# Packaging Corp of America: Form 10-Q for the period ended Sep 30, 2019

- Company: [Packaging Corp of America](/companies/pkg.md) (CIK 75677)
- Form: 10-Q
- Filed: 2019-11-01
- Accepted by EDGAR: Nov 1, 2019, 10:09 ET
- Period: 2019-09-30
- Accession: 0001564590-19-039297
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/75677/000156459019039297/pkg-10q_20190930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/75677/000156459019039297/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-07-01 to 2019-09-30 | $1.75bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2019-01-01 to 2019-09-30 | $5.24bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-07-01 to 2019-09-30 | $1.34bn | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2019-01-01 to 2019-09-30 | $3.98bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-07-01 to 2019-09-30 | $411.4m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2019-01-01 to 2019-09-30 | $1.26bn | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2019-07-01 to 2019-09-30 | $136.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2019-01-01 to 2019-09-30 | $420.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-07-01 to 2019-09-30 | $262.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2019-01-01 to 2019-09-30 | $818.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2019-07-01 to 2019-09-30 | $59.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-01-01 to 2019-09-30 | $184.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-07-01 to 2019-09-30 | $179.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2019-01-01 to 2019-09-30 | $560.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-07-01 to 2019-09-30 | $1.89 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2019-01-01 to 2019-09-30 | $5.91 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-07-01 to 2019-09-30 | $1.90 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2019-01-01 to 2019-09-30 | $5.93 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-07-01 to 2019-09-30 | 94,300,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-01-01 to 2019-09-30 | 94,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-01-01 to 2019-09-30 | $878.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-01-01 to 2019-09-30 | $263.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2019-01-01 to 2019-09-30 | $223.9m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2019-09-30 | $738.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-09-30 | $2.53bn | us-gaap:AssetsCurrent |
| Total assets | at 2019-09-30 | $7.19bn | us-gaap:Assets |
| Current liabilities | at 2019-09-30 | $770.7m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2019-09-30 | $2.49bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2019-09-30 | $3.03bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 47,293 characters.

This management’s discussion and analysis includes statements regarding our expectations with respect to our future performance, expected business conditions, liquidity, and capital resources. Such statements, along with any other statements that are not historical in nature, are forward-looking. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in our 2018 Annual Report on Form 10-K, as well as those factors listed in other documents we file with the Securities and Exchange Commission (SEC). We do not assume any obligation to update any forward-looking statement. Our actual results may differ materially from those contained in or implied by any of the forward-looking statements in this Form 10-Q. Please see “Forward Looking Statements” elsewhere in this Item 2.

### Overview

PCA is the 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 94 corrugated products manufacturing plants. Our containerboard mills produce linerboard and corrugating medium, which are papers primarily used in the production of corrugated products. Our corrugated products manufacturing plants produce a wide variety of corrugated packaging products, including conventional shipping containers used to protect and transport manufactured goods, multi-color boxes and displays with strong visual appeal that help to merchandise the packaged product in retail locations, and honeycomb protective packaging. In addition, we are a large producer of packaging for meat, fresh fruit and vegetables, processed food, beverages, and other industrial and consumer products. We also manufacture and sell white papers, including both commodity and specialty papers, which may have custom or specialized features such as colors, coatings, high brightness, and recycled content. We are headquartered in Lake Forest, Illinois and operate primarily in the United States.

This Item 2 is intended to supplement, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2018 Annual Report on Form 10-K.

### Executive Summary

Third quarter net sales were $1.75 billion in 2019 and $1.81 billion in 2018. We reported $180 million of net income, or $1.89 per diluted share, during the third quarter of 2019, compared to $207 million, or $2.18 per diluted share, during the same period in 2018. Net income included $2 million of expense for special items in the third quarter of 2019, compared to $4 million of expense in 2018 (discussed below). Excluding special items, net income was $182 million, or $1.92 per diluted share, during the third quarter of 2019, compared to $211 million, or $2.23 per diluted share, in the third quarter of 2018. The decrease was driven primarily by lower prices and mix and lower volume in our Packaging segment, lower volume in our Paper segment, higher operating and converting costs, and other costs. These items were partially offset by higher prices and mix in our Paper segment, lower annual outage expenses, and lower freight and logistics expenses. For additional detail on special items included in reported GAAP results, as well as segment income (loss) excluding special items, earnings before non-operating pension expense, interest, income taxes, and depreciation, amortization, and depletion (EBITDA), and EBITDA excluding special items, see “Item 2. Reconciliations of Non-GAAP Financial Measures to Reported Amounts.”

Packaging segment income from operations was $235 million in the third quarter of 2019, compared to $284 million in the third quarter of 2018. Packaging segment EBITDA excluding special items was $325 million in the third quarter of 2019 compared to $378 million in the third quarter of 2018. The decrease in EBITDA excluding special items was due primarily to lower prices and mix, lower sales and production volumes and higher operating and converting costs, partially offset by lower annual outage expenses and lower freight and logistic expenses.

