SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172020
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission file number 1-15399
(Exact Name of Registrant as Specified in its Charter)
Delaware |
| 36-4277050 |
(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification No.) |
|
|
|
|
| 60045 |
(Address of |
| (Zip Code) |
Registrant's telephone number, including area code
(847) 482-3000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | Emerging growth company | ☐ | |
|
|
|
|
| ||
Non-accelerated filer | ☐ |
| Smaller reporting company | ☐ | ||
|
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of OctoberJuly 31, 20172020 the Registrant had outstanding 94,350,49994,835,022 shares of common stock, par value $0.01 per share.
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | PKG | New York Stock Exchange |
Table of Contents
|
| PART I |
|
|
|
|
|
Item 1. |
| 1 | |
|
|
|
|
Item 2. |
| Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
|
|
|
Item 3. |
|
| |
|
|
|
|
Item 4. |
|
| |
|
|
|
|
|
| PART II |
|
|
|
|
|
Item 1. |
|
| |
|
|
|
|
Item 1A. |
|
| |
|
|
|
|
Item 2. |
|
| |
|
|
|
|
Item 3. |
|
| |
|
|
|
|
Item 4. |
|
| |
|
|
|
|
Item 5. |
|
| |
|
|
|
|
Item 6. |
|
|
All reports we file with the Securities and Exchange Commission (SEC) are available free of charge via the Electronic Data Gathering Analysis and Retrieval (EDGAR) System on the SEC website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available through our website at www.packagingcorp.com as soon as reasonably practicable after filing such material with the SEC.
i
FINANCIAL INFORMATION
Packaging Corporation of America
Consolidated Statements of Income and Comprehensive Income
(unaudited, dollars in millions, except per-share data)
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Statements of Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 1,640.1 |
|
| $ | 1,484.0 |
|
| $ | 4,760.6 |
|
| $ | 4,302.4 |
|
| $ | 1,541.6 |
|
| $ | 1,759.9 |
|
| $ | 3,250.3 |
|
| $ | 3,493.6 |
|
Cost of sales |
|
| (1,242.8 | ) |
|
| (1,154.5 | ) |
|
| (3,660.1 | ) |
|
| (3,353.8 | ) |
|
| (1,215.8 | ) |
|
| (1,332.0 | ) |
|
| (2,559.6 | ) |
|
| (2,644.3 | ) |
Gross profit |
|
| 397.3 |
|
|
| 329.5 |
|
|
| 1,100.5 |
|
|
| 948.6 |
|
|
| 325.8 |
|
|
| 427.9 |
|
|
| 690.7 |
|
|
| 849.3 |
|
Selling, general, and administrative expenses |
|
| (130.2 | ) |
|
| (116.9 | ) |
|
| (388.9 | ) |
|
| (346.0 | ) | ||||||||||||||||
Selling, general and administrative expenses |
|
| (136.3 | ) |
|
| (143.7 | ) |
|
| (282.2 | ) |
|
| (283.7 | ) | ||||||||||||||||
Goodwill impairment |
|
| (55.2 | ) |
|
| — |
|
|
| (55.2 | ) |
|
| — |
| ||||||||||||||||
Other expense, net |
|
| (24.8 | ) |
|
| (6.2 | ) |
|
| (32.4 | ) |
|
| (15.2 | ) |
|
| (18.2 | ) |
|
| (3.8 | ) |
|
| (28.1 | ) |
|
| (9.8 | ) |
Income from operations |
|
| 242.3 |
|
|
| 206.4 |
|
|
| 679.2 |
|
|
| 587.4 |
|
|
| 116.1 |
|
|
| 280.4 |
|
|
| 325.2 |
|
|
| 555.8 |
|
Non-operating pension income (expense) |
|
| 0.6 |
|
|
| (2.0 | ) |
|
| 1.1 |
|
|
| (4.1 | ) | ||||||||||||||||
Interest expense, net |
|
| (25.4 | ) |
|
| (23.4 | ) |
|
| (74.6 | ) |
|
| (67.5 | ) |
|
| (25.1 | ) |
|
| (22.4 | ) |
|
| (44.6 | ) |
|
| (46.4 | ) |
Income before taxes |
|
| 216.9 |
|
|
| 183.0 |
|
|
| 604.6 |
|
|
| 519.9 |
|
|
| 91.6 |
|
|
| 256.0 |
|
|
| 281.7 |
|
|
| 505.3 |
|
Provision for income taxes |
|
| (77.8 | ) |
|
| (63.7 | ) |
|
| (204.9 | ) |
|
| (181.0 | ) |
|
| (34.9 | ) |
|
| (62.4 | ) |
|
| (83.4 | ) |
|
| (124.9 | ) |
Net income |
| $ | 139.1 |
|
| $ | 119.3 |
|
| $ | 399.7 |
|
| $ | 338.9 |
|
| $ | 56.7 |
|
| $ | 193.6 |
|
| $ | 198.3 |
|
| $ | 380.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 1.47 |
|
| $ | 1.27 |
|
| $ | 4.24 |
|
| $ | 3.59 |
|
| $ | 0.60 |
|
| $ | 2.05 |
|
| $ | 2.09 |
|
| $ | 4.03 |
|
Diluted |
| $ | 1.47 |
|
| $ | 1.26 |
|
| $ | 4.23 |
|
| $ | 3.58 |
|
| $ | 0.59 |
|
| $ | 2.04 |
|
| $ | 2.08 |
|
| $ | 4.02 |
|
Dividends declared per common share |
| $ | 0.63 |
|
| $ | 0.63 |
|
| $ | 1.89 |
|
| $ | 1.73 |
|
| $ | 0.79 |
|
| $ | 0.79 |
|
| $ | 1.58 |
|
| $ | 1.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Statements of Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
| $ | 139.1 |
|
| $ | 119.3 |
|
| $ | 399.7 |
|
| $ | 338.9 |
| ||||||||||||||||
Net income |
| $ | 56.7 |
|
| $ | 193.6 |
|
| $ | 198.3 |
|
| $ | 380.4 |
| ||||||||||||||||
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
| 0.1 |
|
|
| — |
|
|
| (0.2 | ) |
|
| — |
| ||||||||||||||||
Reclassification adjustments to cash flow hedges included in net income, net of tax of $0.5 million, $0.5 million, $1.6 million, and $1.6 million |
|
| 0.9 |
|
|
| 0.9 |
|
|
| 2.6 |
|
|
| 2.6 |
| ||||||||||||||||
Amortization of pension and postretirement plans actuarial loss and prior service cost, net of tax of $1.2 million, $1.0 million, $3.7 million, and $3.1 million |
|
| 1.9 |
|
|
| 1.8 |
|
|
| 6.2 |
|
|
| 5.0 |
| ||||||||||||||||
Changes in unfunded employee benefit obligation net of tax of $2.0 million |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3.1 |
| ||||||||||||||||
Reclassification adjustments to cash flow hedges included in net income, net of tax of $0.0 million, $0.3 million, $0.0 million, and $0.7 million |
|
| — |
|
|
| 1.0 |
|
|
| — |
|
|
| 1.9 |
| ||||||||||||||||
Changes in unrealized gains on marketable debt securities, net of tax of $0.3 million, $0.0 million, $0.2 million, and $0.0 million |
|
| 0.9 |
|
|
| — |
|
|
| 0.7 |
|
|
| — |
| ||||||||||||||||
Amortization of pension and postretirement plans actuarial loss and prior service cost, net of tax of $0.9 million, $0.8 million, $1.8 million, and $1.6 million |
|
| 2.7 |
|
|
| 2.3 |
|
|
| 5.4 |
|
|
| 4.7 |
| ||||||||||||||||
Other comprehensive income |
|
| 2.9 |
|
|
| 2.7 |
|
|
| 8.6 |
|
|
| 10.7 |
|
|
| 3.6 |
|
|
| 3.3 |
|
|
| 6.1 |
|
|
| 6.6 |
|
Comprehensive income |
| $ | 142.0 |
|
| $ | 122.0 |
|
| $ | 408.3 |
|
| $ | 349.6 |
|
| $ | 60.3 |
|
| $ | 196.9 |
|
| $ | 204.4 |
|
| $ | 387.0 |
|
See accompanying condensed notes to unaudited quarterly consolidated financial statements.
1
Packaging Corporation of America
(unaudited, dollars and shares in millions, except per-share data)
|
| September 30, |
|
| December 31, |
|
| June 30, |
|
| December 31, |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 370.5 |
|
| $ | 239.3 |
|
| $ | 853.3 |
|
| $ | 679.5 |
|
Accounts receivable, net of allowance for doubtful accounts and customer deductions of $11.3 million and $10.1 million as of September 30, 2017, and December 31, 2016, respectively |
|
| 831.3 |
|
|
| 689.2 |
| ||||||||
Short-term marketable debt securities |
|
| 86.9 |
|
|
| 87.9 |
| ||||||||
Accounts receivable, net of allowance for credit losses and customer deductions of $12.6 million as of both June 30, 2020, and December 31, 2019 |
|
| 817.3 |
|
|
| 845.6 |
| ||||||||
Inventories |
|
| 736.6 |
|
|
| 723.6 |
|
|
| 834.5 |
|
|
| 794.1 |
|
Prepaid expenses and other current assets |
|
| 43.4 |
|
|
| 30.3 |
|
|
| 60.9 |
|
|
| 44.8 |
|
Federal and state income taxes receivable |
|
| 20.0 |
|
|
| 13.9 |
|
|
| 6.1 |
|
|
| 26.5 |
|
Total current assets |
|
| 2,001.8 |
|
|
| 1,696.3 |
|
|
| 2,659.0 |
|
|
| 2,478.4 |
|
Property, plant, and equipment, net |
|
| 2,881.6 |
|
|
| 2,895.7 |
|
|
| 3,114.7 |
|
|
| 3,151.7 |
|
Goodwill |
|
| 732.1 |
|
|
| 737.9 |
|
|
| 863.5 |
|
|
| 918.7 |
|
Intangible assets, net |
|
| 347.8 |
|
|
| 367.1 |
| ||||||||
Other intangible assets, net |
|
| 314.9 |
|
|
| 338.8 |
| ||||||||
Operating lease right-of-use assets |
|
| 229.7 |
|
|
| 234.3 |
| ||||||||
Long-term marketable debt securities |
|
| 36.3 |
|
|
| 58.1 |
| ||||||||
Other long-term assets |
|
| 63.9 |
|
|
| 80.0 |
|
|
| 53.9 |
|
|
| 55.8 |
|
Total assets |
| $ | 6,027.2 |
|
| $ | 5,777.0 |
|
| $ | 7,272.0 |
|
| $ | 7,235.8 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
| $ | 156.5 |
|
| $ | 25.8 |
| ||||||||
Capital lease obligations |
|
| 1.3 |
|
|
| 1.3 |
| ||||||||
Operating lease obligations |
| $ | 67.1 |
|
| $ | 62.6 |
| ||||||||
Finance lease obligations |
|
| 1.6 |
|
|
| 1.5 |
| ||||||||
Accounts payable |
|
| 379.5 |
|
|
| 323.8 |
|
|
| 315.2 |
|
|
| 351.9 |
|
Dividends payable |
|
| 60.3 |
|
|
| 59.9 |
|
|
| 76.5 |
|
|
| 76.6 |
|
Accrued liabilities |
|
| 207.8 |
|
|
| 201.2 |
|
|
| 211.3 |
|
|
| 217.5 |
|
Accrued interest |
|
| 18.9 |
|
|
| 13.4 |
|
|
| 11.9 |
|
|
| 13.7 |
|
Total current liabilities |
|
| 824.3 |
|
|
| 625.4 |
|
|
| 683.6 |
|
|
| 723.8 |
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
| 2,456.3 |
|
|
| 2,620.0 |
|
|
| 2,478.0 |
|
|
| 2,476.8 |
|
Capital lease obligations |
|
| 19.3 |
|
|
| 20.3 |
| ||||||||
Operating lease obligations |
|
| 171.5 |
|
|
| 177.6 |
| ||||||||
Finance lease obligations |
|
| 15.2 |
|
|
| 16.0 |
| ||||||||
Deferred income taxes |
|
| 342.1 |
|
|
| 334.7 |
|
|
| 361.1 |
|
|
| 340.1 |
|
Compensation and benefits |
|
| 322.8 |
|
|
| 357.2 |
|
|
| 369.5 |
|
|
| 375.5 |
|
Other long-term liabilities |
|
| 68.2 |
|
|
| 59.6 |
|
|
| 60.0 |
|
|
| 55.0 |
|
Total long-term liabilities |
|
| 3,208.7 |
|
|
| 3,391.8 |
|
|
| 3,455.3 |
|
|
| 3,441.0 |
|
Commitments and contingent liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share, 300.0 million shares authorized, 94.4 million and 94.2 million shares issued as of September 30, 2017, and December 31, 2016, respectively |
|
| 0.9 |
|
|
| 0.9 |
| ||||||||
Common stock, par value $0.01 per share, 300.0 million shares authorized, 94.8 million and 94.7 million shares issued as of June 30, 2020 and December 31, 2019, respectively |
|
| 0.9 |
|
|
| 0.9 |
| ||||||||
Additional paid in capital |
|
| 466.1 |
|
|
| 451.4 |
|
|
| 542.7 |
|
|
| 524.8 |
|
Retained earnings |
|
| 1,658.2 |
|
|
| 1,447.1 |
|
|
| 2,742.9 |
|
|
| 2,704.8 |
|
Accumulated other comprehensive loss |
|
| (131.0 | ) |
|
| (139.6 | ) |
|
| (153.4 | ) |
|
| (159.5 | ) |
Total stockholders' equity |
|
| 1,994.2 |
|
|
| 1,759.8 |
|
|
| 3,133.1 |
|
|
| 3,071.0 |
|
Total liabilities and stockholders' equity |
| $ | 6,027.2 |
|
| $ | 5,777.0 |
|
| $ | 7,272.0 |
|
| $ | 7,235.8 |
|
See accompanying condensed notes to unaudited quarterly consolidated financial statements.
2
Packaging Corporation of America
Consolidated Statements of Cash Flows
(unaudited, dollars in millions)
|
| Nine Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| September 30, |
|
| June 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 399.7 |
|
| $ | 338.9 |
|
| $ | 198.3 |
|
| $ | 380.4 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization of intangibles |
|
| 283.7 |
|
|
| 264.3 |
|
|
| 208.5 |
|
|
| 190.7 |
|
Amortization of deferred financing costs |
|
| 6.0 |
|
|
| 5.8 |
|
|
| 1.3 |
|
|
| 4.3 |
|
Share-based compensation expense |
|
| 15.4 |
|
|
| 15.0 |
|
|
| 17.8 |
|
|
| 18.6 |
|
Deferred income tax provision |
|
| 1.6 |
|
|
| 6.5 |
|
|
| 19.2 |
|
|
| 26.9 |
|
Net loss on impairment of assets |
|
| 13.5 |
|
|
| — |
| ||||||||
Pension and post retirement benefits expense, net of contributions |
|
| (25.3 | ) |
|
| (33.5 | ) | ||||||||
Loss on asset disposals |
|
| 2.3 |
|
|
| 1.9 |
| ||||||||
Goodwill impairment |
|
| 55.2 |
|
|
| — |
| ||||||||
Pension and post-retirement benefits expense, net of contributions |
|
| (1.1 | ) |
|
| 11.3 |
| ||||||||
Other, net |
|
| 12.0 |
|
|
| 3.7 |
|
|
| 14.1 |
|
|
| 8.7 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in assets — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (142.2 | ) |
|
| (36.0 | ) |
|
| 28.3 |
|
|
| (44.9 | ) |
Inventories |
|
| (13.0 | ) |
|
| 4.1 |
|
|
| (40.4 | ) |
|
| (20.1 | ) |
Prepaid expenses and other current assets |
|
| (10.3 | ) |
|
| (11.2 | ) |
|
| (14.9 | ) |
|
| (21.2 | ) |
Increase (decrease) in liabilities — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
| 37.7 |
|
|
| 13.6 |
|
|
| (37.8 | ) |
|
| (1.8 | ) |
Accrued liabilities |
|
| 9.6 |
|
|
| 10.8 |
|
|
| (7.7 | ) |
|
| (22.3 | ) |
Federal and state income taxes payable / receivable |
|
| (5.1 | ) |
|
| 11.5 |
|
|
| 20.4 |
|
|
| 5.9 |
|
Net cash provided by operating activities |
|
| 583.3 |
|
|
| 593.5 |
|
|
| 463.5 |
|
|
| 538.4 |
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant, and equipment |
|
| (226.2 | ) |
|
| (188.1 | ) |
|
| (151.2 | ) |
|
| (170.9 | ) |
Acquisition of business, net of cash acquired |
|
| — |
|
|
| (385.6 | ) | ||||||||
Additions to other long term assets |
|
| (6.9 | ) |
|
| (9.4 | ) |
|
| (5.1 | ) |
|
| (1.8 | ) |
Redemptions of marketable debt securities, net of purchases |
|
| 23.2 |
|
|
| — |
| ||||||||
Proceeds from disposals |
|
| 4.4 |
|
|
| — |
|
|
| 4.3 |
|
|
| 1.2 |
|
Other, net |
|
| 1.1 |
|
|
| 0.4 |
|
|
| — |
|
|
| (1.3 | ) |
Net cash used for investing activities |
|
| (227.6 | ) |
|
| (582.7 | ) |
|
| (128.8 | ) |
|
| (172.8 | ) |
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of debt and capital lease obligations |
|
| (35.6 | ) |
|
| (30.7 | ) | ||||||||
Proceeds from issuance of debt |
|
| — |
|
|
| 385.0 |
| ||||||||
Financing costs paid |
|
| — |
|
|
| (2.1 | ) | ||||||||
Repayments of debt and finance lease obligations |
|
| (0.8 | ) |
|
| (0.7 | ) | ||||||||
Common stock dividends paid |
|
| (178.2 | ) |
|
| (156.7 | ) |
|
| (149.7 | ) |
|
| (149.3 | ) |
Repurchases of common stock |
|
| — |
|
|
| (100.3 | ) | ||||||||
Shares withheld to cover employee restricted stock taxes |
|
| (10.7 | ) |
|
| (10.2 | ) |
|
| (10.4 | ) |
|
| (7.7 | ) |
Other, net |
|
| — |
|
|
| (0.2 | ) | ||||||||
Net cash (used for) provided by financing activities |
|
| (224.5 | ) |
|
| 84.8 |
| ||||||||
Net cash used for financing activities |
|
| (160.9 | ) |
|
| (157.7 | ) | ||||||||
Net increase in cash and cash equivalents |
|
| 131.2 |
|
|
| 95.6 |
|
|
| 173.8 |
|
|
| 207.9 |
|
Cash and cash equivalents, beginning of period |
|
| 239.3 |
|
|
| 184.2 |
|
|
| 679.5 |
|
|
| 361.5 |
|
Cash and cash equivalents, end of period |
| $ | 370.5 |
|
| $ | 279.8 |
|
| $ | 853.3 |
|
| $ | 569.4 |
|
See accompanying condensed notes to unaudited quarterly consolidated financial statements.
