UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

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.)

 

 

 

1 North Field Court, Lake Forest, Illinois

 

60045

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant's telephone number, including area code: (847) 482-3000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange On Which Registered

Common Stock, $0.01 par value

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes    No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes    No  

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 every Interactive Data File required to be submitted 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 such files). Yes    No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth 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  ☒

At June 30, 2018, the last day of the Registrant's most recently completed second fiscal quarter, the aggregate market value of Registrant's common equity held by non-affiliates was approximately $10,429,672,301 based upon the closing sale price as reported on the New York Stock Exchange. This calculation of market value has been made for the purposes of this report only and should not be considered as an admission or conclusion by the Registrant that any person is in fact an affiliate of the Registrant.

On February 22, 2019, there were 94,495,930 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the Proxy Statement for the Registrant's 2019 Annual Meeting of Stockholders are incorporated by reference to the extent indicated in Part III of this Form 10-K.

 

 

 


 

Table of Contents

 

 

PART I

 

 

 

 

Item 1.

Business

1

 

Packaging

2

 

Paper

5

 

Corporate and Other

6

 

Employees

6

 

Environmental Matters

6

 

Executive Officers of the Registrant

6

 

 

 

Item 1A.

Risk Factors

7

 

 

 

Item 1B.

Unresolved Staff Comments

12

 

 

 

Item 2.

Properties

12

 

 

 

Item 3.

Legal Proceedings

12

 

 

 

Item 4.

Mine Safety Disclosure

12

 

 

 

 

PART II

 

 

 

 

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

13

 

 

 

Item 6.

Selected Financial Data

15

 

 

 

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

16

 

Overview

16

 

Executive Summary

16

 

Industry and Business Conditions

18

 

Outlook

18

 

Results of Operations

18

 

Liquidity and Capital Resources

23

 

Commitments

25

 

Off-Balance-Sheet Arrangements

26

 

Inflation and Other General Cost Increases

26

 

Environmental Matters

27

 

Critical Accounting Policies and Estimates

28

 

New and Recently Adopted Accounting Standards

31

 

Reconciliations of Non-GAAP Financial Measures to Reported Amounts

31

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 8.

Financial Statements and Supplementary Data

34

 

 

 

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

77

 

 

 

Item 9A.

Controls and Procedures

77

 

 

 

Item 9B.

Other Information

77

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers, and Corporate Governance

78

 

 

 

Item 11.

Executive Compensation

78

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

78

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

79

 

 

 

Item 14.

Principal Accounting Fees and Services

79

 

 

 

PART IV

 

 

Item 15.

Exhibits, Financial Statement Schedules

80

 

 

 

 

Signatures

84

 

 

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PART I

Item 1.

BUSINESS

Packaging Corporation of America (“we,” “us,” “our,” “PCA,” or the “Company”) is the third largest producer of containerboard products and the third largest producer of uncoated freesheet (UFS) in North America. We operate six containerboard mills, two white paper mills and 95 corrugated products manufacturing plants. We are headquartered in Lake Forest, Illinois and operate primarily in the United States.

We report in three reportable segments: Packaging, Paper and Corporate and Other. For segment financial information see Note 18, Segment Information, of the Notes to Consolidated Financial Statements in “Part II, Item 8, Financial Statements and Supplementary Data” of this Form 10-K.

During the second quarter of 2018, we discontinued the production of uncoated free sheet and coated one-side grades at the Wallula, Washington mill and converted the No. 3 machine to a virgin kraft linerboard machine. Subsequent to the date of conversion in May 2018, operating results for the Wallula mill are primarily included in the Packaging segment. Before such date, operating results were included in the Paper segment.  

Production and Shipments

The following table summarizes the Packaging segment's containerboard production and corrugated products shipments and the Paper segment's white paper and market pulp production.

 

 

 

 

 

 

 

 

 

First

Quarter

 

 

Second

Quarter

 

 

Third

Quarter

 

 

Fourth

Quarter

 

 

Full Year

 

Containerboard Production (a)

 

PCA

 

 

2018

 

 

 

953

 

 

 

1,020

 

 

 

1,087

 

 

 

1,021

 

 

 

4,081

 

(thousand tons)

 

 

 

 

2017

 

 

 

932

 

 

 

947

 

 

 

996

 

 

 

1,006

 

 

 

3,881

 

 

 

 

 

 

2016

 

 

 

898

 

 

 

926

 

 

 

950

 

 

 

962

 

 

 

3,736

 

Corrugated Shipments (BSF)

 

PCA

 

 

2018

 

 

 

14.4

 

 

 

15.1

 

 

 

14.8

 

 

 

14.6

 

 

 

58.9

 

 

 

 

 

 

2017

 

 

 

13.6

 

 

 

13.9

 

 

 

13.7

 

 

 

14.5

 

 

 

55.7

 

 

 

 

 

 

2016

 

 

 

12.3

 

 

 

12.7

 

 

 

13.1

 

 

 

13.2

 

 

 

51.3

 

