# Packaging Corp of America: Form 10-K for the period ended Dec 31, 2018 - Company: [Packaging Corp of America](/companies/pkg.md) (CIK 75677) - Form: 10-K - Filed: 2019-02-28 - Accepted by EDGAR: Feb 28, 2019, 16:53 ET - Period: 2018-12-31 - Accession: 0001564590-19-005284 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/75677/000156459019005284/pkg-10k_20181231.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/75677/000156459019005284/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2018-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2018-10-01 to 2018-12-31 | $1.75bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Revenue | 12 months, 2018-01-01 to 2018-12-31 | $7.01bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Cost of revenue | 12 months, 2018-01-01 to 2018-12-31 | $5.37bn | us-gaap:CostOfGoodsAndServicesSold | | Gross profit | 3 months, 2018-10-01 to 2018-12-31 | $425.4m | us-gaap:GrossProfit | | Gross profit | 12 months, 2018-01-01 to 2018-12-31 | $1.65bn | us-gaap:GrossProfit | | Research and development | 12 months, 2018-01-01 to 2018-12-31 | $14.4m | us-gaap:ResearchAndDevelopmentExpense | | Selling, general and administrative | 12 months, 2018-01-01 to 2018-12-31 | $536.4m | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 3 months, 2018-10-01 to 2018-12-31 | $286.7m | us-gaap:OperatingIncomeLoss | | Operating income | 12 months, 2018-01-01 to 2018-12-31 | $1.07bn | us-gaap:OperatingIncomeLoss | | Income tax | 12 months, 2018-01-01 to 2018-12-31 | $232.5m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2018-10-01 to 2018-12-31 | $204.6m | us-gaap:NetIncomeLoss | | Net income | 12 months, 2018-01-01 to 2018-12-31 | $738.0m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2018-10-01 to 2018-12-31 | $2.16 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 12 months, 2018-01-01 to 2018-12-31 | $7.80 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2018-10-01 to 2018-12-31 | $2.17 | us-gaap:EarningsPerShareBasic | | Basic EPS | 12 months, 2018-01-01 to 2018-12-31 | $7.82 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2018-01-01 to 2018-12-31 | 93,900,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 12 months, 2018-01-01 to 2018-12-31 | $1.18bn | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2018-01-01 to 2018-12-31 | $551.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 12 months, 2018-01-01 to 2018-12-31 | $268.1m | us-gaap:PaymentsOfDividendsCommonStock | | Cash and equivalents | at 2018-12-31 | $361.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2018-12-31 | $2.12bn | us-gaap:AssetsCurrent | | Total assets | at 2018-12-31 | $6.57bn | us-gaap:Assets | | Current liabilities | at 2018-12-31 | $693.6m | us-gaap:LiabilitiesCurrent | | Long-term debt | at 2018-12-31 | $2.48bn | us-gaap:LongTermDebtNoncurrent | | Current portion of debt | at 2018-12-31 | $0 | us-gaap:LongTermDebtCurrent | | Shareholders' equity | at 2018-12-31 | $2.67bn | us-gaap:StockholdersEquity | ## Business As filed, 24,331 characters. Packaging Corporation of America (“we,” “us,” “our,” “PCA,” or the “Company”) is the third largest producer of containerboard products and the third largest producer of uncoated freesheet (UFS) in North America. We operate six containerboard mills, two white paper mills and 95 corrugated products manufacturing plants. We are headquartered in Lake Forest, Illinois and operate primarily in the United States. We report in three reportable segments: Packaging, Paper and Corporate and Other. For segment financial information see Note 18, Segment Information, of the Notes to Consolidated Financial Statements in “Part II, Item 8, Financial Statements and Supplementary Data” of this Form 10-K. During the second quarter of 2018, we discontinued the production of uncoated free sheet and coated one-side grades at the Wallula, Washington mill and converted the No. 3 machine to a virgin kraft linerboard machine. Subsequent to the date of conversion in May 2018, operating results for the Wallula mill are primarily included in the Packaging segment. Before such date, operating results were included in the Paper segment. ### Production and Shipments The following table summarizes the Packaging segment's containerboard production and corrugated products shipments and the Paper segment's white paper and market pulp production. | | | | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | | --- | --- | --- | ---: | ---: | ---: | ---: | ---: | | Containerboard Production (a) | PCA | 2018 | 953 | 1,020 | 1,087 | 1,021 | 4,081 | | (thousand tons) | | 2017 | 932 | 947 | 996 | 1,006 | 3,881 | | | | 2016 | 898 | 926 | 950 | 962 | 3,736 | | Corrugated Shipments (BSF) | PCA | 2018 | 14.4 | 15.1 | 14.8 | 14.6 | 58.9 | | | | 2017 | 13.6 | 13.9 | 13.7 | 14.5 | 55.7 | | | | 2016 | 12.3 | 12.7 | 13.1 | 13.2 | 51.3 | | White Paper (UFS) Production (a) | PCA | 2018 | 279 | 252 | 239 | 247 | 1,017 | | (thousand tons) | | 2017 | 273 | 289 | 278 | 278 | 1,118 | | | | 2016 | 283 | 268 | 288 | 288 | 1,127 | | Market Pulp Production (b) | PCA | 2018 | — | — | — | — | — | | (thousand tons) | | 2017 | — | — | — | — | — | | | | 2016 | 16 | 10 | 12 | 7 | 45 | (a) In May 2018, PCA ceased production of uncoated free sheet and coated one-side grades at our Wallula, Washington mill and converted the No. 3 machine to a virgin kraft linerboard machine. (b) On December 1, 2016, PCA ceased production of softwood market pulp at our Wallula, Washington mill and permanently shut down the No. 1 machine. Below is a map of our locations: ### Packaging ### Packaging Products Our containerboard mills produce linerboard and semi-chemical 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. During the year ended December 31, 2018, our Packaging segment produced 4.1 million tons of containerboard at our mills. Our corrugated products manufacturing plants sold 58.9 billion square feet (BSF) of corrugated products. Our net sales to third parties totaled $5.9 billion in 2018. ### Facilities We currently manufacture containerboard, which includes a variety of performance and specialty grades, at six containerboard mills. Total annual containerboard capacity was approximately 4.4 million tons as of December 31, 2018. We also produce corrugated and protective packaging products at 95 manufacturing locations. The following provides more details of our operations: *Counce.* Our Counce, Tennessee mill produces kraft linerboard on two paper machines. The mill can produce basis weights from 26 lb. to 90 lb. *DeRidder.* Our DeRidder, Louisiana mill produces kraft linerboard and semi-chemical corrugating medium on two paper machines. The mill can produce linerboard in basis weights of 26 lb. to 69 lb. and medium in basis weights of 23 lb. to 33 lb. *Valdosta.* Our Valdosta, Georgia mill produces kraft linerboard on one paper machine. The mill can produce basis weights from 35 lb. to 96 lb. *Tomahawk.* Our Tomahawk, Wisconsin mill produces semi-chemical corrugating medium on two paper machines. The mill can produce basis weights from 23 lb. to 47 lb. *Filer City.* Our Filer City, Michigan mill produces semi-chemical corrugating medium on three paper machines. The mill can produce basis weights from 20 lb. to 47 lb. *Wallula.* Our Wallula, Washington mill produces semi-chemical corrugating medium on its No. 2 machine and kraft linerboard on its No. 3 machine. The mill can produce medium in basis weights from 23 lb. to 33 lb. and linerboard in basis weights from 31 lb. to 52 lb. As described above, the No. 3 machine was converted from white paper to linerboard in May of 2018. We operate 95 corrugated manufacturing and protective packaging operations, a technical and development center, 10 regional design centers, a rotogravure printing operation, and a complement of packaging supplies and distribution centers. Of the 95 manufacturing facilities, 61 operate as combining operations, commonly called corrugated plants, which manufacture corrugated sheets and finished corrugated packaging products, 33 are sheet plants, which procure combined sheets and manufacture finished corrugated packaging products, and one is a corrugated sheet-only manufacturer. Corrugated products plants tend to be located in close proximity to customers to minimize freight costs. Each of our plants serve a market radius of approximately 150 miles. Our sheet plants are generally located in close proximity to our larger corrugated plants, which enables us to offer additional services and converting capabilities such as small volume and quick turnaround items. ### Major Raw Materials Used *Fiber supply.* Fiber is the largest raw material cost to manufacture containerboard. We consume both wood fiber and recycled fiber in our containerboard mills. Our mill system has the capability to shift a portion of its fiber consumption between softwood, hardwood, and recycled sources. All of our mills can utilize virgin wood fiber and all of our mills, other than the Valdosta mill, can utilize some recycled fiber in their containerboard production. Our corrugated manufacturing operations generate recycled fiber as a by-product from the manufacturing process, which is consumed by our mills. In 2018, our usage of recycled fiber, net of internal generation, represents 18% of our containerboard production. We procure wood fiber through leases of cutting rights, long-term supply agreements, and market purchases and believe we have adequate sources of fiber supply for the foreseeable future. We participate in the Sustainable Forestry Initiative® (SFI), the Programme for the Endorsement of Forest Certification™ (PEFC), as well as the Forest Stewardship Council® (FSC), and we are certified under their sourcing and chain of custody standards. These standards are aimed at ensuring the long-term health and conservation of forestry resources. We are committed to sourcing wood fiber through environmentally, socially, and economically sustainable practices and promoting resource and conservation stewardship ethics. *Energy supply.* Energy at our packaging mills is obtained through self-generated or purchased fuels and electricity. Fuel sources include by-products of the containerboard manufacturing and pulping process (including black liquor and wood waste), natural gas, purchased wood waste, and other purchased fuels. Each of our mills self-generates process steam requirements from by-products (black liquor and wood waste), as well as from the various purchased fuels. The process steam is used throughout the production process and also to generate electricity. In 2018, our packaging mills consumed about 70 million MMBTU’s of fuel to produce both steam and electricity. Of the 70 million MMBTU’s consumed, about 64% was from mill generated by-products and 36% was from purchased fuels. Of the purchased fuels, 65% was from natural gas, 31% was from purchased wood waste and 4% was from other purchased fuels. *Chemical supply.* We consume various chemicals in the production of containerboard, including caustic soda, sulfuric acid, soda ash, and lime. Most of our chemicals are purchased under contracts, which are bid or negotiated periodically. ### Sales, Marketing, and Distribution Our corrugated products are sold through our direct sales and marketing organization, independent brokers, and distribution partners. We have sales representatives and a sales manager at most of our corrugated manufacturing operations and also have corporate account managers who serve customer accounts with a national presence. Additionally, our design centers maintain an on-site dedicated graphics sales force. In addition to direct sales and marketing personnel, we utilize new product development engineers and product graphics and design specialists. These individuals are located at both the corrugated plants and the design centers. General marketing support is located at our corporate headquarters. Our containerboard sales group is responsible for linerboard and corrugating medium order processing and sales to our corrugated plants, to outside domestic customers, and to export customers. These personnel also coordinate and execute all containerboard trade agreements with other containerboard manufacturers. Containerboard produced in our mills is shipped by rail or truck. Our corrugated products are delivered by truck due to our large number of customers and their demand for timely service. Our corrugated manufacturing operations typically serve customers within a 150-mile radius. We sometimes use third-party warehouses for short-term storage of corrugated products. ### Customers We sell containerboard and corrugated products to approximately 18,000 customers in over 36,000 locations. About three-quarters of our corrugated products sales are to regional and local accounts, which are broadly diversified across industries and geographic locations. The remaining one-quarter of our customer base consists primarily of national accounts that have multiple locations and are served by a number of PCA plants. No single customer exceeds 10% of segment sales. The primary end-use markets in the United States for corrugated products are shown below as reported in the 2017 Fibre Box Association annual report: | | | | --- | ---: | | Food, beverages, and agricultural products | 44% | | Retail and wholesale trade | 22% | | Paper and other products | 14% | | Miscellaneous manufacturing | 10% | | Chemical, plastic, and rubber products | 10% | ### Competition As of December 31, 2018, we were the third largest producer of containerboard products in North America, according to industry sources and our own estimates. According to industry sources, corrugated products are produced by about 460 U.S. companies operating approximately 1,200 plants. The primary basis for competition for most of our packaging products includes quality, service, price, product design, and innovation. Most corrugated products are manufactured to the customer’s specifications. Corrugated producers generally sell within a 150-mile radius of their plants and compete with other corrugated producers in their local region. Competition in our corrugated products operations tends to be regional, although we also face competition from competitors with significant national account presence. On a national level, our primary competitors are International Paper Company, WestRock Company, Georgia-Pacific LLC, and Pratt Industries. However, with our strategic focus on regional and local accounts, we also compete with the smaller, independent producers. ### Paper We are the third largest manufacturer of uncoated freesheet in North America, according to industry sources and our own estimates. We 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. White papers consist of communication papers, including cut-size office papers and printing and converting papers. ### Facilities We currently have two white paper mills located in the United States. Total annual white paper capacity is 949,000 tons. The following paragraphs describe our white paper mills: *Jackson.