3
Packaging Corporation of America
Consolidated Statements of Changes in Stockholders’ Equity
(unaudited, dollars in millions and shares in thousands)
|
| Common Stock |
|
| Additional Paid in |
|
| Retained |
|
| Accumulated Other Comprehensive |
|
| Total Stockholders' |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Equity |
| ||||||
Balance at April 1, 2020 |
|
| 94,848 |
|
| $ | 0.9 |
|
| $ | 534.9 |
|
| $ | 2,771.1 |
|
| $ | (157.0 | ) |
| $ | 3,149.9 |
|
Common stock withheld and retired to cover taxes on vested stock awards |
|
| (106 | ) |
|
| — |
|
|
| (0.8 | ) |
|
| (9.6 | ) |
|
| — |
|
|
| (10.4 | ) |
Common stock dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (75.3 | ) |
|
| — |
|
|
| (75.3 | ) |
Share-based compensation |
|
| 93 |
|
|
| — |
|
|
| 8.6 |
|
|
| — |
|
|
| — |
|
|
| 8.6 |
|
Comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 56.7 |
|
|
| 3.6 |
|
|
| 60.3 |
|
Balance at June 30, 2020 |
|
| 94,835 |
|
| $ | 0.9 |
|
| $ | 542.7 |
|
| $ | 2,742.9 |
|
| $ | (153.4 | ) |
| $ | 3,133.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
|
| Additional Paid in |
|
| Retained |
|
| Accumulated Other Comprehensive |
|
| Total Stockholders' |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Equity |
| ||||||
Balance at April 1, 2019 |
|
| 94,494 |
|
| $ | 0.9 |
|
| $ | 501.4 |
|
| $ | 2,427.8 |
|
| $ | (135.5 | ) |
| $ | 2,794.6 |
|
Common stock withheld and retired to cover taxes on vested stock awards |
|
| (83 | ) |
|
| — |
|
|
| (0.6 | ) |
|
| (7.1 | ) |
|
| — |
|
|
| (7.7 | ) |
Common stock dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (74.9 | ) |
|
| — |
|
|
| (74.9 | ) |
Share-based compensation |
|
| 255 |
|
|
| — |
|
|
| 12.5 |
|
|
| — |
|
|
| — |
|
|
| 12.5 |
|
Other |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.2 | ) |
|
| — |
|
|
| (0.2 | ) |
Comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 193.6 |
|
|
| 3.3 |
|
|
| 196.9 |
|
Balance at June 30, 2019 |
|
| 94,666 |
|
| $ | 0.9 |
|
| $ | 513.3 |
|
| $ | 2,539.2 |
|
| $ | (132.2 | ) |
| $ | 2,921.2 |
|
|
| Common Stock |
|
| Additional Paid in |
|
| Retained |
|
| Accumulated Other Comprehensive |
|
| Total Stockholders' |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Equity |
| ||||||
Balance at January 1, 2020 |
|
| 94,655 |
|
| $ | 0.9 |
|
| $ | 524.8 |
|
| $ | 2,704.8 |
|
| $ | (159.5 | ) |
| $ | 3,071.0 |
|
Common stock withheld and retired to cover taxes on vested stock awards |
|
| (107 | ) |
|
| — |
|
|
| (0.8 | ) |
|
| (9.6 | ) |
|
| — |
|
|
| (10.4 | ) |
Common stock dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (150.5 | ) |
|
| — |
|
|
| (150.5 | ) |
Share-based compensation |
|
| 287 |
|
|
| — |
|
|
| 18.7 |
|
|
| — |
|
|
| — |
|
|
| 18.7 |
|
Other |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.1 | ) |
|
| — |
|
|
| (0.1 | ) |
Comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 198.3 |
|
|
| 6.1 |
|
|
| 204.4 |
|
Balance at June 30, 2020 |
|
| 94,835 |
|
| $ | 0.9 |
|
| $ | 542.7 |
|
| $ | 2,742.9 |
|
| $ | (153.4 | ) |
| $ | 3,133.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
|
| Additional Paid in |
|
| Retained |
|
| Accumulated Other Comprehensive |
|
| Total Stockholders' |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Equity |
| ||||||
Balance at January 1, 2019 |
|
| 94,497 |
|
| $ | 0.9 |
|
| $ | 494.5 |
|
| $ | 2,315.8 |
|
| $ | (138.8 | ) |
| $ | 2,672.4 |
|
Common stock withheld and retired to cover taxes on vested stock awards |
|
| (83 | ) |
|
| — |
|
|
| (0.6 | ) |
|
| (7.1 | ) |
|
| — |
|
|
| (7.7 | ) |
Common stock dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (149.7 | ) |
|
| — |
|
|
| (149.7 | ) |
Share-based compensation |
|
| 252 |
|
|
| — |
|
|
| 19.4 |
|
|
| — |
|
|
| — |
|
|
| 19.4 |
|
Other |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.2 | ) |
|
| — |
|
|
| (0.2 | ) |
Comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 380.4 |
|
|
| 6.6 |
|
|
| 387.0 |
|
Balance at June 30, 2019 |
|
| 94,666 |
|
| $ | 0.9 |
|
| $ | 513.3 |
|
| $ | 2,539.2 |
|
| $ | (132.2 | ) |
| $ | 2,921.2 |
|
See accompanying condensed notes to unaudited quarterly consolidated financial statements.
4
Condensed Notes to Unaudited Quarterly Consolidated Financial Statements
1. | Nature of Operations and Basis of Presentation |
Packaging Corporation of America ("we," "us," "our," PCA," or the "Company") was incorporated on January 25, 1999. In April 1999, PCA acquired the containerboard and corrugated packaging products business of Pactiv Corporation (Pactiv), formerly known as Tenneco Packaging, Inc., a wholly owned subsidiary of Tenneco Inc. We are a large diverse manufacturer of both packaging and paper products. We are headquartered in Lake Forest, Illinois and we operate primarily in the United States.
We report our business in three3 reportable segments: Packaging, Paper, and Corporate and Other. Our Packaging segment produces a wide variety of containerboard and corrugated packaging products. The Paper segment manufactures and sells a range of white papers, including uncoated free sheet and coated one-side grades. During the third quarter of 2017, the Company announced that it will discontinue the production of uncoated free sheet and coated one-side grades at the Wallula, Washington mill in the second quarter of 2018 to begin the conversion of the No. 3 machine to a 400,000 ton-per-year virgin kraft linerboard machine.communication-based papers. Corporate and Other includes support staff services and related assets and liabilities, transportation assets, and activity related to other ancillary support operations. For more information about our segments, see Note 1618, Segment Information.
In these consolidated financial statements, certain amounts in prior periods' consolidated financial statements have been reclassified to conform with the current period presentation.
The consolidated financial statements of PCA as of SeptemberJune 30, 20172020 and for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 are unaudited but include all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of such financial statements. The preparation of the consolidated financial statements involves the use of estimates and accruals. Actual results may vary from those estimates. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotesnotes required by accounting principles generally accepted in the United States for complete audited financial statements. Operating results for the three and ninesix months ended SeptemberJune 30, 20172020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2020. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
The consolidated financial statements include the accounts of PCA and its majority-owned subsidiaries after elimination of intercompany balances and transactions.
TimBar Acquisition
On August 29, 2016, PCA acquired substantially allRecently Adopted Accounting Standards
Effective January 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduces the Current Expected Credit Losses (“CECL”) framework for evaluating credit losses on financial instruments measured at amortized cost. ASU 2016-13 was applied using the modified retrospective method, and as a result, amounts recorded prior to January 1, 2020 have not been retrospectively restated. This new framework requires entities to incorporate forward-looking information into their estimate of current expected credit loss as of each reporting date. Although available-for-sale (“AFS”) debt securities are not within the scope of the assetsnew CECL framework, the ASU includes an amended impairment model for evaluating losses related to AFS debt securities. The guidance in this update also includes enhanced requirements for disclosures related to credit loss estimates.
Prior to adoption of TimBar Corporation (“TimBar”),the new standard, the Company already incorporated forward-looking information into its estimate of credit losses for trade receivables. Due to the short duration of the Company’s trade receivables, the adoption of ASU 2016-13 did not have a large independent corrugated products producer with six corrugated products production facilities,material impact on trade receivables. The adoption of ASU 2016-13 also did not have a material impact on the Company’s AFS marketable debt securities, as the Company only invests in highly-rated AFS marketable debt securities. Overall, the adoption of ASU 2016-13 did not have a material impact on the Company’s financial condition, results of operations or cash flow.
Effective January 1, 2020, the Company adopted ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes or modifies certain disclosure requirements and adds additional requirements to improve the usefulness of the fair value measurement disclosure for financial statement users. Certain new requirements of ASU 2018-13 are required to be applied prospectively for the first interim period of the initial year of adoption. However, the modifications and removal of certain information needs to be applied retrospectively. The adoption of this Update did not have a significant impact on the Company’s related disclosures as reflected in this Quarterly Report on Form 10-Q.
New Accounting Standards Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional guidance for a purchase pricelimited period of $385.6 million, nettime to ease the potential burden in accounting for, or recognizing the effects of, cash acquired. We financedreference rate reform on financial reporting. The amendments in this Update are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Companies can apply the acquisitionASU immediately, but the guidance will only be available until December 31, 2022. The Company is currently evaluating the impact of this guidance, but does not expect the guidance to have a significant impact on its related disclosures.
5
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. The ASU is effective for annual periods beginning after December 31, 2020, with early adoption permitted. The amendments in ASU 2018-14 would need to be applied on a new $385.0 million five-year term loan facility. TimBar provides solutionsretrospective basis. The Company is currently evaluating the impact of this guidance, but does not expect the guidance will have a significant impact on its related disclosures.
There were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.
3. | Revenue |
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to customers in an amount that reflects the higher margin retail, industrial packagingconsideration expected to be received in exchange for those goods or services. Sales, value added, and display and fulfillment marketsother taxes collected concurrently with a focus on a multi-color graphics and technical innovation. TimBar’s financial resultsrevenue-producing activities are included in the Packaging segmentexcluded from the date of acquisition.revenue.
The Company accounted for the TimBar acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations. The total purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed based on respective fair values, as followsfollowing table presents our revenues disaggregated by product line (dollars in millions):
|
| 12/31/16 Allocation |
|
| Adjustments |
|
| Revised Allocation |
| |||
Goodwill |
| $ | 157.3 |
|
| $ | (1.1 | ) |
| $ | 156.2 |
|
Other intangible assets |
|
| 94.4 |
|
|
| - |
|
| 94.4 |
| |
Property, plant and equipment |
|
| 95.3 |
|
|
| - |
|
| 95.3 |
| |
Other net assets |
|
| 38.6 |
|
|
| - |
|
| 38.6 |
| |
Net assets acquired |
| $ | 385.6 |
|
| $ | (1.1 | ) |
| $ | 384.5 |
|
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Packaging |
| $ | 1,409.9 |
|
| $ | 1,504.6 |
|
| $ | 2,877.4 |
|
| $ | 2,982.2 |
|
Paper |
|
| 123.3 |
|
|
| 237.8 |
|
|
| 340.7 |
|
|
| 477.5 |
|
Corporate and Other |
|
| 8.4 |
|
|
| 17.5 |
|
|
| 32.2 |
|
|
| 33.9 |
|
Total revenue |
| $ | 1,541.6 |
|
| $ | 1,759.9 |
|
| $ | 3,250.3 |
|
| $ | 3,493.6 |
|
DuringPackaging Revenue
Our containerboard mills produce linerboard and corrugating medium which are papers primarily used in the first quarterproduction of 2017, we received $1.1 million from the seller related to a working capital adjustment. We recorded the adjustment as a decrease to goodwill which lowered the purchase price to $384.5 million.
Goodwillcorrugated products. The majority of our containerboard production is calculated as the excess of the purchase price over the fair value of the net assets acquired. Among the factors that contributed to the recognition of goodwill were TimBar's commitment to continuous improvement and innovation in their operations, as well as the expected increases in PCA's containerboard integration levels. Goodwill is deductible for tax purposes.
Other intangible assets, primarily customer relationships, were assigned an estimated weighted average useful life of 14.2 years.
Property, plant and equipment were assigned estimated useful lives ranging from two to 24 years.
Columbus Container Acquisition
On November 30, 2016, PCA acquired substantially all of the assets of Columbus Container, Inc., an independentused internally by our corrugated products producer with one production facilitymanufacturing facilities. The remaining containerboard is sold to outside domestic and five warehousing facilities, forexport customers. Our corrugated products manufacturing plants produce a purchase price of $99.7 million, net of cash acquired. We paid the purchase price with available cash on hand. Columbus Container, Inc. is a full-service providerwide variety of corrugated packaging products utilizing state-of-the-art technologies and design centersretail merchandise displays. We sell corrugated products to providenational, regional and local customers, which are broadly diversified across industries and geographic locations.
The Company recognizes revenue for its packaging products when performance obligations under the terms of a solutioncontract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time. Based on our express terms and conditions of the sale of products to our customers, as well as terms included in contractual arrangements with our customers, we do not have an enforceable right of payment that includes a reasonable profit throughout the duration of the contract for nearly anyproducts that do not have an alternative use. Revenue is recognized when the product is shipped from the mill or from our manufacturing facility to our customer. Certain customers may receive volume-based incentives, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue recognized.
Certain customers receive a portion of their packaging need. Columbus Container’s financial resultsproducts as consigned inventory with billing triggered once the customer uses or consumes the designated product. Prior to invoicing, these amounts are handled as unbilled receivables. Total unbilled receivables, which are immaterial in amount, are included in the Packaging segment from the dateaccounts receivable financial statement caption.
Paper Revenue
We manufacture and sell a range of acquisition.communication-based papers. Communication papers consist of cut-size office papers, and printing and converting papers.
The Company recognizes revenue for its paper products when performance obligations under the terms of a contract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time. Revenue is recognized when the product is shipped from the mill or from our manufacturing facility or distribution center to our customer. Certain customers may receive volume-based incentives, which are accounted for the Columbus Container acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations. The total purchase price has been preliminarily allocated to tangible and intangible assets acquired and liabilities assumedas variable consideration. We estimate these amounts based on respective fair values, as follows (dollars in millions):the expected amount to be provided to customers and reduce revenue recognized.
|
| 12/31/16 Allocation |
|
| Adjustments |
|
| Revised Allocation |
| |||
Goodwill |
| $ | 36.6 |
|
| $ | (4.7 | ) |
| $ | 31.9 |
|
Other intangible assets |
|
| 26.3 |
|
|
| 6.0 |
|
|
| 32.3 |
|
Property, plant and equipment |
|
| 27.2 |
|
|
| 1.0 |
|
|
| 28.2 |
|
Other net assets |
|
| 9.6 |
|
|
| (0.1) |
|
|
| 9.5 |
|
Net assets acquired |
| $ | 99.7 |
|
| $ | 2.2 |
|
| $ | 101.9 |
|
DuringCorporate and Other Revenue
Revenue in this segment primarily relates to Louisiana Timber Procurement Company, L.L.C. (LTP), a variable-interest entity that is 50% owned by PCA and 50% owned by Boise Cascade Company (Boise Cascade). PCA is the third quarterprimary beneficiary of 2017,LTP and has the power to direct the
6
activities that most significantly affect the economic performance of LTP. Therefore, we increasedconsolidate 100% of LTP in our financial statements. See Note 17, Transactions With Related Parties, for more information related to LTP.
The Company recognizes revenue within this segment when performance obligations under the purchase price by $2.2 million as a resultterms of a working capital adjustment expectedcontract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time.
Practical Expedients and Exemption
Shipping and handling fees billed to be paid toa customer are recorded on a gross basis in "Net sales" with the seller. We recordedcorresponding shipping and handling costs included in "Cost of sales" in the adjustment as a $2.2 million increase to goodwill. The purchase price allocation above is preliminary and is subject to the finalization of working capital adjustments. Our current estimates and assumptions may change as more information becomes available.
Goodwill is calculatedconcurrent period as the excess ofrevenue is recorded. We expense sales commissions when incurred because the purchase price overamortization period is one year or less. Sales commissions are recorded in "Selling, general, and administrative expenses".
We do not disclose the fair value of the net assets acquired. Among the factors that contributed to the recognitionunsatisfied performance obligations for contracts with an original expected duration of goodwill were Columbus Container's commitment to continuous improvement and innovation in their operations, as well as the expected increases in PCA's containerboard integration levels. Goodwill is deductible for tax purposes.
Other intangible assets, primarily customer relationships, were assigned an estimated weighted average useful life of 14.1 years.
Property, plant and equipment were assigned estimated useful lives ranging from one to 32 years.year or less.
| Earnings Per Share |
The following table sets forth the computation of basic and diluted income per common share for the periods presented (dollars and shares in millions, except per share data):
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
Numerator: |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Net income |
| $ | 139.1 |
|
| $ | 119.3 |
|
| $ | 399.7 |
|
| $ | 338.9 |
|
| $ | 56.7 |
|
| $ | 193.6 |
|
| $ | 198.3 |
|
| $ | 380.4 |
|
Less: distributed and undistributed earnings allocated to participating securities |
|
| (1.1 | ) |
|
| (1.1 | ) |
|
| (3.4 | ) |
|
| (3.4 | ) | ||||||||||||||||
Less: Distributed and undistributed earnings allocated to participating securities |
|
| (0.5 | ) |
|
| (1.5 | ) |
|
| (1.8 | ) |
|
| (2.9 | ) | ||||||||||||||||
Net income attributable to common shareholders |
| $ | 138.0 |
|
| $ | 118.2 |
|
| $ | 396.3 |
|
| $ | 335.5 |
|
| $ | 56.2 |
|
| $ | 192.1 |
|
| $ | 196.5 |
|
| $ | 377.5 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding |
|
| 93.6 |
|
|
| 93.4 |
|
|
| 93.5 |
|
|
| 93.6 |
|
|
| 94.0 |
|
|
| 93.8 |
|
|
| 94.0 |
|
|
| 93.8 |
|
Effect of dilutive securities |
|
| 0.2 |
|
|
| 0.2 |
|
|
| 0.2 |
|
|
| 0.1 |
|
|
| 0.4 |
|
|
| 0.2 |
|
|
| 0.4 |
|
|
| 0.2 |
|
Weighted average diluted common shares outstanding |
|
| 93.8 |
|
|
| 93.6 |
|
|
| 93.7 |
|
|
| 93.7 |
|
|
| 94.4 |
|
|
| 94.0 |
|
|
| 94.4 |
|
|
| 94.0 |
|
Basic income per common share |
| $ | 1.47 |
|
| $ | 1.27 |
|
| $ | 4.24 |
|
| $ | 3.59 |
|
| $ | 0.60 |
|
| $ | 2.05 |
|
| $ | 2.09 |
|
| $ | 4.03 |
|
Diluted income per common share |
| $ | 1.47 |
|
| $ | 1.26 |
|
| $ | 4.23 |
|
| $ | 3.58 |
|
| $ | 0.59 |
|
| $ | 2.04 |
|
| $ | 2.08 |
|
| $ | 4.02 |
|
The components of other income (expense),expense, net, were as follows (dollars in millions):
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Wallula mill restructuring (a) |
| $ | (22.7 | ) |
| $ | — |
|
| $ | (22.7 | ) |
| $ | — |
|
DeRidder mill incident (b) |
|
| 2.6 |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
Facilities closure and other costs (c)(f) |
|
| (0.9 | ) |
|
| (1.6 | ) |
|
| (1.9 | ) |
|
| (5.9 | ) |
Acquisition and integration related costs (d)(g) |
|
| (0.5 | ) |
|
| (2.0 | ) |
|
| (0.8 | ) |
|
| (2.3 | ) |
Hexacomb working capital adjustment (e) |
|
| — |
|
|
| — |
|
|
| 2.3 |
|
|
| — |
|
Asset disposals and write-offs |
|
| (3.9 | ) |
|
| (0.6 | ) |
|
| (8.6 | ) |
|
| (3.5 | ) |
Other |
|
| 0.6 |
|
|
| (2.0 | ) |
|
| (0.8 | ) |
|
| (3.5 | ) |
Total |
| $ | (24.8 | ) |
| $ | (6.2 | ) |
| $ | (32.4 | ) |
| $ | (15.2 | ) |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Asset disposals and write-offs |
| $ | (5.0 | ) |
| $ | (4.5 | ) |
| $ | (11.0 | ) |
| $ | (8.8 | ) |
Facilities closure and other costs (a) |
|
| (13.3 | ) |
|
| — |
|
|
| (13.7 | ) |
|
| — |
|
Wallula mill restructuring (b) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.4 | ) |
Other |
|
| 0.1 |
|
|
| 0.7 |
|
|
| (3.4 | ) |
|
| (0.6 | ) |
Total |
| $ | (18.2 | ) |
| $ | (3.8 | ) |
| $ | (28.1 | ) |
| $ | (9.8 | ) |
________________
(a) |
|
(b) | Includes charges related to the |
|
|
|
|
|
|
|
|
|
|
|
|
| Income Taxes |
For the three months ended SeptemberJune 30, 20172020 and 20162019, we recorded $77.8$34.9 million and $63.7$62.4 million of income tax expense and had an effective tax rate of 35.9%38.2% and 34.8%24.4%, respectively. The increase in our effective tax rate forFor the threesix months ended SeptemberJune 30, 2017 compared with the same period in 2016, was primarily due to an internal legal entity consolidation that will simplify future operating activities2020 and resulted in $3.3 million of tax expense for the change in value of deferred taxes.
For the nine months ended September 30, 2017 and 2016,2019, we recorded $204.9$83.4 millionand $181.0$124.9 million of income tax expense and had an effective tax rate of 33.9% 29.6%and 34.8%24.7%, respectively. The decreaseincrease in our effective tax rate for both the ninethree and six months ended SeptemberJune 30, 20172020 compared with the same period in 2016,2019 was primarily due to the adoptionnondeductible goodwill impairment charge associated with our Paper reporting unit slightly offset by the favorable impact of ASU 2016-09 (Topic 718): Improvements to Employee Share-Based Payment Accounting, which requires allemployee restricted stock and performance unit vests with higher excess tax benefits (ASU 2016-09) during the three and deficiencies from employee share-based payment awardssix months ended June 30, 2020 compared to be recognized in the income statement as opposed to additional paid in capital. This was partially offset by the tax expense from the internal legal entity consolidation.June 30, 2019.
7
Our effective tax rate may differ from the federal statutory income tax rate of 35.0%,21.0% due primarily to the effect of employee share-based payment awards, the domestic manufacturing deduction, and state and local income taxes.taxes and the nondeductible goodwill impairment recorded in the second quarter of 2020.During the six months ended June 30, 2020 and 2019, cash paid for taxes, net of refunds received, was $43.7 million and $92.1 million, respectively. The decrease in cash tax payments between the periods is primarily due to lower taxable income.
During the three and ninesix months ended SeptemberJune 30, 20172020, there were no significant changes to our uncertain tax positions. For more information, see Note 6,8, Income Taxes, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 20162019 Annual Report on Form 10-K.
During the nine months ended September 30, 2017 and 2016 cash paid for taxes, net of refunds received, was $208.3 million and $158.8 million, respectively.