White Paper (UFS) Production (a)

 

PCA

 

 

2018

 

 

 

279

 

 

 

252

 

 

 

239

 

 

 

247

 

 

 

1,017

 

(thousand tons)

 

 

 

 

2017

 

 

 

273

 

 

 

289

 

 

 

278

 

 

 

278

 

 

 

1,118

 

 

 

 

 

 

2016

 

 

 

283

 

 

 

268

 

 

 

288

 

 

 

288

 

 

 

1,127

 

Market Pulp Production (b)

 

PCA

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(thousand tons)

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

16

 

 

 

10

 

 

 

12

 

 

 

7

 

 

 

45

 

 

(a)

In May 2018, PCA ceased production of uncoated free sheet and coated one-side grades at our Wallula, Washington mill and converted the No. 3 machine to a virgin kraft linerboard machine.

(b)

On December 1, 2016, PCA ceased production of softwood market pulp at our Wallula, Washington mill and permanently shut down the No. 1 machine.

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Below is a map of our locations:

 

 

Packaging

Packaging Products

Our containerboard mills produce linerboard and semi-chemical corrugating medium, which are papers primarily used in the production of corrugated products. Our corrugated products manufacturing plants produce a wide variety of corrugated packaging products, including conventional shipping containers used to protect and transport manufactured goods, multi-color boxes and displays with strong visual appeal that help to merchandise the packaged product in retail locations, and honeycomb protective packaging. In addition, we are a large producer of packaging for meat, fresh fruit and vegetables, processed food, beverages, and other industrial and consumer products.

During the year ended December 31, 2018, our Packaging segment produced 4.1 million tons of containerboard at our mills. Our corrugated products manufacturing plants sold 58.9 billion square feet (BSF) of corrugated products. Our net sales to third parties totaled $5.9 billion in 2018.

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Facilities

We currently manufacture containerboard, which includes a variety of performance and specialty grades, at six containerboard mills. Total annual containerboard capacity was approximately 4.4 million tons as of December 31, 2018. We also produce corrugated and protective packaging products at 95 manufacturing locations. The following provides more details of our operations:

Counce. Our Counce, Tennessee mill produces kraft linerboard on two paper machines. The mill can produce basis weights from 26 lb. to 90 lb.

DeRidder. Our DeRidder, Louisiana mill produces kraft linerboard and semi-chemical corrugating medium on two paper machines. The mill can produce linerboard in basis weights of 26 lb. to 69 lb. and medium in basis weights of 23 lb. to 33 lb.

Valdosta. Our Valdosta, Georgia mill produces kraft linerboard on one paper machine. The mill can produce basis weights from 35 lb. to 96 lb.

Tomahawk. Our Tomahawk, Wisconsin mill produces semi-chemical corrugating medium on two paper machines. The mill can produce basis weights from 23 lb. to 47 lb.

Filer City. Our Filer City, Michigan mill produces semi-chemical corrugating medium on three paper machines. The mill can produce basis weights from 20 lb. to 47 lb.

Wallula. Our Wallula, Washington mill produces semi-chemical corrugating medium on its No. 2 machine and kraft linerboard on its No. 3 machine. The mill can produce medium in basis weights from 23 lb. to 33 lb. and linerboard in basis weights from 31 lb. to 52 lb. As described above, the No. 3 machine was converted from white paper to linerboard in May of 2018.

We operate 95 corrugated manufacturing and protective packaging operations, a technical and development center, 10 regional design centers, a rotogravure printing operation, and a complement of packaging supplies and distribution centers. Of the 95 manufacturing facilities, 61 operate as combining operations, commonly called corrugated plants, which manufacture corrugated sheets and finished corrugated packaging products, 33 are sheet plants, which procure combined sheets and manufacture finished corrugated packaging products, and one is a corrugated sheet-only manufacturer.

Corrugated products plants tend to be located in close proximity to customers to minimize freight costs. Each of our plants serve a market radius of approximately 150 miles. Our sheet plants are generally located in close proximity to our larger corrugated plants, which enables us to offer additional services and converting capabilities such as small volume and quick turnaround items.

Major Raw Materials Used

Fiber supply. Fiber is the largest raw material cost to manufacture containerboard. We consume both wood fiber and recycled fiber in our containerboard mills. Our mill system has the capability to shift a portion of its fiber consumption between softwood, hardwood, and recycled sources. All of our mills can utilize virgin wood fiber and all of our mills, other than the Valdosta mill, can utilize some recycled fiber in their containerboard production. Our corrugated manufacturing operations generate recycled fiber as a by-product from the manufacturing process, which is consumed by our mills. In 2018, our usage of recycled fiber, net of internal generation, represents 18% of our containerboard production.

We procure wood fiber through leases of cutting rights, long-term supply agreements, and market purchases and believe we have adequate sources of fiber supply for the foreseeable future.

