# Packaging Corp of America: Form 10-Q for the period ended Jun 30, 2017

- Company: [Packaging Corp of America](/companies/pkg.md) (CIK 75677)
- Form: 10-Q
- Filed: 2017-08-04
- Accepted by EDGAR: Aug 4, 2017, 11:55 ET
- Period: 2017-06-30
- Accession: 0001564590-17-015560
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/75677/000156459017015560/pkg-10q_20170630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/75677/000156459017015560/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2017-04-01 to 2017-06-30 | $1.22bn | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2017-01-01 to 2017-06-30 | $2.42bn | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2017-04-01 to 2017-06-30 | $364.6m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2017-01-01 to 2017-06-30 | $703.2m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2017-04-01 to 2017-06-30 | $130.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2017-01-01 to 2017-06-30 | $258.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-04-01 to 2017-06-30 | $233.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2017-01-01 to 2017-06-30 | $436.9m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2017-04-01 to 2017-06-30 | $65.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-01-01 to 2017-06-30 | $127.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-04-01 to 2017-06-30 | $143.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-01-01 to 2017-06-30 | $260.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-04-01 to 2017-06-30 | $1.52 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2017-01-01 to 2017-06-30 | $2.76 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-04-01 to 2017-06-30 | $1.52 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2017-01-01 to 2017-06-30 | $2.76 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-04-01 to 2017-06-30 | 93,600,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-01-01 to 2017-06-30 | 93,600,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2017-01-01 to 2017-06-30 | $385.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2017-01-01 to 2017-06-30 | $139.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2017-01-01 to 2017-06-30 | $118.8m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2017-01-01 to 2017-06-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2017-06-30 | $321.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-06-30 | $1.86bn | us-gaap:AssetsCurrent |
| Total assets | at 2017-06-30 | $5.90bn | us-gaap:Assets |
| Current liabilities | at 2017-06-30 | $760.2m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2017-06-30 | $2.46bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2017-06-30 | $156.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2017-06-30 | $1.91bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 47,489 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 statements that are not historical in nature 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 2016 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 products and the third largest producer of uncoated freesheet paper in the United States, based on production capacity. We operate five containerboard mills, three paper mills, and 93 corrugated products manufacturing plants. Our containerboard mills produce linerboard and corrugating medium, which are papers primarily used in the production of corrugated products. 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 are headquartered in Lake Forest, Illinois and operate primarily in the United States.

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 2016 Annual Report on Form 10-K.

### Executive Summary

Second quarter net sales were $1.58 billion in 2017 and $1.42 billion in 2016. We reported $143 million of net income, or $1.52 per diluted share, during the second quarter of 2017, compared to $116 million of net income, or $1.23 per diluted share, during the same period in 2016. The second quarter of 2017 included $0.5 million of pre-tax expense for special items (discussed below) compared to $3 million of pre-tax expense for special items in 2016. Excluding special items, we recorded $144 million of net income, or $1.52 per diluted share, during the second quarter of 2017, compared to $118 million of net income, or $1.25 per diluted share, in the second quarter of 2016. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes, lower costs for annual mill outages, lower taxes, and a partial insurance recovery related to the DeRidder Mill incident, partially offset by higher costs for energy, fiber, labor, freight, and chemicals, higher depreciation and interest expense, and lower Paper segment prices and mix.

Packaging segment income from operations was $225 million in the second quarter of 2017, compared to $192 million in the second quarter of 2016. Packaging segment earnings before interest, taxes, depreciation, amortization, and depletion (EBITDA) excluding special items was $303 million in the second quarter of 2017 and $267 million in the second quarter of 2016. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes, and a partial insurance recovery related to the DeRidder Mill incident, partially offset by increased fiber, energy, labor and freight costs.

Paper segment income from operations was $29 million in the second quarter of 2017, compared to $24 million in the second quarter of 2016. Paper segment EBITDA excluding special items was $43 million in the second quarter of 2017, compared to $39 million in the second quarter of 2016. The increase was due to lower annual mill outage and fiber costs, partially offset by higher energy and chemical costs, and lower paper prices and mix.