Paper segment income from operations was $48 million in the third quarter of 2019, compared to $32 million in the third quarter of 2018. Paper segment EBITDA excluding special items was $58 million in the third quarter of 2019, compared to $44 million in the third quarter of 2018. The increase in EBITDA excluding special items was due to higher prices and mix, lower annual outage expenses, and lower freight costs, partially offset by lower sales and production volumes.

During the first nine months of 2019, we reported $560 million of net income, or $5.91 per diluted share, compared to $533 million of net income, or $5.64 per diluted share, during the same period in 2018. Net income included $3 million of expense for special items, compared to $22 million of expense for special items during the same period in 2018 (discussed below). Excluding special items, we recorded $563 million of net income, or $5.94 per diluted share, during the first nine months of 2019, compared to $555 million of net income, or $5.87 per diluted share, in the first nine months of 2018. The increase was driven primarily by higher corrugated products prices and mix, higher containerboard and corrugated products sales and production volumes, higher Paper segment prices and mix, and lower annual outage expenses, and lower depreciation expense, partially offset by lower containerboard domestic and export prices and mix, lower volumes in our Paper segment, primarily related to the exit from the paper business at the Wallula Mill, higher operating and converting costs, and higher fixed expenses.

Packaging segment income from operations was $749 million in the first nine months of 2019, compared to $782 million in the same period in 2018. Packaging segment EBITDA excluding special items was $1.01 billion in the first nine months of 2019, compared to $1.05 billion in the first nine months of 2018. The decrease related primarily to higher operating and converting costs, lower domestic and export containerboard prices and mix, and other expenses, partially offset by higher corrugated products prices and mix, higher containerboard and corrugated products sales and production volumes, and lower annual outage expense.

Paper segment income from operations was $133 million in the first nine months of 2019, compared to $56 million in the first nine months of 2018. Paper segment EBITDA excluding special items was $161 million in the first nine months of 2019, compared to $113 million in the same period in 2018. The increase was due primarily to higher prices and mix and lower operating costs, partially offset by lower sales and production volumes, primarily related to the exit from the paper business at the Wallula Mill, and higher annual outage 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 took an extended outage on the machine to complete the conversion in the fourth quarter of 2018. The Company incurred charges in both the Packaging and Paper segments during the first quarter of 2019 and the first, second, and third quarters of 2018 relating to these activities as described below under “Special Items and Earnings per Diluted Share, Excluding Special Items.” The Company does not expect to incur further related charges going forward.

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

A reconciliation of reported earnings per diluted share to earnings per diluted share, excluding special items, for the three and nine months ended September 30, 2019 and 2018 are as follows:

|  | Three Months Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Earnings per diluted share, as reported | $1.89 | $2.18 | $5.91 | $5.64 |
| Special items: |  |  |  |  |
| DeRidder mill fixed asset disposals (a) | 0.02 | — | 0.02 | — |
| Wallula mill restructuring (b) | — | 0.04 | 0.01 | 0.22 |
| Facilities closure and other costs (c) | — | 0.01 | — | 0.01 |
| Total special items | 0.02 | 0.05 | 0.03 | 0.23 |
| Earnings per diluted share, excluding special items | $ 1.92 (d) | $2.23 | $5.94 | $5.87 |

(a) For the three and nine months ended September 30, 2019, includes $3.0 million of charges for the disposal of fixed assets related to the containerboard mill conversion at our DeRidder, Louisiana mill.

(b) For the nine months ended September 30, 2019 and the three and nine months ended September 30, 2018, includes $0.6 million, $4.0 million, and $26.4 million, respectively, of charges related to the discontinuation of production of uncoated free sheet and coated one-side grades at the Wallula, Washington mill in the second quarter of 2018 and conversion of the No. 3 paper machine to a high-performance 100% virgin kraft linerboard machine.

(c) For the three and nine months ended September 30, 2018, includes $1.3 million and $1.8 million, respectively, of charges consisting of closure costs related to corrugated products facilities and a corporate administration facility.

(d) Amount does not foot due to rounding.

Included in this Item 2 are various non-GAAP financial measures, including diluted EPS excluding special items, segment income excluding special items and EBITDA excluding special items. Management excludes special items as it believes these items are not necessarily reflective of the ongoing results of operations of our business. We present these measures because they provide a means to evaluate the performance of our segments and our Company on an ongoing basis using the same measures that are used by our management, because these measures assist in providing a meaningful comparison between periods presented and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. A reconciliation of diluted EPS to diluted EPS excluding special items is included above and the reconciliations of other non-GAAP measures used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, to the most comparable measure reported in accordance with GAAP, are included in Item 2 under “Reconciliations of Non-GAAP Financial Measures to Reported Amounts.” Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such.