We participate in the Sustainable Forestry Initiative® (SFI), the Programme for the Endorsement of Forest Certification™ (PEFC), as well as the Forest Stewardship Council® (FSC), and we are certified under their sourcing and chain of custody standards. These standards are aimed at ensuring the long-term health and conservation of forestry resources. We are committed to sourcing wood fiber through environmentally, socially, and economically sustainable practices and promoting resource and conservation stewardship ethics.

3


 

Energy supply. Energy at our packaging mills is obtained through self-generated or purchased fuels and electricity. Fuel sources include by-products of the containerboard manufacturing and pulping process (including black liquor and wood waste), natural gas, purchased wood waste, and other purchased fuels. Each of our mills self-generates process steam requirements from by-products (black liquor and wood waste), as well as from the various purchased fuels. The process steam is used throughout the production process and also to generate electricity.

In 2018, our packaging mills consumed about 70 million MMBTU’s of fuel to produce both steam and electricity. Of the 70 million MMBTU’s consumed, about 64% was from mill generated by-products and 36% was from purchased fuels. Of the purchased fuels, 65% was from natural gas, 31% was from purchased wood waste and 4% was from other purchased fuels.

Chemical supply. We consume various chemicals in the production of containerboard, including caustic soda, sulfuric acid, soda ash, and lime. Most of our chemicals are purchased under contracts, which are bid or negotiated periodically.

Sales, Marketing, and Distribution

Our corrugated products are sold through our direct sales and marketing organization, independent brokers, and distribution partners. We have sales representatives and a sales manager at most of our corrugated manufacturing operations and also have corporate account managers who serve customer accounts with a national presence. Additionally, our design centers maintain an on-site dedicated graphics sales force. In addition to direct sales and marketing personnel, we utilize new product development engineers and product graphics and design specialists. These individuals are located at both the corrugated plants and the design centers. General marketing support is located at our corporate headquarters.

Our containerboard sales group is responsible for linerboard and corrugating medium order processing and sales to our corrugated plants, to outside domestic customers, and to export customers. These personnel also coordinate and execute all containerboard trade agreements with other containerboard manufacturers.

Containerboard produced in our mills is shipped by rail or truck. Our corrugated products are delivered by truck due to our large number of customers and their demand for timely service. Our corrugated manufacturing operations typically serve customers within a 150-mile radius. We sometimes use third-party warehouses for short-term storage of corrugated products.

Customers

We sell containerboard and corrugated products to approximately 18,000 customers in over 36,000 locations. About three-quarters of our corrugated products sales are to regional and local accounts, which are broadly diversified across industries and geographic locations. The remaining one-quarter of our customer base consists primarily of national accounts that have multiple locations and are served by a number of PCA plants. No single customer exceeds 10% of segment sales.

The primary end-use markets in the United States for corrugated products are shown below as reported in the 2017 Fibre Box Association annual report:

 

Food, beverages, and agricultural products

 

 

44

%

Retail and wholesale trade

 

 

22

%

Paper and other products

 

 

14

%

Miscellaneous manufacturing

 

 

10

%

Chemical, plastic, and rubber products

 

 

10

%

 

Competition

As of December 31, 2018, we were the third largest producer of containerboard products in North America, according to industry sources and our own estimates. According to industry sources, corrugated products are produced by about 460 U.S. companies operating approximately 1,200 plants. The primary basis for competition for most of our packaging products includes quality, service, price, product design, and innovation. Most corrugated products are manufactured to the customer’s specifications. Corrugated producers generally sell within a 150-mile radius of their plants and compete with other corrugated producers in their local region. Competition in our corrugated products operations tends to be regional, although we also face competition from competitors with significant national account presence.

4


 

On a national level, our primary competitors are International Paper Company, WestRock Company, Georgia-Pacific LLC, and Pratt Industries. However, with our strategic focus on regional and local accounts, we also compete with the smaller, independent producers.

Paper

We are the third largest manufacturer of uncoated freesheet in North America, according to industry sources and our own estimates. We manufacture and sell white papers, including both commodity and specialty papers, which may have custom or specialized features such as colors, coatings, high brightness, and recycled content. White papers consist of communication papers, including cut-size office papers and printing and converting papers.

Facilities

We currently have two white paper mills located in the United States. Total annual white paper capacity is 949,000 tons. The following paragraphs describe our white paper mills:

Jackson. Our Jackson, Alabama mill produces both commodity and specialty papers on two paper machines.

International Falls. Our International Falls, Minnesota mill produces both commodity and specialty papers on two paper machines.

Wallula. Our Wallula, Washington mill produced pressure sensitive papers and a variety of white paper grades on its No. 3 machine, prior to its conversion to kraft linerboard during the second quarter of 2018.

Major Raw Materials Used

Fiber supply. Fiber is the largest raw material cost in this segment. We consume wood fiber, recycled fiber, and purchased pulp. Our Jackson mill purchases recycled fiber to produce our line of recycled office papers. We purchase wood fiber through contracts and open-market purchase, and we purchase recycled fiber and pulp from third parties pursuant to contractual agreements.

