| Summary of Significant Accounting Policies | 2.
Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the consolidated financial statements in future periods. Revenue Recognition We recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration expected to be received in exchange for those goods or services. The timing of revenue recognition for most goods and services occurs when performance obligations under the terms of a contract with the customer are satisfied. This occurs with the transfer of control of our products at a specific point in time. For most packaging and paper products, revenue is recognized when the product is shipped from the mill or from our manufacturing facility to our customer. Shipping and handling fees billed to a customer are recorded on a gross basis in “Net sales”, with the corresponding shipping and handling costs included in “Cost of sales” in the concurrent period as the revenue is recorded. We present taxes collected from customers and remitted to governmental authorities on a net basis in our Consolidated Statements of Income. In January 2018, the Company adopted ASU 2014-09 (Topic 606): Revenue from Contracts with Customers. Planned Major Maintenance Costs The Company accounts for its planned major maintenance activities in accordance with ASC 360, Property, Plant, and Equipment Share-Based Compensation We recognize compensation expense for awards granted under the PCA long-term equity incentive plans based on the fair value on the grant date. We recognize the cost of the equity awards expected to vest over the period the awards vest. See Note 13, Share-Based Compensation, for more information. Research and Development Research and development costs are expensed as incurred. The amount charged to expense was $14.4 million, $12.8 million, and $13.3 million for the years ended December 31, 2018, 2017, and 2016, respectively. Cash and Cash Equivalents Cash and cash equivalents include all cash balances and highly liquid investments with a stated maturity of three months or less. Cash equivalents are stated at cost, which approximates market. Cash and cash equivalents totaled $361.5 million and $216.9 million at December 31, 2018 and 2017, respectively, which included cash equivalents of $311.1 million Trade Accounts Receivable, Allowance for Doubtful Accounts, and Customer Deductions Trade accounts receivable are stated at the amount we expect to collect. The collectability of our accounts receivable is based upon a combination of factors. In circumstances where a specific customer is unable to meet its financial obligations to PCA (e.g., bankruptcy filings, substantial downgrading of credit sources), a specific reserve for bad debts is recorded against amounts due to the Company to reduce the net recorded receivable to the amount the Company reasonably believes will be collected. For all other customers, reserves for bad debts are recognized based on historical collection experience. If collection experience deteriorates (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations to the Company), the estimate of the recoverability of amounts due could be reduced by a material amount. We periodically review our allowance for doubtful accounts and adjustments to the valuation allowance are recorded as income or expense. Trade accounts receivable balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. At December 31, 2018 and 2017, the allowance for doubtful accounts was $4.6 million and $4.2 million, respectively. The customer deductions reserve represents the estimated amount required for customer returns, allowances, and earned discounts. Based on the Company’s experience, customer returns, allowances, and earned discounts have averaged approximately 1% of gross selling price. Accordingly, PCA reserves 1% of its open customer accounts receivable balance for these items. The reserves for customer deductions of $9.0 million Derivative Instruments and Hedging Activities The Company records its derivatives, if any, in accordance with ASC 815, Derivatives and Hedging Fair Value Measurements PCA measures the fair value of its financial instruments in accordance with ASC 820, Fair Value Measurements and Disclosures Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets. Level 2 — 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. Level 3 — Valuations based on unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Assets that are measured at fair value using the net asset value (NAV) per share as a practical expedient are not categorized within the fair value hierarchy. Financial instruments measured at fair value on a recurring basis include the fair value of our pension and postretirement benefit assets and liabilities. See Note 11, Employee Benefit Plans and Other Postretirement Benefits, for more information. Other assets and liabilities measured and recognized at fair value on a nonrecurring basis include assets acquired and liabilities assumed in acquisitions and our asset retirement obligations. Given the nature of these assets and liabilities, evaluating their fair value from the perspective of a market participant is inherently complex. Assumptions and estimates about future values can be affected by a variety of internal and external factors. Changes in these factors may require us to revise our estimates and could require us to retroactively adjust provisional amounts that we recorded for the fair values of assets acquired and liabilities assumed in connection with business combinations. These adjustments could have a material effect on our financial condition and results of operations. See Note 4, Acquisitions, and Note 12, Asset Retirement Obligations, for more information. Inventory Valuation 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):