### Industry and Business Conditions

Trade publications reported North American industry-wide corrugated products shipments per work day were up 1.5% during the third quarter of 2019 compared to the same quarter of 2018. Reported industry containerboard production decreased 4.9% compared to the third quarter of 2018. Reported industry containerboard inventories at the end of the third quarter of 2019 were approximately 2.5 million tons, down 3.4% compared to the same period in 2018. Reported containerboard export shipments were down 16.9% compared to the third quarter of 2018. Prices reported by trade publications decreased by $10 per ton for linerboard in March, May, and June 2019, and corrugating medium decreased $20 per ton in January and $10 per ton in May and June 2019.

Trade publications reported North American uncoated freesheet paper shipments were down 9.8% in the third quarter of 2019, compared to the same quarter of 2018. Average prices reported by a trade publication for cut size office papers increased $35 per ton in both the second and third quarters of 2019. Average prices were higher by $46 per ton, or 4.3%, in the third quarter of 2019, compared to the third quarter of 2018.

### Outlook

Looking ahead to the fourth quarter of 2019, in our Packaging segment we expect slightly lower prices as the remaining impact of the published domestic containerboard price decreases from earlier this year work through our system, and lower export prices. We also expect a seasonally less rich mix in corrugated products and slightly lower shipments with one less shipping day than the third quarter of 2019. Containerboard sales volume is expected to be lower. We expect to match production to our demand as well as increase our containerboard inventory levels to prepare for first quarter 2020 scheduled maintenance outages at our three largest containerboard mills. In our Paper segment, volumes are expected to be seasonally lower along with lower average prices when compared to the third quarter of 2019. With anticipated colder weather, energy costs are expected to be higher, and we expect certain other operating and converting costs to be higher as well, which includes the costs associated with the start-up of our new Richland, Washington box plant during the quarter. Scheduled maintenance outage costs are also expected to be higher than the third quarter of 2019. Considering these items, we expect fourth quarter earnings to be lower than the third quarter of 2019.

### Results of Operations

### Three Months Ended September 30, 2019, compared to Three Months Ended September 30, 2018

The historical results of operations of PCA for the three months ended September 30, 2019 and 2018 are set forth below (dollars in millions):

|  | Three Months Ended September 30, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Packaging | $1,489.9 | $1,535.1 | $(45.2) |
| Paper | 242.8 | 254.3 | (11.5) |
| Corporate and Other | 59.0 | 59.6 | (0.6) |
| Intersegment eliminations | (41.0) | (39.1) | (1.9) |
| Net sales | $1,750.7 | $1,809.9 | $(59.2) |
| Packaging | $235.1 | $284.4 | $(49.3) |
| Paper | 48.1 | 32.3 | 15.8 |
| Corporate and Other | (20.4) | (18.2) | (2.2) |
| Income from operations | $262.8 | $298.5 | $(35.7) |
| Non-operating pension expense | (1.9) | (0.5) | (1.4) |
| Interest expense, net | (21.6) | (23.9) | 2.3 |
| Income before taxes | 239.3 | 274.1 | (34.8) |
| Income tax provision | (59.5) | (67.4) | 7.9 |
| Net income | $179.8 | $206.7 | $(26.9) |
| Non-GAAP Measures (a) |  |  |  |
| Net income excluding special items | $182.1 | $211.1 | $(29.0) |
| Consolidated EBITDA | 360.7 | 400.0 | (39.3) |
| Consolidated EBITDA excluding special items | 363.7 | 405.8 | (42.1) |
| Packaging EBITDA | 321.6 | 373.0 | (51.4) |
| Packaging EBITDA excluding special items | 324.6 | 378.2 | (53.6) |
| Paper EBITDA | 57.7 | 43.5 | 14.2 |
| Paper EBITDA excluding special items | 57.7 | 44.1 | 13.6 |

(a) See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 2 for a reconciliation of non-GAAP measures to the most comparable GAAP measure.

### Net Sales

Net sales decreased $59 million, or 3.3%, to $1,751 million during the three months ended September 30, 2019, compared to $1,810 million during the same period in 2018.

*Packaging.* Net sales decreased $45 million, or 2.9%, to $1,490 million, compared to $1,535 million in the third quarter of 2018 due to lower containerboard and corrugated products prices and mix ($62 million), partially offset by increased corrugated products volume ($16 million). In the third quarter of 2019, our domestic containerboard prices decreased 6.6%, while export prices decreased 27.6%, compared to the same period in 2018. In the third quarter of 2019, export and domestic containerboard outside shipments decreased 13.4%, compared to the third quarter of 2018. Total corrugated products shipments were up 1.9%, compared to the same period in 2018 with the same number of workdays.