We value our raw materials, work in process, and finished goods inventories using lower of cost, as determined by the average cost method, or market. Supplies and materials are valued at the first-in, first-out (FIFO) or average cost methods.
The components of inventories were as follows (dollars in millions):
|
| September 30, |
|
| December 31, |
|
| June 30, |
|
| December 31, |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Raw materials |
| $ | 263.7 |
|
| $ | 271.9 |
|
| $ | 272.1 |
|
| $ | 271.5 |
|
Work in process |
|
| 13.0 |
|
|
| 12.9 |
|
|
| 13.1 |
|
|
| 11.0 |
|
Finished goods |
|
| 214.5 |
|
|
| 206.5 |
|
|
| 231.7 |
|
|
| 207.7 |
|
Supplies and materials |
|
| 245.4 |
|
|
| 232.3 |
|
|
| 317.6 |
|
|
| 303.9 |
|
Inventories |
| $ | 736.6 |
|
| $ | 723.6 |
|
| $ | 834.5 |
|
| $ | 794.1 |
|
| Property, Plant, and Equipment |
The components of property, plant, and equipment were as follows (dollars in millions):
|
| September 30, |
|
| December 31, |
|
| June 30, |
|
| December 31, |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Land and land improvements |
| $ | 156.1 |
|
| $ | 149.7 |
|
| $ | 177.5 |
|
| $ | 177.5 |
|
Buildings |
|
| 731.2 |
|
|
| 717.1 |
|
|
| 845.1 |
|
|
| 837.4 |
|
Machinery and equipment |
|
| 5,066.2 |
|
|
| 4,951.4 |
|
|
| 5,793.7 |
|
|
| 5,727.4 |
|
Construction in progress |
|
| 177.6 |
|
|
| 125.4 |
|
|
| 214.5 |
|
|
| 174.0 |
|
Other |
|
| 66.5 |
|
|
| 66.7 |
|
|
| 86.2 |
|
|
| 81.5 |
|
Property, plant and equipment, at cost |
|
| 6,197.6 |
|
|
| 6,010.3 |
|
|
| 7,117.0 |
|
|
| 6,997.8 |
|
Less accumulated depreciation |
|
| (3,316.0 | ) |
|
| (3,114.6 | ) |
|
| (4,002.3 | ) |
|
| (3,846.1 | ) |
Property, plant, and equipment, net |
| $ | 2,881.6 |
|
| $ | 2,895.7 |
|
| $ | 3,114.7 |
|
| $ | 3,151.7 |
|
During the second quarter of 2020, with the exacerbated deterioration in uncoated freesheet market conditions arising from the COVID-19 pandemic and the estimated impact on our Paper segment and its projected future results of operations, we identified a triggering event indicating possible impairment of our long lived assets within our Paper segment, including property, plant, and equipment, and performed a recoverability test on the Paper reporting unit long lived assets as of May 31, 2020. The recoverability test was based on forecasts of undiscounted cash flows. The results of the recoverability test indicated that the long lived assets within our Paper segment, inclusive of property, plant, and equipment, were 100% recoverable.
Depreciation expense for the three months ended SeptemberJune 30, 20172020 and 20162019 was $87.0$93.3 million and $79.9$85.8 million, respectively. During the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, depreciation expense was $253.0$183.1 million and $240.5$171.0 million, respectively. During the nine months ended September 30, 2017, weWe recognized $2.6 million of incremental depreciation expense fromduring the six months ended June 30, 2020 as a result of the closure of the San Lorenzo, California corrugated products facility. We recognized $0.2 millionof incremental depreciation expense during the six months ended June 30, 2019 as a result of shortening the useful lives of certain assets primarily related to the Wallula mill restructuring.
At SeptemberJune 30, 20172020 and December 31, 20162019, purchases of property, plant, and equipment included in accounts payable were $30.4$27.9 million and $12.8$26.8 million, respectively.
8
| Goodwill and Intangible Assets |
During the second quarter of 2020, with the exacerbated deterioration in uncoated freesheet market conditions arising from the COVID-19 pandemic and the estimated impact on our Paper segment and its projected future results of operations, we identified a triggering event indicating possible impairment of goodwill and our long lived assets within our Paper reporting unit.
Goodwill
Due to the triggering event identified above an interim quantitative impairment analysis was performed as of May 31, 2020 for the Paper reporting unit, which is the same as our Paper reportable segment. We estimated the fair value of the Paper reporting unit using a combination of the income approach and the market approach, as further described below. Based on the evaluation performed, we determined that the carrying value of the Paper reporting unit exceeded its fair value, which resulted in a goodwill impairment charge totaling $55.2 million. The impairment charge is included in “Goodwill impairment” on our unaudited Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2020 and is not tax deductible.
For purposes of our goodwill impairment analysis, we estimated the fair value of the Paper reporting unit using a combination of the income approach and the market approach applying an equal weighting. The income approach incorporated the estimated future cash flows and a terminal value discounted to their present value using an appropriate risk-adjusted discount rate. The estimated future cash flows and terminal value were based on internal forecasts and industry trends, including the long-term outlook for the paper industry. Our expected cash flows include assumptions about industry pricing, expected paper demand, and anticipated input and conversion costs. The discount rate utilized in the income approach was 9%, which was derived using a capital asset pricing model based on relevant industry data to estimate the cost of equity financing. The discount rate is commensurate with the risks and uncertainties inherent in the business and the cash flow forecasts, updated for recent events. The market approach estimated the fair value of the Paper reporting unit by using valuation metrics of publicly traded companies or historically completed transactions of comparable businesses.
The valuation of our Paper reporting unit requires significant judgment in evaluating recent indicators of market activity and estimated future cash flows, discount rates, and other factors. Our impairment analysis contains inherent uncertainties due to uncontrollable events that could positively or negatively impact anticipated future economic and operating conditions. In making these estimates, the weighted-average cost of capital is utilized to calculate the present value of future cash flows and terminal value. Many variables go into estimating future cash flows, including estimates of our future revenue growth and operating results. When estimating our projected revenue growth and future operating results, we considered industry trends, economic data, and our competitive situation.
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 Septemberboth June 30, 20172020 and December 31, 20162019, we had $676.9 million and $682.7$863.5 million of goodwill recorded in our Packaging segment, respectively.segment. At both SeptemberJune 30, 20172020 and December 31, 20162019, we had $0 million and $55.2 million of goodwill recorded in our Paper segment.segment, respectively.
Changes in the carrying amount of our goodwill are as follows (dollars in millions):
|
| Goodwill |
| |
Balance at January 1, 2017 |
| $ | 737.9 |
|
Acquisitions (a)(b) |
|
| (5.8 | ) |
Balance at September 30, 2017 |
| $ | 732.1 |
|
|
| Goodwill |
| |
Balance at January 1, 2020 |
| $ | 918.7 |
|
Impairment of Paper segment |
|
| (55.2 | ) |
Balance at June 30, 2020 |
| $ | 863.5 |
|
|
|
|
|
Intangible assets are primarily comprised of customer relationships and trademarks and trade names. As a result of the triggering event described above, we also performed a recoverability test on our long-lived assets within the Paper segment, including long lived intangible assets, as of May 31, 2020. The recoverability test was based on forecasts of undiscounted cash flows. The results of the recoverability test indicated that the long lived assets within our Paper segment, inclusive of the long lived intangible assets, were 100% recoverable.
The weighted average remaining useful life, gross carrying amount, and accumulated amortization of our intangible assets were as follows (dollars in millions):
|
| September 30, 2017 |
|
| December 31, 2016 |
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||||||||||||||||||||||||||||||||
|
| Weighted Average Remaining Useful Life (in Years) |
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Weighted Average Remaining Useful Life (in Years) |
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Weighted Average Remaining Useful Life (in Years) |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Weighted Average Remaining Useful Life (in Years) |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
| ||||||||||
Customer relationships |
| 12.5 |
| $ | 429.4 |
|
| $ | 100.9 |
|
| 13.1 |
| $ | 424.5 |
|
| $ | 79.8 |
|
|
| 9.4 |
|
| $ | 503.8 |
|
| $ | 202.7 |
|
|
| 10.0 |
|
| $ | 503.8 |
|
| $ | 180.2 |
|
Trademarks and trade names |
| 10.7 |
|
| 28.8 |
|
|
| 11.8 |
|
| 10.5 |
|
| 27.7 |
|
|
| 8.1 |
|
|
| 9.3 |
|
|
| 34.8 |
|
|
| 21.8 |
|
|
| 9.5 |
|
|
| 34.8 |
|
|
| 20.6 |
|
Other |
| 3.9 |
|
| 4.2 |
|
|
| 1.9 |
|
| 4.3 |
|
| 4.2 |
|
|
| 1.4 |
|
|
| 1.6 |
|
|
| 4.3 |
|
|
| 3.5 |
|
|
| 2.1 |
|
|
| 4.3 |
|
|
| 3.3 |
|
Total intangible assets (excluding goodwill) |
| 12.3 |
| $ | 462.4 |
|
| $ | 114.6 |
|
| 12.9 |
| $ | 456.4 |
|
| $ | 89.3 |
|
|
| 9.4 |
|
| $ | 542.9 |
|
| $ | 228.0 |
|
|
| 9.9 |
|
| $ | 542.9 |
|
| $ | 204.1 |
|
__________________
9
(a) | During the second quarter of 2020, the Company recorded a $4.5 million adjustment to decrease the remaining book value of the customer relationships intangible asset as a result of the closure of the San Lorenzo, California corrugated products facility. |
During the threesix months ended SeptemberJune 30, 20172020 and 2016,2019, amortization expense was $8.4$23.9 million and $6.3$19.2 million, respectively. During the nine months ended September 30, 2017 and 2016, amortization expense was $25.3 million and $17.5 million, respectively.
| Accrued Liabilities |
The components of accrued liabilities were as follows (dollars in millions):
|
| September 30, |
|
| December 31, |
|
| June 30, |
|
| December 31, |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Compensation and benefits |
| $ | 119.3 |
|
| $ | 120.4 |
|
| $ | 108.5 |
|
| $ | 124.5 |
|
Customer volume discounts and rebates |
|
| 25.7 |
|
|
| 27.9 |
| ||||||||
Medical insurance and workers’ compensation |
|
| 28.8 |
|
|
| 28.8 |
|
|
| 25.0 |
|
|
| 26.3 |
|
Franchise, property, sales and use taxes |
|
| 22.8 |
|
|
| 16.7 |
|
|
| 22.9 |
|
|
| 15.3 |
|
Customer volume discounts and rebates |
|
| 21.0 |
|
|
| 18.9 |
| ||||||||
Severance, retention, and relocation |
|
| 9.7 |
|
|
| 3.5 |
| ||||||||
Environmental liabilities and asset retirement obligations |
|
| 4.2 |
|
|
| 6.4 |
|
|
| 4.8 |
|
|
| 5.6 |
|
Severance, retention, and relocation |
|
| 4.2 |
|
|
| 3.0 |
| ||||||||
Other |
|
| 7.5 |
|
|
| 7.0 |
|
|
| 14.7 |
|
|
| 14.4 |
|
Total |
| $ | 207.8 |
|
| $ | 201.2 |
|
| $ | 211.3 |
|
| $ | 217.5 |
|
| Debt |
During
For the ninesix months ended SeptemberJune 30, 2017, we made principal payments of $29.8 million2020 and $4.9 million on our five-year term loan due August 2021 and our seven-year term loan due October 2020, respectively. For the nine months ended September 30, 2017 and 2016,2019, cash payments for interest were $67.2$49.4 million and $59.5$45.8 million, respectively.
Included in interest expense, net areis the amortization of financing costs, and, for 2019 only, the amortization of treasury lock settlements. The remaining balances of the treasury lock settlements and amortization of financing costs.were written off in connection with the debt refinancing completed in December 2019. For both the three months ended SeptemberJune 30, 20172020 and 2016,2019, amortization of financing costs was $0.5 millionand $0.7 million, respectively, and during the six months ended June 30, 2020 and 2019, amortization of financing costs was $1.0 millionand $1.4 million, respectively. For the three and six months ended June 30, 2019, amortization of treasury lock settlements was $1.4$1.3 million and for both the nine months ended September 30, 2017 and 2016, amortization of treasury locks was $4.2 million. For both the three months ended September 30, 2017 and 2016, amortization of financing costs was $0.5$2.6 million, and during the nine months ended September 30, 2017 and 2016, amortization of financing costs was $1.5 million and $1.4 million, respectively.
At SeptemberJune 30, 20172020, we had $1,647.7$2,493.4 million of fixed-rate senior notes and $977.6 million of variable-rate term loans outstanding. At September 30, 2017 theThe fair value of our fixed-rate debt was estimated to be $1,739.2$2,782.7 million. The difference between the book value and fair value is due to the difference between the period-end market interest rate and the stated rate of our fixed-rate debt. We estimated the fair value of our fixed-rate debt using quoted market prices (Level 2 inputs) within the fair value hierarchy, which is further defined in 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 our 20162019 Annual Report on Form 10-K. The fair value of our variable-rate term debt approximates the carrying amount as our cost of borrowing is variable and approximates current market rates.
For more information on our long-term debt and interest rates on that debt, see Note 9,11, Debt, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our 20162019 Annual Report on Form 10-K.
12. | Cash, Cash Equivalents, and Marketable Debt Securities |
The following table shows the Company’s cash and available-for-sale (AFS) debt securities by major asset category at June 30, 2020 and December 31, 2019 (in millions):
|
| June 30, 2020 |
| |||||||||||||||||||||||||
|
| Adjusted Cost Basis |
|
| Unrealized Gain |
|
| Unrealized Loss |
|
| Fair Value |
|
| Cash and Cash Equivalents |
|
| Short-Term Marketable Debt Securities |
|
| Long-Term Marketable Debt Securities |
| |||||||
Cash and cash equivalents |
| $ | 824.3 |
|
| $ | — |
|
| $ | — |
|
| $ | 824.3 |
|
| $ | 824.3 |
|
| $ | — |
|
| $ | — |
|
Level 1 (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
| 29.0 |
|
|
| — |
|
|
| — |
|
|
| 29.0 |
|
|
| 29.0 |
|
|
| — |
|
|
| — |
|
U.S. Treasury securities |
|
| 27.8 |
|
|
| 0.3 |
|
|
| — |
|
|
| 28.1 |
|
|
| — |
|
|
| 17.3 |
|
|
| 10.8 |
|
Subtotal |
|
| 56.8 |
|
|
| 0.3 |
|
|
| — |
|
|
| 57.1 |
|
|
| 29.0 |
|
|
| 17.3 |
|
|
| 10.8 |
|
Level 2 (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
| 0.7 |
|
|
| — |
|
|
| — |
|
|
| 0.7 |
|
|
| — |
|
|
| 0.7 |
|
|
| — |
|
U.S. government agency securities |
|
| 5.6 |
|
|
| — |
|
|
| — |
|
|
| 5.6 |
|
|
| — |
|
|
| 3.0 |
|
|
| 2.6 |
|
Corporate debt securities |
|
| 88.1 |
|
|
| 0.7 |
|
|
| — |
|
|
| 88.8 |
|
|
| — |
|
|
| 65.9 |
|
|
| 22.9 |
|
Subtotal |
|
| 94.4 |
|
|
| 0.7 |
|
|
| — |
|
|
| 95.1 |
|
|
| — |
|
|
| 69.6 |
|
|
| 25.5 |
|
Total |
| $ | 975.5 |
|
| $ | 1.0 |
|
| $ | — |
|
| $ | 976.5 |
|
| $ | 853.3 |
|
| $ | 86.9 |
|
| $ | 36.3 |
|
10
|
| December 31, 2019 |
| |||||||||||||||||||||||||
|
| Adjusted Cost Basis |
|
| Unrealized Gain |
|
| Unrealized Loss |
|
| Fair Value (c) |
|
| Cash and Cash Equivalents |
|
| Short-Term Marketable Debt Securities |
|
| Long-Term Marketable Debt Securities |
| |||||||
Cash and cash equivalents |
| $ | 675.6 |
|
|
|
|
|
|
|
|
|
| $ | 675.6 |
|
| $ | 675.6 |
|
| $ | — |
|
| $ | — |
|
Level 1 (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
| 0.1 |
|
|
| — |
|
|
| — |
|
|
| 0.1 |
|
|
| 0.1 |
|
|
| — |
|
|
| — |
|
U.S. Treasury securities |
|
| 27.1 |
|
|
| — |
|
|
| — |
|
|
| 27.1 |
|
|
| 3.1 |
|
|
| 11.5 |
|
|
| 12.5 |
|
Subtotal |
|
| 27.2 |
|
|
|
|
|
|
|
|
|
|
| 27.2 |
|
|
| 3.2 |
|
|
| 11.5 |
|
|
| 12.5 |
|
Level 2 (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
| 3.9 |
|
|
| — |
|
|
| — |
|
|
| 3.9 |
|
|
| — |
|
|
| 3.9 |
|
|
| — |
|
Commercial paper |
|
| 5.6 |
|
|
| — |
|
|
| — |
|
|
| 5.6 |
|
|
| 0.7 |
|
|
| 4.9 |
|
|
| — |
|
U.S. government agency securities |
|
| 7.0 |
|
|
| — |
|
|
| — |
|
|
| 7.0 |
|
|
| — |
|
|
| 3.0 |
|
|
| 4.0 |
|
Corporate debt securities |
|
| 106.2 |
|
|
| — |
|
|
| — |
|
|
| 106.2 |
|
|
| — |
|
|
| 64.6 |
|
|
| 41.6 |
|
Subtotal |
|
| 122.7 |
|
|
|
|
|
|
|
|
|
|
| 122.7 |
|
|
| 0.7 |
|
|
| 76.4 |
|
|
| 45.6 |
|
Total |
| $ | 825.5 |
|
| $ | — |
|
| $ | — |
|
| $ | 825.5 |
|
| $ | 679.5 |
|
| $ | 87.9 |
|
| $ | 58.1 |
|
(b) | Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. |
(c) | Unrealized gains and losses were insignificant as of December 31, 2019. Therefore, the fair value approximates the adjusted cost basis for each major asset category. |
For the three and six months ended June 30, 2020, net realized gains and losses on the sales and maturities of certain marketable debt securities were insignificant.
The Company invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy requires securities to be investment grade and limits the amount of credit exposure to any one issuer. The maturities of the Company’s long-term marketable debt securities generally range from one to two years.
Fair values were determined for each individual marketable debt security in the investment portfolio. The Company evaluates each individual security to determine whether the security is impaired. An impairment exists when a security’s fair value is below its amortized cost basis. The Company reviews each impaired investment to determine if the decline in fair value below the amortized cost basis resulted from a credit loss or other factors. If the impairment of a marketable debt security (or a portion of the impairment) is due to credit factors of the issuer, the Company records an allowance for credit losses. Non-credit related impairments are recorded in Other Comprehensive Income (OCI). PCA reviews factors such as the duration and extent to which the fair value of the marketable debt security is less than its cost, the financial condition of the issuer and any changes thereto, the general market condition in which the issuer operates, and ability of the issuer to make all required payments of the marketable debt security. PCA utilizes various credit rating services to provide information on the impaired investment of a particular issuer.
As of June 30, 2020 and December 31, 2019, we do not consider any of our marketable debt securities to be other-than-temporarily impaired. Any impairment existing at June 30, 2020 or December 31, 2019 is not related to credit losses. Therefore, we have not recorded an allowance for credit losses related to our marketable debt securities. All unrealized gains and losses were recorded in OCI.