* Our Jackson, Alabama mill produces both commodity and specialty papers on two paper machines. *International Falls.* Our International Falls, Minnesota mill produces both commodity and specialty papers on two paper machines. *Wallula.* Our Wallula, Washington mill produced pressure sensitive papers and a variety of white paper grades on its No. 3 machine, prior to its conversion to kraft linerboard during the second quarter of 2018. ### Major Raw Materials Used *Fiber supply.* Fiber is the largest raw material cost in this segment. We consume wood fiber, recycled fiber, and purchased pulp. Our Jackson mill purchases recycled fiber to produce our line of recycled office papers. We purchase wood fiber through contracts and open-market purchase, and we purchase recycled fiber and pulp from third parties pursuant to contractual agreements. We participate in the Sustainable Forestry Initiative® (SFI), the Programme for the Endorsement of Forest Certification™ (PEFC), as well as the Forest Stewardship Council® (FSC), and we are certified under their sourcing and chain of custody standards. These standards are aimed at ensuring the long-term health and conservation of forestry resources. We are committed to sourcing wood fiber through environmentally, socially, and economically sustainable practices and promoting resource and conservation stewardship ethics. *Energy supply.* We obtain energy through self-generated or purchased fuels and electricity. Fuel sources include by-products of the manufacturing and pulping process (including black liquor and wood waste), natural gas, electricity, and purchased wood waste. Each of the paper mills self-generates process steam requirements from by-products (black liquor and wood waste), as well as from the various purchased fuels. The process steam is used throughout the production process and to generate electricity. In 2018, our white paper mills consumed about 24 million MMBTU’s of fuel to produce both steam and electricity. Of the 24 million MMBTU’s consumed, about 62% was from mill generated by-products and 38% was from purchased fuels. Of the purchased fuels, 85% was from natural gas and 15% from purchased wood waste. *Chemical supply.* We consume various chemicals in the production of white papers, including starch, precipitated calcium carbonate, caustic soda, and sodium chlorate. Most of our chemicals are purchased under contracts, which are bid or negotiated periodically. ### Sales, Marketing, and Distribution Our white papers are sold primarily through our sales and marketing organization. We ship to customers both directly from our mills and through distribution centers and a network of outside warehouses by rail or truck. This allows us to respond quickly to customer requirements. ### Customers We have over 150 customers in approximately 450 locations. These customers include office products distributors and retailers, paper merchants, and envelope and other converters. We have established long-term relationships with many of our customers. Office Depot, Inc. is our largest customer in the Paper segment. We have an agreement with Office Depot in which we will supply at least 50% of Office Depot's requirements for commodity office papers through December 2019. The agreement will renew automatically through December 2020; however, there are circumstances that could cause the agreement to terminate in 2019. If this were to occur, Office Depot's purchase obligations under the agreement would phase out over two years. In 2018, our sales revenue to Office Depot represented 47% of our Paper segment sales revenue. ### Competition The markets in which our Paper segment competes are large and highly competitive. Commodity grades of white paper are globally traded, with numerous worldwide manufacturers, and as a result, these products compete primarily on the basis of price. All of our paper manufacturing facilities are located in the United States, and although we compete primarily in the domestic market, we do face competition from foreign producers. In 2016, as a result of a case brought by us and other domestic producers before United States international trade authorities, antidumping and countervailing duties at various levels were imposed on producers of uncoated freesheet papers produced in Australia, Brazil, China, Indonesia, and Portugal. These duties remain in effect. Other factors influencing competition from overseas producers include domestic and foreign demand and foreign currency exchange rates. Our largest competitors include Domtar Corporation, International Paper Company, and Georgia-Pacific LLC. We also face competition from foreign producers. Although price is the primary basis for competition in most of our paper grades, quality and service are also important competitive determinants. Our white papers compete with electronic data transmission, e-readers, electronic document storage alternatives, and paper grades we do not produce. Increasing shifts to these alternatives have had, and are likely to continue to have, an adverse effect on traditional print media and paper usage and lower demand for communication papers. ### Corporate and Other Our Corporate and Other segment includes corporate support staff services and related assets and liabilities. This segment also includes transportation assets, such as rail cars and trucks, which we use to transport some of our products to and from our manufacturing sites, and assets related to a 50% owned variable interest entity, Louisiana Timber Procurement Company, L.L.C. (LTP). ### Employees As of December 31, 2018, we had approximately 15,000 employees, including 4,500 salaried and 10,500 hourly employees. Approximately 63% of our hourly employees worked pursuant to collective bargaining agreements. The majority of our unionized employees are represented by the United Steel Workers (USW), the International Brotherhood of Teamsters (IBT), the International Association of Machinists (IAM), and the Association of Western Pulp and Paper Workers (AWPPW). We are currently in negotiations to renew or extend any union contracts that have recently expired or are expiring in the near future. During 2018, we experienced no work stoppages, and we believe we have satisfactory labor relations with our employees. ### Environmental Matters A discussion of the financial impact of our compliance with environmental laws is presented under the caption “Environmental Matters” in “Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K. ### Executive Officers of the Registrant Brief statements setting forth the age at February 28, 2019, the principal occupation, employment during the past five years, the year in which such person first became an officer of PCA, and other information concerning each of our executive officers appears below. ***Mark W. Kowlzan,*** **63, Chairman and Chief Executive Officer** - Mr. Kowlzan has served as PCA's Chairman since January 2016 and as Chief Executive Officer and a director since July 2010. From 1998 through June 2010, Mr. Kowlzan led the company’s containerboard mill system, first as Vice President and General Manager and then as Senior Vice President - Containerboard. From 1996 through 1998, Mr. Kowlzan served in various senior mill-related operating positions with PCA and Tenneco Packaging, including as manager of the Counce linerboard mill. Prior to joining Tenneco Packaging, Mr. Kowlzan spent 15 years at International Paper Company, a global paper and packaging company, where he held a series of operational and managerial positions within its mill organization. Mr. Kowlzan is a member of the board of American Forest and Paper Association. ***Thomas A. Hassfurther,*** **63, Executive Vice President - Corrugated Products** - Mr. Hassfurther has served as Executive Vice President - Corrugated Products of PCA since September 2009. From February 2005 to September 2009, Mr. Hassfurther served as Senior Vice President - Sales and Marketing, Corrugated Products. Prior to this he held various senior-level management and sales positions at PCA and Tenneco Packaging. Mr. Hassfurther joined the company in 1977. ***Charles J. Carter,*** **59, Senior Vice President - Containerboard Mill Operations** - Mr. Carter has served as Senior Vice President - Containerboard Mill Operations since July 2013. Prior to this, he served as Vice President – Containerboard Mill Operations since January 2011. From March 2010 to January 2011, Mr. Carter served as PCA’s Director of Papermaking Technology. Prior to joining PCA in 2010, Mr. Carter spent 28 years with various pulp and paper companies in managerial and technical positions of increasing responsibility, most recently as Vice President and General Manager of the Calhoun, Tennessee mill of Abitibi Bowater from 2007 to 2010 and as manager of SP Newsprint’s Dublin, Georgia mill from 1999 to 2007. ***Robert P. Mundy,*** **57, Senior Vice President and Chief Financial Officer -** Mr. Mundy has served as PCA’s Senior Vice President since July 2015 and Chief Financial Officer since September 2015. He previously served as Senior Vice President and Chief Financial Officer of Verso Corporation, a leading North American supplier of coated papers to catalog and magazine publishers, from 2006 to June 2015. Verso Corporation filed for Chapter 11 bankruptcy in January 2016. Prior to that, he worked at International Paper Company, from 1983 to 2006, where he was Director of Finance of the Coated and Supercalendered Papers division from 2002 to 2006, Director of Finance Projects from 2001 to 2002, Controller of Masonite Corporation from 1999 to 2001, and Controller of the Petroleum and Minerals business from 1996 to 1999. He served in various business positions at International Paper from 1983 to 1996. ***Kent A. Pflederer,*** **48, Senior Vice President, General Counsel and Secretary** - Mr. Pflederer has served as Senior Vice President, General Counsel and Corporate Secretary since January 2013 and has led our legal department since June 2007. Prior to joining PCA, Mr. Pflederer served as Senior Counsel, Corporate and Securities, at Hospira, Inc. from 2004 to 2007 and served in the corporate and securities practice at Mayer Brown, LLP from 1996 to 2004. ***Thomas W.H. Walton,*** **59, Senior Vice President - Sales and Marketing, Corrugated Products** - Mr. Walton has served as Senior Vice President - Sales and Marketing, Corrugated Products since October 2009. Prior to this, he served as a Vice President and Area General Manager within the Corrugated Products Group since 1998. Mr. Walton joined the company in 1981 and has also held positions in production, sales, and general management. ### Available Information PCA’s internet website address is *www.packagingcorp.com*. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. In addition, our Code of Ethics may be accessed in the Investor Relations section of PCA’s website. PCA’s website and the information contained or incorporated therein are not intended to be incorporated into this report. ## Risk factors As filed, 22,786 characters. Some of the statements in this report 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. 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, but are not limited to, the factors described below. 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 so, 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 or otherwise update any forward-looking statements that have been made to reflect the occurrence of events after the date hereof. In addition to the risks and uncertainties we discuss elsewhere in this Form 10-K (particularly in “Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations”) or in our other filings with the Securities and Exchange Commission (SEC), the following are important factors that could cause our actual results to differ materially from those we project in any forward-looking statement. ***Industry Cyclicality - Changes in the prices of our products could materially affect our financial condition, results of operations, and liquidity.*** Macroeconomic conditions and fluctuations in industry capacity can create changes in prices, sales volumes, and margins for most of our products, particularly commodity grades of packaging and paper products. Prices for all of our products are driven by many factors, including demand for our products, industry capacity and decisions made by other producers with respect to capacity, and other competitive conditions in our industry. These factors are affected by general global and domestic economic conditions. We have little influence over the timing and extent of price changes of our products, which may be unpredictable and volatile. In addition, our selling prices are influenced by index levels published by trade publications. Changes in how these index levels are determined or maintained may affect our sales prices. If supply exceeds demand, industry operating conditions deteriorate or other factors result in lower prices for our products, our earnings and operating cash flows would be harmed. ***General Economic Conditions - If business, political, and economic conditions change in an adverse manner, our business, results of operations, liquidity, and financial position may be harmed.*** General global and domestic economic conditions directly affect the levels of demand and production of consumer goods, levels of employment, the availability and cost of credit, and ultimately, the profitability of our business. If economic conditions deteriorate and result in higher unemployment rates, lower disposable income, unfavorable currency exchange rates, lower corporate earnings, lower business investment, and lower consumer spending, we may experience lower demand for our products, which is largely driven by demand for products of our customers which utilize our products. If economic conditions result in higher inflation, we may experience higher production and transportation costs, which we may not be able to recover through higher prices or otherwise. In addition, changes in trade policy, including renegotiating or potentially terminating existing bilateral or multilateral agreements as well as the imposition of tariffs, could impact global markets and demand for our and our customers’ products and the costs associated with certain of our capital investments. Further changes in tax laws or tax rates may have a material impact on our future cash taxes, effective tax rate or deferred tax assets and liabilities. These conditions are beyond our control and may have a material impact on our business, results of operations, liquidity, and financial position. ***Competition - The intensity of competition in the industries in which we operate could result in downward pressure on pricing and volume, which could lower earnings and operating cash flows.