We participate in the Sustainable Forestry Initiative® (SFI), the Programme for the Endorsement of Forest Certification™ (PEFC), as well as the Forest Stewardship Council® (FSC), and we are certified under their sourcing and chain of custody standards. These standards are aimed at ensuring the long-term health and conservation of forestry resources. We are committed to sourcing wood fiber through environmentally, socially, and economically sustainable practices and promoting resource and conservation stewardship ethics.

Energy supply. We obtain energy through self-generated or purchased fuels and electricity. Fuel sources include by-products of the manufacturing and pulping process (including black liquor and wood waste), natural gas, electricity, and purchased wood waste. Each of the paper mills self-generates process steam requirements from by-products (black liquor and wood waste), as well as from the various purchased fuels. The process steam is used throughout the production process and to generate electricity.

In 2018, our white paper mills consumed about 24 million MMBTU’s of fuel to produce both steam and electricity. Of the 24 million MMBTU’s consumed, about 62% was from mill generated by-products and 38% was from purchased fuels. Of the purchased fuels, 85% was from natural gas and 15% from purchased wood waste.

Chemical supply. We consume various chemicals in the production of white papers, including starch, precipitated calcium carbonate, caustic soda, and sodium chlorate. Most of our chemicals are purchased under contracts, which are bid or negotiated periodically.

Sales, Marketing, and Distribution

Our white papers are sold primarily through our sales and marketing organization. We ship to customers both directly from our mills and through distribution centers and a network of outside warehouses by rail or truck. This allows us to respond quickly to customer requirements.

5


 

Customers

We have over 150 customers in approximately 450 locations. These customers include office products distributors and retailers, paper merchants, and envelope and other converters. We have established long-term relationships with many of our customers. Office Depot, Inc. is our largest customer in the Paper segment. We have an agreement with Office Depot in which we will supply at least 50% of Office Depot's requirements for commodity office papers through December 2019. The agreement will renew automatically through December 2020; however, there are circumstances that could cause the agreement to terminate in 2019. If this were to occur, Office Depot's purchase obligations under the agreement would phase out over two years. In 2018, our sales revenue to Office Depot represented 47% of our Paper segment sales revenue.

Competition

The markets in which our Paper segment competes are large and highly competitive. Commodity grades of white paper are globally traded, with numerous worldwide manufacturers, and as a result, these products compete primarily on the basis of price. All of our paper manufacturing facilities are located in the United States, and although we compete primarily in the domestic market, we do face competition from foreign producers. In 2016, as a result of a case brought by us and other domestic producers before United States international trade authorities, antidumping and countervailing duties at various levels were imposed on producers of uncoated freesheet papers produced in Australia, Brazil, China, Indonesia, and Portugal. These duties remain in effect. Other factors influencing competition from overseas producers include domestic and foreign demand and foreign currency exchange rates.

Our largest competitors include Domtar Corporation, International Paper Company, and Georgia-Pacific LLC. We also face competition from foreign producers. Although price is the primary basis for competition in most of our paper grades, quality and service are also important competitive determinants. Our white papers compete with electronic data transmission, e-readers, electronic document storage alternatives, and paper grades we do not produce. Increasing shifts to these alternatives have had, and are likely to continue to have, an adverse effect on traditional print media and paper usage and lower demand for communication papers.

Corporate and Other

Our Corporate and Other segment includes corporate support staff services and related assets and liabilities. This segment also includes transportation assets, such as rail cars and trucks, which we use to transport some of our products to and from our manufacturing sites, and assets related to a 50% owned variable interest entity, Louisiana Timber Procurement Company, L.L.C. (LTP).

Employees

As of December 31, 2018, we had approximately 15,000 employees, including 4,500 salaried and 10,500 hourly employees. Approximately 63% of our hourly employees worked pursuant to collective bargaining agreements. The majority of our unionized employees are represented by the United Steel Workers (USW), the International Brotherhood of Teamsters (IBT), the International Association of Machinists (IAM), and the Association of Western Pulp and Paper Workers (AWPPW). We are currently in negotiations to renew or extend any union contracts that have recently expired or are expiring in the near future. During 2018, we experienced no work stoppages, and we believe we have satisfactory labor relations with our employees.

Environmental Matters

A discussion of the financial impact of our compliance with environmental laws is presented under the caption “Environmental Matters” in “Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.

Executive Officers of the Registrant

Brief statements setting forth the age at February 28, 2019, the principal occupation, employment during the past five years, the year in which such person first became an officer of PCA, and other information concerning each of our executive officers appears below.

Mark W. Kowlzan, 63, Chairman and Chief Executive Officer - Mr. Kowlzan has served as PCA's Chairman since January 2016 and as Chief Executive Officer and a director since July 2010. From 1998 through June 2010, Mr. Kowlzan led

6


 

the company’s containerboard mill system, first as Vice President and General Manager and then as Senior Vice President - Containerboard. From 1996 through 1998, Mr. Kowlzan served in various senior mill-related operating positions with PCA and Tenneco Packaging, including as manager of the Counce linerboard mill. Prior to joining Tenneco Packaging, Mr. Kowlzan spent 15 years at International Paper Company, a global paper and packaging company, where he held a series of operational and managerial positions within its mill organization. Mr. Kowlzan is a member of the board of American Forest and Paper Association.