The following table provides information about the Company’s marketable debt securities that have been in a continuous loss position as of June 30, 2020 and December 31, 2019 (in millions, except number of marketable debt securities in a loss position):
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||||||||||||||||
|
| Fair Value of Marketable Debt Securities |
|
| Number of Marketable Debt Securities in a Loss Position |
|
| Unrealized Losses (d) |
|
| Fair Value of Marketable Debt Securities |
|
| Number of Marketable Debt Securities in a Loss Position |
| Unrealized Losses (d) |
| |||||
U.S. Treasury securities |
| $ | — |
|
|
| — |
|
| $ | — |
|
| $ | 14.0 |
|
| 9 |
| $ | — |
|
U.S. government agency securities |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.8 |
|
| 1 |
|
| — |
|
Corporate debt securities |
|
| 4.0 |
|
| 7 |
|
|
| — |
|
|
| 63.3 |
|
| 61 |
|
| — |
| |
|
| $ | 4.0 |
|
| 7 |
|
| $ | — |
|
| $ | 78.1 |
|
| 71 |
| $ | — |
|
(d) | Unrealized losses were insignificant for the periods ended June 30, 2020 and December 31, 2019. |
11
13. | Employee Benefit Plans and Other Postretirement Benefits |
The components of net periodic benefit cost for our pension plans were as follows (dollars in millions):
|
| Pension Plans |
|
| Pension Plans |
| ||||||||||||||||||||||||||
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Service cost |
| $ | 5.8 |
|
| $ | 6.2 |
|
| $ | 18.0 |
|
| $ | 18.4 |
|
| $ | 5.9 |
|
| $ | 6.2 |
|
| $ | 11.9 |
|
| $ | 12.3 |
|
Interest cost |
|
| 10.4 |
|
|
| 10.2 |
|
|
| 31.1 |
|
|
| 30.6 |
|
|
| 10.0 |
|
|
| 11.7 |
|
|
| 19.9 |
|
|
| 23.5 |
|
Expected return on plan assets |
|
| (13.5 | ) |
|
| (12.3 | ) |
|
| (40.5 | ) |
|
| (37.1 | ) |
|
| (14.2 | ) |
|
| (13.0 | ) |
|
| (28.4 | ) |
|
| (26.0 | ) |
Net amortization of unrecognized amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
| 1.4 |
|
|
| 1.4 |
|
|
| 4.4 |
|
|
| 4.3 |
|
|
| 1.1 |
|
|
| 1.6 |
|
|
| 2.2 |
|
|
| 3.1 |
|
Actuarial loss |
|
| 1.9 |
|
|
| 1.5 |
|
|
| 5.7 |
|
|
| 4.3 |
|
|
| 2.7 |
|
|
| 1.7 |
|
|
| 5.3 |
|
|
| 3.5 |
|
Net periodic benefit cost |
| $ | 6.0 |
|
| $ | 7.0 |
|
| $ | 18.7 |
|
| $ | 20.5 |
|
| $ | 5.5 |
|
| $ | 8.2 |
|
| $ | 10.9 |
|
| $ | 16.4 |
|
PCA makes pension plan contributions that are sufficient to fund its actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA). From time to time, PCA may make additional discretionary contributions based on the funded status of the plans, tax deductibility, income from operations, and other factors. During the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019, payments to our nonqualified pension plans were insignificant. For the three and ninesix months ended SeptemberJune 30, 2017,2020, we made contributions of $36.2$7.2 million and $42.1$11.1 million, respectively, to our qualified pension plans, which exceeded our 2017 minimum pension contributions of $8.0.plans. We made contributions of $49.7$3.9 million and $53.4$4.6 million to our qualified plans during the three and ninesix months ended SeptemberJune 30, 2016 .2019, respectively. We expect to contribute at least the estimated required minimum contributions to our qualified plans of approximately $19.8 million in 2020.
The components ofFor the three and six months ended June 30, 2020 and 2019, the net periodic benefit cost for our postretirement plans were as follows (dollars in millions):
|
| Postretirement Plans |
| |||||||||||||
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Service cost |
| $ | 0.1 |
|
| $ | 0.1 |
|
| $ | 0.2 |
|
| $ | 0.5 |
|
Interest cost |
|
| 0.2 |
|
|
| 0.1 |
|
|
| 0.5 |
|
|
| 0.5 |
|
Net amortization of unrecognized amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
| (0.1 | ) |
|
| (0.1 | ) |
|
| (0.1 | ) |
|
| (0.1 | ) |
Actuarial income |
|
| (0.1 | ) |
|
| — |
|
|
| (0.1 | ) |
|
| (0.4 | ) |
Net periodic benefit cost |
| $ | 0.1 |
|
| $ | 0.1 |
|
| $ | 0.5 |
|
| $ | 0.5 |
|
was insignificant.
| Share-Based Compensation |
The Company has a long-term equity incentive plan, which allows for grants of restricted stock, performance awards, stock appreciation rights, and stock options to directors, officers, and employees, as well as others who engage in services for PCA. On February 25, 2020, our board of directors approved and, on May 5, 2020, our stockholders approved, the amendment and restatement of the plan. The plan, as amended, terminatesamendment extended the plan’s term to May 1, 20235, 2030 and authorizes 10.6 millionincreased the number of shares of common stock available for grant overissuance under the lifeplan by 1,400,000 shares. The total number of the plan. shares authorized for past and future awards is 11,950,000 shares.
As of SeptemberJune 30, 2017, 1.02020, assuming performance units are measured at the target level of performance, 1.5 million shares were available for future issuancegrants under the plan.current plan. Forfeitures are added back to the pool of shares of common stock available to be granted at a future date.
The following table presents restricted stock and performance unit award activity for the ninesix months ended SeptemberJune 30, 2017:2020:
|
| Restricted Stock |
|
| Performance Units |
|
| Restricted Stock |
|
| Performance Units |
| ||||||||||||||||||||
|
| Shares |
|
| Weighted Average Grant- Date Fair Value |
|
| Shares |
|
| Weighted Average Grant- Date Fair Value |
|
| Shares |
|
| Weighted Average Grant- Date Fair Value |
|
| Shares |
|
| Weighted Average Grant- Date Fair Value |
| ||||||||
Outstanding at January 1, 2017 |
|
| 786,079 |
|
| $ | 63.44 |
|
|
| 232,088 |
|
| $ | 62.68 |
| ||||||||||||||||
Outstanding at January 1, 2020 |
|
| 716,952 |
|
| $ | 94.50 |
|
|
| 323,147 |
|
| $ | 96.56 |
| ||||||||||||||||
Granted |
|
| 173,199 |
|
|
| 107.57 |
|
|
| 61,861 |
|
|
| 108.19 |
|
|
| 204,960 |
|
|
| 94.25 |
|
|
| 120,285 |
|
|
| 99.16 |
|
Vested |
|
| (212,172 | ) |
|
| 51.54 |
|
|
| (67,391 | ) |
|
| 56.08 |
|
|
| (241,714 | ) |
|
| 71.82 |
|
|
| (86,015 | ) |
|
| 70.81 |
|
Forfeitures |
|
| (4,714 | ) |
|
| 68.85 |
|
|
| — |
|
|
| — |
|
|
| (3,666 | ) |
|
| 96.60 |
|
|
| — |
|
|
| — |
|
Outstanding at September 30, 2017 |
|
| 742,392 |
|
| $ | 77.11 |
|
|
| 226,558 |
|
| $ | 77.07 |
| ||||||||||||||||
Outstanding at June 30, 2020 |
|
| 676,532 |
|
| $ | 102.52 |
|
|
| 357,417 |
|
| $ | 103.63 |
|
Our share-based compensation expense is recorded in "Selling, general, and administrative expenses".expenses." Compensation expense for share-based awards recognized in the Consolidated Statements of Income, net of forfeitures, was as follows (dollars in millions):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Restricted stock |
| $ | 3.8 |
|
| $ | 3.5 |
|
| $ | 11.3 |
|
| $ | 12.2 |
|
| $ | 5.6 |
|
| $ | 10.8 |
|
| $ | 13.6 |
|
| $ | 15.7 |
|
Performance units |
|
| 1.4 |
|
|
| 1.3 |
|
|
| 4.1 |
|
|
| 2.8 |
|
|
| 2.1 |
|
|
| 0.9 |
|
|
| 4.2 |
|
|
| 2.9 |
|
Total share-based compensation expense |
|
| 5.2 |
|
|
| 4.8 |
|
|
| 15.4 |
|
|
| 15.0 |
|
|
| 7.7 |
|
|
| 11.7 |
|
|
| 17.8 |
|
|
| 18.6 |
|
Income tax benefit |
|
| (2.0 | ) |
|
| (1.8 | ) |
|
| (5.9 | ) |
|
| (5.8 | ) |
|
| (1.9 | ) |
|
| (3.0 | ) |
|
| (4.5 | ) |
|
| (4.7 | ) |
Share-based compensation expense, net of tax benefit |
| $ | 3.2 |
|
| $ | 3.0 |
|
| $ | 9.5 |
|
| $ | 9.2 |
|
| $ | 5.8 |
|
| $ | 8.7 |
|
| $ | 13.3 |
|
| $ | 13.9 |
|
12
The fair value of restricted stock and performance units is determined based on the closing price of the Company’s common stock on the grant date. Compensation expense, net of estimated forfeitures, is recorded over the requisite service period. As PCA’s Board of Directors has the ability to accelerate the vesting of share-basedthese awards upon an employee’s retirement, the Company accelerates the recognition of compensation expense for certain employees approaching normal retirement age.
Performance unit awards are earned based on the achievement of defined performance rankings of Return on Invested Capital (ROIC) or Total Shareholder Return (TSR) compared to ROIC and TSR for peer companies. For performance unit awards made in 2020 and 2019, in terms of grant date value, 50% used TSR as the performance measure and 50% used ROIC as the performance measure. The ROIC component of performance unit awards is valued based on the closing price of the stock on the grant date. As the ROIC component contains a performance condition, compensation expense, net of estimated forfeitures, is recorded over the requisite service period based on the most probable number of awards expected to vest. The TSR component of performance unit awards is valued using a Monte Carlo simulation as the TSR component contains a market condition. The Monte Carlo simulation estimates the fair value of the TSR component based on the expected term of the award, a risk-free interest rate, expected dividends, and expected volatility of the Company’s common stock and the common stock of the peer companies. Compensation expense is recorded ratably over the expected term of the award.
The unrecognized compensation expense for all share-based awards at SeptemberJune 30, 20172020 was as follows (dollars in millions):
|
| September 30, 2017 |
|
| June 30, 2020 |
| ||||||||||
|
| Unrecognized Compensation Expense |
|
| Remaining Weighted Average Recognition Period (in years) |
|
| Unrecognized Compensation Expense |
|
| Remaining Weighted Average Recognition Period (in years) |
| ||||
Restricted stock |
| $ | 34.3 |
|
| 2.7 |
|
| $ | 32.6 |
|
|
| 3.1 |
| |
Performance units |
|
| 10.9 |
|
|
| 3.0 |
|
|
| 22.9 |
|
|
| 2.6 |
|
Total unrecognized share-based compensation expense |
| $ | 45.2 |
|
|
| 2.8 |
|
| $ | 55.5 |
|
|
| 2.9 |
|
| Stockholders' Equity |
Dividends
During the ninesix months ended SeptemberJune 30, 2017,2020, we paid $178.2$149.7 million of dividends to shareholders. On August 25, 2017 PCA'sMay 5, 2020, PCA’s Board of Directors announceddeclared a regular quarterly cash dividend of $0.63$0.79 per share of common stock, which was paid on October 13, 2017July 15, 2020 to shareholders of record as of SeptemberJune 15, 2017.2020. The July 2017 dividend payment was $59.4$74.9 million.
Repurchases of Common Stock
On February 25, 2016, PCA announced that its Board of Directors authorized the repurchase of an additional $200.0 million of the Company’s outstanding common stock. Repurchases may be made from time to time in open market or privately negotiated transactions in accordance with applicable securities regulations. The timing and amount of repurchases will be determined by the Company in its discretion based on factors such as PCA’s stock price and market and business conditions.
The Company did not0t repurchase any shares of its common stock under this authority during the three and ninesix months ended SeptemberJune 30, 2017.2020. At June 30, 2020, $193.0 million of the authorized amount remained available for repurchase of the Company’s common stock.
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) (AOCI) by component were as follows (dollars in millions). Amounts in parentheses indicate losses:
|
| Unrealized Loss On Treasury Locks, Net |
|
| Unrealized Loss on Foreign Exchange Contracts |
|
| Unfunded Employee Benefit Obligations |
|
| Total |
| ||||
Balance at January 1, 2017 |
| $ | (17.8 | ) |
| $ | (0.4 | ) |
| $ | (121.4 | ) |
| $ | (139.6 | ) |
Amounts reclassified from AOCI, net of tax |
|
| 2.6 |
|
|
| (0.2 | ) |
|
| 6.2 |
|
|
| 8.6 |
|
Balance at September 30, 2017 |
| $ | (15.2 | ) |
| $ | (0.6 | ) |
| $ | (115.2 | ) |
| $ | (131.0 | ) |
|
| Foreign Currency Translation Adjustments |
|
| Unrealized Loss on Foreign Exchange Contracts |
|
| Unrealized Loss on Marketable Debt Securities |
|
| Unfunded Employee Benefit Obligations |
|
| Total |
| |||||
Balance at January 1, 2020 |
| $ | (0.4 | ) |
| $ | (0.2 | ) |
| $ | — |
|
| $ | (158.9 | ) |
| $ | (159.5 | ) |
Other comprehensive income before reclassifications, net of tax |
|
|
|
|
|
| — |
|
|
| 0.7 |
|
|
| — |
|
|
| 0.7 |
|
Amounts reclassified from AOCI, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5.4 |
|
|
| 5.4 |
|
Balance at June 30, 2020 |
| $ | (0.4 | ) |
| $ | (0.2 | ) |
| $ | 0.7 |
|
| $ | (153.5 | ) |
| $ | (153.4 | ) |
Reclassifications out of AOCI were as follows (dollars in millions). Amounts in parentheses indicate expenses in the Consolidated Statements of Income:
|
| Amounts Reclassified from AOCI |
|
|
| |||||||||||||
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
|
| ||||||||||
Details about AOCI Components |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
|
| ||||
Unrealized loss on treasury locks, net |
| $ | (1.4 | ) |
| $ | (1.4 | ) |
| $ | (4.2 | ) |
| $ | (4.2 | ) |
| See (a) below |
|
|
| 0.5 |
|
|
| 0.5 |
|
|
| 1.6 |
|
|
| 1.6 |
|
| Tax benefit |
|
| $ | (0.9 | ) |
| $ | (0.9 | ) |
| $ | (2.6 | ) |
| $ | (2.6 | ) |
| Net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded employee benefit obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs |
| $ | (1.3 | ) |
| $ | (1.3 | ) |
| $ | (4.3 | ) |
| $ | (4.2 | ) |
| See (b) below |
Amortization of actuarial losses |
|
| (1.8 | ) |
|
| (1.5 | ) |
|
| (5.6 | ) |
|
| (3.9 | ) |
| See (b) below |
|
|
| (3.1 | ) |
|
| (2.8 | ) |
|
| (9.9 | ) |
|
| (8.1 | ) |
| Total before tax |
|
|
| 1.2 |
|
|
| 1.0 |
|
|
| 3.7 |
|
|
| 3.1 |
|
| Tax benefit |
|
| $ | (1.9 | ) |
| $ | (1.8 | ) |
| $ | (6.2 | ) |
| $ | (5.0 | ) |
| Net of tax |
|
| Amounts Reclassified from AOCI |
|
|
| |||||||||||||
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
|
|
| ||||||||||
Details about AOCI Components |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
|
| ||||
Unrealized loss on treasury locks, net (a) |
| $ | — |
|
| $ | (1.3 | ) |
| $ | — |
|
| $ | (2.6 | ) |
| See (a) below |
|
|
| — |
|
|
| 0.3 |
|
|
| — |
|
|
| 0.7 |
|
| Tax benefit |
|
| $ | — |
|
| $ | (1.0 | ) |
| $ | — |
|
| $ | (1.9 | ) |
| Net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded employee benefit obligations (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs |
| $ | (1.0 | ) |
| $ | (1.5 | ) |
| $ | (2.0 | ) |
| $ | (3.0 | ) |
| See (b) below |
Amortization of actuarial losses |
|
| (2.6 | ) |
|
| (1.6 | ) |
|
| (5.2 | ) |
|
| (3.3 | ) |
| See (b) below |
|
|
| (3.6 | ) |
|
| (3.1 | ) |
|
| (7.2 | ) |
|
| (6.3 | ) |
| Total before tax |
|
|
| 0.9 |
|
|
| 0.8 |
|
|
| 1.8 |
|
|
| 1.6 |
|
| Tax benefit |
|
| $ | (2.7 | ) |
| $ | (2.3 | ) |
| $ | (5.4 | ) |
| $ | (4.7 | ) |
| Net of tax |
(a) |
|
(b) | These AOCI components are included in the computation of net pension and postretirement benefit costs. See Note |
| Concentrations of Risk |
Our Paper segment has had a long-standing commercial and contractual relationship with Office Depot, our largest customer in the paper business. This relationship exposes us to a significant concentration of business and financial risk. Our sales to Office Depot represent approximately 7%5% and 8%7% of our total Company sales revenue for both the nine monthssix month periods ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and approximately 42%44% and 41%51% of our Paper segment sales revenue for both of those periods, respectively. For full year 2019, sales to Office Depot represented 50% of our Paper segment sales. At SeptemberJune 30, 20172020 and December 31, 20162019, we had $31.2$34.0 million and $31.8$76.2 million of accounts receivable due from Office Depot, respectively, which represents 4% and 5%9% of our total Company accounts receivable, for both of those periods, respectively.
In 2016, sales to Office Depot represented 42% of our Paper segment sales. If these sales are reduced, 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 affects its willingness to purchase our products will harm our business and results of operations.
Louisiana Timber Procurement Company, L.L.C. (LTP) is a variable-interest entity that is 50% owned by PCA and 50% owned by Boise Cascade Company (Boise Cascade). LTP procures sawtimber, pulpwood, residual chips, and other residual wood fiber to meet the wood and fiber requirements of PCA and Boise Cascade in Louisiana. PCA is the primary beneficiary of LTP and has the power to direct the activities that most significantly affect the economic performance of LTP. Therefore, we consolidate 100% of LTP in our financial statements in our Corporate and Other segment. The carrying amounts of LTP's assets and liabilities (which relate primarily to noninventorynon-inventory working capital items) on our Consolidated Balance Sheets were $4.6$5.0 million at SeptemberJune 30, 20172020 and $5.0$3.9 million at December 31, 2016.2019. During the three months ended SeptemberJune 30, 20172020 and 2016,2019, we recorded $20.8$13.8 million and $15.5$21.4 million, respectively, and during the ninesix months ended SeptemberJune 30, 20172020 and 20162019, we recorded $66.0$36.4 million and $54.8$41.4 million, respectively, of LTP sales to Boise Cascade in "Net Sales" in the Consolidated Statements of Income and approximately the same amount of expenses in "Cost of Sales".
During the three months ended SeptemberJune 30, 20172020 and 2016,2019, fiber purchases from related parties were $4.0$2.5 million and $3.9$4.4 million, respectively. Fiber purchases from related parties were $13.6$6.7 million and $13.2$8.8 million, respectively, during the ninesix months ended SeptemberJune 30, 20172020 and 2016.2019. Most of these purchases related to chip and log purchases by LTP from Boise Cascade's wood products business. These purchases are recorded in "Cost of Sales" in the Consolidated Statements of Income.
| Segment Information |
We report our business in three3 reportable segments: Packaging, Paper, and Corporate and Other. These segments represent distinct businesses that are managed separately because of differing products and services. Each of these businesses requires distinct operating and marketing strategies.
Each segment’s profits and losses are measured on operating profits before interest expense, net, non-operating pension expense, and income taxes. For many of thesecertain allocated expenses, the related assets and liabilities remain in the Corporate and Other segment.