*** Our industries are highly competitive, with no single containerboard, corrugated packaging, or white paper producer having a dominant position. Containerboard and commodity white paper products cannot generally be differentiated by producer, which tends to intensify price competition. The corrugated packaging industry is also sensitive to changes in economic conditions, as well as other factors including innovation, design, quality, and service. To the extent that one or more competitors are more successful than we are with respect to any key competitive factor, our business could be adversely affected. Our packaging products also compete, to some extent, with various other packaging materials, including products made of paper, plastics, wood, and various types of metal. If we are unable to successfully compete, we may lose market share or may be required to charge lower sales prices for our products, both of which would reduce our earnings and operating cash flows. White paper products compete with electronic data transmission and document storage alternatives. Increasing shifts to electronic alternatives have had and will continue to have an adverse effect on usage of these products. As a result of such competition, the industry is experiencing decreasing demand for existing white paper products. As the use of these alternatives grows, demand for paper products is likely to further decline. Declines in demand for our paper products may adversely affect our earnings and operating cash flows. Some of our competitors are larger than we are and may have greater financial and other resources, greater manufacturing economies of scale, greater energy self-sufficiency, or lower operating costs, compared to our company. We may be unable to compete effectively with these companies particularly during economic downturns. Some of the factors that may adversely affect our ability to compete in the markets in which we participate include the entry of new competitors into the markets we serve, increased competition from overseas producers, our competitors' pricing strategies, changes in customer preferences, and the cost-efficiency of our facilities. ***Inflation and Other General Cost Increases - We may not be able to offset higher costs***. We are subject to both contractual, inflationary, and other general cost increases, including with regard to our labor costs and purchases of raw materials and transportation services. General economic conditions may result in higher inflation, which may increase our exposure to higher costs. If we are unable to offset these cost increases by price increases, growth, and/or cost reductions in our operations, these inflationary and other general cost increases could have a material adverse effect on our operating cash flows, profitability, and liquidity. In 2018, our total company costs including cost of sales (COS) and selling, general, and administrative expenses (SG&A) was $5.9 billion, and excluding non-cash costs (depreciation, depletion and amortization, pension and postretirement expense, and share-based compensation expense) was $5.4 billion. A 1% increase in COS and SG&A costs would increase costs by $59 million and cash costs by $54 million. ***Cost of Fiber - An increase in the cost of fiber could increase our manufacturing costs and lower our earnings.*** The market price of wood fiber varies based upon availability, source, and the costs of fuels used in the harvesting and transportation of wood fiber. The cost and availability of wood fiber can also be impacted by weather, general logging conditions, geography, and regulatory activity. The availability and cost of recycled fiber depends heavily on recycling rates and the domestic and global demand for recycled products. We purchase recycled fiber for use at five of our six containerboard mills and both paper mills. In 2018, we purchased approximately 810,000 tons of recycled fiber, net of the recycled fiber generated by our corrugated box plants. The amount of recycled fiber purchased each year varies based upon production and the prices of both recycled fiber and wood fiber. Periods of supply and demand imbalance have created significant price volatility. Periods of higher recycled fiber costs and unusual price volatility have occurred in the past, including during 2018 as demand for domestic recycled fiber from Chinese producers declined significantly, and may fluctuate significantly in the future, which could result in higher costs and lower earnings. A $10 per ton price increase in recycled fiber for our containerboard mills, would result in approximately $7 million of additional expense based on 2018 consumption. ***Cost of Purchased Fuels and Chemicals - An increase in the cost of purchased fuels and chemicals could lead to higher manufacturing costs, resulting in reduced earnings.*** We have the ability to use various types of purchased fuels in our manufacturing operations, including natural gas, bark, and other purchased fuels. Fuel prices, in particular prices for oil and natural gas, have fluctuated in the past. New and more stringent environmental regulations may discourage, reduce the availability of, or make more expensive, the use of certain fuels, particularly coal and fossil fuels. In addition, costs for key chemicals used in our manufacturing operations also fluctuate. These fluctuations impact our manufacturing costs and result in earnings volatility. If fuel and chemical prices rise, our production costs and transportation costs will increase and cause higher manufacturing costs and reduced earnings if we are unable to recover such increases through higher prices of our products. A $0.10 per million MMBTU in natural gas prices would result in approximately $3 million of additional expense, based on 2018 usage. ***Transportation Costs - Reduced truck and rail availability could lead to higher costs or poorer service, resulting in lower earnings, and harm our ability to distribute our products.*** We ship our products primarily by truck and rail. We have experienced lower availability of third-party trucking services and service issues, interruptions, and delays in rail services. We have also experienced higher costs for transportation services in general. If these factors persist, we could experience even higher transportation costs in the future and difficulties shipping our products in a timely manner. We may not be able to recover higher transportation costs through higher prices or otherwise, which would result in lower earnings. ***Material Disruption of Manufacturing - A material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales, and/or negatively affect our results of operations and financial condition.*** Our business depends on continuous operation of our facilities, particularly at our mills. Any of our manufacturing facilities, or any of our machines within such facilities, could cease operations unexpectedly for a significant period of time due to a number of events, including: - Unscheduled maintenance outages. - Prolonged power failures. - Equipment or information system breakdowns or failures. - Explosion of a boiler or other major facilities. - Disruption in the supply of raw materials, such as wood fiber, energy, or chemicals. - A spill or release of pollutants or hazardous substances. - Closure or curtailment related to environmental concerns. - Labor difficulties. - Disruptions in the transportation infrastructure, including roads, bridges, railroad tracks, and tunnels. - Fires, floods, earthquakes, hurricanes, or other catastrophic events. - Terrorism or threats of terrorism. - Other operational problems. These events could harm our ability to produce our products and serve our customers and may lead to higher costs and reduced earnings. ***Environmental Matters - PCA may incur significant environmental liabilities with respect to both past and future operations.*** We are subject to, and must comply with, a variety of federal, state and local environmental laws, particularly those relating to air and water quality, waste disposal and the cleanup of contaminated soil and groundwater. Failure to comply with these regulations could result in fines, which may be significant, or other adverse regulatory action. Because environmental regulations are constantly evolving, we have incurred, and will continue to incur, costs to maintain compliance with those laws. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters” for estimates of expenditures we expect to make for environmental compliance in the next few years. New and more stringent environmental regulations may be adopted and may require us to incur additional operating expenses and/or significant additional capital expenditures to modify or replace certain of our boilers and other equipment. In addition, environmental regulations may increase the cost of our raw materials and purchased energy. Although we have established reserves to provide for known environmental liabilities, these reserves may change over time due to the enactment of new environmental laws or regulations or changes in existing laws or regulations, which might require additional significant environmental expenditures. ***Mergers and Acquisitions - Our acquired businesses may underperform relative to our expectations, and we may not be able to successfully integrate these businesses into our own.*** We have completed several mergers and acquisitions and investments in recent years. Our success will depend in part on our ability to successfully integrate, and receive the intended benefits from, these acquisitions. There may be difficulties, costs and delays involved in the integration of these businesses into ours. Integration requires modification of operational and financial systems and may result in significant additional expenses. If the acquired businesses underperform relative to our expectations, or if we fail to successfully integrate these businesses, our business, financial condition and results of operations may be materially and adversely affected. ***Customer Concentration - We rely on certain large customers.*** Our packaging and paper segments each have large customers, the loss of which could adversely affect the segment’s sales and profitability. In particular, because our businesses operate in highly competitive industry segments, we regularly bid for new business or for renewal of existing business. The loss of business from our larger customers, or the renewal of business on less favorable terms, may adversely impact our financial results. We have a supply agreement with Office Depot, our largest customer in the Paper segment. The agreement requires Office Depot to buy, and us to supply, at least 50% of Office Depot's requirements for commodity office papers through December 2019. In 2018, sales to Office Depot represented 47% of our Paper segment sales and 7% of our consolidated sales. If these sales are reduced, including if we are unable to renew the agreement at committed volumes, we would need to find new customers. We may not be able to fully replace any lost sales, and any new sales may be at lower prices or higher costs. Any significant deterioration in the financial condition of Office Depot affecting its ability to pay or any other change that makes Office Depot less willing to purchase our products will harm our business and results of operations. ***Labor Relations- If we experience strikes or other work stoppages, our business will be harmed.*** Our workforce is highly unionized and operates under various collective bargaining agreements. We must negotiate to renew or extend any union contracts that have recently expired or are expiring in the near future. While we believe that we have satisfactory labor relations, we may not be able to successfully negotiate new agreements without work stoppages or labor difficulties in the future or renegotiate them on favorable terms. If we are unable to successfully renegotiate the terms of any of these agreements, or if we experience any extended interruption of operations at any of our facilities as a result of strikes or other work stoppages, our business, results of operations and financial condition may be harmed. ***Reliance on Personnel - We may fail to attract and retain qualified personnel, including key management personnel.*** Our ability to operate and grow our business depends on our ability to attract and retain employees with the skills necessary to operate and maintain our facilities, produce our products and serve our customers. The increasing demand for qualified personnel may make it more difficult for us to attract and retain qualified employees. Changing demographics and labor work force trends may make it difficult for us to replace retiring employees at our manufacturing and other facilities. If we fail to attract and retain qualified personnel, or if we experience labor shortages, we may experience higher costs and other difficulties, and our business may be adversely impacted. In addition, we rely on key executive and management personnel to manage our business efficiently and effectively. As our business has grown in size and geographic scope, we have relied on these individuals to manage increasingly complex operations. The loss of any of our key personnel could adversely affect our business. ***Cyber Security - Risks related to security breaches of company, customer, employee, and vendor information, as well as the technology that manages our operations and other business processes, could adversely affect our business.*** We rely on various information technology systems to capture, process, store, and report data and interact with customers, vendors, and employees. Despite careful security and controls design, implementation, updating, and internal and independent third-party assessments, our information technology systems, and those of our third party providers, could become subject to cyber attacks or security breaches. Network, system, and data breaches could result in misappropriation of sensitive data or operational disruptions including interruption to systems availability and denial of access to and misuse of applications required by our customers to conduct business with us. Misuse of internal applications; theft of intellectual property, trade secrets, or other corporate assets; and inappropriate disclosure of confidential information could stem from such incidents. Delayed sales, slowed production, or other issues resulting from these disruptions could result in lost sales, business delays, and negative publicity and could have a material adverse effect on our operations, financial condition, or operating cash flows. ***Debt obligations - Our debt service obligations may reduce our operating flexibility.