During the first six months of 2017 we reported $261 million of net income, or $2.76 per diluted share, compared to $220 million of net income, or $2.32 per diluted share, during the same period in 2016. The six months ended June 30, 2017 included $4 million of pre-tax expense for special items (discussed below), compared to $6 million of pre-tax expense for special items during the same period in 2016. Excluding special items, we recorded $263 million of net income, or $2.79 per diluted share, during the first six months of 2017, compared to $223 million of net income, or $2.36 per diluted share, in the first six months of 2016. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes, higher Paper segment prices and mix, lower costs for annual mill outages and lower taxes, partially offset by higher costs for energy, fiber, labor and freight, higher depreciation and interest expense, and lower Paper segment sales and production volumes. Earnings for the year to date were negatively impacted due to the DeRidder Mill incident described in Note 18 to the Financial Statements included in this report.

Packaging segment income from operations was $415 million in the first six months of 2017, compared to $354 million in the same period of 2016. Packaging segment EBITDA excluding special items was $576 million in the first six months of 2017, compared to $503 million in the first six months of 2016. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes, and lower costs for annual mill outages, while costs were higher for fiber, energy, labor, and freight. The Packaging segment was negatively impacted by the DeRidder Mill incident losses described above.

Paper segment income from operations was $59 million in the first six months of 2017, compared to $61 million in the first six months of 2016. Paper segment EBITDA excluding special items was $87 million in the first six months of 2017, compared to $90 million in the same period of 2016. The decrease was due primarily to lower paper sales and production volumes, higher costs for energy and chemicals, partially offset by lower costs for fiber and annual mill outage costs, and higher paper prices and mix.

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

The second quarter of 2017 included $0.5 million of pre-tax expense for special items compared to $3 million of pre-tax expense in the same period in 2016. The special items in the second quarter of 2017 consist of facility closure costs related to corrugated products facilities and integration costs related to recent acquisitions. Second quarter 2016 special items included $2 million related to closing a corrugated manufacturing facility and a paper distribution center and $1 million related to our withdrawal from a multiemployer pension plan.

The six months ended June 30, 2017 included $4 million of pre-tax expense for special items, compared to $6 million of pre-tax expense for special items during the same period in 2016. The six months ended June 30, 2017 included expense of $5 million for the property damage and business interruption insurance deductible related to the DeRidder Mill incident; $1 million of charges consisting of closure costs related to corrugated products facilities, integration costs related to the recent acquisitions, and costs related to a lump sum settlement payment for a multiemployer pension plan withdrawal liability; and $2 million of income related to a working capital adjustment from the April 2015 sale of our Hexacomb corrugated manufacturing operations in Europe and Mexico. The six months ended June 30, 2016 included $6 million of charges consisting of closure costs related to corrugated products facilities and a paper distribution facility, acquisition-related costs for the TimBar Corporation, and costs related to our withdrawal from a multiemployer pension plan.

A reconciliation of reported earnings per diluted share to earnings per share, excluding special items, for the three and six months ended June 30, 2017 and 2016 are as follows:

|  | Three Months Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Earnings per diluted share, as reported | $1.52 | $1.23 | $2.76 | $2.32 |
| Special items: |  |  |  |  |
| Integration-related, facilities closure and other costs | — | 0.02 | 0.01 | 0.04 |
| Acquisition-related costs | — | — | — | — |
| DeRidder mill incident | — | — | 0.03 | — |
| Hexacomb working capital adjustment | — | — | (0.01) | — |
| Total special items | — | 0.02 | 0.03 | 0.04 |
| Earnings per diluted share, excluding special items | $1.52 | $1.25 | $2.79 | $2.36 |

Management excludes special items as it believes these items are not necessarily reflective of the ongoing results of operations of our business. We present these measures 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, because these measures assist in providing a meaningful comparison between periods presented and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. 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 industry-wide corrugated products total shipments increased 2.4% during the second quarter of 2017, compared to the same quarter in 2016. Reported industry containerboard production increased 3.2% compared to the second quarter of 2016, and reported industry containerboard inventories at the end of the second quarter of 2017 were approximately 2.3 million tons, down 4.2% compared to the same period in 2016. Reported containerboard export shipments were up 6.6% compared to the second quarter of 2016. Published containerboard prices increased in April 2017 by $50 per ton for linerboard and corrugating medium. In July 2017, trade publications reported a further increase of $20 per ton for corrugating medium.