*Paper.* Net sales during the three months ended September 30, 2019 decreased $11 million, or 4.5%, to $243 million, compared to $254 million in the third quarter of 2018, due to decreased volume ($22 million), primarily due to the exit from the paper business at Wallula, partially offset by favorable changes in prices and mix ($11 million).

### Gross Profit

Gross profit decreased $32 million during the three months ended September 30, 2019, compared to the same period in 2018. The decrease was driven primarily by lower containerboard and corrugated products prices and mix, lower containerboard sales and production volumes, lower volumes in our Paper segment, and higher operating and converting costs, partially offset by higher prices and mix in our Paper segment and lower annual outage costs. In the three months ended September 30, 2019, gross profit included no significant special items, compared to $0.3 million of Wallula Mill restructuring charges in the same period last year.

### Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (“SG&A”) increased $3 million during the three months ended September 30, 2019, compared to the same period in 2018. The increase was primarily due to higher employee salaries and fringes.

### Other Income (Expense), Net

Other income (expense), net, for the three months ended September 30, 2019 and 2018 are set forth below (dollars in millions):

|  | Three Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: |
| Asset disposals and write-offs | $(9.5) | $(5.1) |
| Wallula mill restructuring | — | (3.7) |
| Facilities closure and other costs | — | (1.5) |
| Insurance deductible for property damage | — | (0.5) |
| Acquisition and integration related costs | — | (0.1) |
| Other | (2.2) | 0.4 |
| Total | $(11.7) | $(10.5) |

We discuss these items in more detail in Note 7, Other Income (Expense), Net of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in “Part I, Item1. Financial Statements” of this Form 10-Q.

### Income from Operations

Income from operations decreased $36 million, or 12.0%, during the three months ended September 30, 2019, compared to the same period in 2018. The third quarter of 2019 included $3 million of special item expense related to DeRidder fixed asset disposals, compared to $6 million of expense primarily related to the Wallula Mill restructuring in the third quarter of 2018.

*Packaging.* Packaging segment income from operations decreased $49 million to $235 million, compared to $284 million during the three months ended September 30, 2018. The decrease related primarily to lower domestic and export containerboard prices ($25 million), lower corrugated products prices and mix ($20 million), lower containerboard sales and production volumes ($7 million), higher operating and converting costs ($6 million), and other fixed costs ($2 million), partially offset by lower annual outage expenses ($8 million) and lower freight expenses ($1 million). Special items during the third quarter of 2019 included $3 million of DeRidder fixed asset disposals, compared to $6 million for the third quarter of 2018 primarily related to Wallula Mill restructuring and corrugated facility closure charges.

*Paper.* Paper segment income from operations increased $16 million to $48 million, compared to $32 million during the three months ended September 30, 2018. The increase primarily related to higher prices and mix ($11 million), lower annual outage expenses ($4 million), and lower freight expenses ($2 million), partially offset by lower sales and production volumes ($3 million). There were no material special items in the Paper segment in the third quarter of 2019. Special items for the third quarter 2018 included expense of $1 million of Wallula Mill restructuring charges.

### Non-Operating Pension Expense, Interest Expense, Net and Income Taxes

Non-operating pension expense increased $1 million during the three months ended September 30, 2019, compared to the same period in 2018. The increase in non-operating pension expense was primarily related to the 2018 asset performance (i.e. lower asset balances resulted in lower than expected return) and the amortization of the 2018 losses.

Interest expense, net decreased $2 million during the three months ended September 30, 2019, compared to the same period in 2018. The decrease in interest expense, net was primarily due to higher interest income as a result of higher cash balances in 2019.

During the three months ended September 30, 2019, we recorded $59 million of income tax expense, compared to $67 million of expense during the three months ended September 30, 2018. The effective tax rate for the three months ended September 30, 2019 and 2018 was 24.9% and 24.6%, respectively. The increase in our effective tax rate was due to higher state and local income taxes net of the federal benefit and higher employee compensation related impacts from the elimination of the performance based exclusion in tax reform.

### Nine Months Ended September 30, 2019, compared to Nine Months Ended September 30, 2018

The historical results of operations of PCA for the nine months ended September 30, 2019 and 2018 are set forth below (dollars in millions):