Thomas A. Hassfurther, 63, Executive Vice President - Corrugated Products - Mr. Hassfurther has served as Executive Vice President - Corrugated Products of PCA since September 2009. From February 2005 to September 2009, Mr. Hassfurther served as Senior Vice President - Sales and Marketing, Corrugated Products. Prior to this he held various senior-level management and sales positions at PCA and Tenneco Packaging. Mr. Hassfurther joined the company in 1977.

Charles J. Carter, 59, Senior Vice President - Containerboard Mill Operations - Mr. Carter has served as Senior Vice President - Containerboard Mill Operations since July 2013. Prior to this, he served as Vice President – Containerboard Mill Operations since January 2011. From March 2010 to January 2011, Mr. Carter served as PCA’s Director of Papermaking Technology. Prior to joining PCA in 2010, Mr. Carter spent 28 years with various pulp and paper companies in managerial and technical positions of increasing responsibility, most recently as Vice President and General Manager of the Calhoun, Tennessee mill of Abitibi Bowater from 2007 to 2010 and as manager of SP Newsprint’s Dublin, Georgia mill from 1999 to 2007.

Robert P. Mundy, 57, Senior Vice President and Chief Financial Officer - Mr. Mundy has served as PCA’s Senior Vice President since July 2015 and Chief Financial Officer since September 2015. He previously served as Senior Vice President and Chief Financial Officer of Verso Corporation, a leading North American supplier of coated papers to catalog and magazine publishers, from 2006 to June 2015. Verso Corporation filed for Chapter 11 bankruptcy in January 2016. Prior to that, he worked at International Paper Company, from 1983 to 2006, where he was Director of Finance of the Coated and Supercalendered Papers division from 2002 to 2006, Director of Finance Projects from 2001 to 2002, Controller of Masonite Corporation from 1999 to 2001, and Controller of the Petroleum and Minerals business from 1996 to 1999. He served in various business positions at International Paper from 1983 to 1996.

Kent A. Pflederer, 48, Senior Vice President, General Counsel and Secretary - Mr. Pflederer has served as Senior Vice President, General Counsel and Corporate Secretary since January 2013 and has led our legal department since June 2007. Prior to joining PCA, Mr. Pflederer served as Senior Counsel, Corporate and Securities, at Hospira, Inc. from 2004 to 2007 and served in the corporate and securities practice at Mayer Brown, LLP from 1996 to 2004.

Thomas W.H. Walton, 59, Senior Vice President - Sales and Marketing, Corrugated Products - Mr. Walton has served as Senior Vice President - Sales and Marketing, Corrugated Products since October 2009. Prior to this, he served as a Vice President and Area General Manager within the Corrugated Products Group since 1998. Mr. Walton joined the company in 1981 and has also held positions in production, sales, and general management.

Available Information

PCA’s internet website address is www.packagingcorp.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. In addition, our Code of Ethics may be accessed in the Investor Relations section of PCA’s website. PCA’s website and the information contained or incorporated therein are not intended to be incorporated into this report.

Item 1A.

RISK FACTORS

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

7


 

Our actual results, performance, or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what impact they will have on our results of operations or financial condition. In view of these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We expressly disclaim any obligation to publicly revise or otherwise update any forward-looking statements that have been made to reflect the occurrence of events after the date hereof.

In addition to the risks and uncertainties we discuss elsewhere in this Form 10-K (particularly in “Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations”) or in our other filings with the Securities and Exchange Commission (SEC), the following are important factors that could cause our actual results to differ materially from those we project in any forward-looking statement.

Industry Cyclicality - Changes in the prices of our products could materially affect our financial condition, results of operations, and liquidity. Macroeconomic conditions and fluctuations in industry capacity can create changes in prices, sales volumes, and margins for most of our products, particularly commodity grades of packaging and paper products. Prices for all of our products are driven by many factors, including demand for our products, industry capacity and decisions made by other producers with respect to capacity, and other competitive conditions in our industry. These factors are affected by general global and domestic economic conditions. We have little influence over the timing and extent of price changes of our products, which may be unpredictable and volatile. In addition, our selling prices are influenced by index levels published by trade publications. Changes in how these index levels are determined or maintained may affect our sales prices. If supply exceeds demand, industry operating conditions deteriorate or other factors result in lower prices for our products, our earnings and operating cash flows would be harmed.