The market for communication papers competes heavily with electronic data transmission and document storage alternatives. Increasing shifts to these alternatives have reduced usage of, and lower demand for, traditional print media and communication papers. Trade publications reported that uncoated freesheet paper shipments were down 5.2% in the second quarter of 2017, compared to the same quarter in 2016. Average prices reported by a trade publication for cut size office papers were lower by $25 per ton, or 2.6%, in the second quarter of 2017, compared to the second quarter of 2016.

### Outlook

Looking ahead to the third quarter of 2017, we expect higher containerboard and corrugated products shipments resulting from strong demand and we expect to realize the substantial majority of our previously announced packaging segment price increases. White paper sales volumes should be seasonally higher, although price and mix are expected to move lower. We also anticipate continued price inflation in recycled fiber and certain chemicals, higher freight costs and a higher tax rate. Considering these items, we expect third quarter earnings, excluding special items, to be higher than second quarter earnings.

### Results of Operations

### Three Months Ended June 30, 2017, compared to Three Months Ended June 30, 2016

The historical results of operations of PCA for the three months ended June 30, 2017 and 2016 are set forth below (dollars in millions):

|  | Three Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: |
| Packaging | $1,311.5 | $1,125.3 | $186.2 |
| Paper | 253.7 | 266.8 | (13.1) |
| Corporate and Other | 55.9 | 60.0 | (4.1) |
| Intersegment eliminations | (37.1) | (34.7) | (2.4) |
| Net sales | $1,584.0 | $1,417.4 | $166.6 |
| Packaging | $224.5 | $192.4 | $32.1 |
| Paper | 29.1 | 24.4 | 4.7 |
| Corporate and Other | (19.8) | (16.6) | (3.2) |
| Income from operations | $233.8 | $200.2 | $33.6 |
| Interest expense, net | (25.2) | (22.5) | (2.7) |
| Income before taxes | 208.6 | 177.7 | 30.9 |
| Income tax provision | (65.4) | (61.8) | (3.6) |
| Net income | $143.2 | $115.9 | $27.3 |
| Non-GAAP Measures (a) |  |  |  |
| Net income excluding special items | $143.6 | $117.7 | $25.9 |
| Consolidated EBITDA | 327.5 | 287.8 | 39.7 |
| Consolidated EBITDA excluding special items | 328.0 | 290.4 | 37.6 |
| Packaging EBITDA | 302.8 | 264.4 | 38.4 |
| Packaging EBITDA excluding special items | 303.3 | 266.7 | 36.6 |
| Paper EBITDA | 43.1 | 38.7 | 4.4 |
| Paper EBITDA excluding special items | 43.1 | 38.7 | 4.4 |

(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 increased $167 million, or 11.8%, to $1,584 million during the three months ended June 30, 2017, compared to $1,417 million during the same period in 2016.

*Packaging.* Net sales increased $186 million, or 16.5%, to $1,312 million, compared to $1,125 million in the second quarter of 2016, due to increased containerboard and corrugated products volume ($127 million), including the addition of TimBar and Columbus Container, and higher domestic and export containerboard and corrugated products price and mix ($59 million). Our domestic containerboard prices in the second quarter of 2017 increased 13.9% and export prices increased 13.8%, compared to the same period in 2016. In the second quarter of 2017, our containerboard outside shipments increased 3.6%, and total corrugated products shipments were up 10.0%, compared to the second quarter of 2016. Containerboard mill production in the second quarter of 2017 was 947,000 tons compared to 926,000 in 2016. Industry Containerboard prices reported by trade publications increased in April 2017 by $50 per ton for linerboard and corrugating medium.

*Paper.* Net sales during the three months ended June 30, 2017 decreased $13 million, or 4.9%, to $254 million, compared to $267 million in the second quarter of 2016, due to lower volume ($12 million) including the 2016 shutdown of our market pulp operations at our Wallula Mill and unfavorable changes in prices and mix ($1 million).

### Gross Profit

Gross profit increased $45 million during the three months ended June 30, 2017, compared to the same period in 2016. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes, and lower costs for annual mill outages, partially offset by higher energy, fiber, labor and freight costs, and lower Paper segment prices and mix.

### Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased $15 million during the three months ended June 30, 2017, compared to the same period in 2016. The increase was primarily due to higher administrative costs corresponding to the TimBar and Columbus Container acquisitions.

### Other Income (Expense), Net

Other income (expense), net, during the three months ended June 30, 2017 was $1 million of expense, compared to $5 million of expense during the three months ended June 30, 2016. The second quarter of 2017 included charges of $2 million for asset disposals and write-offs and $0.5 million of closure costs related to corrugated products facilities and integration costs related to the recent acquisitions, partially offset by $3 million of property damage and business interruption insurance net recoveries related to the February 2017 incident at our DeRidder, Mill. The second quarter of 2016 included $1 million of facilities closure costs, $1 million of asset disposal costs, and $1 million of costs related to our withdrawal from a multiemployer pension plan. 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 $34 million, or 16.8%, during the three months ended June 30, 2017, compared to the same period in 2016. The second quarter of 2017 included $0.5 million of expense from special items compared to $3 million for the second quarter of 2016. The special items in the second quarter of 2017 includes closure costs related to corrugated products facilities and integration costs related to the recent acquisitions. Second quarter 2016 special items included $3 million related to closing a corrugated manufacturing facility and a paper distribution center and costs related to our withdrawal from a multiemployer pension plan.

*Packaging.* Packaging segment income from operations increased $32 million to $225 million, compared to $192 million during the three months ended June 30, 2016. The increase in the second quarter of 2017 related primarily to favorable changes in containerboard and corrugated products prices and mix ($36 million), higher containerboard and corrugated products sales and production volumes ($19 million), and a partial insurance recovery related to the DeRidder Mill incident ($3 million), partially offset by higher costs for fiber ($10 million), energy ($4 million), labor ($4 million), and freight ($3 million), and increased depreciation expense ($3 million). Special items during the second quarter of 2017 include expense of $0.5 million which includes closure costs related to corrugated products facilities and integration costs related to the recent acquisitions. Special items for the second quarter 2016 includes expense of $2 million related to closing a corrugated manufacturing facility and costs related to our withdrawal from a multiemployer pension plan.

*Paper.* Paper segment income from operations increased $5 million to $29 million, compared to $24 million during the three months ended June 30, 2016. The increase primarily related to lower costs for annual mill outages ($9 million), wood ($3 million), and labor ($1 million), partially offset by higher energy ($5 million) and chemical ($2 million) costs, and prices and mix ($1 million). There were no special items in the second quarters of 2017 or 2016, compared to expense of $0.3 million for facility closure costs in the same period of 2016.

### Interest Expense, Net, and Income Taxes

Interest expense, net, increased $3 million, during the three months ended June 30, 2017, compared to the same period in 2016. The increase in interest expense was primarily due to higher term loan borrowings for the TimBar acquisition and higher interest rates on PCA’s variable rate debt in the second quarter of 2017.

During the three months ended June 30, 2017, we recorded $65 million of income tax expense, compared to $62 million of expense during the three months ended June 30, 2016. The effective tax rate for the three months ended June 30, 2017 and 2016 was 31.4% and 34.8%, respectively. The decrease in our effective tax rate for the three months ended June 30, 2017 compared with the same period in 2016, was primarily due to the adoption of ASU 2016-09 (Topic 718): *Improvements to Employee Share-Based Payment Accounting*, which requires all excess tax benefits and deficiencies from employee share-based payment awards to be recognized in the income statement as opposed to additional paid in capital.

### Six Months Ended June 30, 2017, compared to Six Months Ended June 30, 2016

The historical results of operations of PCA for the six months ended June 30, 2017 and 2016 are set forth below (dollars in millions):

