy OfficeMax business. We cannot predict how the merger, if finalized, would affect the financial condition of the combined company, the paper requirements of the legacy OfficeMax business, or the effects the combined company would have on the pricing and competition for office papers. Significant reductions in paper purchases from OfficeMax (or the post-merger entity) would cause our paper business to expand its customer base and could potentially decrease its profitability if new customer sales required either a decrease in its pricing and/or an increase in its cost of sales. Any significant deterioration in the financial condition of OfficeMax (or the post-merger entity) affecting the ability to pay or causing a significant change in the willingness to continue to purchase our products could harm our business and results of operations.

***The acquired businesses of Boise may underperform relative to our expectations, and we may not be able to successfully integrate our existing business with the business of Boise.***

The acquired business of Boise may underperform relative to our expectations, which may cause our financial results to differ from our own or the investment community’s expectations. There may be substantial difficulties, costs and delays involved in the integration of our business with Boise’s business. Integration of Boise will also require PCA to modify its operational and financial systems, and may result in significant additional expenses.

If Boise’s business underperforms relative to our expectations, or if we fail to successfully integrate our business with Boise, our business, financial condition and results of operations may be materially and adversely affected.

### Increased leverage may harm our financial condition and results of operations.

We materially increased our indebtedness in connection with our acquisition of Boise from $807.6 million (including capital leases) as of the end of the third quarter to approximately $2.7 billion after the acquisition. We and our subsidiaries may incur additional indebtedness in the future. This increase and any future increase in our level of indebtedness will have several important effects on our future operations, including, without limitation:

- we will have additional cash requirements in order to support the payment of interest on our outstanding indebtedness;
- increases in our outstanding indebtedness and leverage may increase our vulnerability to adverse changes in our business;
- our ability to obtain additional financing for working capital, capital expenditures, general corporate and other purposes may be reduced;
- our flexibility in planning for, or reacting to, changes in our business and our industry may be reduced; and
- our flexibility to make acquisitions may be limited.

Further, if we cannot service our indebtedness, we may have to take actions to secure additional cash by selling assets, seeking additional equity or reducing investments.

Filed Nov 8, 2013.
Source: SEC EDGAR, the filing index for accession 0001193125-13-434620. Last ingested by Listed: Nov 5, 2026, 13:32 ET. No prices; not investment advice.