December 31,
2018
2017
Raw materials
$
307.8
$
279.8
Work in process
13.9
12.6
Finished goods
199.0
217.0
Supplies and materials
274.9
253.1
Inventories
$
795.6
$
762.5
Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. Cost includes expenditures for major improvements and replacements and the amount of interest cost associated with significant capital additions. Repairs and maintenance costs are expensed as incurred . Property, plant, and equipment consisted of the following (dollars in millions):
December 31,
2018
2017
Land and land improvements
$
161.9
$
156.0
Buildings
795.5
729.8
Machinery and equipment
5,481.6
5,162.5
Construction in progress
176.7
194.5
Other
75.4
68.4
Property, plant and equipment, at cost
6,691.1
6,311.2
Less accumulated depreciation
(3,582.5
)
(3,386.3
)
Property, plant and equipment, net
$
3,108.6
$
2,924.9
The amount of interest capitalized from construction in progress was $4.5 million, $2.5 million, and $2.5 million for the years ended December 31, 2018, 2017, and 2016, respectively. Depreciation is computed on the straight-line basis over the estimated useful lives of the related assets. Assets under capital leases are depreciated on the straight-line method over the term of the lease or the useful life, if shorter. The following lives are used for the various categories of assets:
Buildings and land improvements
5 to 40 years
Machinery and equipment
3 to 25 years
Trucks and automobiles
3 to 10 years
Furniture and fixtures
3 to 20 years
Computers and hardware
3 to 10 years
Leasehold improvements
Period of the lease life, if shorter The amount of depreciation expense was $361.7 million, $347.8 million, and $324.1 million for the years ended December 31, 2018, 2017, and 2016, respectively. In 2018 and 2017, we recognized incremental depreciation expense of $14.5 million and $10.5 million, respectively, primarily related to the second quarter 2018 discontinuation of uncoated free sheet and coated one-side grades at the Wallula, Washington mill associated with the conversion of the No. 3 paper machine to a high-performance 100% virgin kraft linerboard machine. During the year ended December 31, 2016, we recognized $2.9 million of incremental depreciation expense primarily related to facilities closure costs and the Wallula, Washington mill restructuring due to the discontinuation of market pulp production. Pursuant to the terms of an industrial revenue bond, title to certain property, plant, and equipment was transferred to a municipal development authority in 2009 in order to receive a property tax abatement. The title of these assets will revert back to PCA upon retirement or cancellation of the bond. The assets are included in the consolidated balance sheets under the caption “Property, plant, and equipment, net” as all risks and rewards remain with the Company. Leases We assess lease classification as either capital or operating at lease inception or upon modification. We lease some of our locations, as well as other property and equipment, under operating leases. For purposes of determining straight-line rent expense, the lease term is calculated from the date of possession of the facility, including any periods of free rent and any renewal option periods that are reasonably assured of being exercised. In February 2016, the FASB issued ASU 2016-02 (Topic 842): Leases Long-Lived Asset Impairment Long-lived assets other than goodwill and other intangibles are reviewed for impairment in accordance with provisions of ASC 360, Property, Plant and Equipment Goodwill and Intangible Assets The Company has capitalized certain intangible assets, primarily goodwill, customer relationships, and trademarks and trade names, based on their estimated fair value at the date of acquisition. Amortization is provided for customer relationships on a straight-line basis over periods ranging from ten to 40 years, and trademarks and trade names over periods ranging from five to 20 years. Goodwill, which amounted to $917.3 million and $883.2 million for the years ended December 31, 2018 and 2017, respectively, is not amortized but is subject to an annual impairment test in accordance with ASC 350, Intangibles – Goodwill and Other. Pension and Postretirement Benefits Several estimates and assumptions are required to record pension costs and liabilities, including discount rate, return on assets, and longevity and service lives of employees. We review and update these assumptions annually unless a plan curtailment or other event occurs, requiring that we update the estimates on an interim basis. While we believe the assumptions used to measure our pension and postretirement benefit obligations are reasonable, differences in actual experience or changes in assumptions may materially affect our pension and postretirement benefit obligations and future expense. See Note 11, Employee Benefit Plans and Other Postretirement Benefits, for additional information. For postretirement health care plan accounting, the Company reviews external data and its own historical trends for health care costs to determine the health care cost trend rate assumption. In January 2018, the Company adopted ASU 2017-07, Compensation – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost Environmental Matters Environmental expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. Liabilities are recorded for environmental contingencies when such costs are probable and reasonably estimable. These liabilities are adjusted as further information develops or circumstances change. Environmental expenditures related to existing conditions resulting from past or current operations from which no current or future benefit is discernible are expensed as incurred. Asset Retirement Obligations The Company accounts for its retirement obligations related predominantly to landfill closure, wastewater treatment pond dredging, closed-site monitoring costs, and certain leasehold improvements under ASC 410, Asset Retirement and Environmental Obligations Deferred Debt Issuance Costs PCA has capitalized certain costs related to obtaining its financing. These costs are amortized to interest expense using the effective interest rate method over the terms of the related financing, which range from three to ten years. At December 31, 2018 and 2017 deferred debt issuance costs were $12.6 million and $15.3 million, respectively, and were recorded in “Long-Term Debt” on our Consolidated Balance Sheets. Cutting Rights and Fiber Farms We lease the cutting rights to approximately 75,000 acres of timberland, and we lease 3,000 acres of land where we operate fiber farms as a source of future fiber supply. For our cutting rights and fiber farms, we capitalize the annual lease payments and reforestation costs associated with these leases. Costs are recorded as depletion when the timber or fiber is harvested and used in operations or sold to customers. Capitalized long-term lease costs for our cutting rights and fiber farms, primarily recorded in “Other long-term assets” on our Consolidated Balance Sheets, were $22.4 million and $31.5 million as of December 31, 2018 and 2017, respectively. The amount of depletion expense was $7.6 million, $5.2 million, and $4.7 million for the years ended December 31, 2018, 2017, and 2016, respectively. Additionally, in conjunction with the conversion of the No. 3 machine at the Wallula mill to kraft linerboard, management performed a recoverability test on associated fiber farms in 2018 and 2017 and deemed the asset group to not be fully recoverable. As a result of the recoverability calculation on the fiber farm asset group, the Company recorded an impairment loss of $3.1 million Deferred Software Costs PCA capitalizes costs related to the purchase and development of software, which is used in its business operations. The costs attributable to these software systems are amortized over their estimated useful lives based on various factors such as the effects of obsolescence, technology, and other economic factors. Net capitalized software costs recorded in “Other long-term assets” on our Consolidated Balance Sheets were $1.6 million and $3.3 million for the years ended December 31, 2018 and 2017, respectively. Software amortization expense was $2.1 million, $2.3 million, and $2.5 million for the years ended December 31, 2018, 2017, and 2016, respectively. Income Taxes PCA utilizes the liability method of accounting for income taxes whereby it recognizes deferred tax assets and liabilities for the future tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets will be reduced by a valuation allowance if, based upon management’s estimates, it is more likely than not that a portion of the deferred tax assets will not be realized in a future period. The estimates utilized in the recognition of deferred tax assets are subject to revision in future periods based on new facts or circumstances. PCA’s practice is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. Trade Agreements PCA regularly trades containerboard with other manufacturers primarily to reduce shipping costs. These agreements are entered into with other producers on an annual basis, pursuant to which both parties agree to ship an identical number of tons of containerboard to each other within the agreement period. These agreements lower transportation costs by allowing each party’s containerboard mills to ship containerboard to the other party’s closer corrugated products plant. PCA tracks each shipment to ensure that the other party’s shipments to PCA match PCA’s shipments to the other party during the agreement period. Such transfers are possible because containerboard is a commodity product with no distinguishing product characteristics. These transactions are accounted for at carrying value, and revenue is not recorded as the transactions do not represent the culmination of an earnings process. The transactions are recorded into inventory accounts, and no sale or income is recorded until such inventory is converted to a finished product and sold to an end-use customer. Business Combinations The Company accounts for acquisitions under ASC 805, Business Combinations Clarifying the Definition of a Business Recently Adopted Accounting Standards Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 (Topic 606): Revenue from Contracts with Customers Revenue Recognition a. The Company ships a portion of its products to customers under consignment agreements. These products do not have an alternative use, and, under the new standard, revenue associated with these products is required to be recognized earlier than under prior revenue recognition standards. Utilizing the modified retrospective method, the cumulative impact of adopting the new standard resulted in an increase of approximately $1.6 million, net of tax, to