*** At December 31, 2018, we had $2.5 billion of debt outstanding and a $326.9 million undrawn revolving credit facility, after deducting letters of credit. All debt is comprised of fixed-rate senior notes. We and our subsidiaries are not restricted from incurring, and may incur, additional indebtedness in the future. Our current borrowings, plus any future borrowings, may affect our ability to operate our business, including, without limitation: - Result in significant cash requirements to make interest and maturity payments on our outstanding indebtedness; - Increase our vulnerability to adverse changes in our business or industry conditions; - Increase our vulnerability to increases in interest rates; - Limit our ability to obtain additional financing for working capital, capital expenditures, general corporate, and other purposes; - Limit our flexibility in planning for, or reacting to, changes in our business and our industry; and - Limit our flexibility to make acquisitions. 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, which may not be achievable on acceptable terms or at all. ***Pension Plans – Our pension plans may require additional funding.*** We record a liability associated with our pensions equal to the excess of the benefit obligations over the fair value of the assets funding the plans. The actual required amounts and timing of future cash contributions will be sensitive to changes in the applicable discount rates and returns on plan assets, and could also be impacted by future changes in the laws and regulations applicable to plan funding. Fluctuations in the market performance of our plan assets will affect our pension plan costs in future periods. Changes in assumptions regarding expected long-term rate of return on plan assets, our discount rate, expected compensation levels, or mortality will also increase or decrease pension costs. ***Market Price of our Common Stock - The market price of our common stock may be volatile, which could cause the value of the stock to decline.*** Securities markets worldwide periodically experience significant price declines and volume fluctuations due to macroeconomic factors and other factors beyond our control. This market volatility, as well as general economic, market, or political conditions, could reduce the market price of our common stock with little regard to our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors, and in response, the market price of our common stock could decrease significantly. ## Properties As filed, 2,208 characters. We own and lease properties in our business. Primarily all of our leases are noncancelable and are accounted for as operating leases. These leases are not subject to early termination except for standard nonperformance clauses. Information concerning capacity and utilization of our principal operating facilities, the segments that use those facilities, and a map of geographical locations is presented in “Part I, Item 1. Business” of this Form 10-K. We assess the condition and capacity of our manufacturing, distribution, and other facilities needed to meet our operating requirements. Our properties have been generally well maintained and are in good operating condition. In general, our facilities have sufficient capacity and are adequate for our production and distribution requirements. We currently own buildings and land for six containerboard mills and two white paper mills. Additionally, we have 95 corrugated manufacturing operations, of which the buildings and land for 51 are owned, including 43 combining operations, or corrugated plants, one corrugated sheet-only manufacturer, and seven sheet plants. We lease the buildings for 18 corrugated plants and 26 sheet plants. We own warehouses and miscellaneous other properties, including sales offices and woodlands management offices. We lease space for regional design centers and numerous other distribution centers, warehouses, and facilities. The equipment in these leased facilities is, in virtually all cases, owned by us, except for forklifts and other rolling stock, which are generally leased. We lease the cutting rights to approximately 75,000 acres of timberland located near our Valdosta mill (68,000 acres) and our Counce mill (7,000 acres). On average, these cutting rights agreements have terms with approximately 13 years remaining. Additionally, we lease approximately 3,000 acres of land for a fiber farm, located near our Wallula mill, where we plant, grow, and harvest fiber. Our corporate headquarters is located in Lake Forest, Illinois. The headquarter facility is owned, and we lease additional neighboring office space through the next three years with provisions for two additional five year lease extensions. ## Legal proceedings As filed, 266 characters. Information concerning legal proceedings can be found in Note 19, Commitments, Guarantees, Indemnifications, and Legal Proceedings, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K. ## Management's discussion and analysis As filed, 75,340 characters. The following discussion and analysis of historical results of operations and financial condition should be read in conjunction with the audited financial statements and the notes thereto which appear elsewhere in this Form 10-K. This discussion includes forward-looking statements regarding our expectations with respect to our future performance, liquidity, and capital resources. Such statements, along with any other non-historical statements in the discussion, are forward-looking. See our discussion regarding forward-looking statements included under “Part I, Item 1A. Risk Factors” of this Form 10-K. ### Overview PCA is the third largest producer of containerboard products and the third largest producer of uncoated freesheet paper in North America. We operate six containerboard mills, two paper mills, and 95 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. ### Executive Summary Net sales were $7.01 billion for the year ended December 31, 2018 and $6.44 billion in 2017. We reported $738 million of net income, or $7.80 per diluted share, in 2018, compared to $669 million, or $7.07 per diluted share, in 2017. Net income included $22 million of expense for special items in 2018, compared to $100 million of income for special items in 2017, including $122 million of estimated income tax benefit related to the enactment in December 2017 of the Tax Cut and Jobs Act (H.R.1). Special items in both periods are described later in this section. Excluding special items, we recorded $760 million of net income, or $8.03 per diluted share, in 2018, compared to $569 million, or $6.02 per diluted share, in 2017. The increase was driven primarily by higher prices and mix and volumes in our Packaging segment, higher prices and mix in our Paper segment, lower taxes, and lower wood and recycled fiber costs, partially offset by lower volumes in our Paper segment, higher operating and converting costs, higher freight and logistic expenses, and higher annual outage expense, and other costs. For additional detail on special items included in reported GAAP results and other non-GAAP measures, see “Item 7. Reconciliations of Non-GAAP Financial Measures to Reported Amounts.” Packaging segment income from operations was $1,045 million in 2018, compared to $950 million in 2017. Packaging segment EBITDA excluding special items was $1,401 million in 2018, compared to $1,264 million in 2017. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes driven by strong demand, and lower recycled fiber costs; partially offset by higher operating and converting costs; higher freight and logistic expense; and higher annual outage expense. Paper segment income from operations was $98 million in 2018, compared to $54 million in 2017. Paper segment EBITDA excluding special items was $165 million in 2018, compared to $145 million in 2017. The increase was due primarily to higher paper prices and mix, lower operating costs, and lower annual outage expense, partially offset by higher freight and logistic expense and higher fiber costs. During the second quarter of 2018, the Company discontinued production of uncoated freesheet and coated one-side grades at its Wallula, Washington mill and converted the No. 3 paper machine to a 400,000 ton-per-year virgin kraft linerboard machine. The Company incurred charges in the Packaging and Paper segments relating to these activities during 2017 and 2018 as described below under “Special Items and Earnings per Diluted Share, Excluding Special Items.” In October 2017, the Company acquired substantially all of the assets of Sacramento Container Corporation, and 100% of the membership interests of Northern Sheets, LLC and Central California Sheets, LLC (collectively the “Sacramento Container acquisition”) for $274 million with cash on hand. The acquired companies operate two full-line corrugated product operations and sheet feeders in McClellan, California and Kingsburg, California. The operating results of the companies acquired in the Sacramento Container acquisition are included in our results and reported in the Packaging segment from and after October 2017. These operations have been substantially integrated into our business and have helped drive growth in our corrugated products volumes during 2018. #### Special Items and Earnings per Diluted Share, Excluding Special Items Earnings per diluted share, excluding special items, in 2018 and 2017 were as follows: | | Year Ended December 31, 2018 | 2017 | | --- | ---: | ---: | | Earnings per diluted share | $7.80 | $7.07 | | Special items: | | | | Wallula mill restructuring (a) | 0.24 | 0.21 | | Facilities closure and other costs (b) | 0.01 | (0.04) | | Tax reform (c) | (0.02) | (1.29) | | Internal legal entity consolidation (d) | — | 0.04 | | DeRidder mill incident (e) | — | 0.03 | | Acquisition and integration related costs (f) | — | 0.01 | | Deferred debt issuance costs (g) | — | 0.01 | | Expiration of timberland repurchase option (h) | — | (0.01) | | Hexacomb working capital adjustment (i) | — | (0.01) | | Total special items (income) expense | 0.23 | (1.05) | | Earnings per diluted share, excluding special items | $8.03 | $6.02 | (a) For 2018 and 2017, includes $30.0 million and $33.4 million, respectively, of charges related to the second quarter 2018 discontinuation of uncoated free sheet and coated one-side grades at the Wallula, Washington mill associated with the conversion of the No. 3 paper machine to a high-performance 100% virgin kraft linerboard machine. (b) For 2018, includes $1.8 million of charges consisting of closure costs related to corrugated products facilities and a corporate administration facility. For 2017, includes $5.8 million of income primarily related to the sale of land corresponding to the closure of a corrugated products facility, partially offset by closure costs related to corrugated products facilities, a paper administration facility, a corporate administration facility, and a lump sum settlement of a multiemployer pension plan withdrawal liability for one of our corrugated products facilities. (c) For 2018 and 2017, includes $2.0 million and $122.1 million, respectively, of income tax benefit for the re-measurement of our net deferred tax liability for the reduction in the U.S. corporate federal statutory income tax rate related to our 2017 measurement period adjustments in accordance with SEC Staff Accounting Bulletin No. 118 (SAB 118), *Income Tax Accounting Implications of the Tax Cuts and Jobs Act.* (d) Includes $3.3 million of tax expense for the change in value of deferred taxes as a result of an internal legal entity consolidation that will simplify future operating activities. (e) Includes $5.0 million of costs for the property damage and business interruption insurance deductible corresponding to the February 2017 explosion at our DeRidder, Louisiana mill. (f) Includes $1.7 million of charges for acquisition and integration costs related to recent acquisitions. (g) Includes $1.8 million of expense related to the write-off of deferred debt issuance costs in connection with the December 2017 debt refinancing. (h) Includes a $2.0 million gain related to the expiration of a repurchase option corresponding to timberland previously sold. (i) Includes $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. 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 later in Item 7 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 North American industry-wide corrugated products total shipments increased 1.7% during 2018, compared to 2017. Reported industry containerboard production increased 1.7% compared to 2017, and reported industry containerboard inventories at the end of 2018 were approximately 2.7 million tons, up 11.7% compared to 2017. Reported containerboard export shipments were flat compared to 2017. In March 2018, trade publications reported a $50 price per ton increase on linerboard and corrugating medium. In January 2019, trade publications reported a $10 price per ton decrease on 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 traditional print media and communication papers. Trade publications reported North American uncoated freesheet paper shipments were down 4.0% in 2018, compared to 2017. Average prices reported by a trade publication for cut size office papers increased $83 per ton, or 8.7%, in 2018, compared to 2017. ### Outlook Looking ahead to the first quarter of 2019, we expect continued strong demand in our Packaging segment for both containerboard volume and corrugated products volume, and we expect strong market conditions in our Paper segment to continue. We anticipate higher labor and benefits costs with annual wage increases and other timing-related expenses. Although we expect costs for freight and recycled fiber to be fairly flat, we do anticipate some inflation with most of our chemical and repair and materials costs, while seasonally colder weather will increase energy usage and wood costs. We also expect our tax rate to be slightly higher. Finally, the recent decrease in the published price for domestic medium will have a minimal effect on earnings. Considering these items, we expect first quarter 2019 earnings, excluding special items, to be lower than fourth quarter 2018. We do not expect special items to be significant during the first quarter of 2019. ### Results of Operations ### Year Ended December 31, 2018, Compared with Year Ended December 31, 2017 The historical results of operations of PCA for the years ended December 31, 2018 and 2017 are set forth below (dollars in millions): | | Year Ended December 31, 2018 | 2017 (c) | Change | | --- | ---: | ---: | ---: | | Packaging | $5,938.5 | $5,312.3 | $626.2 | | Paper | 1,002.0 | 1,051.8 | (49.8) | | Corporate and other and eliminations | 74.1 | 80.8 | (6.7) | | Net sales | $7,014.6 | $6,444.9 | $569.7 | | Packaging | $1,045.4 | $950.3 | $95.1 | | Paper | 97.7 | 54.0 | 43.7 | | Corporate and other | (75.4) | (71.8) | (3.6) | | Income from operations | 1,067.7 | 932.5 | 135.2 | | Interest expense, net and other | (97.2) | (103.9) | 6.7 | | Income before taxes | 970.5 | 828.6 | 141.9 | | Income tax expense (a) | (232.5) | (160.0) | (72.5) | | Net income | $738.0 | $668.6 | $69.4 | | Net income excluding special items (b) | $760.4 | $569.1 | $191.3 | | EBITDA (b) | $1,478.6 | $1,323.9 | $154.7 | | EBITDA excluding special items (b) | $1,497.2 | $1,343.4 | $153.8 | (a) The U.S. corporate federal statutory income tax rate in 2018 was 21% and in 2017 was 35%. Income tax expense for 2018 and 2017 included a tax benefit of $2.0 million and $122.1 million, respectively, related to the enactment in December 2017 of the Tax Cuts and Jobs Act (H.R.1). See Note 7, Income Taxes, for more information. (b) See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 7 for a reconciliation of non-GAAP measures to the most comparable GAAP measure. (c) Effective January 1, 2018, the Company adopted ASU 2017-07, *Compensation: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost* and applied this standard retrospectively to the prior period reflected herein. See Note 2, Summary of Significant Accounting Policies and Note 18, Segment Information, for more information. #### Net Sales Net sales increased $570 million, or 8.8%, to $7,015 million in 2018, compared to $6,445 million in 2017. *Packaging.