General Economic Conditions - If business, political, and economic conditions change in an adverse manner, our business, results of operations, liquidity, and financial position may be harmed. General global and domestic economic conditions directly affect the levels of demand and production of consumer goods, levels of employment, the availability and cost of credit, and ultimately, the profitability of our business. If economic conditions deteriorate and result in higher unemployment rates, lower disposable income, unfavorable currency exchange rates, lower corporate earnings, lower business investment, and lower consumer spending, we may experience lower demand for our products, which is largely driven by demand for products of our customers which utilize our products. If economic conditions result in higher inflation, we may experience higher production and transportation costs, which we may not be able to recover through higher prices or otherwise. In addition, changes in trade policy, including renegotiating or potentially terminating existing bilateral or multilateral agreements as well as the imposition of tariffs, could impact global markets and demand for our and our customers’ products and the costs associated with certain of our capital investments. Further changes in tax laws or tax rates may have a material impact on our future cash taxes, effective tax rate or deferred tax assets and liabilities. These conditions are beyond our control and may have a material impact on our business, results of operations, liquidity, and financial position.

Competition - The intensity of competition in the industries in which we operate could result in downward pressure on pricing and volume, which could lower earnings and operating cash flows. Our industries are highly competitive, with no single containerboard, corrugated packaging, or white paper producer having a dominant position. Containerboard and commodity white paper products cannot generally be differentiated by producer, which tends to intensify price competition. The corrugated packaging industry is also sensitive to changes in economic conditions, as well as other factors including innovation, design, quality, and service. To the extent that one or more competitors are more successful than we are with respect to any key competitive factor, our business could be adversely affected. Our packaging products also compete, to some extent, with various other packaging materials, including products made of paper, plastics, wood, and various types of metal. If we are unable to successfully compete, we may lose market share or may be required to charge lower sales prices for our products, both of which would reduce our earnings and operating cash flows.

White paper products compete with electronic data transmission and document storage alternatives. Increasing shifts to electronic alternatives have had and will continue to have an adverse effect on usage of these products. As a result of such competition, the industry is experiencing decreasing demand for existing white paper products. As the use of these alternatives grows, demand for paper products is likely to further decline. Declines in demand for our paper products may adversely affect our earnings and operating cash flows.

Some of our competitors are larger than we are and may have greater financial and other resources, greater manufacturing economies of scale, greater energy self-sufficiency, or lower operating costs, compared to our company. We may be unable to compete effectively with these companies particularly during economic downturns. Some of the factors that may adversely affect our ability to compete in the markets in which we participate include the entry of new competitors into the markets we

8


 

serve, increased competition from overseas producers, our competitors' pricing strategies, changes in customer preferences, and the cost-efficiency of our facilities.

Inflation and Other General Cost Increases - We may not be able to offset higher costs. We are subject to both contractual, inflationary, and other general cost increases, including with regard to our labor costs and purchases of raw materials and transportation services. General economic conditions may result in higher inflation, which may increase our exposure to higher costs. If we are unable to offset these cost increases by price increases, growth, and/or cost reductions in our operations, these inflationary and other general cost increases could have a material adverse effect on our operating cash flows, profitability, and liquidity.

In 2018, our total company costs including cost of sales (COS) and selling, general, and administrative expenses (SG&A) was $5.9 billion, and excluding non-cash costs (depreciation, depletion and amortization, pension and postretirement expense, and share-based compensation expense) was $5.4 billion. A 1% increase in COS and SG&A costs would increase costs by $59 million and cash costs by $54 million.

Cost of Fiber - An increase in the cost of fiber could increase our manufacturing costs and lower our earnings. The market price of wood fiber varies based upon availability, source, and the costs of fuels used in the harvesting and transportation of wood fiber. The cost and availability of wood fiber can also be impacted by weather, general logging conditions, geography, and regulatory activity.

The availability and cost of recycled fiber depends heavily on recycling rates and the domestic and global demand for recycled products. We purchase recycled fiber for use at five of our six containerboard mills and both paper mills. In 2018, we purchased approximately 810,000 tons of recycled fiber, net of the recycled fiber generated by our corrugated box plants. The amount of recycled fiber purchased each year varies based upon production and the prices of both recycled fiber and wood fiber.

Periods of supply and demand imbalance have created significant price volatility. Periods of higher recycled fiber costs and unusual price volatility have occurred in the past, including during 2018 as demand for domestic recycled fiber from Chinese producers declined significantly, and may fluctuate significantly in the future, which could result in higher costs and lower earnings. A $10 per ton price increase in recycled fiber for our containerboard mills, would result in approximately $7 million of additional expense based on 2018 consumption.

Cost of Purchased Fuels and Chemicals - An increase in the cost of purchased fuels and chemicals could lead to higher manufacturing costs, resulting in reduced earnings. We have the ability to use various types of purchased fuels in our manufacturing operations, including natural gas, bark, and other purchased fuels. Fuel prices, in particular prices for oil and natural gas, have fluctuated in the past. New and more stringent environmental regulations may discourage, reduce the availability of, or make more expensive, the use of certain fuels, particularly coal and fossil fuels. In addition, costs for key chemicals used in our manufacturing operations also fluctuate. These fluctuations impact our manufacturing costs and result in earnings volatility. If fuel and chemical prices rise, our production costs and transportation costs will increase and cause higher manufacturing costs and reduced earnings if we are unable to recover such increases through higher prices of our products. A $0.10 per million MMBTU in natural gas prices would result in approximately $3 million of additional expense, based on 2018 usage.