opening retained earnings as of January 1, 2018. b. The new revenue standard also provides additional clarity concerning contract fulfillment costs, which resulted in certain costs being classified as cost of sales rather than selling, general and administrative expenses beginning January 1, 2018. For the year ended December 31, 2018, this amount totaled $28.2 million. See Note 3, Revenue, for more information. Effective January 1, 2018, the Company adopted ASU 2017-07, Compensation: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. are required to be presented in the income statement separately from the service cost component and outside the subtotal of operating income. The update also allows only the service cost component to be eligible for capitalization for internally developed capital projects. The amendments in this update are applied retrospectively for the income statement presentations and prospectively for the capitalization of service costs. The adoption of this ASU retrospectively resulted in a $1.3 million and $3.0 million reclassification between cost of sales and selling, general and administrative expenses (both components of income from operations) and interest expense, net and other (a component outside of income from operations) for the years ended December 31, 2017 and 2016, respectively. Effective January 1, 2018, the Company adopted ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting , which clarifies what changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. T Effective January 1, 2018, the Company adopted Clarifying the Definition of a Business Business Combinations Effective January 1, 2018, the Company adopted Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments New Accounting Standards Not Yet Adopted Leases, to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for all leases, with the exception of short-term leases, and expands disclosures about leasing arrangements for both lessees and lessors, among other items. The new standard is effective for the Company beginning January 1, 2019. In July 2018, the FASB issued ASU No. 2018-11 , which provides a modified retrospective transition method where an entity can elect to apply the transition provisions at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this method, comparative prior period financial information is not restated. Effective January 1, 2019, the Company will adopt the new lease accounting standard using the modified retrospective transition method at the adoption date with prior periods not restated. In addition, we will elect the package of practical expedients permitted under the transition guidance within the new standard, which permits us to not reassess our prior conclusions about lease identification, lease classification and initial direct costs. We will also elect the practical expedient related to land easements, allowing us to carry forward our current accounting treatment for existing agreements on land easements, which are not accounted for as leases. We will elect the short-term lease recognition exemption, which permits us to exclude short-term leases (i.e. leases with terms of 12 months or less) from the recognition requirements of this standard. In preparing for the transition of the new standard, we identified and assessed appropriate changes to our business processes, systems and controls to support the new leasing accounting requirements and disclosures under the new standard. We expect that adoption of this standard will result in recognition of lease liabilities of approximately $220 million to $240 million as of January 1, 2019, with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments for existing operating leases. We do not expect to make any cumulative-effect adjustment to retained earnings as a result of the adoption of this standard. We do not believe that adoption of this ASU will have a material impact on our consolidated net earnings, liquidity, or debt covenants under our current debt agreements. In February 2018, the FASB issued ASU 2018-02 (Topic 220): Income Statement – R eporting Comprehensive Income – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which allows for optional reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the enactment of H.R.1 (P.L. 115-97), originally known as the “Tax Cuts and Jobs Act,” in December 2017. An entity that elects to reclassify these amounts must reclassify stranded tax effects related to the change in federal tax rate for all items accounted for in other comprehensive income (e.g., pension and postretirement benefits and cash flow hedges). Entities may also elect to reclassify other stranded tax effects that relate to the Act but do not directly relate to the change in the federal tax rate (e.g., state taxes). Upon adoption of ASU 2018-02, entities are required to disclose their policy for releasing the income tax effects from accumulated other comprehensive income. ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently finalizing its evaluation of this guidance but does not expect this ASU to have a material impact on the Company’s financial position, results of operations, or cash flow. In August 2018, the 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 retrospective basis. The Company is currently evaluating the impact this guidance will have on its related disclosures. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The Company is currently evaluating the impact of the new guidance. 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. |