|  | Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: |
| Packaging | $2,568.4 | $2,220.8 | $347.6 |
| Paper | 512.9 | 547.3 | (34.4) |
| Corporate and Other | 110.1 | 122.8 | (12.7) |
| Intersegment eliminations | (70.9) | (72.5) | 1.6 |
| Net sales | $3,120.5 | $2,818.4 | $302.1 |
| Packaging | $415.3 | $353.9 | $61.4 |
| Paper | 58.9 | 60.5 | (1.6) |
| Corporate and Other | (37.3) | (33.4) | (3.9) |
| Income from operations | $436.9 | $381.0 | $55.9 |
| Interest expense, net | (49.2) | (44.1) | (5.1) |
| Income before taxes | 387.7 | 336.9 | 50.8 |
| Income tax provision | (127.1) | (117.3) | (9.8) |
| Net income | $260.6 | $219.6 | $41.0 |
| Non-GAAP Measures (a) |  |  |  |
| Net income excluding special items | $263.3 | $223.3 | $40.0 |
| Consolidated EBITDA | 623.1 | 557.3 | 65.8 |
| Consolidated EBITDA excluding special items | 627.1 | 562.6 | 64.5 |
| Packaging EBITDA | 570.8 | 499.2 | 71.6 |
| Packaging EBITDA excluding special items | 575.5 | 503.4 | 72.1 |
| Paper EBITDA | 86.9 | 89.0 | (2.1) |
| Paper EBITDA excluding special items | 86.9 | 89.8 | (2.9) |

(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 increased $302 million, or 10.7%, to $3,121 million during the six months ended June 30, 2017, compared to $2,818 million during the same period in 2016.

*Packaging.* Net sales increased $348 million, or 15.7%, to $2,568 million, compared to $2,221 million in the six months ended June 30, 2016, due to higher containerboard and corrugated products volumes ($257 million), including the addition of TimBar and Columbus Container, and higher domestic and export containerboard and corrugated products price and mix ($90 million). Our domestic containerboard prices in the first six months of 2017 increased 10.0% due to published price increases. Additionally, our export containerboard prices increased 7.5%, compared to the same period in 2016. In the first six months of 2017, our containerboard outside shipments increased 4.1%, and corrugated products shipments were up 10.3%, compared to the first six months of 2016.

*Paper.* Net sales during the six months ended June 30, 2017 decreased $34 million, or 6.3%, to $513 million, compared to $547 million in the six months ended June 30, 2016. Sales decreased due to lower volumes ($39 million), including the 2016 shutdown of our market pulp operations at our Wallula Mill, partially offset by increases in prices and mix ($5 million).

### Gross Profit

Gross profit increased $84 million, or 13.6%, during the six months ended June 30, 2017, compared to the same period in 2016. The increase was primarily due to higher containerboard and corrugated products prices and mix and sales and production volumes, and lower annual maintenance outage costs, partially offset by higher costs for energy, fiber, freight, and lower Paper segment sales and production volumes. In the first six months of 2017, gross profit included no special items, compared to $1 million in the same period last year for facility closure costs.

### Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased $30 million, or 12.9% during the six months ended June 30, 2017, compared to the same period in 2016. The increase was primarily due to higher administrative costs corresponding to the TimBar and Columbus Container acquisitions.

### Other Income (Expense), Net

Other expense, net, during the six months ended June 30, 2017 was $8 million, compared to $9 million during the six months ended June 30, 2016. The six months ended June 30, 2017 included charges of $5 million for asset disposals and write-offs; $3 million of costs for the property damage and business interruption insurance deductible, net of recoveries, related to the DeRidder Mill incident; $1 million of charges consisting of closure costs related to corrugated products facilities, integration costs related to the recent acquisitions, and costs related to a lump sum settlement payment for a multiemployer pension plan withdrawal liability; and $2 million of income related to a working capital adjustment from the April 2015 sale of our Hexacomb corrugated manufacturing operations in Europe and Mexico. The six months ended June 30, 2016 included $5 million of charges consisting of closure costs related to corrugated products facilities and a paper distribution facility, and acquisition-related costs for the TimBar Corporation and costs related to our withdrawal from a multiemployer pension plan, and $3 million of asset disposal costs. 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 $56 million, or 14.7%, during the six months ended June 30, 2017, compared to the same period in 2016. The first six months of 2017 included $4 million of expense from special items, compared to $6 million of expense from special items in the first six months of 2016. The six months ended June 30, 2017 included expense of $5 million for the property damage and business interruption insurance deductible related to the DeRidder Mill incident; $1 million of charges consisting of closure costs related to corrugated products facilities, integration costs related to the recent acquisitions, and costs related to a lump sum settlement payment for a multiemployer pension plan withdrawal liability; and $2 million of income related to a working capital adjustment from the April 2015 sale of our Hexacomb corrugated manufacturing operations in Europe and Mexico. The six months ended June 30, 2016 included $6 million of charges consisting of closure costs related to corrugated products facilities and a paper distribution facility, acquisition-related costs for the TimBar Corporation, and costs related to our withdrawal from a multiemployer pension plan.