* Net sales increased $626 million, or 11.8%, to $5,939 million, compared to $5,312 million in 2017, due to increased containerboard and corrugated products volume ($367 million) and higher domestic and export containerboard and corrugated products prices and mix ($259 million). In 2018, our domestic containerboard prices increased 6.3% and export prices increased 16.3% compared to 2017. Containerboard outside shipments increased 10.7%, and total corrugated products shipments were up 5.2% per day and 5.6% in total, compared to 2017. Prices reported by trade publications increased $50 per ton on linerboard and corrugating medium in March of 2018. *Paper.* Net sales decreased $50 million, or 4.7%, to $1,002 million, compared to $1,052 million in 2017. The decrease was due to lower volume ($93 million), primarily as a result of discontinuing the production and sale of the products on the No. 3 machine at the Wallula mill in connection with its conversion to linerboard production, partially offset by higher prices and mix ($43 million). #### Gross Profit Gross profit increased $175 million in 2018, compared to 2017. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes, higher paper prices and mix, and lower wood and recycled fiber costs, partially offset by lower volumes in our Paper segment and higher operating and converting costs. In 2018, gross profit included special items of $15 million related to the conversion of the No. 3 machine at the Wallula mill, compared to $11 million related to the conversion of the No. 3 machine at the Wallula mill and acquisition-related costs in 2017. #### Selling, General, and Administrative Expenses Selling, general, and administrative expenses (SG&A) increased $17 million in 2018, compared to 2017. The increase in 2018 was primarily due to higher employee salaries and fringes ($18 million), the Sacramento Container acquisition ($8 million), outside professional services ($6 million) and other administrative expenses individually insignificant ($10 million). These increases were partially offset by certain expenses that were previously recorded in SG&A for 2017 which are now recorded in cost of sales for 2018 ($25 million). Effective January 1, 2018, the Company adopted ASU 2014-09 (Topic 606): *Revenue from Contracts with Customers* using the modified retrospective method. The new standard provides additional clarity concerning contract fulfillment costs, which resulted in certain costs being classified as cost of sales rather than SG&A for 2018. #### Other (Expense) Income, Net Other (expense) income, net for the years ended December 31, 2018 and 2017 are set forth below (dollars in millions): | | Year Ended December 31, 2018 | 2017 | | --- | ---: | ---: | | Asset disposals and write-offs | $(17.3) | $(10.5) | | Wallula mill restructuring | (14.9) | (23.1) | | Facilities closure and other costs | (1.6) | 5.9 | | Insurance deductible for property damage | (0.5) | — | | Acquisition and integration related costs | (0.2) | (0.8) | | DeRidder mill incident | — | 9.7 | | Hexacomb working capital adjustment | — | 2.3 | | Expiration of timberland repurchase option | — | 2.0 | | Other | (6.7) | (3.9) | | Total | $(41.2) | $(18.4) | We discuss these items in more detail in Note 6, Other (Expense) Income, Net of the Condensed Notes to the Consolidated Financial Statements in “Part II, Item 8. Financial Statements” of this Form 10-K. #### Income from Operations Income from operations increased $135 million, or 14.5%, for the year ended December 31, 2018, compared to 2017. Income from operations in 2018 included $32 million of expense for special items compared to $30 million in 2017. Special items in 2018 consist of $30 million of charges related to the conversion of the Wallula No. 3 paper machine and $2 million related to facilities closures and other costs. 2017 special items included $33 million of charges related to the conversion of the Wallula No. 3 paper machine, $5 million for the property damage and business interruption insurance deductible related to the DeRidder mill incident, $2 million for integration-related costs, and $11 million in net gains related to facility closures and land sales, an adjustment to Hexacomb working capital, and the expiration of a repurchase option to timberland previously sold. *Packaging.* Segment income from operations increased $95 million to $1,045 million, compared to $950 million in 2017. The increase in 2018 related primarily to higher containerboard and corrugated products prices and mix ($237 million), higher containerboard and corrugated products sales and production volumes ($141 million), and lower wood and recycled fiber costs ($25 million), partially offset by higher operating and converting costs ($177 million), higher annual outage expense ($36 million), higher freight expense ($26 million), higher depreciation expense ($24 million), Wallula No. 3 paper machine conversion-related costs ($5 million), and other expenses primarily related to the disposition of fixed assets ($8 million) and a 2017 insurance recovery related to the DeRidder incident ($13 million). Special items in 2018 included expense of $12 million of charges related to the conversion of the Wallula No. 3 paper machine and $2 million related to facilities closures and other costs. Special items in 2017 included expense of $5 million for property damage and business interruption insurance deductible related to the DeRidder mill incident, $2 million in integration-related costs, and $11 million in net gains related to facility closures, land sales, an adjustment to Hexacomb working capital and the expiration of a repurchase option corresponding to timberland previously sold. *Paper.* Segment income from operations increased $44 million to $98 million, compared to $54 million in 2017. The increase primarily related to higher paper prices and mix ($43 million), lower operating costs ($19 million), lower annual outage expense ($19 million), and lower depreciation expense ($6 million), partially offset by lower sales and production volumes ($35 million), higher freight expense ($12 million), and higher wood and recycled fiber costs ($12 million). Special items during 2018 included expense of $18 million compared to $33 million in 2017 related to the conversion of the Wallula No. 3 paper machine to kraft linerboard. #### Interest Expense, Net and Other, and Income Taxes Interest expense, net and other, during 2018 decreased $7 million compared to 2017. The decrease is primarily related to our repayment of the 6.50% Senior Notes in March 2018 and our term loans in December 2017, partially offset by interest expense on the new notes related to the December 2017 refinancing. During 2018, income tax expense increased $73 million compared to 2017, primarily due to the 2017 income tax benefit of $122.1 million recorded for the re-measurement of our net deferred tax liability to the lower federal income tax rate as a result of H.R. 1 (P.L. 115-97), originally known as the “Tax Cuts and Jobs Act”, which the President signed into law on December 22, 2017. For additional information regarding the 2017 impact of the Tax Act, see Note 7, Income Taxes, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K. Excluding the tax reform related income tax benefits of $2.0 million in 2018 and $122.1 million in 2017, the 2018 income tax expense would have decreased $48 million compared to 2017, primarily as a result of the reduction in the U.S. corporate federal statutory income tax rate. The effective tax rate for 2018 and 2017 was 24.0% and 19.3%, respectively. Excluding the tax reform related income tax benefits of $2.0 million in 2018 and $122.1 million in 2017, the effective tax rate for 2018 and 2017 would have been 24.2% and 34.1%, respectively. ### Year Ended December 31, 2017, Compared with Year Ended December 31, 2016 | | Year Ended December 31, 2017 (c) | 2016 (c) | Change | | --- | ---: | ---: | ---: | | Packaging | $5,312.3 | $4,584.8 | $727.5 | | Paper | 1,051.8 | 1,093.9 | (42.1) | | Corporate and other and eliminations | 80.8 | 100.3 | (19.5) | | Net sales | $6,444.9 | $5,779.0 | $665.9 | | Packaging | $950.3 | $718.5 | $231.8 | | Paper | 54.0 | 131.7 | (77.7) | | Corporate and other | (71.8) | (66.9) | (4.9) | | Income from operations | 932.5 | 783.3 | 149.2 | | Interest expense, net and other | (103.9) | (94.8) | (9.1) | | Income before taxes | 828.6 | 688.5 | 140.1 | | Income tax expense (a) | (160.0) | (238.9) | 78.9 | | Net income | $668.6 | $449.6 | $219.0 | | Net income excluding special items (b) | $569.1 | $462.0 | $107.1 | | EBITDA (b) | $1,323.9 | $1,141.3 | $182.6 | | EBITDA excluding special items (b) | $1,343.4 | $1,157.5 | $185.9 | (a) Income tax expense in 2017 included a tax benefit of $122.1 million related to the enactment in December 2017 of the Tax Cuts and Jobs Act (H.R.1). See Note 7, Income Taxes, for more information. (b) See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 7 for a reconciliation of non-GAAP measures to the most comparable GAAP measure. (c) Effective January 1, 2018, the Company adopted ASU 2017-07, *Compensation: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost* and applied this standard retrospectively to the prior periods reflected herein. See Note 2, Summary of Significant Accounting Policies and Note 18, Segment Information, for more information. #### Net Sales Net sales increased $666 million, or 11.5%, to $6,445 million in 2017, compared to $5,779 million in 2016. *Packaging.* Net sales increased $728 million, or 15.9%, to $5,312 million, compared to $4,585 million in 2016, due to increased containerboard and corrugated products volume ($428 million) and higher domestic and export containerboard and corrugated products prices and mix ($299 million). In 2017, our domestic containerboard prices increased 11.1% and export prices increased 17.2% compared to 2016. Containerboard outside shipments increased 7.9%, and total corrugated products shipments were up 8.6%, compared to 2016. Prices reported by trade publications increased $50 per ton on linerboard in April; corrugating medium increased $50, $20, and $10 per ton in April, July, and August respectively. *Paper.* Net sales decreased $42 million, or 3.8%, to $1,052 million, compared to $1,094 million in 2016. The decrease was due to lower pulp volume ($47 million) as a result of the December 2016 shutdown of our market pulp operations at our Wallula mill, and unfavorable changes in prices and mix ($7 million), partially offset by higher white paper volume ($12 million). #### Gross Profit Gross profit increased $195 million in 2017, compared to 2016. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes, partially offset by lower Paper segment prices and mix and sales and production volumes, and higher input and operating costs. In 2017, gross profit included special items of $10 million related to the conversion of the No. 3 machine at the Wallula mill and $1 million of acquisition-related costs, compared to $5 million in 2016 for facility closure and acquisition-related costs. #### Selling, General, and Administrative Expenses Selling, general, and administrative expenses increased $51 million in 2017, compared to 2016. The increase in 2017 was due primarily to higher administrative costs corresponding to the acquisitions of TimBar and Columbus Container in the second half of 2016 and Sacramento Container in the fourth quarter of 2017. #### Other (Expense) Income, Net Other (expense) income, net for the years ended December 31, 2017 and 2016 are set forth below (dollars in millions): | | Year Ended December 31, 2017 | 2016 | | --- | ---: | ---: | | Wallula mill restructuring | $(23.1) | $— | | Asset disposals and write-offs | (10.5) | (11.9) | | Acquisition and integration related costs | (0.8) | (3.3) | | Expiration of timberland repurchase option | 2.0 | — | | Hexacomb working capital adjustment | 2.3 | — | | Facilities closure and other costs | 5.9 | (10.3) | | DeRidder mill incident | 9.7 | — | | Ceased production of market pulp at Wallula | — | (0.6) | | Other | (3.9) | 1.8 | | Total | $(18.4) | $(24.3) | We discuss these items in more detail in Note 6, Other (Expense) Income, Net of the Condensed Notes to the Consolidated Financial Statements in “Part II, Item 8. Financial Statements” of this Form 10-K. #### Income from Operations Income from operations increased $149 million, or 19.0%, for the year ended December 31, 2017, compared to 2016. 2017 income from operations included $30 million of expense for special items compared to $19 million of expense in 2016. Special items in 2017 consist of $33 million of charges related to the conversion of the Wallula No. 3 paper machine, $5 million for the property damage and business interruption insurance deductible related to the DeRidder mill incident, $2 million for integration-related costs, and $11 million in net gains related to facility closures and land sales, an adjustment to Hexacomb working capital, and the expiration of a repurchase option corresponding to timberland previously sold. 2016 special items included $11 million of facility closure costs related to corrugated manufacturing facilities and a paper distribution center, $4 million of TimBar and Columbus Container acquisition-related costs, $3 million related to shutdown of market pulp operations at our Wallula mill, and $1 million related to our withdrawal from a multiemployer pension plan for one of our corrugated products facilities. *Packaging.