14
Selected financial information by reportable segment was as follows (dollars in millions):
|
| Sales, net |
|
|
|
|
|
|
| Sales, net |
|
|
|
|
|
| ||||||||||||||||||
Three Months Ended September 30, 2017 |
| Trade |
|
| Inter-segment |
|
| Total |
|
| Operating Income (Loss) |
|
| |||||||||||||||||||||
Three Months Ended June 30, 2020 |
| Trade |
|
| Intersegment |
|
| Total |
|
| Operating Income (Loss) |
|
| |||||||||||||||||||||
Packaging |
| $ | 1,340.6 |
|
| $ | 6.0 |
|
| $ | 1,346.6 |
|
| $ | 261.5 |
| (a) |
| $ | 1,401.8 |
|
| $ | 8.1 |
|
| $ | 1,409.9 |
|
| $ | 197.6 |
| (a) |
Paper |
|
| 271.4 |
|
|
| — |
|
|
| 271.4 |
|
|
| (0.7 | ) | (a) |
|
| 123.3 |
|
|
| — |
|
|
| 123.3 |
|
|
| (61.4 | ) | (a)(b) |
Corporate and Other |
|
| 28.1 |
|
|
| 33.0 |
|
|
| 61.1 |
|
|
| (18.5 | ) |
|
|
| 16.5 |
|
|
| 34.0 |
|
|
| 50.5 |
|
|
| (20.1 | ) |
|
Intersegment eliminations |
|
| — |
|
|
| (39.0 | ) |
|
| (39.0 | ) |
|
| — |
|
|
|
| — |
|
|
| (42.1 | ) |
|
| (42.1 | ) |
|
| — |
|
|
|
| $ | 1,640.1 |
|
|
| — |
|
| $ | 1,640.1 |
|
|
| 242.3 |
|
|
| $ | 1,541.6 |
|
| $ | — |
|
| $ | 1,541.6 |
|
|
| 116.1 |
|
|
Non-operating pension income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 0.6 |
|
| |||||||||||||||||
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (25.4 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (25.1 | ) |
|
Income before taxes |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 216.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 91.6 |
|
|
|
| Sales, net |
|
|
|
|
|
| |||||||||
Three Months Ended September 30, 2016 |
| Trade |
|
| Inter-segment |
|
| Total |
|
| Operating Income (Loss) |
|
| ||||
Packaging |
| $ | 1,165.0 |
|
| $ | 2.1 |
|
| $ | 1,167.1 |
|
| $ | 179.6 |
| (c) |
Paper |
|
| 292.8 |
|
|
| — |
|
|
| 292.8 |
|
|
| 44.5 |
| (c) |
Corporate and Other |
|
| 26.2 |
|
|
| 36.7 |
|
|
| 62.9 |
|
|
| (17.7 | ) |
|
Intersegment eliminations |
|
| — |
|
|
| (38.8 | ) |
|
| (38.8 | ) |
|
| — |
|
|
|
| $ | 1,484.0 |
|
| $ | — |
|
| $ | 1,484.0 |
|
|
| 206.4 |
|
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (23.4 | ) |
|
Income before taxes |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 183.0 |
|
|
|
| Sales, net |
|
|
|
|
|
| |||||||||
Nine Months Ended September 30, 2017 |
| Trade |
|
| Inter-segment |
|
| Total |
|
| Operating Income (Loss) |
|
| ||||
Packaging |
| $ | 3,897.4 |
|
| $ | 17.6 |
|
| $ | 3,915.0 |
|
| $ | 676.8 |
| (a)(b) |
Paper |
|
| 784.3 |
|
|
| — |
|
|
| 784.3 |
|
|
| 58.1 |
| (a) |
Corporate and Other |
|
| 78.9 |
|
|
| 92.3 |
|
|
| 171.2 |
|
|
| (55.7 | ) | (a)(b) |
Intersegment eliminations |
|
| — |
|
|
| (109.9 | ) |
|
| (109.9 | ) |
|
| — |
|
|
|
| $ | 4,760.6 |
|
|
| — |
|
| $ | 4,760.6 |
|
|
| 679.2 |
|
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (74.6 | ) |
|
Income before taxes |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 604.6 |
|
|
|
| Sales, net |
|
|
|
|
|
|
| Sales, net |
|
|
|
|
|
| ||||||||||||||||||
Nine Months Ended September 30, 2016 |
| Trade |
|
| Inter-segment |
|
| Total |
|
| Operating Income (Loss) |
|
| |||||||||||||||||||||
Three Months Ended June 30, 2019 |
| Trade |
|
| Intersegment |
|
| Total |
|
| Operating Income (Loss) |
|
| |||||||||||||||||||||
Packaging |
| $ | 3,382.4 |
|
| $ | 5.5 |
|
| $ | 3,387.9 |
|
| $ | 533.5 |
| (c) |
| $ | 1,497.8 |
|
| $ | 6.8 |
|
| $ | 1,504.6 |
|
| $ | 263.9 |
|
|
Paper |
|
| 840.1 |
|
|
| — |
|
|
| 840.1 |
|
|
| 105.0 |
| (c) |
|
| 237.8 |
|
|
| — |
|
|
| 237.8 |
|
|
| 38.8 |
|
|
Corporate and Other |
|
| 79.9 |
|
|
| 105.7 |
|
|
| 185.6 |
|
|
| (51.1 | ) | (c) |
|
| 24.3 |
|
|
| 31.5 |
|
|
| 55.8 |
|
|
| (22.3 | ) |
|
Intersegment eliminations |
|
| — |
|
|
| (111.2 | ) |
|
| (111.2 | ) |
|
| — |
|
|
|
| — |
|
|
| (38.3 | ) |
|
| (38.3 | ) |
|
| — |
|
|
|
| $ | 4,302.4 |
|
| $ | — |
|
| $ | 4,302.4 |
|
|
| 587.4 |
|
|
| $ | 1,759.9 |
|
| $ | — |
|
| $ | 1,759.9 |
|
|
| 280.4 |
|
|
Non-operating pension expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2.0 | ) |
| |||||||||||||||||
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (67.5 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (22.4 | ) |
|
Income before taxes |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 519.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 256.0 |
|
|
|
| Sales, net |
|
|
|
|
|
| |||||||||
Six Months Ended June 30, 2020 |
| Trade |
|
| Intersegment |
|
| Total |
|
| Operating Income (Loss) |
|
| ||||
Packaging |
| $ | 2,867.2 |
|
| $ | 10.2 |
|
| $ | 2,877.4 |
|
| $ | 397.5 |
| (a) |
Paper |
|
| 340.7 |
|
|
| — |
|
|
| 340.7 |
|
|
| (29.0 | ) | (a)(b) |
Corporate and Other |
|
| 42.4 |
|
|
| 68.3 |
|
|
| 110.7 |
|
|
| (43.3 | ) |
|
Intersegment eliminations |
|
| — |
|
|
| (78.5 | ) |
|
| (78.5 | ) |
|
| — |
|
|
|
| $ | 3,250.3 |
|
| $ | — |
|
| $ | 3,250.3 |
|
|
| 325.2 |
|
|
Non-operating pension income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1.1 |
|
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (44.6 | ) |
|
Income before taxes |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 281.7 |
|
|
|
| Sales, net |
|
|
|
|
|
| |||||||||
Six Months Ended June 30, 2019 |
| Trade |
|
| Intersegment |
|
| Total |
|
| Operating Income (Loss) |
|
| ||||
Packaging |
| $ | 2,968.6 |
|
| $ | 13.6 |
|
| $ | 2,982.2 |
|
| $ | 513.4 |
| (c) |
Paper |
|
| 477.5 |
|
|
| — |
|
|
| 477.5 |
|
|
| 84.4 |
| (c) |
Corporate and Other |
|
| 47.5 |
|
|
| 65.0 |
|
|
| 112.5 |
|
|
| (42.0 | ) |
|
Intersegment eliminations |
|
| — |
|
|
| (78.6 | ) |
|
| (78.6 | ) |
|
| — |
|
|
|
| $ | 3,493.6 |
|
| $ | — |
|
| $ | 3,493.6 |
|
|
| 555.8 |
|
|
Non-operating pension expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (4.1 | ) |
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (46.4 | ) |
|
Income before taxes |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 505.3 |
|
|
15
(a) |
| The three and |
2020 include the following: |
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09 (Topic 606): Revenue from Contracts with Customers. This ASU amends the guidance for revenue recognition to replace numerous industry-specific requirements. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers.
There are two permitted transition methods under the standard: full retrospective method, in which case the cumulative effect of applying the standard would be recognized in the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The new standard becomes effective for us as of January 1, 2018, at which time we expect to adopt it using the modified retrospective method.
We have established a transition team to analyze the impact of the standard on our revenue contracts by reviewing our current accounting policies and practices and identifying potential differences that would result from applying the requirements of the new standard. Specifically, we have identified significant revenue streams within each of our reportable segments and have reviewed representative contracts to identify corresponding purchase obligations, variable consideration, acquisition costs and fulfillment costs. In addition, we are in the process of identifying and assessing appropriate changes to our business processes, systems and controls to support revenue recognition and disclosures under the new standard. This team has reported, and will continue to report, its findings and progress of the project to management and the Audit Committee on a periodic basis.
During our assessment, the Company considered whether the adoption would require a transition from point-in-time revenue recognition to an over-time approach for products produced by the Company without an alternative use, which would result in acceleration of revenue. The Company has determined that based on the express terms included in the majority of its contracts, and the Company’s standard terms and conditions, an enforceable right of payment that includes a reasonable profit throughout the duration of the contract does not exist. Therefore, the Company would remain at a point-in-time approach and record revenue at the point control transfers to the customer.
While we continue to assess ASU 2014-09, we do not expect that there will be a material effect on the Company’s financial position or its results of operations as a result of adoption and we anticipate the primary impact to be the additional required disclosures around revenue recognition in the notes to the consolidated financial statements.
Effective January 1, 2017, the Company adopted ASU 2016-09 (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. This ASU requires all excess tax benefits and deficiencies from share-based payment awards (including tax benefits of dividends on share-based payment awards) to be recognized in the income statement when the awards vest or are settled. Excess tax benefits and deficiencies were previously recognized in additional paid in capital in our consolidated balance sheet. Additionally, the guidance requires these excess tax benefits and deficiencies to be presented as an operating activity in the statement of cash flows rather than as a financing activity. As a result of this adoption, the Company recorded $0.3 million and $6.6 million of excess tax benefits from share-based compensation as an income tax benefit in the income statement for the three and nine months ended September 30, 2017, respectively. The Company also retrospectively reclassified excess tax benefits and deficiencies as an operating activity rather than as a financing activity on its consolidated statements of cash flows. The Company will continue to estimate forfeitures at the time of the grant. The Company had no unrecognized excess tax benefits from prior periods to record upon the adoption of this ASU, and all other adopted amendments did not have a material impact on the Company's financial position, results of operations and cash flow.
Effective January 1, 2017, the Company prospectively adopted ASU 2015-11 (Topic 330): Simplifying the Measurement of Inventory, as part of its simplification initiative. Under the ASU, inventory is measured at the "lower of cost and net realizable value" and other options that currently exist for market value will be eliminated. ASU 2015-11 defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. No other changes were made to the current guidance on inventory measurement. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations and cash flow.
In May 2017, the FASB issued ASU 2017-09 Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This ASU is effective for annual periods beginning after December 15, 2017. This ASU will be applied prospectively when changes to the terms or conditions of a share-based payment award occur.
In January 2017, the FASB issued ASU 2017-04 (Topic 350): Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment, eliminating the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under ASU 2017-04, goodwill impairment testing will be 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. This ASU is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption is permitted. This ASU will be applied prospectively to our future goodwill impairment tests beginning with our annual goodwill impairment test in the fourth quarter of 2017.
In January 2017, the FASB issued ASU 2017-01 (Topic 805), Clarifying the Definition of a Business, which amends the guidance in ASC 805, “Business Combinations”. The ASU changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If it is not met, the entity then evaluates whether the set meets the requirements that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The ASU defines an output as “the result of inputs and processes applied to those inputs that provide goods or services to customers, investment income (such as dividends or interest), or other revenues.” The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods, and early adoption is permitted. The ASU will be applied prospectively to any transactions subsequent to adoption.
In August 2016, the FASB issued ASU 2016-15 (Topic 230), Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This ASU adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. It is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted. The Company does not expect this ASU to have a material impact on the Company's financial condition, results of operations, or cash flows.
In February 2016, the FASB issued ASU 2016-02 (Topic 842): Leases. This ASU amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. This ASU is required to be adopted using a modified retrospective approach. We currently plan to adopt this ASU on January 1, 2019 and expect to recognize a liability and corresponding asset associated with in-scope operating leases, but are still in the process of determining the effects on our financial statements and the processes required to account for leasing activity on an ongoing basis.
There were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.
| Commitments, Guarantees, Indemnifications and Legal Proceedings |
We have financial commitments and obligations that arise in the ordinary course of our business. These include long-term debt, capital commitments, lease obligations, and purchase commitments for goods and services, and legal proceedings, all of which are discussed in Note 9,11, Debt, and Note 18,21, Commitments, Guarantees, Indemnifications, and Legal Proceedings, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our 20162019 Annual Report on Form 10-K.
Guarantees and Indemnifications
We provide guarantees, indemnifications, and other assurances to third parties in the normal course of our business. These include tort indemnifications, product guarantees, environmental assurances, and representations and warranties in commercial agreements. At SeptemberJune 30, 20172020, we are not aware of any material liabilities arising from any guarantee, indemnification, or financial assurance we have provided. If we determined such a liability was probable and subject to reasonable determination, we would accrue for it at that time.
DeRidder Mill Incident
On February 8, 2017, a tank located in the pulp mill at the Company's DeRidder, Louisiana facility exploded, resulting in three contractor fatalities and other injuries. The Company has been served with multiple lawsuits involving the decedents and isother allegedly injured parties, alleging negligence on noticethe part of additional claims.the Company and claiming compensatory and punitive damages. The Company maintainsis vigorously defending these lawsuits. The Company believes that these suits are covered by its liability insurance policies, subject to aan aggregate $1.0 million deductible; however,deductible, which has been satisfied in full as a result of settlement of various lawsuits and fees and expenses incurred by the incident remains under investigation and theCompany. All pending lawsuits are in the early stages. Accordingly, the Company is unable to estimate a range of reasonable possible losses at this time.
TheCompany has also incurred property damage and business interruption losses and has claimed these losses, subject to a $5.0 million deductible, under its property damage and business interruption insurance policy. The Company expects to resolve the claim with the insurance carrier over the next several months.
The Company is cooperatingcooperated with investigations from the U.S. Occupational Health and Safety Administration (OSHA), the U.S. Chemical Safety Board (CSB) and the U.S. Environmental Protection Agency relating(EPA). The U.S. Chemical Safety Board completed its investigation and issued its report during the second quarter of 2018. The Company settled with OSHA during the second quarter of 2018 and paid approximately $40,000 in penalties for citations. The EPA investigation is ongoing.
Environmental Matters
On August 8, 2019, the EPA issued a notice of violation (NOV) alleging violations of the Clean Air Act, resulting from an inspection of our Wallula, Washington mill in September 2018. PCA denies the violations set forth in the NOV and has requested that the EPA’s Office of Air Quality Planning and Standards provide an applicability determination to clarify that the incident.relevant operations of PCA have not violated the regulations at issue in the NOV. The EPA denied our request in 2020. We intend to vigorously defend any enforcement action and, on July 27, 2020, filed a petition with the EPA to reconsider its denial of our applicability determination and filed petitions in U.S. federal district court to review the agency’s denial of our applicability determination as well as the rule at issue. While we cannot predict with certainty the ultimate resolution of this matter, we believe that we have a meritorious position that our operations have not violated the Clean Air Act, that we have taken appropriate action to address the matters raised by the EPA in the NOV, and that this matter will not result in a material adverse effect on our financial condition, results of operations, or cash flows.
Legal Proceedings
We are also a party to othervarious legal actions arising in the ordinary course of our business. These legal actions include commercial liability claims, premises liability claims, commercial disputes, and employment-related claims, among others. As of the date of this filing, we believe it is not reasonably possible that any of the legal actions against us will, either individually or in the aggregate, have a material adverse effect on our financial condition, results of operations, or cash flows.
16
17
|
|
On October 2, 2017, we completed the acquisition of the assets of Sacramento Container Corporation and 100% membership interests of Northern Sheets, LLC and Central California Sheets, LLC in a cash-free, debt-free transaction. Funding for the $265 million purchase price came from available 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 Sacramento Container Corporation will be included in PCA’s fourth quarter 2017 results.
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 20162019 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 fourththird largest producer of containerboard products and the third largest producer of uncoated freesheet paper in the United States, based on production capacity.North America. We operate fivesix containerboard mills, threetwo paper mills, and 9493 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 whiteuncoated freesheet 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 20162019 Annual Report on Form 10-K.
Executive Summary
ThirdSecond quarter net sales were $1.64$1.54 billion in 20172020 and $1.48$1.76 billion in 2016.2019. We reported $139$57 million of net income, or $1.47$0.59 per diluted share, during the thirdsecond quarter of 2017,2020, compared to $119$194 million, of net income, or $1.26$2.04 per diluted share, during the same period in 2016. The third quarter of 20172019. Net income included $27$75 million of pre-tax expense for special items (discussed below) compared to $5 million of pre-tax expense for special items in 2016.the second quarter of 2020, compared to no income or expense for special items in 2019 (discussed below). Special items primarily included the non-cash goodwill impairment charge as described in Note 9, Goodwill and Intangible Assets, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this Form 10-Q, charges related to the closure of the San Lorenzo, California corrugated products facility, and incremental costs to address the COVID-19 pandemic. Excluding special items, we recorded $159 million of net income was $132 million, or $1.68$1.38 per diluted share, during the thirdsecond quarter of 2017, compared to $123 million of net income, or $1.30 per diluted share, in the third quarter of 2016.2020. The increasedecrease was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes, and a partial insurance recovery related to the DeRidder Mill incident, partially offset by lower prices and mix in our Packaging and sales and productionPaper segments, lower volumes in our Paper segment, and higher input anddepreciation expense. These items were partially offset by lower operating costs, higher freight andlower annual outage expenses, lower converting costs, lower freight expense, and higherother costs. PCA’s facilities have been permitted to continue to operate as “essential operations” during the COVID-19 pandemic. PCA did not experience significant disruptions in its operations as a result of the pandemic and has maintained adequate availability of its workforce and supply of raw materials and services. 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 interest expense.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 $262$198 million in the thirdsecond quarter of 2017,2020, compared to $180$264 million in the thirdsecond quarter of 2016.2019. Packaging segment earnings before interest, taxes, depreciation, amortization, and depletion (EBITDA)EBITDA excluding special items was $341$313 million in the thirdsecond quarter of 2017 and $2562020 compared to $349 million in the thirdsecond quarter of 2016.2019. The increasedecrease in EBITDA excluding special items was drivendue primarily by higher containerboard and corrugated productsto lower prices and mix, and sales and production volumes, and a partial insurance recovery related to the DeRidder Mill incident, partially offset by higher inputlower operating and converting costs, primarily recycled fiber, higher labor costs,lower annual outage expenses, and higherlower freight expense.and logistic expenses.Demand for our Packaging products remained strong in the second quarter. We cannot predict the future impact of the pandemic on our packaging operations, economic and operating conditions affecting our packaging business or demand for our packaging products.
Paper segment incomeloss from operations was a loss of $1$61 million in the thirdsecond quarter of 2017, which includes $25 million of charges related to the Wallula mill restructuring as discussed below. This compares2020, compared to income of $45$39 million in the thirdsecond quarter of 2016.2019. Paper segment EBITDA excluding special items was $39$5 million in the thirdsecond quarter of 2017,2020, compared to $59$48 million in the thirdsecond quarter of 2016.
2019. The decrease in EBITDA excluding special items was due to lower paper prices and mix and lower sales and production volumes, higher costs for energy, and higher annual mill outage and freight expense.
During the first nine months of 2017, we reported $400 million of net income, or $4.23 per diluted share, compared to $339 million of net income, or $3.58 per diluted share, during the same period in 2016. The nine months ended September 30, 2017 included $31 million of pre-tax expense for special items (discussed below), compared to $11 million of pre-tax expense for special items during the same period in 2016. Excluding special items, we recorded $422 million of net income, or $4.47 per diluted share, during the first nine months of 2017, compared to $346 million of net income, or $3.65 per diluted share, in the first nine months of 2016. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes and lower costs for annual mill outages, partially offset by lower sales and production volumes and prices and mix, in our Paper segment, higher input and operating costs, higher freight expense, and higher depreciation and interest expense. Earnings for the year to date were negatively impacted due to the DeRidder Mill incident described in Note 18 to the Financial Statements included in this report.
Packaging segment income from operations was $677 million in the first nine months of 2017, compared to $534 million in the same period of 2016. Packaging segment EBITDA excluding special items was $917 million in the first nine months of 2017, compared to $759 million in the first nine months of 2016. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes, and lower costs for annual mill outages, partially offset by higher input costs, primarily recycled fiber and energy, higher labor costs, and higher freight expense. The Packaging segment was negatively impacted by the DeRidder Mill incident losses described above.
Paper segment income from operations was $58 million in the first nine months of 2017, which includes $25 million of charges related to the Wallula mill restructuring as discussed below. This compares to $105 million in the first nine months of 2016. Paper segment EBITDA excluding special items was $126 million in the first nine months of 2017, compared to $149 million in the same period of 2016. The decrease was due primarily to lower paper sales and production volumes and prices and mix, and higher input costs, partially offset by lower operating costs and lower annual outage expenses.Reported results in our Paper segment included the goodwill impairment charge described above. Sales were 48% lower than last year, as demand for our paper products has been affected by nationwide responses to address the COVID-19 pandemic, including school and office closures. Operations at our Jackson, Alabama paper mill outage expense.were temporarily idled in late April and are expected to remain idled at least through the end of August.
During the third quarter, the Company announced that it will discontinue production of uncoated freesheet and coated one-side grades at its Wallula, Washington millPackaging segment income from operations was $398 million in the second quarterfirst six months of 20182020, compared to begin the conversion of the No. 3 paper machine to a 400,000 ton-per-year virgin kraft linerboard machine. The Company incurred charges$513 million in the same period in 2019. Packaging segment EBITDA excluding special items was $602 million in the first six months of 2020 compared to $682 million in the first six months of 2019. The decrease in EBITDA excluding special items was due primarily to lower prices and mix, partially offset by higher sales and production volumes, lower operating and converting costs, lower annual outage expense, and lower freight and logistic expenses.
Paper segment relatingloss from operations was $29 million in the first six months of 2020, compared to these activities duringincome of $84 million in the third quarter as described below under “Special Itemsfirst six months of 2019. Paper segment EBITDA excluding special items was $47 million in the first six months of 2020, compared to $103 million in the same
18
period in 2019. The decrease in EBITDA excluding special items was due to lower sales and Earnings per Diluted Share, Excluding Special Items,”production volumes and will incur future charges. The total capital cost of the conversion is expected to be approximately $150 million.
During the third quarter, the Company also agreed to acquire substantially all of the assets of Sacramento Container Corporation,lower prices and 100% of the membership interests of Northern Sheets, LLCmix, partially offset by lower operating costs and Central California Sheets, LLC, in a cash-free, debt-free transaction for $265 million. The Company completed the acquisition on October 2, 2017 and funded the purchase price with cash on hand. The acquired companies operate two full-line corrugated product operations and sheet feeders in McClellan, California and Kingsburg, California.lower annual outage expenses.