*Packaging.* Packaging segment income from operations increased $61 million to $415 million, during the first six months of 2017 compared to the same period last year. The first six months of 2017 included higher containerboard and corrugated products prices and mix ($59 million), sales and production volumes ($46 million), and lower mill outage costs ($3 million), partially offset by higher fiber ($19 million), energy ($9 million), freight ($6 million), and labor ($6 million) costs, and higher depreciation expense ($6 million). Special items included $5 million of expense for the property damage and business interruption insurance deductible related to the DeRidder Mill incident; $1 million of charges consisting of closure costs related to corrugated products facilities, integration costs related to the recent acquisitions, and costs related to a lump sum settlement payment for a multiemployer pension plan withdrawal liability; and $2 million of income related to a working capital adjustment from the April 2015 sale of our Hexacomb corrugated manufacturing operations in Europe and Mexico in the first six months of 2017. The six months ended June 30, 2016 included $4 million of charges consisting of closure costs related to corrugated products facilities and our withdrawal from a multiemployer pension plan.

*Paper.* Paper segment income from operations decreased $2 million to $59 million, compared to the six months ended June 30, 2016. The decrease primarily relates to lower paper sales and production volumes ($11 million) and higher costs for energy ($9 million) and chemicals ($2 million), partially offset by lower fiber ($9 million), annual mill outage ($4 million), and labor ($1 million) costs, and higher paper prices and mix ($4 million). There were no special items in the first six months of 2017, compared to expense of $1 million for facility closure costs in the same period of 2016.

### Interest Expense, Net, and Income Taxes

Interest expense, net, was $49 million during the six months ended June 30, 2017, compared to $44 million during the six months ended June 30, 2016. The increase in interest expense was primarily due to higher term loan borrowings for the TimBar acquisition and higher interest rates on PCA's variable rate debt during the six months ended June 30, 2017 compared to the same period in 2016.

During the six months ended June 30, 2017, we recorded $127 million of income tax expense, compared to $117 million of expense during the six months ended June 30, 2016. The effective tax rate for the six months ended June 30, 2017 and 2016 was 32.8% and 34.8%, respectively. The decrease in our effective tax rate for the six months ended June 30, 2017 compared with the same period in 2016, was primarily due to the adoption of ASU 2016-09.

### 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 June 30, 2017 we had $321 million of cash and $327 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, acquisitions, 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): | Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: |
| Operating activities | $385.6 | $376.2 | $9.4 |
| Investing activities | (140.9) | (127.7) | (13.2) |
| Financing activities | (163.0) | (219.1) | 56.1 |
| Net increase in cash and cash equivalents | $81.7 | $29.4 | $52.3 |

### Operating Activities

During the six months ended June 30, 2017, net cash provided by operating activities was $386 million, compared to $376 million in the same period in 2016, an increase of $10 million. Cash from operations excluding changes in cash used for operating assets and liabilities increased $47 million, primarily due to higher income from operations as discussed above. The remaining $37 million decrease from changes in cash used for operating assets and liabilities was primarily due to the following: an increase in accounts receivable in the first six months of 2017, primarily related to higher sales volumes and prices in the Packaging segment and an increase in inventories in the Paper segment, partially offset by an increase in accounts payable, primarily related to timing of payments in the second quarter of 2017. 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 six months ended June 30, 2017 increased $13 million, to $141 million, compared to $128 million during the same period in 2016. We spent $139 million for capital investments during the six months ended June 30, 2017, compared to $122 million during the same period in 2016.

We expect capital investments to be approximately $350 million in 2017, excluding any acquisitions or other strategic activities. 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 2017 of up to $1 million, and we expect other environmental capital expenditures of about $7 million in 2017. 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 2016 Annual Report on Form 10-K.