Transportation Costs - Reduced truck and rail availability could lead to higher costs or poorer service, resulting in lower earnings, and harm our ability to distribute our products. We ship our products primarily by truck and rail. We have experienced lower availability of third-party trucking services and service issues, interruptions, and delays in rail services. We have also experienced higher costs for transportation services in general. If these factors persist, we could experience even higher transportation costs in the future and difficulties shipping our products in a timely manner. We may not be able to recover higher transportation costs through higher prices or otherwise, which would result in lower earnings.

Material Disruption of Manufacturing - A material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales, and/or negatively affect our results of operations and financial condition. Our business depends on continuous operation of our facilities, particularly at our mills. Any of our manufacturing facilities, or any of our machines within such facilities, could cease operations unexpectedly for a significant period of time due to a number of events, including:

 

Unscheduled maintenance outages.

 

Prolonged power failures.

9


 

 

Equipment or information system breakdowns or failures.

 

Explosion of a boiler or other major facilities.

 

Disruption in the supply of raw materials, such as wood fiber, energy, or chemicals.

 

A spill or release of pollutants or hazardous substances.

 

Closure or curtailment related to environmental concerns.

 

Labor difficulties.

 

Disruptions in the transportation infrastructure, including roads, bridges, railroad tracks, and tunnels.

 

Fires, floods, earthquakes, hurricanes, or other catastrophic events.

 

Terrorism or threats of terrorism.

 

Other operational problems.

These events could harm our ability to produce our products and serve our customers and may lead to higher costs and reduced earnings.

Environmental Matters - PCA may incur significant environmental liabilities with respect to both past and future operations. We are subject to, and must comply with, a variety of federal, state and local environmental laws, particularly those relating to air and water quality, waste disposal and the cleanup of contaminated soil and groundwater. Failure to comply with these regulations could result in fines, which may be significant, or other adverse regulatory action. Because environmental regulations are constantly evolving, we have incurred, and will continue to incur, costs to maintain compliance with those laws. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters” for estimates of expenditures we expect to make for environmental compliance in the next few years. New and more stringent environmental regulations may be adopted and may require us to incur additional operating expenses and/or significant additional capital expenditures to modify or replace certain of our boilers and other equipment. In addition, environmental regulations may increase the cost of our raw materials and purchased energy. Although we have established reserves to provide for known environmental liabilities, these reserves may change over time due to the enactment of new environmental laws or regulations or changes in existing laws or regulations, which might require additional significant environmental expenditures.

Mergers and Acquisitions - Our acquired businesses may underperform relative to our expectations, and we may not be able to successfully integrate these businesses into our own.  We have completed several mergers and acquisitions and investments in recent years. Our success will depend in part on our ability to successfully integrate, and receive the intended benefits from, these acquisitions. There may be difficulties, costs and delays involved in the integration of these businesses into ours. Integration requires modification of operational and financial systems and may result in significant additional expenses. If the acquired businesses underperform relative to our expectations, or if we fail to successfully integrate these businesses, our business, financial condition and results of operations may be materially and adversely affected.

Customer Concentration - We rely on certain large customers. Our packaging and paper segments each have large customers, the loss of which could adversely affect the segment’s sales and profitability. In particular, because our businesses operate in highly competitive industry segments, we regularly bid for new business or for renewal of existing business. The loss of business from our larger customers, or the renewal of business on less favorable terms, may adversely impact our financial results.

We have a supply agreement with Office Depot, our largest customer in the Paper segment. The agreement requires Office Depot to buy, and us to supply, at least 50% of Office Depot's requirements for commodity office papers through December 2019.

10


 

In 2018, sales to Office Depot represented 47% of our Paper segment sales and 7% of our consolidated sales. If these sales are reduced, including if we are unable to renew the agreement at committed volumes, we would need to find new customers. We may not be able to fully replace any lost sales, and any new sales may be at lower prices or higher costs. Any significant deterioration in the financial condition of Office Depot affecting its ability to pay or any other change that makes Office Depot less willing to purchase our products will harm our business and results of operations.

Labor Relations- If we experience strikes or other work stoppages, our business will be harmed. Our workforce is highly unionized and operates under various collective bargaining agreements. We must negotiate to renew or extend any union contracts that have recently expired or are expiring in the near future. While we believe that we have satisfactory labor relations, we may not be able to successfully negotiate new agreements without work stoppages or labor difficulties in the future or renegotiate them on favorable terms. If we are unable to successfully renegotiate the terms of any of these agreements, or if we experience any extended interruption of operations at any of our facilities as a result of strikes or other work stoppages, our business, results of operations and financial condition may be harmed.