Special Items and Earnings per Diluted Share, Excluding Special Items
The third quarter of 2017 included $27 million of pre-tax expense for special items compared to $5 million of pre-tax expense in the same period in 2016. The special items in the third quarter of 2017 consist of $25 million of charges related to the previously announced conversion of the Wallula No. 3 paper machine to a virgin kraft linerboard machine, and $2 million for facility closure costs related to corrugated products facilities and a paper administration facility, and integration costs related to recent acquisitions. The $5 million of special items in the third quarter of 2016 related to closing a corrugated manufacturing facility and a paper distribution center and integration related costs for recent acquisitions.
The nine months ended September 30, 2017 included $31 million of pre-tax expense for special items, compared to $11 million of pre-tax expense for special items during the same period in 2016. The nine months ended September 30, 2017 included $25 million of charges related to the previously announced conversion of the Wallula No. 3 paper machine to a virgin kraft linerboard machine; $5 million for the property damage and business interruption insurance deductible related to the DeRidder Mill incident; $3 million of closure costs related to corrugated products facilities and a paper administration facility, integration costs related to the recent acquisitions, and costs related to a lump sum settlement payment for a multiemployer pension plan withdrawal liability; and $2 million of income related to a working capital adjustment from the April 2015 sale of our Hexacomb corrugated manufacturing operations in Europe and Mexico. The $11 million of special items in the nine months ended September 30, 2016 included $7 million of facility closure costs related to corrugated products facilities and a paper distribution facility and $4 million of acquisition-related costs for the TimBar Corporation, and costs related to our withdrawal from a multiemployer pension plan.
A reconciliation of reported earnings per diluted share to earnings per diluted share, excluding special items, for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 are as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Earnings per diluted share, as reported |
| $ | 1.47 |
|
| $ | 1.26 |
|
| $ | 4.23 |
|
| $ | 3.58 |
|
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wallula mill restructuring |
|
| 0.16 |
|
|
| — |
|
|
| 0.16 |
|
|
| — |
|
DeRidder mill incident |
|
| — |
|
|
| — |
|
|
| 0.03 |
|
|
| — |
|
Internal legal entity consolidation |
|
| 0.04 |
|
|
| — |
|
|
| 0.04 |
|
|
| — |
|
Facilities closure and other costs |
|
| 0.01 |
|
|
| 0.02 |
|
|
| 0.01 |
|
|
| 0.05 |
|
Acquisition and integration related costs |
|
| — |
|
|
| 0.02 |
|
|
| 0.01 |
|
|
| 0.02 |
|
Hexacomb working capital adjustment |
|
| — |
|
|
| — |
|
|
| (0.01 | ) |
|
| — |
|
Total special items |
|
| 0.21 |
|
|
| 0.04 |
|
|
| 0.24 |
|
|
| 0.07 |
|
Earnings per diluted share, excluding special items |
| $ | 1.68 |
|
| $ | 1.30 |
|
| $ | 4.47 |
|
| $ | 3.65 |
|
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Earnings per diluted share, as reported |
| $ | 0.59 |
|
| $ | 2.04 |
|
| $ | 2.08 |
|
| $ | 4.02 |
|
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment (a) |
|
| 0.58 |
|
|
| — |
|
|
| 0.58 |
|
|
| — |
|
Facilities closure and other costs (b) |
|
| 0.16 |
|
|
| — |
|
|
| 0.17 |
|
|
| — |
|
Incremental costs for COVID-19 (c) |
|
| 0.05 |
|
|
| — |
|
|
| 0.05 |
|
|
| — |
|
Total special items |
|
| 0.79 |
|
|
| — |
|
|
| 0.80 |
|
|
| — |
|
Earnings per diluted share, excluding special items |
| $ | 1.38 |
|
| $ | 2.04 |
|
| $ | 2.88 |
|
| $ | 4.02 |
|
(a) | During the second quarter of 2020, with the exacerbated deterioration in uncoated freesheet market conditions and the estimated impact on our Paper reporting unit arising from the COVID-19 pandemic, as well as projected future results of operations, we identified a triggering event indicating possible impairment of goodwill within our Paper reporting unit. The Company performed an interim quantitative impairment analysis as of May 31, 2020, and, based on the evaluation performed, we determined that goodwill was fully impaired for the Paper reporting unit and recognized a non-cash impairment charge of $55.2 million. |
(b) | For the three and six months ended June 30, 2020, includes $20.4 million and $20.8 million, respectively, of charges consisting of closure costs related to corrugated products facilities, substantially all of which relates to the previously announced closure of the San Lorenzo, California facility during the second quarter, partially offset by income related to the sale of a corrugated products facility. |
(c) | For the three and six months ended June 30, 2020, includes $6.1 million and $6.9 million, respectively, of incremental, out-of-pocket costs related to the COVID-19 pandemic, including supplies, cleaning and sick pay. |
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 total shipments increased 1.0%per work day were down 1.4% during the thirdsecond quarter of 2017,2020 compared to the same quarter in 2016.of 2019. Reported industry containerboard production increased 1.5%3.0% compared to the thirdsecond quarter of 2016, and reported2019. Reported industry containerboard inventories at the end of the thirdsecond quarter of 20172020 were approximately 2.42.5 million tons, flat compared to the same period in 2016.2019. Reported containerboard export shipments were down 5.5%up 25.0% compared to the thirdsecond quarter of 2016. 2019. Prices reported by trade publications decreased by $10 per ton for linerboard and $15 per ton for corrugating medium in January 2020; there were no additional price changes reported in the second quarter of 2020.
Trade publications reported a $30 per ton price increase on corrugating medium during the third quarter of 2017.
The market for communication papers competes heavily with electronic data transmission and document storage alternatives. Increasing shifts to these alternatives have reduced usage of, and lowered demand for, traditional print media and communication papers. Trade publications reported that North American uncoated freesheet paper shipments were down 1.4%32.3% in the thirdsecond quarter of 2017,2020, compared to the same quarter in 2016.of 2019. Average prices reported by a trade publication for cut size office paperswere lower by $30$17 per ton, or 3.0%1.5%, in the thirdsecond quarter of 2017,2020 compared to the thirdfirst quarter of 2016.
Outlook
Looking ahead to the fourth quarter of 2017, we expect Packaging segment demand to remain strong although at seasonally2020, and lower volumes, which includes one less shipping day, as well as a seasonally less rich mix in corrugated products,by $65 per ton, or 5.7%, compared to the third quarter. We will also have the additionsecond quarter of our newly acquired Sacramento Container operations in the fourth quarter. In our Paper segment, we have started implementing our recently announced price increases, but expect seasonally lower volumes and a less rich sales mix. While recycled fiber prices should move lower, seasonally higher wood and energy costs along with higher prices for certain key chemicals and higher freight costs are also expected. Annual mill outage costs are estimated to be higher than the third quarter due to scheduled maintenance work at four of our mills. Considering these items, we expect fourth quarter earnings, excluding special items, to be lower than third quarter earnings.2019.
Results of Operations
Three Months Ended SeptemberJune 30, 2017,2020, compared to Three Months Ended SeptemberJune 30, 20162019
The historical results of operations of PCA for the three months ended SeptemberJune 30, 20172020 and 20162019 are set forth below (dollars in millions):
|
| Three Months Ended |
|
|
|
|
|
| Three Months Ended |
|
|
|
|
| ||||||||||
|
| September 30, |
|
|
|
|
|
| June 30, |
|
|
|
|
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| Change |
|
| 2020 |
|
| 2019 |
|
| Change |
| ||||||
Packaging |
| $ | 1,346.6 |
|
| $ | 1,167.1 |
|
| $ | 179.5 |
|
| $ | 1,409.9 |
|
| $ | 1,504.6 |
|
| $ | (94.7 | ) |
Paper |
|
| 271.4 |
|
|
| 292.8 |
|
|
| (21.4 | ) |
|
| 123.3 |
|
|
| 237.8 |
|
|
| (114.5 | ) |
Corporate and Other |
|
| 61.1 |
|
|
| 62.9 |
|
|
| (1.8 | ) |
|
| 50.5 |
|
|
| 55.8 |
|
|
| (5.3 | ) |
Intersegment eliminations |
|
| (39.0 | ) |
|
| (38.8 | ) |
|
| (0.2 | ) |
|
| (42.1 | ) |
|
| (38.3 | ) |
|
| (3.8 | ) |
Net sales |
| $ | 1,640.1 |
|
| $ | 1,484.0 |
|
| $ | 156.1 |
|
| $ | 1,541.6 |
|
| $ | 1,759.9 |
|
| $ | (218.3 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Packaging |
| $ | 261.5 |
|
| $ | 179.6 |
|
| $ | 81.9 |
|
| $ | 197.6 |
|
| $ | 263.9 |
|
| $ | (66.3 | ) |
Paper |
|
| (0.7 | ) |
|
| 44.5 |
|
|
| (45.2 | ) |
|
| (61.4 | ) |
|
| 38.8 |
|
|
| (100.2 | ) |
Corporate and Other |
|
| (18.5 | ) |
|
| (17.7 | ) |
|
| (0.8 | ) |
|
| (20.1 | ) |
|
| (22.3 | ) |
|
| 2.2 |
|
Income from operations |
| $ | 242.3 |
|
| $ | 206.4 |
|
| $ | 35.9 |
|
| $ | 116.1 |
|
| $ | 280.4 |
|
| $ | (164.3 | ) |
Non-operating pension income (expense) |
|
| 0.6 |
|
|
| (2.0 | ) |
|
| 2.6 |
| ||||||||||||
Interest expense, net |
|
| (25.4 | ) |
|
| (23.4 | ) |
|
| (2.0 | ) |
|
| (25.1 | ) |
|
| (22.4 | ) |
|
| (2.7 | ) |
Income before taxes |
|
| 216.9 |
|
|
| 183.0 |
|
|
| 33.9 |
|
|
| 91.6 |
|
|
| 256.0 |
|
|
| (164.4 | ) |
Income tax provision |
|
| (77.8 | ) |
|
| (63.7 | ) |
|
| (14.1 | ) |
|
| (34.9 | ) |
|
| (62.4 | ) |
|
| 27.5 |
|
Net income |
| $ | 139.1 |
|
| $ | 119.3 |
|
| $ | 19.8 |
|
| $ | 56.7 |
|
| $ | 193.6 |
|
| $ | (136.9 | ) |
Non-GAAP Measures (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income excluding special items |
| $ | 158.8 |
|
| $ | 122.6 |
|
| $ | 36.2 |
|
| $ | 131.8 |
|
| $ | 193.6 |
|
| $ | (61.8 | ) |
Consolidated EBITDA |
|
| 339.8 |
|
|
| 294.4 |
|
|
| 45.4 |
|
|
| 224.4 |
|
|
| 376.2 |
|
|
| (151.8 | ) |
Consolidated EBITDA excluding special items |
|
| 363.9 |
|
|
| 298.9 |
|
|
| 65.0 |
|
|
| 299.0 |
|
|
| 376.2 |
|
|
| (77.2 | ) |
Packaging EBITDA |
|
| 340.2 |
|
|
| 251.6 |
|
|
| 88.6 |
|
|
| 293.6 |
|
|
| 348.6 |
|
|
| (55.0 | ) |
Packaging EBITDA excluding special items |
|
| 341.3 |
|
|
| 256.0 |
|
|
| 85.3 |
|
|
| 312.5 |
|
|
| 348.6 |
|
|
| (36.1 | ) |
Paper EBITDA |
|
| 16.4 |
|
|
| 59.2 |
|
|
| (42.8 | ) |
|
| (51.0 | ) |
|
| 48.2 |
|
|
| (99.2 | ) |
Paper EBITDA excluding special items |
|
| 39.4 |
|
|
| 59.3 |
|
|
| (19.9 | ) |
|
| 4.7 |
|
|
| 48.2 |
|
|
| (43.5 | ) |
(a) | See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 2 for a reconciliation of non-GAAP measures to the most comparable GAAP measure. |
Net Sales
Net sales increased $156decreased $218 million, or 10.5%12.4%, to $1,640$1,542 million during the three months ended SeptemberJune 30, 2017,2020, compared to $1,484$1,760 million during the same period in 2016.2019.
Packaging. Net sales increased $180decreased $95 million, or 15.4%6.3%, to $1,347$1,410 million, compared to $1,167$1,505 million in the thirdsecond quarter of 2016,2019 due to higher domestic and exportlower containerboard and corrugated products prices and mix ($12197 million) and increased, partially offset by higher containerboard and corrugated products volume ($592 million). OurIn the second quarter of 2020, our domestic containerboard prices were 7.7% lower, while export prices were 15.4% lower, than the same period in 2019. In the thirdsecond quarter of 2017 increased 14.8%,2020, export and export prices increased 21.3%, domestic containerboard outside shipments decreased 7.1% compared to the second quarter of 2019. Total corrugated products shipments were up 1.2% with the same number of workdayscompared to the same period in 2016. In the third quarter of 2017, our containerboard outside shipments increased 5.7%, and total corrugated products shipments were up 4.0%, compared to the third quarter of 2016. Containerboard mill production in the third quarter of 2017 was 996,000 tons compared to 950,000 in 2016. Prices for corrugating medium reported by trade publications increased by $30 per ton during the third quarter of 2017.2019.
Paper. Net sales during the three months ended SeptemberJune 30, 20172020 decreased $21$115 million, or 7.3%48.1%, to $271$123 million, compared to $293$238 million in the thirdsecond quarter of 2016,2019, due to lower pulpdecreased volume ($12109 million) as a result of the 2016 shutdown of our market pulp operations at our Wallula Mill,and lower white paper volume ($2 million), and unfavorable changes in prices and mix ($76 million)., primarily related to the COVID-19 pandemic.
Gross Profit
Gross profit increased $68decreased $102 million during the three months ended SeptemberJune 30, 2017,2020, compared to the same period in 2016.2019. The increasedecrease was driven primarily by higher containerboard and corrugated productslower prices and mix in our Packaging and salesPaper segments, and productionlower volumes in our Paper segment. These items were partially offset by lower Paper segment pricesoperating costs, lower annual outage expenses, lower converting costs, lower freight expense, and mix and sales and production volumes, and higher input and operatingother costs. In the three months ended SeptemberJune 30, 2017,2020, gross profit included $6 million of special items of $3 millionfor incremental out-of-pocket costs related to the conversionCOVID-19 pandemic, including supplies, cleaning and sick pay, and $3 million of accelerated depreciation associated with the No. 3 machine at the Wallula Mill, compared to $1 millionclosure of our San Lorenzo, California facility. There were no significant special items in the same period last year for acquisition related costs and facility closure costs.three months ended June 30, 2019.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased $13(“SG&A”) decreased $7 million during the three months ended SeptemberJune 30, 2017,2020, compared to the same period in 2016.2019. The increasedecrease was primarily due to higher administrative costs corresponding to the TimBarlower travel and Columbus Container acquisitions.entertainment expenses and employee compensation and fringes.
Other Income (Expense), NetGoodwill Impairment
Other income (expense), net, duringDuring the three months ended SeptemberJune 30, 20172020, with the exacerbated deterioration in uncoated freesheet market conditions and the estimated impact on our Paper reporting unit arising from the COVID-19 pandemic, as well as projected future results of operations, we identified a triggering event indicating possible impairment of goodwill within our Paper reporting unit. The Company performed an interim quantitative impairment analysis as of May 31, 2020, and, based on the evaluation performed, we determined that goodwill was $25 millionfully impaired for the Paper reporting unit and recognized a non-cash impairment charge of $55 million.
Other Expense, Net
Other expense, compared to $6 million of expense duringnet, for the three months ended SeptemberJune 30, 2016. The third quarter of 2017 included $23 million of charges related to the conversion of the No. 3 machine at the Wallula Mill,2020 and $4 million for asset disposals and write-offs, partially offset by $3 million of property damage and business interruption insurance net recoveries related to the February 2017 incident at our DeRidder Mill. The third quarter of 2016 included $4 million of closure costs related to corrugated products facilities and integration costs related to the recent acquisitions, and $1 million of asset disposals and write-offs. 2019 are set forth below (dollars in millions):
|
| Three Months Ended |
| |||||
|
| June 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Asset disposals and write-offs |
| $ | (5.0 | ) |
| $ | (4.5 | ) |
Facilities closure and other costs |
|
| (13.3 | ) |
|
| — |
|
Wallula mill restructuring |
|
| — |
|
|
| — |
|
Other |
|
| 0.1 |
|
|
| 0.7 |
|
Total |
| $ | (18.2 | ) |
| $ | (3.8 | ) |
We discuss these items in more detail in Note 4,5, Other Income (Expense),Expense, Net, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in “Part I, Item1.Item 1. Financial Statements” of this Form 10-Q.
Income from Operations
Income from operations increased $36decreased $164 million, or 17.4%58.6%, during the three months ended SeptemberJune 30, 2017,2020, compared to the same period in 2016.2019. The thirdsecond quarter of 20172020 included $27$82 million of special items expense for special itemsPaper reporting unit goodwill impairment, facility closures, and incremental, out-of-pocket costs related to COVID-19, compared to $5 million in the same period in 2016. Theno special items in the thirdsecond quarter of 2017 consist of $25 million of charges related to the previously announced conversion of the Wallula No. 3 paper machine to a virgin kraft linerboard machine, and $2 million for facility closure costs related to corrugated products facilities and a paper administration facility, and integration costs related to recent acquisitions. Third quarter 2016 special items of $5 million related to closing a corrugated manufacturing facility and a paper distribution center and integration related costs for recent acquisitions.2019.
Packaging. Packaging segment income from operations increased $82decreased $66 million to $262$198 million, compared to $180$264 million during the three months ended SeptemberJune 30, 2016.2019. The increase in the third quarter of 2017decrease related primarily to favorable changes inlower containerboard and corrugated products prices and mix ($8883 million), and higher containerboard and corrugated products sales and production volumesdepreciation expense ($17 million), lower wood costs ($5 million), and a partial insurance recovery related to the DeRidder Mill incident ($34 million), partially offset by higherlower operating and converting costs for recycled fiber ($1535 million), laborlower annual outage expense ($6 million), chemicalsand lower freight expenses ($2 million), repairs ($2 million), energy ($1 million), converting costs ($1 million), freight ($2 million), and higher depreciation expense ($35 million). Special items during the thirdsecond quarter of 20172020 included expense$20 million of $1facility closure costs and $6 million of incremental, out-of-pocket costs related to closure costs for corrugated products facilities and integration costs forCOVID-19, compared to no special items in the recent acquisitions. Special items forPackaging segment in the thirdsecond quarter 2016 included expense of $5 million related to integration costs and closing a corrugated manufacturing facility.2019.
Paper. Paper segment income from operations decreased $45$100 million to a loss of $1$61 million, compared to income of $45$39 million during the three months ended SeptemberJune 30, 2016.2019. The decrease primarily related to unfavorable changes in prices and mix ($7 million), lower sales and production volumes ($50 million), lower prices and mix ($6 million), partially offset by lower operating costs ($7 million), higher energylower annual outage expenses ($27 million), and higher mill outage ($2 million) and freight ($1 million) expense.. Special items during the thirdsecond quarter of 20172020 included expense$55 million of $25goodwill impairment and $1 million of incremental, out-of-pocket costs related to the conversion of the Wallula No. 3 machineCOVID-19, compared to a virgin kraft linerboard machine. There were no special items in the same periodPackaging segment in the second quarter of 2016. Excluding special items, income from operations decreased $20 million. 2019.
Non-Operating Pension Expense, Interest Expense, Net and Income Taxes
InterestNon-operating pension expense net, increased $2decreased $3 million during the three months ended SeptemberJune 30, 2017,2020, compared to the same period in 2016.2019. The decrease in non-operating pension expense was primarily related to the favorable 2019 asset performance, partially offset by assumption changes.
Interest expense, net increased $3 million during the three months ended June 30, 2020, compared to the same period in 2019. The increase in interest expense, net was primarily related to higher earnings on deferred compensation balances in the second quarter of 2020, lower interest income due to higher interestlower rates on PCA’s variable rate debtinvested cash balances in the thirdsecond quarter of 20172020, partially offset by no treasury lock amortization due to increasesthe write-off of the remaining balances of treasury locks in LIBOR andconnection with the interest paid on term loan borrowings for the TimBar acquisition madeCompany’s debt refinancing completed in August 2016.December 2019.
During the three months ended SeptemberJune 30, 2017,2020, we recorded $78$35 million of income tax expense, compared to $64$62 million of expense during the three months ended SeptemberJune 30, 2016.2019. The effective tax rate for the three months ended SeptemberJune 30, 20172020 and 20162019 was 35.9%38.2% and 34.8%24.4%, respectively. The increase in our effective tax rate forwas primarily due to the nondeductible goodwill impairment charge associated with our Paper reporting unit slightly offset by the favorable impact of employee restricted stock and performance unit vests with higher excess tax benefits (ASU 2016-09) during the three months ended SeptemberJune 30, 20172020 compared to the same period in 2016, was primarily due to an internal legal entity consolidation that will simplify future operating activities and resulted in $3 million of tax expense for the change in value of deferred taxes.June 30, 2019.