### Financing Activities

During the six months ended June 30, 2017, net cash used by financing activities decreased $56 million to $163 million, compared to $219 million during the same period in 2016. The decrease primarily relates to less share repurchases, partially offset by an increase in debt repayments and a higher dividend payment. During the six months ended June 30, 2017 we did not repurchase any common stock, compared to $100 million to repurchase 1,987,187 shares of common stock in the same period in 2016. In the first six months of 2017, we made $34 million of principal payments on long-term debt and capital leases, compared to $4 million during the same period in 2016. In the first six months of 2017, we paid $119 million of dividends compared to $105 million of dividends paid during the first six months of 2016.

For more information about our debt, see Note 9, Debt, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 2016 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 2016 Annual Report on Form 10-K.

### 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 as it believes that these items are not necessarily reflective of the ongoing operations of our business. These 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, because these measures assist in providing a meaningful comparison between periods 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 six months ended June 30, 2017 and 2016 follow (dollars in millions):

|  | Three Months Ended June 30, 2017 Income before Taxes | Income Taxes | Net Income | 2016 Income before Taxes | Income Taxes | Net Income |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| As reported in accordance with GAAP | $208.6 | $(65.4) | $143.2 | $177.7 | $(61.8) | $115.9 |
| Special items: |  |  |  |  |  |  |
| Integration-related, facilities closure and other costs (a) | 0.5 | (0.1) | 0.4 | 2.6 | (1.0) | 1.6 |
| Acquisition-related costs (b) | — | — | — | 0.3 | (0.1) | 0.2 |
| Total special items | 0.5 | (0.1) | 0.4 | 2.9 | (1.1) | 1.8 |
| Excluding special items | $209.1 | $(65.5) | $143.6 | $180.6 | $(62.9) | $117.7 |

|  | Six Months Ended June 30, 2017 Income before Taxes | Income Taxes | Net Income | 2016 Income before Taxes | Income Taxes | Net Income |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| As reported in accordance with GAAP | $387.7 | $(127.1) | $260.6 | $336.9 | $(117.3) | $219.6 |
| Special items: |  |  |  |  |  |  |
| Integration-related, facilities closure and other costs (a) | 1.3 | (0.4) | 0.9 | 5.4 | (1.9) | 3.5 |
| Acquisition-related costs (b) | — | — | — | 0.3 | (0.1) | 0.2 |
| DeRidder mill incident (a) | 5.0 | (1.7) | 3.3 | — | — | — |
| Hexacomb working capital adjustment (a) | (2.3) | 0.8 | (1.5) | — | — | — |
| Total special items | 4.0 | (1.3) | 2.7 | 5.7 | (2.0) | 3.7 |
| Excluding special items | $391.7 | $(128.4) | $263.3 | $342.6 | $(119.3) | $223.3 |

22

(a) The three months ended June 30, 2017 include $0.5 million of charges consisting of closure costs related to corrugated products facilities and integration costs related to the recent acquisitions.

The six months ended June 30, 2017 include the following:

1\. $1.3 million of charges consisting of closure costs related to corrugated products facilities, integration costs related to the recent acquisitions, and costs related to a lump sum settlement payment of a multiemployer pension plan withdrawal liability for one of our corrugated products facilities.

2\. $5.0 million of costs for the property damage and business interruption insurance deductible corresponding to the February 2017 explosion at our DeRidder, LA mill.

3\. $2.3 million of income related to a working capital adjustment from the April 2015 sale of our Hexacomb corrugated manufacturing operations in Europe and Mexico.

(b) The three and six months ended June 30, 2016 include $2.9 million and $5.7 million, respectively, of closure costs related to corrugated products facilities and a paper products facility, acquisition-related costs for the TimBar Corporation acquisition, and costs related to our withdrawal from a multiemployer pension plan for one of our corrugated products facilities.