|  | Nine Months Ended September 30, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Packaging | $4,472.1 | $4,434.2 | $37.9 |
| Paper | 720.3 | 774.5 | (54.2) |
| Corporate and Other | 171.5 | 173.8 | (2.3) |
| Intersegment eliminations | (119.6) | (114.4) | (5.2) |
| Net sales | $5,244.3 | $5,268.1 | $(23.8) |
| Packaging | $748.6 | $782.3 | $(33.7) |
| Paper | 132.5 | 55.7 | 76.8 |
| Corporate and Other | (62.5) | (57.0) | (5.5) |
| Income from operations | $818.6 | $781.0 | $37.6 |
| Non-operating pension expense | (6.0) | (1.5) | (4.5) |
| Interest expense, net | (68.0) | (73.5) | 5.5 |
| Income before taxes | 744.6 | 706.0 | 38.6 |
| Income tax provision | (184.4) | (172.6) | (11.8) |
| Net income | $560.2 | $533.4 | $26.8 |
| Non-GAAP Measures (a) |  |  |  |
| Net income excluding special items | $563.0 | $555.0 | $8.0 |
| Consolidated EBITDA | 1,107.1 | 1,094.7 | 12.4 |
| Consolidated EBITDA excluding special items | 1,110.5 | 1,109.9 | 0.6 |
| Packaging EBITDA | 1,003.8 | 1,038.6 | (34.8) |
| Packaging EBITDA excluding special items | 1,007.0 | 1,049.0 | (42.0) |
| Paper EBITDA | 160.6 | 108.2 | 52.4 |
| Paper EBITDA excluding special items | 160.8 | 113.0 | 47.8 |

a) See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 2 for a reconciliation of non-GAAP measures to the most comparable GAAP measure.

### Net Sales

Net sales decreased $24 million, or 0.5%, to $5,244 million during the nine months ended September 30, 2019, compared to $5,268 million during the same period in 2018.

*Packaging*. Net sales increased $38 million, or 0.9%, to $4,472 million, compared to $4,434 million in the nine months ended September 30, 2018, due to higher corrugated products prices and mix ($56 million) and increased corrugated products volume ($31 million), partially offset by lower domestic and export containerboard price and mix ($37 million) and lower containerboard volume ($12 million). Our domestic containerboard prices in the first nine months of 2019 decreased 2.4%, and export prices decreased 17.5%, compared to the same period in 2018. In the first nine months of 2019, containerboard outside shipments decreased 14.3% compared to the same period in 2018. Total corrugated products shipments were up 0.4%, with one less work day in the first nine months of 2019, compared to the first nine months of 2018 and up 1.0% per workday. Prices reported by trade publications decreased by $10 per ton for linerboard in March, May, and June, and corrugating medium decreased $20 per ton in January and $10 per ton in May and June 2019.

*Paper*. Net sales during the nine months ended September 30, 2019 decreased $54 million, or 7.0%, to $720 million, compared to $775 million in the nine months ended September 30, 2018, due to lower volume ($110 million), partially offset by higher prices and mix ($56 million).

### Gross Profit

Gross profit increased $41 million during the nine months ended September 30, 2019, compared to the same period in 2018. The increase was driven primarily by higher corrugated products prices and mix, higher containerboard and corrugated products sales and production volumes, higher Paper segment prices and mix, and lower annual outage expenses, partially offset by lower containerboard domestic and export prices and mix, lower volumes in our Paper segment, primarily related to the exit from the paper business at the Wallula Mill, higher operating and converting costs, and higher fixed expenses. In the nine months ended September 30, 2019, gross profit included no significant special items, compared to $14 million of Wallula Mill restructuring charges in the same period last year.

### Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (“SG&A”) increased $14 million during the nine months ended September 30, 2019, compared to the same period in 2018. The increase was primarily due to higher employee salaries and fringes.

### Other Income (Expense), Net

Other income (expense), net, for the nine months ended September 30, 2019 and 2018 are set forth below (dollars in millions):

|  | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: |
| Asset disposals and write-offs | $(18.3) | $(14.4) |
| Wallula mill restructuring | (0.4) | (11.6) |
| Facilities closure and other costs | — | (1.6) |
| Insurance deductible for property damage | — | (0.5) |
| Acquisition and integration related costs | — | (0.1) |
| Other | (2.8) | (4.0) |
| Total | $(21.5) | $(32.2) |

We discuss these items in more detail in Note 7, Other Income (Expense), Net of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in “Part I, Item1. Financial Statements” of this Form 10-Q.

### Income from Operations

Income from operations increased $38 million, or 4.8%, during the nine months ended September 30, 2019, compared to the same period in 2018. The first nine months of 2019 included $4 million of expense for special items, primarily related to the disposal of fixed assets at the DeRidder Mill. The nine months ended September 30, 2018 included $29 million of expense for special items, primarily related to the Wallula Mill restructuring.

*Packaging.* Packaging segment income from operations decreased $34 million to $749 million during the first nine months of 2019 compared to the same period last year. The decrease related primarily to higher operating and converting costs ($89 million), lower domestic and export containerboard prices and mix ($37 million), and other fixed expenses ($17 million), partially offset by higher corrugated products prices and mix ($48 million), higher containerboard and corrugated products sales and production volumes ($40 million), and lower annual outage expense ($12 million). The first nine months of 2019 included $3 million of special item expense related to the disposal of fixed assets at the DeRidder Mill, compared to $9 million of Wallula Mill restructuring charges and $2 million of closure costs related to corrugated products facilities and other costs during the same period of 2018.