* Segment income from operations increased $232 million to $950 million, compared to $718 million in 2016. The increase in 2017 related primarily to higher containerboard and corrugated products prices and mix ($223 million), and higher containerboard and corrugated products sales and production volumes ($81 million), partially offset by higher costs for input costs ($49 million), labor and fringes ($21 million), freight ($13 million), converting and other costs ($8 million), and higher depreciation expense ($12 million). Special items in 2017 included expense of $5 million for property damage and business interruption insurance deductible related to the DeRidder mill incident, $2 million in integration-related costs, and $11 million in net gains related to facility closures and land sales, an adjustment to Hexacomb working capital, and the expiration of a repurchase option corresponding to timberland previously sold. Special items in 2016 included $9 million of facility closure costs, $4 million of TimBar and Columbus Container acquisition-related costs, and $1 million related to our withdrawal from a multiemployer pension plan for one of our corrugated products facilities. *Paper.* Segment income from operations decreased $78 million to $54 million, compared to $132 million in 2016. The decrease primarily related to lower sales and production volumes ($17 million), lower paper prices and mix ($8 million), and higher costs for energy ($12 million) and annual outage expenses ($10 million). Special items during 2017 included expense of $33 million related to the conversion of the Wallula No. 3 machine to kraft linerboard, compared to $4 million related to the shutdown of market pulp operations at our Wallula mill and facilities closures in 2016. #### Interest Expense, Net and Other, and Income Taxes Interest expense, net and other, during 2017 increased $9 million compared to 2016. The increase in interest expense was primarily due to interest on term loan borrowings for the TimBar acquisition made in August 2016, higher interest rates on variable rate debt due to higher LIBOR in 2017 compared to 2016, and interest on the new notes related to the December 2017 refinancing. During 2017, income tax expense decreased $79 million compared to 2016 primarily due to a $122.1 million tax benefit as a result of H.R. 1 (P.L. 115-97), originally known as the “Tax Cuts and Jobs Act” (the “Tax Act”), which the President signed into law on December 22, 2017. The effective tax rate for 2017 and 2016 was 19.3% and 34.7%, respectively. For additional information regarding the impact of the Tax Act, see Note 7, Income Taxes, in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K. ### 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. We ended the year with $362 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, common stock dividends, and repurchases of common stock. 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): | Year Ended December 31, 2018 | 2017 | 2016 | | --- | ---: | ---: | ---: | | Operating activities | $1,180.1 | $856.1 | $806.9 | | Investing activities | (608.2) | (609.1) | (769.6) | | Financing activities | (427.3) | (269.4) | 17.8 | | Net increase (decrease) in cash and cash equivalents | $144.6 | $(22.4) | $55.1 | ### Operating Activities Our operating cash flow is primarily driven by our earnings and changes in operating assets and liabilities, such as accounts receivable, inventories, accounts payable and other accrued liabilities, as well as other factors described below. 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. During 2018, net cash provided by operating activities was $1,180 million, compared to $856 million for 2017, an increase of $324 million. Cash from operations excluding changes in cash used for operating assets and liabilities increased $231 million. The increase was primarily due to higher income from operations in 2018 as discussed above and lower qualified pension plan contributions of $20 million made in 2018 compared to the same period in 2017. Cash increased by $93 million due to changes in operating assets and liabilities. The increase was primarily due to the following: (a) a reduction in taxes paid in 2018 as a result of the lower U.S. corporate federal statutory income tax rate of 21% and the utilization in 2018 of a federal overpayment from 2017 as a result of Federal Tax Reform, (b) lower accounts receivables levels in 2018 compared to 2017 due to fewer shipping days in December 2018 compared to December 2017, as well as timing of collections, and (c) the receipt of the DeRidder insurance proceeds in the first quarter of 2018. These changes were partially offset by lower accounts payable levels in 2018 compared to 2017 primarily related to timing of payments. During 2017, net cash provided by operating activities was $856 million, compared to $807 million for 2016, an increase of $49 million. Cash from operations excluding changes in cash used for operating assets and liabilities increased $200 million. The increase was primarily due to higher income from operations in 2017 as discussed above. Cash decreased by $151 million due to changes in operating assets and liabilities. The decrease was primarily due to higher accounts receivable levels in 2017 compared to 2016 because of increased sales and timing of collections; and a higher federal and state income tax receivable in 2017 compared to 2016 primarily due to an overpayment of required taxes made in 2017 prior to the enactment of tax reform. These changes were partially offset by an increase in accounts payable levels in 2017 compared to 2016 primarily related to timing of payments. ### Investing Activities We used $608 million for investing activities in 2018, compared to $609 million in 2017. In 2018, we spent $552 million for internal capital investments, compared to $343 million in 2017. During 2018, we spent $56 million for acquisitions (Englander dZignPak), compared to $274 million for acquisitions in 2017 (Sacramento Container). The details of capital expenditures for property and equipment, excluding acquisitions, by segment for the years ended December 31, 2018, 2017, and 2016, are included in the table below (dollars in millions). | | Year Ended December 31, 2018 | 2017 | 2016 | | --- | ---: | ---: | ---: | | Packaging | $504.0 | $305.1 | $239.9 | | Paper | 12.6 | 22.6 | 31.6 | | Corporate and Other | 34.8 | 15.3 | 2.8 | | | $551.4 | $343.0 | $274.3 | We expect capital investments in 2019 to be between $390 million and $410 million. These expenditures could increase or decrease as a result of a number of factors, including our financial results, strategic opportunities, future economic conditions, and our regulatory compliance requirements. We currently estimate capital expenditures to comply with environmental regulations will be about $10 million in 2019. Our estimated environmental expenditures could vary significantly depending upon the enactment of new environmental laws and regulations. For additional information, see “Environmental Matters” in this Management's Discussion and Analysis of Financial Condition and Results of Operations. At December 31, 2018, the Company had commitments for capital expenditures of $113 million. The Company believes that cash-on-hand combined with cash flow from operations will be sufficient to fund these commitments. #### 2017 We used $609 million for investing activities in 2017, compared to $770 million in 2016. In 2017, we spent $343 million for internal capital investments, compared to $274 million in 2016. During 2017, we spent $274 million for acquisitions (Sacramento Container), compared to $485 million for acquisitions in 2016 (TimBar and Columbus Container). ### Financing Activities #### 2018 In 2018, net cash used for financing activities was $427 million, compared to $269 million of cash used for financing activities in 2017, an increase of $158 million. The increase primarily relates to higher debt repayments and dividends in 2018. In March 2018, we repaid from cash $150 million of our maturing 6.5% senior notes. We paid $268 million of dividends in 2018 compared to $238 million in 2017. In 2017, net cash used for financing activities was $269 million, compared to $18 million of cash provided by financing activities in 2016, a change of $287 million. In 2017, we paid down approximately $14 million of debt, including scheduled principal payments on our term loan borrowings and the refinancing of those borrowings as described below. In 2016, we increased our debt, as we borrowed $385 million to finance the TimBar acquisition. In addition, in 2016, we repurchased $100 million of shares, with no such repurchase activity in 2017. We paid $238 million of dividends in 2017 compared to $216 million in 2016. To reduce exposure to variable interest rates, in December 2017, we issued a total of $1 billion in three-year and ten-year notes with fixed interest rates of 2.45% and 3.40%, respectively, and used the proceeds to fully pay down our five-year and seven-year term loans. For more information about our debt, treasury lock derivative instruments, and commitments, see Note 10, Debt, Note 14, Derivative Instruments and Hedging Activities, and Note 19, Commitments, Guarantees, Indemnifications, and Legal Proceedings, respectively, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K. ### Commitments ### Contractual Obligations The table below sets forth our enforceable and legally binding obligations as of December 31, 2018 for the categories described below. Some of the amounts included in the table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in the table. Purchase orders made in the ordinary course of business are excluded from the table below. Any amounts for which we are liable under purchase orders are reflected on the Consolidated Balance Sheets as accounts payable and accrued liabilities (dollars in millions): | | Payments Due by Period Total | Less Than 1 Year 2019 | 1-3 Years 2020-2021 | 3-5 Years 2022-2023 | More Than 5 Years 2024 & After | | --- | ---: | ---: | ---: | ---: | ---: | | 2.45% Senior Notes, due December 2020 | $500.0 | $— | $500.0 | $— | $— | | 3.90% Senior Notes, due June 2022 | 400.0 | — | — | 400.0 | — | | 4.50% Senior Notes, due November 2023 | 700.0 | — | — | 700.0 | — | | 3.65% Senior Notes, due September 2024 | 400.0 | — | — | — | 400.0 | | 3.40% Senior Notes, due December 2027 | 500.0 | — | — | — | 500.0 | | Total short-term and long-term debt (a) | 2,500.0 | — | 500.0 | 1,100.0 | 900.0 | | Interest on long-term debt (b) | 477.2 | 90.9 | 169.7 | 134.0 | 82.6 | | Capital lease obligations, including interest | 25.9 | 2.7 | 5.4 | 5.4 | 12.4 | | Operating leases (c) | 270.3 | 70.1 | 106.1 | 47.7 | 46.4 | | Capital commitments | 112.8 | 112.8 | — | — | — | | Purchase commitments: | | | | | | | Raw materials (d) | 335.1 | 48.6 | 87.3 | 85.1 | 114.1 | | Energy related (e) | 35.7 | 26.7 | 4.5 | 1.1 | 3.4 | | Other liabilities reflected on our Consolidated Balance Sheet (f): | | | | | | | Compensation and benefits (g) | 359.9 | 50.9 | 111.8 | 126.9 | 70.3 | | Other (h) | 71.1 | 13.2 | 7.1 | 2.7 | 48.1 | | | **$4,188.0** | **$415.9** | **$991.9** | **$1,502.9** | **$1,277.3** | (a) The table assumes our long-term debt is held to maturity and includes the current portion of long-term debt. See Note 10, Debt, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K. Amounts reported are gross amounts and do not include unamortized debt discounts of $3.7 million at December 31, 2018. (b) Amounts represent estimated future interest payments as of December 31, 2018, assuming our long-term debt is held to maturity. All interest rates are fixed. (c) We enter into operating leases in the normal course of business. We lease some of our operating facilities, as well as other property and equipment, under operating leases. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our operating lease obligations would change if we exercised these renewal options and/or if we entered into additional operating lease agreements. (d) Included among our raw materials purchase obligations are contracts to purchase approximately $321.0 million of wood fiber. Purchase prices under most of these agreements are set quarterly, semiannually, or annually based on regional market prices, and the estimate is based on contract terms or first quarter 2019 pricing. Except for deposits required pursuant to wood supply contracts, these obligations are not recorded in our consolidated financial statements until contract payment terms take effect. Our log, fiber, and wood chip obligations are subject to change based on, among other things, the effect of governmental laws and regulations, disruptions to our manufacturing operations, and log and fiber availability. (e) We enter into utility contracts for the purchase of electricity and natural gas. We also purchase these services under utility tariffs. The contractual and tariff arrangements include multiple-year commitments and minimum annual purchase requirements. Our payment obligations were based upon prices in effect on December 31, 2018, or contract language, if available. (f) Long-term deferred income taxes of $285.2 million and unrecognized tax benefits of $5.2 million, including interest and penalties, are excluded from this table, because the timing of their future cash outflows are uncertain. (g) Amounts primarily consist of pension and postretirement obligations. We have minimum qualified pension contributions of approximately $15.8 million in 2019. See Note 11, Employee Benefit Plans and Other Postretirement Benefits, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K, for additional information. (h) Amounts primarily consist of workers compensation, environmental, and asset retirement obligations. ### Off-Balance-Sheet Arrangements The Company does not have any off-balance sheet arrangements as of December 31, 2018. ### Inflation and Other General Cost Increases We are subject to both contractual, inflation, and other general cost increases. If we are unable to offset these cost increases by price increases, growth, and/or cost reductions in our operations, these inflation and other general cost increases could have a material adverse effect on our operating cash flows, profitability, and liquidity. In 2018, our total company costs including cost of sales (COS) and selling, general, and administrative expenses (SG&A) was $5.9 billion, and excluding non-cash costs (depreciation, pension and postretirement expense, and share-based compensation expense) was $5.4 billion. A 1% increase in COS and SG&A costs would increase costs by $59 million and cash costs by $54 million. Certain items of product input costs have historically been subject to more cost volatility including fiber, purchased energy, and chemicals. ### Energy In 2018, our mills, including both packaging and paper mills, consumed about 95 million MMBTU’s of fuel, including internally generated and externally purchased, to produce both steam and electricity. The following table for 2018 provides the total MMBTU's purchased externally by fuel type each quarter and the average cost per MMBTU by fuel type for the year. Our mills represent about 90% of our total purchased fuel costs. The cost per MMBTU includes the cost of the fuel plus our transportation and delivery costs. | Fuel Type | 2018 Fuel Purchased (millions of MMBTU's) First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | 2018 Avg. Cost / MMBTU | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Natural gas | 6.97 | 5.83 | 5.47 | 6.23 | 24.50 | $3.48 | | Purchased bark | 2.53 | 2.20 | 2.17 | 2.37 | 9.27 | 2.42 | | Other purchased fuels | 0.31 | 0.23 | 0.23 | 0.33 | 1.10 | 4.11 | | Total mills | 9.81 | 8.26 | 7.87 | 8.93 | 34.87 | $3.22 | In addition, the mills purchased 22.41 million CkWh (hundred kilowatt-hours) of electricity in 2018. The purchases by quarter and the average cost per CkWh were as follows: | | 2018 Purchased Electricity (millions of CkWh) First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | 2018 Avg. Cost / CkWh | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Purchased electricity | 5.38 | 5.66 | 6.04 | 5.33 | 22.41 | $5.57 | 26 ### Environmental Matters Environmental compliance requirements are a significant factor affecting our business. We employ processes in the manufacture of containerboard, paper, and pulp, which result in various discharges, emissions and waste disposal. These processes are subject to numerous federal, state, local and foreign environmental laws and regulations. We operate and expect to continue to operate, under environmental permits and similar authorizations from various governmental authorities that regulate such discharges, emissions, and waste disposal. The most significant of these laws affecting the Company are: - Resource Conservation and Recovery Act (RCRA); - Clean Water Act (CWA); - Clean Air Act (CAA); - The Emergency Planning and Community Right-to-Know-Act (EPCRA); - Toxic Substance Control Act (TSCA); and - Safe Drinking Water Act (SDWA). We believe that we are currently in material compliance with these and all applicable environmental rules and regulations. Because environmental regulations are constantly evolving, the Company has incurred, and will continue to incur, costs to maintain compliance with these and other environmental laws. The Company works diligently to anticipate and budget for the impact of applicable environmental regulations, and does not currently expect that future environmental compliance obligations will materially affect its business or financial condition. For the years ended December 31, 2018, 2017, and 2016, we spent $40 million, $39 million, and $44 million, respectively, to comply with the requirements of these and other environmental laws. Additionally, we had $7 million of environmental capital expenditures in 2018, $9 million in 2017, and $8 million in 2016. In January 2013, the U.S. Environmental Protection Agency (the “EPA”) established a three-year deadline for compliance with the Boiler MACT regulations, establishing air emissions standards and certain other requirements for industrial boilers. PCA's compliance actions involved modifying or replacing certain boilers, and all PCA mills are in full compliance with Boiler MACT requirements. On July 29, 2016, the U.S. Court of Appeals for the District of Columbia Circuit issued a ruling on the consolidated cases challenging Boiler MACT. The court vacated key portions of the rule, including emission limits for certain subcategories of solid fuel boilers, and remanded issues to the EPA for further rulemaking. At this time, we cannot predict with certainty how the recent decision will impact our existing Boiler MACT compliance efforts or whether we will incur additional costs to comply with any revised standards. As is the case with any industrial operation, PCA has, in the past, incurred costs associated with the remediation of soil or groundwater contamination, as required by the federal Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the federal “Superfund” law, and analogous state laws. Cleanup requirements arise with respect to properties the Company currently owns or operates, former facilities and off-site facilities where the Company has disposed of hazardous substances. As part of the sale to PCA of the containerboard and corrugated products business of Pactiv Corporation in April 1999, Pactiv agreed to retain all liability for all former facilities and all sites associated with pre-closing off-site waste disposal. Pactiv also retained environmentally impaired real property in Filer City, Michigan unrelated to current mill operations. In addition, OfficeMax (now an indirect, wholly owned subsidiary of Office Depot) retains responsibility for certain environmental liabilities related to some of the businesses, facilities, and assets we acquired from Boise. Generally, this responsibility relates to hazardous substance releases and other environmental incidents that arose before 2004. Some of these liabilities could be significant; however, Office Depot may not have sufficient funds to satisfy its indemnification obligations, and in some cases, we may not be entitled to such indemnification. Because liability for remediation costs under environmental laws is strict, meaning that liability is imposed without fault, joint and several, meaning that liability is imposed on each party without regard to contribution, and retroactive, PCA could receive notifications of cleanup liability in the future and this liability could be material. From 2006 through 2018, there were no significant environmental remediation costs at PCA's mills and corrugated plants. As of December 31, 2018, we maintained an environmental reserve of $27.3 million relating to on-site landfills and surface impoundments as well as ongoing and anticipated remedial projects. The Company believes that it is not reasonably possible that future environmental expenses above the $27.3 million accrued at December 31, 2018, will have a material impact on its financial condition, results of operations, and cash flows. While legislation regarding the regulation of greenhouse gas emissions has been proposed at the federal level, it is uncertain whether such legislation will be passed and, if so, what the breadth and scope of such legislation will be. The result of the regulation of greenhouse gas emissions could be an increase in our future environmental compliance costs, through caps, taxes or additional capital expenditures to modify facilities, which may be material. However, climate change legislation and the resulting future energy policy could also provide us with opportunities if the use of renewable energy is encouraged. We currently self-generate a significant portion of our power requirements at our mills using bark, black liquor and biomass as fuel, which are derived from renewable resources. While we believe we are well-positioned to take advantage of any renewable energy incentives, it is uncertain what the ultimate costs and opportunities of any climate change legislation will be and how our business and industry will be affected. ### 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, goodwill and intangible assets, pensions and other postretirement benefits, environmental liabilities, income taxes, and long-lived asset impairment, 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. Critical accounting estimates are those that are most important to the portrayal of our financial condition and results. These estimates require management's most difficult, subjective, or complex judgments. We review the development, selection, and disclosure of our critical accounting estimates with the Audit Committee of our board of directors. The Company believes that of its significant accounting policies, the following involve a higher degree of judgment and/or complexity: ### Pensions The Company accounts for defined benefit pension plans in accordance with Accounting Standards Codification (ASC) 715, *Compensation - Retirement Benefits*. The calculation of pension expense and pension liabilities requires decisions about a number of key assumptions that can significantly affect expense and liability amounts, including discount rates, expected return on plan assets, expected rate of compensation increases, longevity and service lives of participants, expected contributions, and other factors. The pension assumptions used to measure pension expense and liabilities are discussed in Note 11, Employee Benefit Plans and Other Postretirement Benefits. We recognize the funded status of our pension plans on our Consolidated Balance Sheet and recognize the actuarial and experience gains and losses and the prior service costs and credits as a component of “Accumulated Other Comprehensive Loss” in our Consolidated Statement of Changes in Stockholders' Equity. Actual results that differ from assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense in future periods. At December 31, 2018, we had approximately $127.9 million of actuarial losses and prior service costs, net of tax, recorded in “Accumulated other comprehensive loss” on our Consolidated Balance Sheet. Accumulated losses in excess of 10% of the greater of the projected benefit obligation or the market-related value of assets will be recognized on a straight-line basis over the average remaining service period of active employees in PCA plans (which is between seven and ten years) and over the average remaining lifetime of inactive participants of Boise plans (which is between 24 and 27 years), to the extent that losses are not offset by gains in subsequent years. While we believe that the assumptions used to measure our pension obligations are reasonable, differences in actual experience or changes in assumptions may materially affect our pension obligations and future expense. We believe that the accounting estimate related to pensions is a critical accounting estimate because it is highly susceptible to change from period to period. As discussed above, the future effects of pension plans on our financial position and results of operations will depend on economic conditions, employee demographics, mortality rates, retirement rates, investment performance, and funding decisions, among other factors. The following table presents selected assumptions used and expected to be used in the measurement of pension expense in the following periods (dollars in millions): | | Year Ending December 31, 2019 | Year Ended December 31 2018 | 2017 | | --- | ---: | ---: | ---: | | Pension expense | $32.8 | $27.1 | $24.8 | | **Assumptions** | | | | | Discount rate | 4.31% | 3.66% | 4.24% | | Expected rate of return on plan assets | 6.06% | 6.06% | 6.55% | A change of 0.25% in either direction to the discount rate or the expected rate of return on plan assets would have had the following effect on 2018 and 2019 pension expense (dollars in millions): | 2018 | Base Expense | Increase (Decrease) in Pension Expense(a) 0.25% Increase | 0.25% Decrease | | --- | ---: | ---: | ---: | | Discount rate | $27.1 | $(2.2) | $2.6 | | Expected rate of return on plan assets | 27.1 | (2.3) | 2.3 | | **2019** | | | | | Discount rate | $32.8 | $(2.3) | $2.5 | | Expected rate of return on plan assets | 32.8 | (2.2) | 2.2 | (a) The sensitivities shown above are specific to 2018 and 2019. The sensitivities may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown. For more information related to our pension benefit plans, see Note 11, Employee Benefit Plans and Other Postretirement Benefits, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K. ### Goodwill Impairment Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. At December 31, 2018, we had $917.3 million of goodwill, of which, during 2018, we recorded $28.6 million in connection with the acquisition of Englander. At December 31, 2018, we had $862.1 million and $55.2 million of goodwill recorded in our Packaging and Paper segments, respectively. We maintain two reporting units for purposes of our goodwill impairment testing, Packaging and Paper, which are the same as our operating segments discussed in Note 18, Segment Information, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K. We test goodwill for impairment annually in the fourth quarter or sooner if events or changes in circumstances indicate that the carrying value of the asset may exceed fair value. Under ASU 2017-04 (Topic 350), *Intangibles - Goodwill and Other – Simplifying the Test for Goodwill Impairment*, companies are no longer required to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment, thus eliminating Step Two of the analysis that was required under the prior guidance. Under ASU 2017-04, goodwill impairment testing is performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company adopted this ASU prospectively beginning with its annual goodwill impairment test in the fourth quarter of 2017. The update to the standard does not eliminate the optional qualitative assessment of goodwill impairment that is often used to determine if the quantitative assessment is necessary. The qualitative assessment requires the evaluation of certain events and circumstances such as macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, as well as company and reporting unit specific items. If, after assessing these qualitative factors, the Company determines that it is more likely than not that the carrying value of the reporting unit is less than its fair value, then no further testing is required. Otherwise, the Company would perform a quantitative analysis. The quantitative analysis requires companies to compare the fair value of the reporting units to which goodwill was assigned to their respective carrying values. In calculating fair value, we use the income approach as our primary indicator of fair value. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. These estimates are based on a number of factors including industry experience, business expectations and the economic environment. If the fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is potentially impaired, and the carrying value of goodwill is then reduced to the implied value, or to zero if the fair value of the assets exceeds the fair value of the reporting unit, through an impairment charge. During the annual goodwill impairment test performed in the fourth quarter of 2018, we assessed qualitative factors to determine whether it was more likely than not that the fair value of each reporting unit was less than its carrying value. Based on the results of the qualitative impairment test, we determined that it was more likely than not that the carrying value was less than the fair value of the Packaging and Paper reporting units. If management's estimates of future operating results materially change or if there are changes to other assumptions, the estimated fair value of our goodwill could change significantly. Such change could result in impairment charges in future periods, which could have a significant noncash impact on our operating results and financial condition. We cannot predict the occurrence of future events that might adversely affect the reported value of our goodwill. As additional information becomes known, we may change our estimates. ### Long-Lived Asset Impairment An impairment of a long-lived asset exists when the carrying value of an asset is not recoverable through future undiscounted cash flows from operations and when the carrying value of the asset exceeds its fair value. Long-lived asset impairment is a critical accounting estimate, as it is susceptible to change from period to period. We review the carrying value of long-lived assets, including intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. For purposes of testing for impairment, we group our long-lived assets at the lowest level for which identifiable cash flows are largely independent of the cash flows from other assets and liabilities. Our asset groupings vary based on the related business in which the long-lived asset is employed and the interrelationship between those long-lived assets in producing net cash flows. Asset groupings could change in the future if changes in the operations of the business or business environment affect the way particular long-lived assets are employed or the interrelationships between assets. To estimate whether the carrying value of an asset or asset group is impaired, we estimate the undiscounted cash flows that could be generated under a range of possible outcomes. To measure future cash flows, we are required to make assumptions about future production volumes, future product pricing, and future expenses to be incurred. In addition, estimates of future cash flows may change based on the availability of fiber, environmental requirements, capital spending, and other strategic management decisions. We estimate the fair value of an asset or asset group based on quoted market prices for similar assets and liabilities or inputs that are observable either directly (Level 1 measurement) or indirectly (the amount for which the asset(s) could be bought or sold in a current transaction with a third party) when available (Level 2 measurement). When quoted market prices are not available, we use a discounted cash flow model to estimate fair value (Level 3 measurement). We periodically assess the estimated useful lives of our assets. Changes in circumstances, such as changes to our operational or capital strategy, changes in regulation, or technological advances, may result in the actual useful lives differing from our estimates. Revisions to the estimated useful lives of assets requires judgment and constitutes a change in accounting estimate, which is accounted for prospectively by adjusting or accelerating depreciation and amortization rates. In 2018 and 2017, we recognized incremental depreciation expense of $14.5 million and $10.5 million, respectively, primarily related to the second quarter 2018 discontinuation of uncoated free sheet and coated one-side grades at the Wallula, Washington mill associated with the conversion of the No. 3 paper machine to a high-performance 100% virgin kraft linerboard machine. Additionally, in conjunction with the conversion of the No. 3 paper machine, we recognized an impairment loss of $3.1 million and $13.5 million associated with the fiber farm asset group during 2018 and 2017, respectively. ### New and Recently Adopted Accounting Standards For a listing of our new and recently adopted accounting standards, see Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K. ### Reconciliations of Non-GAAP Financial Measures to Reported Amounts 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 years ended December 31, 2018, 2017, and 2016, follow (dollars in millions): | | Year Ended December 31, 2018 Income before Taxes | Income Taxes | Net Income | 2017 Income before Taxes | Income Taxes | Net Income | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | As reported in accordance with GAAP | $970.5 | $(232.5) | $738.0 | $828.6 | $(160.0) | $668.6 | | Special items: | | | | | | | | Wallula mill restructuring (a) | 30.0 | (7.5) | 22.5 | 33.4 | (13.1) | 20.3 | | Facilities closure and other costs (b) | 1.8 | (0.5) | 1.3 | (5.8) | 2.3 | (3.5) | | Insurance deductible for property damage (c) | 0.5 | (0.1) | 0.4 | — | — | — | | Acquisition and integration related costs (d) | 0.2 | — | 0.2 | 1.7 | (0.7) | 1.0 | | Tax reform (e) | — | (2.0) | (2.0) | — | (122.1) | (122.1) | | DeRidder mill incident (f) | — | — | — | 5.0 | (2.0) | 3.0 | | Deferred debt issuance costs (g) | — | — | — | 1.8 | (0.7) | 1.1 | | Hexacomb working capital adjustment (h) | — | — | — | (2.3) | 0.9 | (1.4) | | Expiration of timberland repurchase option (i) | — | — | — | (2.0) | 0.8 | (1.2) | | Internal legal entity consolidation (j) | — | — | — | — | 3.3 | 3.3 | | Total special items | 32.5 | (10.1) | 22.4 | 31.8 | (131.3) | (99.5) | | Excluding special items | $1,003.0 | $(242.6) | $760.4 | $860.4 | $(291.3) | $569.1 | | | Year Ended December 31, 2016 Income before Taxes | Income Taxes | Net Income | | --- | ---: | ---: | ---: | | As reported in accordance with GAAP | $688.5 | $(238.9) | $449.6 | | Special items: | | | | | Facilities closure and other costs (b) | 11.9 | (4.2) | 7.7 | | Acquisition and integration related costs (d) | 4.5 | (1.6) | 2.9 | | Ceased production of market pulp at Wallula (k) | 2.7 | (0.9) | 1.8 | | Total special items | 19.1 | (6.7) | 12.4 | | Excluding special items | $707.6 | $(245.6) | $462.0 | (a) Includes charges related to the second quarter 2018 discontinuation of uncoated free sheet and coated one-side grades at the Wallula, Washington mill associated with the conversion of the No. 3 paper machine to a high-performance 100% virgin kraft linerboard machine. (b) For 2018, includes charges consisting of closure costs related to corrugated products facilities and a corporate administration facility. For 2017, includes income primarily related to the sale of land corresponding to the closure of a corrugated products facility, partially offset by closure costs related to corrugated products facilities, a paper administration facility, a corporate administration facility, and a lump sum settlement of a multiemployer pension plan withdrawal liability for one of our corrugated products facilities. For 2016, includes closure costs related to corrugated product facilities and a paper products facility, and a lump sum settlement of a multiemployer pension plan withdrawal liability for one of our corrugated products facilities. (c) Includes costs for the property damage insurance deductible for a weather-related incident at one of the corrugated products facilities. (d) Includes charges for acquisition and integration costs related to recent acquisitions. (e) For 2018 and 2017, includes $2.0 million and $122.1 million, respectively, of income tax benefit for the re-measurement of our net deferred tax liability for the reduction in the U.S. corporate federal statutory income tax rate related to our 2017 measurement period adjustments in accordance with SEC Staff Accounting Bulletin No. 118 (SAB 118), *Income Tax Accounting Implications of the Tax Cuts and Jobs Act.* (f) Includes costs for the property damage and business interruption insurance deductible corresponding to the February 2017 explosion at our DeRidder, Louisiana mill. (g) Includes expense related to the write-off of deferred debt issuance costs in connection with the December 2017 debt refinancing. (h) Includes income related to a working capital adjustment from the April 2015 sale of our Hexacomb corrugated manufacturing operations in Europe and Mexico. (i) Includes a gain related to the expiration of a repurchase option corresponding to timberland previously sold. (j) Includes tax expense for the change in value of deferred taxes as a result of an internal legal entity consolidation that will simplify future operating activities. (k) Includes costs related to ceased production of softwood market pulp operations at our Wallula, Washington mill and the permanent shutdown of the No. 1 machine. The following table reconciles net income (loss) to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions): | | Year Ended December 31, 2018 | 2017 | | 2016 | | | --- | ---: | ---: | --- | ---: | --- | | Net income | $738.0 | $668.6 | | $449.6 | | | Interest expense, net and other | 97.2 | 103.9 | (a) | 94.8 | (a) | | Provision for income taxes (b) | 232.5 | 160.0 | | 238.9 | | | Depreciation, amortization, and depletion | 410.9 | 391.4 | | 358.0 | | | EBITDA | $1,478.6 | $1,323.9 | (a) | $1,141.3 | (a) | | Special items: | | | | | | | Acquisition and integration related costs | $0.2 | $1.7 | | $4.5 | | | Facilities closure and other costs | 1.6 | (6.0) | | 11.1 | | | Wallula mill restructuring | 16.3 | 23.1 | | — | | | Insurance deductible for property damage | 0.5 | — | | — | | | DeRidder mill incident | — | 5.0 | | — | | | Hexacomb working capital adjustment | — | (2.3) | | — | | | Expiration of timberland repurchase option | — | (2.0) | | — | | | Ceased production of market pulp at Wallula | — | — | | 0.6 | | | EBITDA excluding special items | $1,497.2 | $1,343.4 | (a) | $1,157.5 | (a) | (a) Effective January 1, 2018, the Company adopted ASU 2017-07, *Compensation: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost* and applied this standard retrospectively to the prior periods reflected herein. See Note 2, Summary of Significant Accounting Policies and Note 18, Segment Information, for more information. (b) The U.S. corporate federal statutory income tax rate in 2018 was 21% and 35% in all prior years presented in the table. Income tax expense for 2018 and 2017 included a tax benefit of $2.0 million and $122.1 million, respectively, related to the enactment in December 2017 of the Tax Cuts and Jobs Act (H.R.1). See Note 7, Income Taxes, for more information. The following table reconciles segment income (loss) to EBITDA and EBITDA excluding special items (dollars in millions): | Packaging | Year Ended December 31, 2018 | 2017 (a) | 2016 (a) | | --- | ---: | ---: | ---: | | Segment income | $1,045.4 | $950.3 | $718.5 | | Depreciation, amortization, and depletion | 342.0 | 317.5 | 293.3 | | EBITDA | 1,387.4 | 1,267.8 | 1,011.8 | | Facilities closure and other costs | 1.6 | (7.2) | 10.2 | | Acquisition and integration related costs | 0.2 | 1.7 | 4.2 | | Wallula mill restructuring | 11.3 | — | — | | Insurance deductible for property damage | 0.5 | — | — | | DeRidder mill incident | — | 5.0 | — | | Expiration of timberland repurchase option | — | (2.0) | — | | Hexacomb working capital adjustment | — | (1.6) | — | | EBITDA excluding special items | **$1,401.0** | **$1,263.7** | **$1,026.2** | | **Paper** | | | | | Segment income | $97.7 | $54.0 | $131.7 | | Depreciation, amortization, and depletion | 62.0 | 67.6 | 59.6 | | EBITDA | 159.7 | 121.6 | 191.3 | | Wallula mill restructuring | 5.0 | 23.1 | — | | Facilities closure and other costs | — | 0.4 | 0.9 | | Ceased production of market pulp at Wallula | — | — | 0.6 | | EBITDA excluding special items | **$164.7** | **$145.1** | **$192.8** | | **Corporate and Other** | | | | | Segment loss | $(75.4) | $(71.8) | $(66.9) | | Depreciation, amortization, and depletion | 6.9 | 6.3 | 5.1 | | EBITDA | (68.5) | (65.5) | (61.8) | | Facilities closure and other costs | — | 0.8 | — | | Hexacomb working capital adjustment | — | (0.7) | — | | Acquisition and integration related costs | — | — | 0.3 | | EBITDA excluding special items | **$(68.5)** | **$(65.4)** | **$(61.5)** | | **EBITDA** | **$1,478.6** | **$1,323.9** | **$1,141.3** | | **EBITDA excluding special items** | **$1,497.2** | **$1,343.4** | **$1,157.5** | (a) Effective January 1, 2018, the Company adopted ASU 2017-07, *Compensation: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost* and applied this standard retrospectively to the prior periods reflected herein. See Note 2, Summary of Significant Accounting Policies and Note 18, Segment Information, for more information. ## Market risk As filed, 635 characters. 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. We were not party to any derivative-based arrangements at December 31, 2018. For a discussion of derivatives and hedging activities, see Note 14, Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K. At December 31, 2018, the interest rates on 100% of PCA’s outstanding debt are fixed. ## Controls and procedures As filed, 4,484 characters. ### Controls and Procedures 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 December 31, 2018. 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 December 31, 2018. During the quarter ended December 31, 2018, 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. ### Management’s Report on Internal Control Over Financial Reporting PCA’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only with proper authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, PCA’s internal control over financial reporting may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. PCA’s management, under the supervision of and with the participation of the Chief Executive Officer and Chief Financial Officer, assessed the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in *Internal Control - Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, PCA’s management concluded that its internal control over financial reporting was effective as of December 31, 2018, based on the specified criteria. KPMG LLP, the independent registered public accounting firm that audited PCA’s financial statements included in this Form 10-K, has also audited the effectiveness of the Company’s internal control over financial reporting. Their attestation report precedes PCA’s audited financial statements included elsewhere in this report. Filed Feb 28, 2019. Source: SEC EDGAR, the filing index for accession 0001564590-19-005284. Last ingested by Listed: Oct 24, 2026, 14:53 ET. No prices; not investment advice.