Six Months Ended SeptemberJune 30, 2017,2020, compared to NineSix Months Ended SeptemberJune 30, 20162019
The historical results of operations of PCA for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 are set forth below (dollars in millions):
|
| Nine Months Ended |
|
|
|
|
|
| Six Months Ended |
|
|
|
|
| ||||||||||
|
| September 30, |
|
|
|
|
|
| June 30, |
|
|
|
|
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| Change |
|
| 2020 |
|
| 2019 |
|
| Change |
| ||||||
Packaging |
| $ | 3,915.0 |
|
| $ | 3,387.9 |
|
| $ | 527.1 |
|
| $ | 2,877.4 |
|
| $ | 2,982.2 |
|
| $ | (104.8 | ) |
Paper |
|
| 784.3 |
|
|
| 840.1 |
|
|
| (55.8 | ) |
|
| 340.7 |
|
|
| 477.5 |
|
|
| (136.8 | ) |
Corporate and Other |
|
| 171.2 |
|
|
| 185.6 |
|
|
| (14.4 | ) |
|
| 110.7 |
|
|
| 112.5 |
|
|
| (1.8 | ) |
Intersegment eliminations |
|
| (109.9 | ) |
|
| (111.2 | ) |
|
| 1.3 |
|
|
| (78.5 | ) |
|
| (78.6 | ) |
|
| 0.1 |
|
Net sales |
| $ | 4,760.6 |
|
| $ | 4,302.4 |
|
| $ | 458.2 |
|
| $ | 3,250.3 |
|
| $ | 3,493.6 |
|
| $ | (243.3 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Packaging |
| $ | 676.8 |
|
| $ | 533.5 |
|
| $ | 143.3 |
|
| $ | 397.5 |
|
| $ | 513.4 |
|
| $ | (115.9 | ) |
Paper |
|
| 58.1 |
|
|
| 105.0 |
|
|
| (46.9 | ) |
|
| (29.0 | ) |
|
| 84.4 |
|
|
| (113.4 | ) |
Corporate and Other |
|
| (55.7 | ) |
|
| (51.1 | ) |
|
| (4.6 | ) |
|
| (43.3 | ) |
|
| (42.0 | ) |
|
| (1.3 | ) |
Income from operations |
| $ | 679.2 |
|
| $ | 587.4 |
|
| $ | 91.8 |
|
| $ | 325.2 |
|
| $ | 555.8 |
|
| $ | (230.6 | ) |
Non-operating pension income (expense) |
|
| 1.1 |
|
|
| (4.1 | ) |
|
| 5.2 |
| ||||||||||||
Interest expense, net |
|
| (74.6 | ) |
|
| (67.5 | ) |
|
| (7.1 | ) |
|
| (44.6 | ) |
|
| (46.4 | ) |
|
| 1.8 |
|
Income before taxes |
|
| 604.6 |
|
|
| 519.9 |
|
|
| 84.7 |
|
|
| 281.7 |
|
|
| 505.3 |
|
|
| (223.6 | ) |
Income tax provision |
|
| (204.9 | ) |
|
| (181.0 | ) |
|
| (23.9 | ) |
|
| (83.4 | ) |
|
| (124.9 | ) |
|
| 41.5 |
|
Net income |
| $ | 399.7 |
|
| $ | 338.9 |
|
| $ | 60.8 |
|
| $ | 198.3 |
|
| $ | 380.4 |
|
| $ | (182.1 | ) |
Non-GAAP Measures (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income excluding special items |
| $ | 422.0 |
|
| $ | 345.9 |
|
| $ | 76.1 |
|
| $ | 274.3 |
|
| $ | 380.9 |
|
| $ | (106.6 | ) |
Consolidated EBITDA |
|
| 962.9 |
|
|
| 851.7 |
|
|
| 111.2 |
|
|
| 533.7 |
|
|
| 746.4 |
|
|
| (212.7 | ) |
Consolidated EBITDA excluding special items |
|
| 991.0 |
|
|
| 861.5 |
|
|
| 129.5 |
|
|
| 609.5 |
|
|
| 746.8 |
|
|
| (137.3 | ) |
Packaging EBITDA |
|
| 911.0 |
|
|
| 750.8 |
|
|
| 160.2 |
|
|
| 582.3 |
|
|
| 682.2 |
|
|
| (99.9 | ) |
Packaging EBITDA excluding special items |
|
| 916.8 |
|
|
| 759.4 |
|
|
| 157.4 |
|
|
| 602.3 |
|
|
| 682.4 |
|
|
| (80.1 | ) |
Paper EBITDA |
|
| 103.2 |
|
|
| 148.2 |
|
|
| (45.0 | ) |
|
| (9.1 | ) |
|
| 102.9 |
|
|
| (112.0 | ) |
Paper EBITDA excluding special items |
|
| 126.2 |
|
|
| 149.1 |
|
|
| (22.9 | ) |
|
| 46.7 |
|
|
| 103.1 |
|
|
| (56.4 | ) |
_____________________
(a) | See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 2 for a reconciliation of non-GAAP measures to the most comparable GAAP measure. |
Net Sales
Net sales increased $458decreased $243 million, or 10.6%7.0%, to $4,761$3,250 million during the ninesix months ended SeptemberJune 30, 2017,2020, compared to $4,302$3,494 million during the same period in 2016.
2019.
Packaging. Net sales increased $527decreased $105 million, or 15.6%3.5%, to $3,915$2,877 million, compared to $3,388$2,982 million in the ninesix months ended SeptemberJune 30, 2016,2019, due to higher containerboard and corrugated products volume ($315 million) and higher domestic and exportlower containerboard and corrugated products prices and mix ($212191 million), partially offset by higher containerboard and corrugated products volume ($86 million). OurIn the first six months of 2020, our domestic containerboard prices were 7.8% lower, while export prices were 20.5% lower, than the same period in 2019. In the first ninesix months of 20172020, export and domestic containerboard outside shipments increased 11.6% reflecting higher prices reported by trade publications. Additionally, our export containerboard prices increased 12.0%,2.7% compared to the first six months of 2019. Total corrugated products shipments were up 3.4% with one additional workday, and up 2.6% per day compared to the same period in 2016. In the first nine months of 2017, our containerboard outside shipments increased 4.7%, and corrugated products shipments were up 8.1% compared to the first nine months of 2016.2019.
Paper. Net sales during the ninesix months ended SeptemberJune 30, 20172020 decreased $56$137 million, or 6.6%28.6%, to $784$341 million, compared to $840$478 million in the ninesix months ended SeptemberJune 30, 2016. Sales decreased2019, due to lower pulpdecreased volume ($38126 million) as a result of the 2016 shutdown of our market pulp operations at our Wallula Mill,and lower white paper volume ($16 million), and unfavorable changes in prices and mix ($212 million).
, primarily related to the COVID-19 pandemic.
Gross Profit
Gross profit increased $152decreased $159 million or 16.0%, during the ninesix months ended SeptemberJune 30, 2017,2020, compared to the same period in 2016.2019. The increasedecrease was driven primarily due to higher containerboard and corrugated productsby lower prices and mix in our Packaging and sales and production volumes,Paper segments, lower volume in our Paper segment, partially offset by higher volumes in our Packaging segment, lower Paper segment salesoperating and production volumesconverting costs, lower annual outage expense, and priceslower freight and mix, and higher input and operating costs.logistic expenses. In the first ninesix months of 2017,ended June 30, 2020, gross profit included $7 million of special items of $3 millionfor incremental out-of-pocket costs related to the conversionCOVID-19 pandemic, including supplies, cleaning and sick pay, and $3 million of accelerated depreciation associated with the No. 3 machine at the Wallula Mill, compared to $2 millionclosure of our San Lorenzo, California facility. There were no significant special items in the same period last year for acquisition related costs and facility closure costs.six months ended June 30, 2019.
22
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased $43(“SG&A”) decreased $2 million or 12.4% during the ninesix months ended SeptemberJune 30, 2017,2020, compared to the same period in 2016.2019. The increasedecrease was primarily due to higher administrative costs corresponding tolower employee compensation and fringes and travel and entertainment expenses.
Goodwill Impairment
During the TimBarsix months ended June 30, 2020, with the exacerbated deterioration in uncoated freesheet market conditions and Columbus Container acquisitions.
the estimated impact on our Paper reporting unit arising from the COVID-19 pandemic, as well as projected future results of operations, we identified a triggering event indicating possible impairment of goodwill within our Paper reporting unit. The Company performed an interim quantitative impairment analysis as of May 31, 2020, and, based on the evaluation performed, we determined that goodwill was fully impaired for the Paper reporting unit and recognized a non-cash impairment charge of $55 million.
Other Income (Expense),Expense, Net
Other expense, net, duringfor the ninesix months ended SeptemberJune 30, 2017 was $32 million, compared to $15 million during the nine months ended September 30, 2016. The nine months ended September 30, 2017 included charges of $23 million for charges related to the conversion of the No. 3 machine at the Wallula Mill; $9 million for asset disposals2020 and write-offs; $3 million of charges consisting of closure costs related to corrugated products facilities, integration costs related to the recent acquisitions, and costs related to lump sum settlement payments for multiemployer pension plan withdrawal liability; and $2 million of income related to a working capital adjustment from the April 2015 sale of our Hexacomb corrugated manufacturing operations2019 are set forth below (dollars in Europe and Mexico. The nine months ended September 30, 2016 included $6 million of charges consisting of closure costs related to corrugated products facilities and a paper distribution facility and costs related to our withdrawal from a multiemployer pension plan, $2 million of acquisition-related costs for the TimBar Corporation, and $4 million of asset disposal and write-offs. millions):
|
| Six Months Ended |
| |||||
|
| June 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Asset disposals and write-offs |
| $ | (11.0 | ) |
| $ | (8.8 | ) |
Facilities closure and other costs |
|
| (13.7 | ) |
|
| — |
|
Wallula mill restructuring |
|
| — |
|
|
| (0.4 | ) |
Other |
|
| (3.4 | ) |
|
| (0.6 | ) |
Total |
| $ | (28.1 | ) |
| $ | (9.8 | ) |
We discuss these items in more detail in Note 4,5, Other Income (Expense),Expense, Net, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part“Part I, Item1.Item 1. Financial Statements"Statements” of this Form 10-Q.
Income from Operations
Income from operations increased $92decreased $231 million, or 15.6%41.5%, during the ninesix months ended SeptemberJune 30, 2017,2020, compared to the same period in 2016.2019. The first ninesix months of 20172020 included $31$83 million of pre-taxspecial items expense for Paper reporting unit goodwill impairment; incremental, out-of-pocket costs related to COVID-19; and facility closure costs, compared to less than $1 million of expense for special items comparedrelated to $11 million of pre-tax expense for special items duringWallula Mill restructuring in the same period in 2016. The nine months ended September 30, 2017 included $25 million of charges related to the previously announced conversion of the Wallula No. 3 paper machine to a virgin kraft linerboard machine; $5 million for the property damage and business interruption insurance deductible related to the DeRidder Mill incident; $3 million of closure costs related to corrugated products facilities and a paper administration facility, integration costs related to the recent acquisitions, and costs related to a lump sum settlement payment for a multiemployer pension plan withdrawal liability; and $2 million of income related to a working capital adjustment from the April 2015 sale of our Hexacomb corrugated manufacturing operations in Europe and Mexico. The nine months ended September 30, 2016 included $7 million of facility closure costs related to corrugated products facilities and a paper distribution facility and $4 million of acquisition-related costs for the TimBar Corporation, and costs related to our withdrawal from a multiemployer pension plan.
2019.
Packaging. Packaging segment income from operations increased $143decreased $116 million to $677$398 million during the first ninesix months of 20172020, compared to the same period last year. The first nine months of 2017 included higherdecrease related primarily to lower containerboard and corrugated products prices and mix ($148164 million), higher sales and production volumes ($63 million), a partial insurance recovery related to the DeRidder Mill incident ($7 million), and lower mill outage costs ($2 million), partially offset by higher costs for recycled fiber ($38 million), energy ($10 million), labor ($12 million), freight ($8 million), and higher depreciation expense ($9 million). Special items included $5 million of expense for the property damage, partially offset by lower operating and business interruption insurance deductible related to the DeRidder Mill incident; $3 million of charges consisting of closureconverting costs related to corrugated products facilities, integration costs related to the recent acquisitions, and costs related to a lump sum settlement payment for a multiemployer pension plan withdrawal liability; and $2 million of income related to a working capital adjustment from the April 2015 sale of our Hexacomb corrugated manufacturing operations in Europe and Mexico in the first nine months of 2017. The nine months ended September 30, 2016 included $6 million of charges consisting of closure costs related to corrugated products facilities and our withdrawal from a multiemployer pension plan and $3 million of TimBar acquisition-related costs. Excluding special items, income from operations increased $140 million.
Paper. Paper segment income from operations decreased $47 million to $58 million, compared to the nine months ended September 30, 2016. The decrease primarily relates to lower paper($51 million), higher sales and production volumes ($18 million), lower paperannual outage expenses ($7 million), and lower freight expenses ($7 million). Special items during the first six months of 2020 included $21 million of facility closure costs and $6 million of incremental, out-of-pocket costs related to COVID-19, compared to an insignificant amount of special items in the Packaging segment in the first six months of 2019.
Paper. Paper segment income from operations decreased $113 million to a loss of $29 million, compared to the six months ended June 30, 2019. The decrease primarily related to lower sales and production volumes ($54 million), lower prices and mix ($312 million), and higher costs for energyfreight and other expenses ($115 million), partially offset by lower fiberoperating costs ($810 million) and lower millannual outage costsexpenses ($2 million). Special items during the first ninesix months of 20172020 included expense$55 million of $25goodwill impairment and $1 million of incremental, out-of-pocket costs related to the conversionCOVID-19. There were an insignificant amount of the Wallula No. 3 machine to containerboard, compared to $2 million of facility closure costs for the same period in 2016. Excluding special items income from operations decreased $23 million.in the Paper segment in the first six months of 2019.
Non-Operating Pension Expense, Interest Expense, Net and Income Taxes
InterestNon-operating pension expense net, was $75decreased $5 million during the ninesix months ended SeptemberJune 30, 2017, compared to $68 million during the nine months ended September 30, 2016. The increase in interest expense was primarily due to interest on term loan borrowings for the TimBar acquisition made in August 2016 and higher interest rates on PCA's variable rate debt due to increases in LIBOR during the nine months ended September 30, 20172020, compared to the same period in 2016.2019. The decrease in non-operating pension expense was primarily related to the favorable 2019 asset performance, partially offset by assumption changes.
Interest expense, net decreased $2 million during the six months ended June 30, 2020, compared to the same period in 2019. The decrease in interest expense, net was primarily related to no treasury lock amortization due to the write-off of the remaining balances of treasury locks in connection with the Company’s debt refinancing completed in December 2019 and lower earnings on deferred compensation balances in 2020, partially offset by higher interest rates on the notes issued in November 2019, net of interest on the notes redeemed in December 2019.
During the ninesix months ended SeptemberJune 30, 2017,2020, we recorded $205$83 million of income tax expense, compared to $181$125 million of expense during the ninesix months ended SeptemberJune 30, 2016.2019. The effective tax rate for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 was 33.9%29.6% and 34.8%24.7%, respectively. The decreaseincrease in our effective tax rate for the nine months ended September 30, 2017 compared to the
same period in 2016, was primarily due to the adoptionnondeductible goodwill impairment charge associated with our Paper reporting unit slightly offset by the favorable impact of ASU 2016-09 (Topic 718): Improvements to Employee Share-Based Payment Accounting, which requires allemployee restricted stock and performance unit vests with higher excess tax benefits and deficiencies from employee share-based payment awards(ASU 2016-09) during the six months ended June 30, 2020 compared to be recognized in the income statement as opposed to additional paid in capital. This was partially offset by the tax expense from the internal legal entity consolidation.June 30, 2019.
23
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 SeptemberJune 30, 20172020, we had $371$853 million of cash and $327cash equivalents, $123 million of marketable debt securities, and $326millionof unused borrowing capacity under the revolving credit facility, net of letters of credit. We paid the $265 million cash purchase price for the Sacramento Container acquisition on October 2, 2017 from cash on hand. Currently, our primary uses of cash are for operations, capital expenditures, acquisitions, debt service, (including voluntary payments of debt),common stock dividends, and repurchases of common stock, and declared common stock dividends.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):
|
| Nine Months Ended |
|
|
|
|
|
| Six Months Ended |
|
|
|
|
| ||||||||||
|
| September 30, |
|
|
|
|
|
| June 30, |
|
|
|
|
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| Change |
|
| 2020 |
|
| 2019 |
|
| Change |
| ||||||
Net cash provided by (used for): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
| $ | 583.3 |
|
| $ | 593.5 |
|
| $ | (10.2 | ) |
| $ | 463.5 |
|
| $ | 538.4 |
|
| $ | (74.9 | ) |
Investing activities |
|
| (227.6 | ) |
|
| (582.7 | ) |
|
| 355.1 |
|
|
| (128.8 | ) |
|
| (172.8 | ) |
|
| 44.0 |
|
Financing activities |
|
| (224.5 | ) |
|
| 84.8 |
|
|
| (309.3 | ) |
|
| (160.9 | ) |
|
| (157.7 | ) |
|
| (3.2 | ) |
Net increase in cash and cash equivalents |
| $ | 131.2 |
|
| $ | 95.6 |
|
| $ | 35.6 |
|
| $ | 173.8 |
|
| $ | 207.9 |
|
| $ | (34.1 | ) |
Operating Activities
During the nine months ended September 30, 2017, netOur operating cash providedflow is primarily driven by operating activities was $583 million, compared to $593 million in the same period in 2016, a decrease of $10 million. Cash from operations excludingour earnings and changes in cash used for operating assets and liabilities, increased $106 million, primarily due to higher income from operationssuch as discussed above. The increase was offset by $116 million of cash used for operating assets and liabilities primarily due to the following: (a) an increase in accounts receivable, in the first nine months of 2017, primarily related to higher sales volumesinventories, accounts payable and prices in the Packaging segment, and (b) an increase in inventories in both the Packaging and Paper segments in anticipation of the four mill outages in the fourth quarter of 2017other accrued liabilities, as well as additional inventory build in Packaging segment as we begin the integration of the Sacramento Container acquisition that we purchased in early October 2017. This was partially offset by an increase in accounts payable, primarily related to timing of payments in the third quarter of 2017.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 six months ended June 30, 2020, net cash provided by operating activities was $463 million, compared to $538 million in the same period in 2019, a decrease of $75 million. Cash from operations excluding changes in cash used for operating assets and liabilities decreased $127 million, primarily due to lower income from operations as discussed above. Cash increased by $52 million due to changes in operating assets and liabilities, primarily due to the following:
a) | a decrease in accounts receivables primarily due to a reduction in Paper segment sales resulting from the pandemic, |
b) | a smaller decrease in accrued liabilities for 2020 compared to 2019 primarily related to lower payouts and higher accruals for employee compensation and benefits liabilities for the first half of 2020, and |
c) | lower Federal and state income taxes paid in the first six months of 2020 compared to 2019, partially offset by a lower income tax provision in 2020 compared to 2019 due to lower income levels in 2020. |
These favorable changes were partially offset by the following:
a) | a larger increase in inventory levels in 2020 compared to 2019 due to higher Paper segment finished goods levels in 2020 as a result of lower sales resulting from the pandemic, as well as an increase in 2020 fiber levels in the Packaging segment compared to 2019, and |
b) | a larger decrease in accounts payable levels in 2020 compared to 2019 primarily due to the curtailment of the Jackson Mill in the second quarter of 2020. |
Investing Activities
Net cashWe used $129 million for investing activities during the ninesix months ended SeptemberJune 30, 2017 decreased $355 million, to $228 million,2020 compared to $583$173 million during the same period in 2016, primarily due to an acquisition we made in the prior year. During the third quarter of 2016 we acquired TimBar2019. We spent $151 million for a purchase price of $386 million, net of cash acquired. We also spent $226 million forinternal capital investments during the ninesix months ended SeptemberJune 30, 2017,2020, compared to $188$171 million during the same period in 2016.2019. We also received $23 million from redemptions of marketable debt securities, net of purchases during the six months ended June 30, 2020.
We expect capital investments in 2020 to be approximately $370between $400 million in 2017,and $425 million, not including $30 million for the Wallula mill paper machine conversion. On October 2, 2017, we acquired the assets of Sacramento Container Corporation and the membership interests of Northern Sheets, LLC and Central California Sheets, LLC for $265 million.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 Boiler MACTenvironmental regulations in 2017 of up to $1 million, and we expect other environmental capital expenditures ofwill be about $7$10 million in 2017.2020. Our estimated environmental expenditures could vary significantly depending upon the enactment of new environmental laws and
24
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 20162019 Annual Report on Form 10-K.
Financing Activities
During the ninesix months ended SeptemberJune 30, 2017,2020, net cash used byfor financing activities changed by $309 million to a use of $225was $161 million, compared to a source of $85$158 million during the same period in 2016. The decrease primarily relates to 2016 borrowings of $385 million to finance the TimBar acquisition in August 2016. Additionally, we have not repurchased common stock in 2017, have increased debt
repayments in 2017 and have paid out higher dividends in 2017. During the nine months ended September 30, 2017 we did not repurchase any common stock, compared to $100 million in the same period in 2016.2019. In the first ninesix months of 2017, we made $36 million of principal payments on long-term debt and capital leases, compared to $31 million during the same period in 2016. In the first nine months of 2017,2020 we paid $178$150 million of dividends compared to $157with $149 million of dividends paid during the first ninesix months of 2016.2019.