*Paper.* Paper segment income from operations increased $77 million to $133 million, compared to the nine months ended September 30, 2018. The increase primarily related to higher prices and mix ($57 million), lower operating costs ($16 million), lower freight expenses ($5 million), and lower depreciation ($11 million), partially offset by lower sales and production volume ($25 million) and higher annual outage expense ($5 million). There were an insignificant amount of special items in the Paper segment in the first nine months of 2019. The first nine months of 2018 included $18 million of Wallula Mill restructuring charges.

### Non-Operating Pension Expense, Interest Expense, Net and Income Taxes

Non-operating pension expense increased $4 million during the nine months ended September 30, 2019, compared to the same period in 2018. The increase in non-operating pension expense was primarily related to the 2018 asset performance (i.e. lower asset balances resulted in lower than expected return) and the amortization of the 2018 losses.

Interest expense, net decreased $5 million during the nine months ended September 30, 2019, compared to the same period in 2018. The decrease in interest expense, net was primarily due to higher interest income as a result of higher cash balances in 2019 and lower interest, as the Company repaid $150 million of notes in March 2018.

During the nine months ended September 30, 2019, we recorded $184 million of income tax expense, compared to $173 million of expense during the nine months ended September 30, 2018. The effective tax rate for the nine months ended September 30, 2019 and 2018 was 24.8% and 24.4%, respectively. The increase in our effective tax rate was due to higher state and local income taxes net of the federal benefit, higher employee compensation related impacts from restricted stock vests with a lower excess tax benefit (ASU 2016-09), and the elimination of the performance based exclusion in tax reform.

### Liquidity and Capital Resources

### Sources and Uses of Cash

Our primary sources of liquidity are net cash provided by operating activities and available borrowing capacity under our revolving credit facility. At September 30, 2019, we had $738 million of cash and $329 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, refinance, extend, or replace such debt or credit facilities. Our ability to do so will be subject to future economic conditions and financial, business, and other factors, many of which are beyond our control.

Below is a summary table of our cash flows, followed by a discussion of our sources and uses of cash through operating activities, investing activities, and financing activities (dollars in millions):

| Net cash provided by (used for): | Nine Months Ended September 30, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Operating activities | $878.2 | $834.5 | $43.7 |
| Investing activities | (268.3) | (405.3) | 137.0 |
| Financing activities | (233.1) | (352.3) | 119.2 |
| Net increase in cash and cash equivalents | $376.8 | $76.9 | $299.9 |

### 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 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 the nine months ended September 30, 2019, net cash provided by operating activities was $878 million, compared to $834 million in the same period in 2018, an increase of $44 million. Cash increased by $51 million due to changes in operating assets and liabilities, primarily due to the following: a smaller increase in accounts receivable in 2019 compared to 2018 related to the timing of collections in the Packaging segment, partially offset by: (a) lower taxes paid in 2018 compared to 2019 due to the 2018 use of a federal overpayment carryforward from the 2017 tax year resulting from Federal Tax Reform, and (b) a decrease in accounts payable levels related to the timing of payments in 2019. Cash from operations excluding changes in cash used for operating assets and liabilities decreased $7 million, primarily due to higher pension contributions made in 2019 compared to 2018 of $33 million, partially offset by higher income from operations as discussed above.

### Investing Activities

We used $268 million for investing activities during the nine months ended September 30, 2019 compared to $405 million during the same period in 2018. We spent $264 million for internal capital investments during the nine months ended September 30, 2019, compared to $404 million during the same period in 2018.

We expect capital investments in 2019 to be between $385 million and $395 million, not including acquisitions. 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, including those related to greenhouse gas emissions and industrial boilers. For additional information, see “Environmental Matters” in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2018 Annual Report on Form 10-K.

### Financing Activities

During the nine months ended September 30, 2019, net cash used for financing activities was $233 million, compared to $352 million during the same period in 2018. The decrease primarily relates to the $150 million repayment from cash on hand at maturity of our 6.5% senior notes that were due March 2018. In the first nine months of 2019, we paid $224 million of dividends compared with $193 million of dividends paid during the first nine months of 2018. On May 15, 2018, PCA's Board of Directors announced an increase in the regular quarterly cash dividend to $0.79 per share from the previous $0.63 per share dividend, beginning with the dividend paid on July 13, 2018.

For more information about our debt, see Note 10, Debt, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 2018 Annual Report on Form 10-K.

### Contractual Obligations

There have been no material changes to the contractual obligations table disclosed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2018 Annual Report on Form 10-K.