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

|  | Three Months Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $143.2 | $115.9 | $260.6 | $219.6 |
| Interest expense, net | 25.2 | 22.5 | 49.2 | 44.1 |
| Income tax provision | 65.4 | 61.8 | 127.1 | 117.3 |
| Depreciation, amortization, and depletion | 93.7 | 87.6 | 186.2 | 176.3 |
| EBITDA | $327.5 | $287.8 | $623.1 | $557.3 |
| Special items: |  |  |  |  |
| Integration-related, facilities closure and other costs | 0.5 | 2.3 | 1.3 | 5.0 |
| Acquisition-related costs | — | 0.3 | — | 0.3 |
| DeRidder mill incident | — | — | 5.0 | — |
| Hexacomb working capital adjustment | — | — | (2.3) | — |
| Total special items | 0.5 | 2.6 | 4.0 | 5.3 |
| EBITDA excluding special items | $328.0 | $290.4 | $627.1 | $562.6 |

23

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

| Packaging | Three Months Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Segment income | $224.5 | $192.4 | $415.3 | $353.9 |
| Depreciation, amortization, and depletion | 78.3 | 72.0 | 155.5 | 145.3 |
| EBITDA | 302.8 | 264.4 | 570.8 | 499.2 |
| Integration-related, facilities closure and other costs | 0.5 | 2.3 | 1.3 | 4.2 |
| DeRidder mill incident | — | — | 5.0 | — |
| Hexacomb working capital adjustment | — | — | (1.6) | — |
| EBITDA excluding special items | **$303.3** | **$266.7** | **$575.5** | **$503.4** |
| **Paper** |  |  |  |  |
| Segment income | $29.1 | $24.4 | $58.9 | $60.5 |
| Depreciation, amortization, and depletion | 14.0 | 14.3 | 28.0 | 28.5 |
| EBITDA | 43.1 | 38.7 | 86.9 | 89.0 |
| Integration-related, facilities closure and other costs | — | — | — | 0.8 |
| EBITDA excluding special items | **$43.1** | **$38.7** | **$86.9** | **$89.8** |
| **Corporate and Other** |  |  |  |  |
| Segment loss | $(19.8) | $(16.6) | $(37.3) | $(33.4) |
| Depreciation, amortization, and depletion | 1.4 | 1.3 | 2.7 | 2.5 |
| EBITDA | (18.4) | (15.3) | (34.6) | (30.9) |
| Acquisition-related costs | — | 0.3 | — | 0.3 |
| Hexacomb working capital adjustment | — | — | (0.7) | — |
| EBITDA excluding special items | **$(18.4)** | **$(15.0)** | **$(35.3)** | **$(30.6)** |
| **EBITDA** | **$327.5** | **$287.8** | **$623.1** | **$557.3** |
| **EBITDA excluding special items** | **$328.0** | **$290.4** | **$627.1** | **$562.6** |

### 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. We were not a party to any derivatives-based arrangements at June 30, 2017. 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 2016 Annual Report on Form 10-K.

The interest rates on approximately 63% 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 $10 million annually.

### Off-Balance-Sheet Activities

The Company does not have any off-balance sheet arrangements as of June 30, 2017.

### 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 2016 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 business combinations, pensions and other postretirement benefits, goodwill and intangible assets, long-lived asset impairment, environmental liabilities 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 2016 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 six months of 2017.

### 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. Forward-looking statements include statements about our expectations regarding our future liquidity, earnings, expenditures, and financial condition. 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 acquired businesses and risks and uncertainties regarding operation, expected benefits and integration of such businesses;
- 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;
- the timing and amount of insurance recoveries relating to the DeRidder incident; 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, 2016.

## Market risk

As filed, 238 characters.

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

## Controls and procedures

As filed, 2,480 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 June 30, 2017. 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 June 30, 2017.

### Changes in Internal Control over Financial Reporting

On August 29, 2016, PCA acquired TimBar Corporation (“TimBar”). Additionally, on November 30, 2016, PCA acquired Columbus Container, Inc. (“Columbus Container”). We are currently in the process of evaluating and integrating TimBar’s and Columbus Container’s controls over financial reporting which may result in changes or additions to PCA’s internal control over financial reporting. Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired company. Except as may relate to the integration of the TimBar and Columbus Container acquisitions, there were no other changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the most recent fiscal quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our 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, 2016.

Filed Aug 4, 2017.
Source: SEC EDGAR, the filing index for accession 0001564590-17-015560. Last ingested by Listed: Nov 5, 2026, 13:32 ET. No prices; not investment advice.