For more information about our debt, see Note 9,11, Debt, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 20162019 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 20162019 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 ninesix months ended SeptemberJune 30, 20172020 and 20162019 follow (dollars in millions):
|
| Three Months Ended September 30, |
| |||||||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| Income before Taxes |
|
| Income Taxes |
|
| Net Income |
|
| Income before Taxes |
|
| Income Taxes |
|
| Net Income |
| ||||||
As reported in accordance with GAAP |
| $ | 216.9 |
|
| $ | (77.8 | ) |
| $ | 139.1 |
|
| $ | 183.0 |
|
| $ | (63.7 | ) |
| $ | 119.3 |
|
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wallula mill restructuring (a) |
|
| 25.3 |
|
|
| (9.8 | ) |
|
| 15.5 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Internal legal entity consolidation (b) |
|
| — |
|
|
| 3.3 |
|
|
| 3.3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Facilities closure and other costs (a)(d) |
|
| 0.9 |
|
|
| (0.3 | ) |
|
| 0.6 |
|
|
| 2.0 |
|
|
| (0.6 | ) |
|
| 1.4 |
|
Acquisition and integration related costs (a)(d) |
|
| 0.5 |
|
|
| (0.2 | ) |
|
| 0.3 |
|
|
| 2.9 |
|
|
| (1.0 | ) |
|
| 1.9 |
|
Total special items |
|
| 26.7 |
|
|
| (7.0 | ) |
|
| 19.7 |
|
|
| 4.9 |
|
|
| (1.6 | ) |
|
| 3.3 |
|
Excluding special items |
| $ | 243.6 |
|
| $ | (84.8 | ) |
| $ | 158.8 |
|
| $ | 187.9 |
|
| $ | (65.3 | ) |
| $ | 122.6 |
|
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| Income before Taxes |
|
| Income Taxes |
|
| Net Income |
|
| Income before Taxes |
|
| Income Taxes |
|
| Net Income |
| ||||||
As reported in accordance with GAAP |
| $ | 604.6 |
|
| $ | (204.9 | ) |
| $ | 399.7 |
|
| $ | 519.9 |
|
| $ | (181.0 | ) |
| $ | 338.9 |
|
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wallula mill restructuring (a) |
|
| 25.3 |
|
|
| (9.7 | ) |
|
| 15.6 |
|
|
| — |
|
|
| — |
|
|
| — |
|
DeRidder mill incident (c) |
|
| 5.0 |
|
|
| (1.9 | ) |
|
| 3.1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Internal legal entity consolidation (b) |
|
| — |
|
|
| 3.3 |
|
|
| 3.3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Facilities closure and other costs (a)(d) |
|
| 1.9 |
|
|
| (0.7 | ) |
|
| 1.2 |
|
|
| 7.4 |
|
|
| (2.5 | ) |
|
| 4.9 |
|
Acquistion and integration related costs (a)(d) |
|
| 0.8 |
|
|
| (0.3 | ) |
|
| 0.5 |
|
|
| 3.2 |
|
|
| (1.1 | ) |
|
| 2.1 |
|
Hexacomb working capital adjustment (c) |
|
| (2.3 | ) |
|
| 0.9 |
|
|
| (1.4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Total special items |
|
| 30.7 |
|
|
| (8.4 | ) |
|
| 22.3 |
|
|
| 10.6 |
|
|
| (3.6 | ) |
|
| 7.0 |
|
Excluding special items |
| $ | 635.3 |
|
| $ | (213.3 | ) |
| $ | 422.0 |
|
| $ | 530.5 |
|
| $ | (184.6 | ) |
| $ | 345.9 |
|
|
| Three Months Ended June 30, |
| |||||||||||||||||||||
|
| 2020 |
|
| 2019 |
| ||||||||||||||||||
|
| Income before Taxes |
|
| Income Taxes |
|
| Net Income |
|
| Income before Taxes |
|
| Income Taxes |
|
| Net Income |
| ||||||
As reported in accordance with GAAP |
| $ | 91.6 |
|
| $ | (34.9 | ) |
| $ | 56.7 |
|
| $ | 256.0 |
|
| $ | (62.4 | ) |
| $ | 193.6 |
|
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment (a) |
|
| 55.2 |
|
|
| — |
|
|
| 55.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Facilities closure and other costs (b) |
|
| 20.4 |
|
|
| (5.1 | ) |
|
| 15.3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Incremental costs for COVID-19 (b) |
|
| 6.1 |
|
|
| (1.5 | ) |
|
| 4.6 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total special items |
|
| 81.7 |
|
|
| (6.6 | ) |
|
| 75.1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Excluding special items |
| $ | 173.3 |
|
| $ | (41.5 | ) |
| $ | 131.8 |
|
| $ | 256.0 |
|
| $ | (62.4 | ) |
| $ | 193.6 |
|
____________
|
| Six Months Ended June 30, |
| |||||||||||||||||||||
|
| 2020 |
|
| 2019 |
| ||||||||||||||||||
|
| Income before Taxes |
|
| Income Taxes |
|
| Net Income |
|
| Income before Taxes |
|
| Income Taxes |
|
| Net Income |
| ||||||
As reported in accordance with GAAP |
| $ | 281.7 |
|
| $ | (83.4 | ) |
| $ | 198.3 |
|
| $ | 505.3 |
|
| $ | (124.9 | ) |
| $ | 380.4 |
|
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment (a) |
|
| 55.2 |
|
|
| — |
|
|
| 55.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Facilities closure and other costs (b) |
|
| 20.8 |
|
|
| (5.2 | ) |
|
| 15.6 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Incremental costs for COVID-19 (b) |
|
| 6.9 |
|
|
| (1.7 | ) |
|
| 5.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Wallula mill restructuring (c) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.6 |
|
|
| (0.1 | ) |
|
| 0.5 |
|
Total special items |
|
| 82.9 |
|
|
| (6.9 | ) |
|
| 76.0 |
|
|
| 0.6 |
|
|
| (0.1 | ) |
|
| 0.5 |
|
Excluding special items |
| $ | 364.6 |
|
| $ | (90.3 | ) |
| $ | 274.3 |
|
| $ | 505.9 |
|
| $ | (125.0 | ) |
| $ | 380.9 |
|
(a) | Includes $55.2 million of non-cash impairment charges related to the Paper reporting unit goodwill impairment. |
(b) | The three and |
25
| 1. | $ |
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles net income to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Net income |
| $ | 139.1 |
|
| $ | 119.3 |
|
| $ | 399.7 |
|
| $ | 338.9 |
|
| $ | 56.7 |
|
| $ | 193.6 |
|
| $ | 198.3 |
|
| $ | 380.4 |
|
Non-operating pension (income) expense |
|
| (0.6 | ) |
|
| 2.0 |
|
|
| (1.1 | ) |
|
| 4.1 |
| ||||||||||||||||
Interest expense, net |
|
| 25.4 |
|
|
| 23.4 |
|
|
| 74.6 |
|
|
| 67.5 |
|
|
| 25.1 |
|
|
| 22.4 |
|
|
| 44.6 |
|
|
| 46.4 |
|
Income tax provision |
|
| 77.8 |
|
|
| 63.7 |
|
|
| 204.9 |
|
|
| 181.0 |
|
|
| 34.9 |
|
|
| 62.4 |
|
|
| 83.4 |
|
|
| 124.9 |
|
Depreciation, amortization, and depletion |
|
| 97.5 |
|
|
| 88.0 |
|
|
| 283.7 |
|
|
| 264.3 |
|
|
| 108.3 |
|
|
| 95.8 |
|
|
| 208.5 |
|
|
| 190.6 |
|
EBITDA |
| $ | 339.8 |
|
| $ | 294.4 |
|
| $ | 962.9 |
|
| $ | 851.7 |
|
| $ | 224.4 |
|
| $ | 376.2 |
|
| $ | 533.7 |
|
| $ | 746.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
| 55.2 |
|
|
| — |
|
|
| 55.2 |
|
|
| — |
| ||||||||||||||||
Facilities closure and other costs |
|
| 13.3 |
|
|
| — |
|
|
| 13.7 |
|
|
| — |
| ||||||||||||||||
Incremental costs for COVID-19 |
|
| 6.1 |
|
|
| — |
|
|
| 6.9 |
|
|
| — |
| ||||||||||||||||
Wallula mill restructuring |
|
| 22.7 |
|
|
| — |
|
|
| 22.7 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.4 |
|
Facilities closure and other costs |
|
| 0.9 |
|
|
| 1.6 |
|
|
| 1.9 |
|
|
| 6.6 |
| ||||||||||||||||
Acquisition and integration related costs |
|
| 0.5 |
|
|
| 2.9 |
|
|
| 0.8 |
|
|
| 3.2 |
| ||||||||||||||||
DeRidder mill incident |
|
| — |
|
|
| — |
|
|
| 5.0 |
|
|
| — |
| ||||||||||||||||
Hexacomb working capital adjustment |
|
| — |
|
|
| — |
|
|
| (2.3 | ) |
|
| — |
| ||||||||||||||||
Total special items |
|
| 24.1 |
|
|
| 4.5 |
|
|
| 28.1 |
|
|
| 9.8 |
|
|
| 74.6 |
|
|
| — |
|
|
| 75.8 |
|
|
| 0.4 |
|
EBITDA excluding special items |
| $ | 363.9 |
|
| $ | 298.9 |
|
| $ | 991.0 |
|
| $ | 861.5 |
|
| $ | 299.0 |
|
| $ | 376.2 |
|
| $ | 609.5 |
|
| $ | 746.8 |
|
26
The following table reconciles segment income (loss) to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Packaging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income |
| $ | 261.5 |
|
| $ | 179.6 |
|
| $ | 676.8 |
|
| $ | 533.5 |
|
| $ | 197.6 |
|
| $ | 263.9 |
|
| $ | 397.5 |
|
| $ | 513.4 |
|
Depreciation, amortization, and depletion |
|
| 78.7 |
|
|
| 72.0 |
|
|
| 234.2 |
|
|
| 217.3 |
|
|
| 96.0 |
|
|
| 84.7 |
|
|
| 184.8 |
|
|
| 168.8 |
|
EBITDA |
|
| 340.2 |
|
|
| 251.6 |
|
|
| 911.0 |
|
|
| 750.8 |
|
|
| 293.6 |
|
|
| 348.6 |
|
|
| 582.3 |
|
|
| 682.2 |
|
Faclities closure and other costs |
|
| 0.6 |
|
|
| 1.5 |
|
|
| 1.6 |
|
|
| 5.7 |
| ||||||||||||||||
Acquisition and integration related costs |
|
| 0.5 |
|
|
| 2.9 |
|
|
| 0.8 |
|
|
| 2.9 |
| ||||||||||||||||
DeRidder mill incident |
|
| — |
|
|
| — |
|
|
| 5.0 |
|
|
| — |
| ||||||||||||||||
Hexacomb working capital adjustment |
|
| — |
|
|
| — |
|
|
| (1.6 | ) |
|
| — |
| ||||||||||||||||
Facilities closure and other costs |
|
| 13.3 |
|
|
| — |
|
|
| 13.7 |
|
|
| — |
| ||||||||||||||||
Incremental costs for COVID-19 |
|
| 5.6 |
|
|
| — |
|
|
| 6.3 |
|
|
| — |
| ||||||||||||||||
Wallula mill restructuring |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.2 |
| ||||||||||||||||
EBITDA excluding special items |
| $ | 341.3 |
|
| $ | 256.0 |
|
| $ | 916.8 |
|
| $ | 759.4 |
|
| $ | 312.5 |
|
| $ | 348.6 |
|
| $ | 602.3 |
|
| $ | 682.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income |
| $ | (0.7 | ) |
| $ | 44.5 |
|
| $ | 58.1 |
|
| $ | 105.0 |
|
| $ | (61.4 | ) |
| $ | 38.8 |
|
| $ | (29.0 | ) |
| $ | 84.4 |
|
Depreciation, amortization, and depletion |
|
| 17.1 |
|
|
| 14.7 |
|
|
| 45.1 |
|
|
| 43.2 |
|
|
| 10.4 |
|
|
| 9.4 |
|
|
| 19.9 |
|
|
| 18.5 |
|
EBITDA |
|
| 16.4 |
|
|
| 59.2 |
|
|
| 103.2 |
|
|
| 148.2 |
|
|
| (51.0 | ) |
|
| 48.2 |
|
|
| (9.1 | ) |
|
| 102.9 |
|
Goodwill impairment |
|
| 55.2 |
|
|
| — |
|
|
| 55.2 |
|
|
| — |
| ||||||||||||||||
Incremental costs for COVID-19 |
|
| 0.5 |
|
|
| — |
|
|
| 0.6 |
|
|
| — |
| ||||||||||||||||
Wallula mill restructuring |
|
| 22.7 |
|
|
| — |
|
|
| 22.7 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.2 |
|
Integration-related, facilities closure and other costs |
|
| 0.3 |
|
|
| 0.1 |
|
|
| 0.3 |
|
|
| 0.9 |
| ||||||||||||||||
EBITDA excluding special items |
| $ | 39.4 |
|
| $ | 59.3 |
|
| $ | 126.2 |
|
| $ | 149.1 |
|
| $ | 4.7 |
|
| $ | 48.2 |
|
| $ | 46.7 |
|
| $ | 103.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment loss |
| $ | (18.5 | ) |
| $ | (17.7 | ) |
| $ | (55.7 | ) |
| $ | (51.1 | ) |
| $ | (20.1 | ) |
| $ | (22.3 | ) |
| $ | (43.3 | ) |
| $ | (42.0 | ) |
Depreciation, amortization, and depletion |
|
| 1.7 |
|
|
| 1.3 |
|
|
| 4.4 |
|
|
| 3.8 |
|
|
| 1.9 |
|
|
| 1.7 |
|
|
| 3.8 |
|
|
| 3.3 |
|
EBITDA |
|
| (16.8 | ) |
|
| (16.4 | ) |
|
| (51.3 | ) |
|
| (47.3 | ) |
|
| (18.2 | ) |
|
| (20.6 | ) |
|
| (39.5 | ) |
|
| (38.7 | ) |
Hexacomb working capital adjustment |
|
| — |
|
|
| — |
|
|
| (0.7 | ) |
|
| — |
| ||||||||||||||||
Acquisition and integration related costs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.3 |
| ||||||||||||||||
EBITDA excluding special items |
| $ | (16.8 | ) |
| $ | (16.4 | ) |
| $ | (52.0 | ) |
| $ | (47.0 | ) |
| $ | (18.2 | ) |
| $ | (20.6 | ) |
| $ | (39.5 | ) |
| $ | (38.7 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
| $ | 339.8 |
|
| $ | 294.4 |
|
| $ | 962.9 |
|
| $ | 851.7 |
|
| $ | 224.4 |
|
| $ | 376.2 |
|
| $ | 533.7 |
|
| $ | 746.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA excluding special items |
| $ | 363.9 |
|
| $ | 298.9 |
|
| $ | 991.0 |
|
| $ | 861.5 |
|
| $ | 299.0 |
|
| $ | 376.2 |
|
| $ | 609.5 |
|
| $ | 746.8 |
|
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 SeptemberJune 30, 2017.2020. For a discussion of derivatives and hedging activities, see Note 13,16, Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 20162019 Annual Report on Form 10-K.
TheAt June 30, 2020, interest rates on approximately 63% 100%of PCA’s outstanding debt are fixed. A one percent increase in interest rates related to variable-rate debt would have resulted in an increase in interest expense and a corresponding decrease in income before taxes of approximately $10 million annually.
Off-Balance-Sheet Activities
The Company does not have any off-balance sheet arrangements as of SeptemberJune 30, 2017.2020.
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 20162019 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
27
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 20162019 Annual Report on Form 10-Ka 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 ninesix months of 2017.2020.
New and Recently Adopted Accounting Standards
For a listing of our new and recently adopted accounting standards, see Note 17,2, 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 general economic conditions; |
the impact of acquired businesses and risks and uncertainties regarding operation, expected benefits and integration of such businesses;
• | the impact of the COVID-19 pandemic on the health of our employees, on our vendors and customers and on economic conditions affecting our business; |
containerboard, corrugated products, and white paper general industry conditions, including competition, product demand, product pricing, and input costs;
• | the impact of acquired businesses and risks and uncertainties regarding operation, expected benefits and integration of such businesses; |
fluctuations in wood fiber and recycled fiber costs;
• | containerboard, corrugated products, and white paper general industry conditions, including competition, product demand, product pricing, and input costs; |
fluctuations in purchased energy costs;
• | fluctuations in wood fiber and recycled fiber costs; |
the possibility of unplanned outages or interruptions at our principal facilities;
• | fluctuations in purchased energy costs; |
the timing and amount of insurance recoveries relating to the DeRidder incident; and
• | the possibility of unplanned outages or interruptions at our principal facilities; |
legislative or regulatory actions or requirements, particularly concerning environmental or tax matters.
• | legislative or regulatory actions or requirements, particularly concerning environmental or tax matters. |
Our actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do occur, what impact they will have on our results of operations or financial condition. Given these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We expressly disclaim any obligation to publicly revise any forward-looking statements that have been made to reflect the occurrence of events after the date hereof. For a discussion of other factors, risks and uncertainties that may affect our business, see Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2016.2019, as supplemented by Part II, Item 1A. Risk Factors included in our Quarterly Report on Form 10-Q for the first quarter of 2020.
28
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.
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 SeptemberJune 30, 2017.2020. 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 SeptemberJune 30, 2017.2020.
Changes in Internal Control over Financial Reporting
On November 30, 2016, PCA acquired Columbus Container, Inc. (“Columbus Container”). We are currently in the process of evaluating and integrating Columbus Container’s controls over financial reporting which may result in changes or additions to PCA’s internal control over financial reporting. Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired company. Except as may relate to the integration of the Columbus Container acquisition, there wereThere have been no other changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the most recent fiscal quarter ended SeptemberJune 30, 20172020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
The disclosure set forth under the caption "Legal Proceedings" in Note 18,19, Commitments, Guarantees, Indemnifications and Legal Proceedings, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item 1. Financial Statements" of this Form 10-Q is incorporated herein by reference.
ThereExcept as disclosed in “Part II, Item IA. Risk Factors” of our Quarterly Report on Form 10-Q for the first quarter of 2020, which disclosure is incorporated by reference herein, there have been no material changes to the risk factors disclosed in "Part“Part I, Item 1A.IA. Risk Factors"Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
The following table presents information related to our repurchases of common stock made under repurchase plans authorized by PCA's Board of Directors, and shares withheld to cover taxes on vesting of equity awards, during the three months ended SeptemberJune 30, 2017:2020:
Issuer Purchases of Equity Securities | Issuer Purchases of Equity Securities |
| Issuer Purchases of Equity Securities |
| ||||||||||||||||||||||||||||
Period |
| Total Number of Shares Purchased (a) |
|
| Average Price Paid Per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in millions) |
|
| Total Number of Shares Purchased (a) |
|
| Average Price Paid Per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in millions) |
| ||||||||
July 1-31, 2017 |
|
| 1,136 |
|
| $ | 112.11 |
|
|
| — |
|
| $ | 193.0 |
| ||||||||||||||||
August 1-31, 2017 |
|
| 73 |
|
|
| 109.62 |
|
|
| — |
|
|
| 193.0 |
| ||||||||||||||||
September 1-30, 2017 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 193.0 |
| ||||||||||||||||
April 1-30, 2020 |
|
| 4,936 |
|
| $ | 82.20 |
|
|
| — |
|
| $ | 193.0 |
| ||||||||||||||||
May 1-31, 2020 |
|
| 656 |
|
|
| 93.33 |
|
|
| — |
|
|
| 193.0 |
| ||||||||||||||||
June 1-30, 2020 |
|
| 100,510 |
|
|
| 98.60 |
|
|
| — |
|
|
| 193.0 |
| ||||||||||||||||
Total |
|
| 1,209 |
|
| $ | 111.96 |
|
|
| — |
|
| $ | 193.0 |
|
|
| 106,102 |
|
| $ | 97.80 |
|
|
| — |
|
| $ | 193.0 |
|
(a) | All shares were withheld from employees to cover income and payroll taxes on equity awards that vested during the period. |
None.
Not applicable.
None.
30
Exhibit Number |
| Description |
|
|
|
31.1 |
| |
|
|
|
31.2 |
| |
|
|
|
32 |
| |
|
|
|
|
|
|
101.SCH | Inline XBRL Taxonomy Extension Schema Document. † | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. † | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. † | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. † | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. † | |
104 | Cover Page Interactive Data File (formatted as inline XBRL and |
† | Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| Packaging Corporation of America |
|
| |
|
| /s/ |
|
|
|
| ||
|
|
|
| ||
| ||
|
Date: November 3, 2017August 6, 2020
30