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

Income from operations excluding special items, net income excluding special items, EBITDA, and EBITDA excluding special items are non-GAAP financial measures. Management excludes special items, as it believes that these items are not necessarily reflective of the ongoing operations of our business. These measures are presented because they provide a means to evaluate the performance of our segments and our Company on an ongoing basis using the same measures that are used by our management, because these measures assist in providing a meaningful comparison between periods and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such. Reconciliations of the non-GAAP measures to the most comparable measure reported in accordance with GAAP for the three and nine months ended September 30, 2019 and 2018 follow (dollars in millions):

|  | Three Months Ended September 30, 2019 Income before Taxes | Income Taxes | Net Income | 2018 Income before Taxes | Income Taxes | Net Income |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| As reported in accordance with GAAP | $239.3 | $(59.5) | $179.8 | $274.1 | $(67.4) | $206.7 |
| Special items: |  |  |  |  |  |  |
| DeRidder mill fixed asset disposals (a) | 3.0 | (0.7) | 2.3 | — | — | — |
| Wallula mill restructuring (c) | — | — | — | 4.0 | (1.1) | 2.9 |
| Facilities closure and other costs (c) | — | — | — | 1.3 | (0.3) | 1.0 |
| Insurance deductible for property damage (c) | — | — | — | 0.5 | (0.1) | 0.4 |
| Acquisition and integration related costs (c) | — | — | — | 0.1 | — | 0.1 |
| Total special items | 3.0 | (0.7) | 2.3 | 5.9 | (1.5) | 4.4 |
| Excluding special items | $242.3 | $(60.2) | $182.1 | $280.0 | $(68.9) | $211.1 |

|  | Nine Months Ended September 30, 2019 Income before Taxes | Income Taxes | Net Income | 2018 Income before Taxes | Income Taxes | Net Income |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| As reported in accordance with GAAP | $744.6 | $(184.4) | $560.2 | $706.0 | $(172.6) | $533.4 |
| Special items: |  |  |  |  |  |  |
| DeRidder mill fixed asset disposals (a) | 3.0 | (0.7) | 2.3 | — | — | — |
| Wallula mill restructuring (b)(c) | 0.6 | (0.1) | 0.5 | 26.4 | (6.6) | 19.8 |
| Facilities closure and other costs (c) | — | — | — | 1.8 | (0.5) | 1.3 |
| Insurance deductible for property damage (c) | — | — | — | 0.5 | (0.1) | 0.4 |
| Acquisition and integration related costs (c) | — | — | — | 0.1 | — | 0.1 |
| Total special items | 3.6 | (0.8) | 2.8 | 28.8 | (7.2) | 21.6 |
| Excluding special items | $748.2 | $(185.2) | $563.0 | $734.8 | $(179.8) | $555.0 |

(a) The three and nine months ended September 30, 2019 include $3.0 million of charges for the disposal of fixed assets related to the containerboard mill conversion at our DeRidder, Louisiana mill.

(b) The nine months ended September 30, 2019 include $0.6 million of charges related to the announced 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.

(c) The three and nine months ended September 30, 2018 include the following:

1\. $4.0 million and $26.4 million, respectively, of charges related to the announced 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.

2\. $1.3 million and $1.8 million, respectively, of charges consisting of closure costs related to corrugated products facilities and a corporate administration facility.

3\. $0.5 million of costs for the property damage insurance deductible for a weather-related incident at one of the corrugated products facilities.

4\. $0.1 million of charges related to recent acquisitions.

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

|  | Three Months Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $179.8 | $206.7 | $560.2 | $533.4 |
| Non-operating pension expense | 1.9 | 0.5 | 6.0 | 1.6 |
| Interest expense, net | 21.6 | 23.9 | 68.0 | 73.4 |
| Income tax provision | 59.5 | 67.4 | 184.4 | 172.6 |
| Depreciation, amortization, and depletion | 97.9 | 101.5 | 288.5 | 313.7 |
| EBITDA | $360.7 | $400.0 | $1,107.1 | $1,094.7 |
| Special items: |  |  |  |  |
| DeRidder mill fixed asset disposals | 3.0 | — | 3.0 | — |
| Wallula mill restructuring | — | 3.7 | 0.4 | 13.0 |
| Facilities closure and other costs | — | 1.5 | — | 1.6 |
| Insurance deductible for property damage | — | 0.5 | — | 0.5 |
| Acquisition and integration related costs | — | 0.1 | — | 0.1 |
| Total special items | 3.0 | 5.8 | 3.4 | 15.2 |
| EBITDA excluding special items | $363.7 | $405.8 | $1,110.5 | $1,109.9 |

26

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

| Packaging | Three Months Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Segment income | $235.1 | $284.4 | $748.6 | $782.3 |
| Depreciation, amortization, and depletion | 86.5 | 88.6 | 255.2 | 256.3 |
| EBITDA | 321.6 | 373.0 | 1,003.8 | 1,038.6 |
| DeRidder mill fixed asset disposals | 3.0 | — | 3.0 | — |
| Wallula mill restructuring | — | 3.1 | 0.2 | 8.2 |
| Facilities closure and other costs | — | 1.5 | — | 1.6 |
| Property damage insurance deductible | — | 0.5 | — | 0.5 |
| Acquisition and integration related costs | — | 0.1 | — | 0.1 |
| EBITDA excluding special items | **$324.6** | **$378.2** | **$1,007.0** | **$1,049.0** |
| **Paper** |  |  |  |  |
| Segment income | $48.1 | $32.3 | $132.5 | $55.7 |
| Depreciation, amortization, and depletion | 9.6 | 11.2 | 28.1 | 52.5 |
| EBITDA | 57.7 | 43.5 | 160.6 | 108.2 |
| Wallula mill restructuring | — | 0.6 | 0.2 | 4.8 |
| EBITDA excluding special items | **$57.7** | **$44.1** | **$160.8** | **$113.0** |
| **Corporate and Other** |  |  |  |  |
| Segment loss | $(20.4) | $(18.2) | $(62.5) | $(57.0) |
| Depreciation, amortization, and depletion | 1.8 | 1.7 | 5.2 | 4.9 |
| EBITDA | (18.6) | (16.5) | (57.3) | (52.1) |
| EBITDA excluding special items | **$(18.6)** | **$(16.5)** | **$(57.3)** | **$(52.1)** |
| **EBITDA** | **$360.7** | **$400.0** | **$1,107.1** | **$1,094.7** |
| **EBITDA excluding special items** | **$363.7** | **$405.8** | **$1,110.5** | **$1,109.9** |

### Market Risk and Risk Management Policies

PCA is exposed to the impact of interest rate changes and changes in the market value of its financial instruments. We periodically enter into derivatives to minimize these risks, but not for trading purposes. We were not a party to any derivatives-based arrangements at September 30, 2019. 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 our 2018 Annual Report on Form 10-K.

At September 30, 2019, interest rates on 100% of PCA’s outstanding debt are fixed.

### Off-Balance-Sheet Activities

The Company does not have any off-balance sheet arrangements as of September 30, 2019.

### Environmental Matters

There have been no material changes to the disclosure set forth in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters” filed with our 2018 Annual Report on Form 10-K.

### Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, PCA evaluates its estimates, including those related to business combinations, pensions and other postretirement benefits, goodwill and intangible assets, long-lived asset impairment, environmental liabilities, and income taxes, among others. PCA bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

PCA has included in its 2018 Annual Report on Form 10-K a discussion of its critical accounting policies and estimates which require management’s most difficult, subjective, or complex judgments used in the preparation of its consolidated financial statements. PCA has not had any changes to these critical accounting estimates during the first nine months of 2019.

### New and Recently Adopted Accounting Standards

For a listing of our new and recently adopted accounting standards, see Note 2, New and Recently Adopted Accounting Standards, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this Form 10-Q.

### Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q, and in particular, statements found in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our expectations regarding our future liquidity, earnings, expenditures, and financial condition. These statements are often identified by the words “will,” “should,” “anticipate,” “believe,” “expect,” “intend,” “estimate,” “hope,” or similar expressions. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties. There are important factors that could cause actual results to differ materially from those in forward-looking statements, many of which are beyond our control. These factors, risks and uncertainties include the following:

- the impact of general economic conditions;
- the impact of acquired businesses and risks and uncertainties regarding operation, expected benefits and integration of such businesses;
- containerboard, corrugated products, and white paper general industry conditions, including competition, product demand, product pricing, and input costs;
- fluctuations in wood fiber and recycled fiber costs;
- fluctuations in purchased energy costs;
- the possibility of unplanned outages or interruptions at our principal facilities;
- legislative or regulatory actions or requirements, particularly concerning environmental or tax matters.

Our actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do occur, what impact they will have on our results of operations or financial condition. Given these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We expressly disclaim any obligation to publicly revise any forward-looking statements that have been made to reflect the occurrence of events after the date hereof. For a discussion of other factors, risks and uncertainties that may affect our business, see Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2018.

## Market risk

As filed, 238 characters.

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

## Controls and procedures

As filed, 1,393 characters.

PCA maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in PCA’s filings under the Securities Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to PCA’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Prior to filing this report, PCA completed an evaluation under the supervision and with the participation of PCA’s management, including PCA’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of PCA’s disclosure controls and procedures as of September 30, 2019. The evaluation of PCA’s disclosure controls and procedures included a review of the controls’ objectives and design, PCA’s implementation of the controls, and the effect of the controls on the information generated for use in this report. Based on this evaluation, PCA’s Chief Executive Officer and Chief Financial Officer concluded that PCA’s disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2019.

### PART II

### OTHER INFORMATION

## Risk factors

As filed, 172 characters.

There have been no material changes to the risk factors disclosed in "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018.

Filed Nov 1, 2019.
Source: SEC EDGAR, the filing index for accession 0001564590-19-039297. Last ingested by Listed: Nov 12, 2026, 19:57 ET. No prices; not investment advice.