Reliance on Personnel - We may fail to attract and retain qualified personnel, including key management personnel. Our ability to operate and grow our business depends on our ability to attract and retain employees with the skills necessary to operate and maintain our facilities, produce our products and serve our customers. The increasing demand for qualified personnel may make it more difficult for us to attract and retain qualified employees. Changing demographics and labor work force trends may make it difficult for us to replace retiring employees at our manufacturing and other facilities. If we fail to attract and retain qualified personnel, or if we experience labor shortages, we may experience higher costs and other difficulties, and our business may be adversely impacted.

In addition, we rely on key executive and management personnel to manage our business efficiently and effectively. As our business has grown in size and geographic scope, we have relied on these individuals to manage increasingly complex operations. The loss of any of our key personnel could adversely affect our business.

Cyber Security - Risks related to security breaches of company, customer, employee, and vendor information, as well as the technology that manages our operations and other business processes, could adversely affect our business. We rely on various information technology systems to capture, process, store, and report data and interact with customers, vendors, and employees. Despite careful security and controls design, implementation, updating, and internal and independent third-party assessments, our information technology systems, and those of our third party providers, could become subject to cyber attacks or security breaches. Network, system, and data breaches could result in misappropriation of sensitive data or operational disruptions including interruption to systems availability and denial of access to and misuse of applications required by our customers to conduct business with us. Misuse of internal applications; theft of intellectual property, trade secrets, or other corporate assets; and inappropriate disclosure of confidential information could stem from such incidents. Delayed sales, slowed production, or other issues resulting from these disruptions could result in lost sales, business delays, and negative publicity and could have a material adverse effect on our operations, financial condition, or operating cash flows.

Debt obligations - Our debt service obligations may reduce our operating flexibility. At December 31, 2018, we had $2.5 billion of debt outstanding and a $326.9 million undrawn revolving credit facility, after deducting letters of credit. All debt is comprised of fixed-rate senior notes. We and our subsidiaries are not restricted from incurring, and may incur, additional indebtedness in the future.

Our current borrowings, plus any future borrowings, may affect our ability to operate our business, including, without limitation:

 

Result in significant cash requirements to make interest and maturity payments on our outstanding indebtedness;

 

Increase our vulnerability to adverse changes in our business or industry conditions;

 

Increase our vulnerability to increases in interest rates;

 

Limit our ability to obtain additional financing for working capital, capital expenditures, general corporate, and other purposes;

 

Limit our flexibility in planning for, or reacting to, changes in our business and our industry; and

 

Limit our flexibility to make acquisitions.

Further, if we cannot service our indebtedness, we may have to take actions to secure additional cash by selling assets, seeking additional equity or reducing investments, which may not be achievable on acceptable terms or at all.

11


 

Pension Plans – Our pension plans may require additional funding. We record a liability associated with our pensions equal to the excess of the benefit obligations over the fair value of the assets funding the plans. The actual required amounts and timing of future cash contributions will be sensitive to changes in the applicable discount rates and returns on plan assets, and could also be impacted by future changes in the laws and regulations applicable to plan funding. Fluctuations in the market performance of our plan assets will affect our pension plan costs in future periods. Changes in assumptions regarding expected long-term rate of return on plan assets, our discount rate, expected compensation levels, or mortality will also increase or decrease pension costs.

Market Price of our Common Stock - The market price of our common stock may be volatile, which could cause the value of the stock to decline. Securities markets worldwide periodically experience significant price declines and volume fluctuations due to macroeconomic factors and other factors beyond our control. This market volatility, as well as general economic, market, or political conditions, could reduce the market price of our common stock with little regard to our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors, and in response, the market price of our common stock could decrease significantly.

Item 1B.

UNRESOLVED STAFF COMMENTS

None.

Item 2.

PROPERTIES

We own and lease properties in our business. Primarily all of our leases are noncancelable and are accounted for as operating leases. These leases are not subject to early termination except for standard nonperformance clauses.

Information concerning capacity and utilization of our principal operating facilities, the segments that use those facilities, and a map of geographical locations is presented in “Part I, Item 1. Business” of this Form 10-K. We assess the condition and capacity of our manufacturing, distribution, and other facilities needed to meet our operating requirements. Our properties have been generally well maintained and are in good operating condition. In general, our facilities have sufficient capacity and are adequate for our production and distribution requirements.

We currently own buildings and land for six containerboard mills and two white paper mills. Additionally, we have 95 corrugated manufacturing operations, of which the buildings and land for 51 are owned, including 43 combining operations, or corrugated plants, one corrugated sheet-only manufacturer, and seven sheet plants. We lease the buildings for 18 corrugated plants and 26 sheet plants. We own warehouses and miscellaneous other properties, including sales offices and woodlands management offices. We lease space for regional design centers and numerous other distribution centers, warehouses, and facilities. The equipment in these leased facilities is, in virtually all cases, owned by us, except for forklifts and other rolling stock, which are generally leased.

We lease the cutting rights to approximately 75,000 acres of timberland located near our Valdosta mill (68,000 acres) and our Counce mill (7,000 acres). On average, these cutting rights agreements have terms with approximately 13 years remaining. Additionally, we lease approximately 3,000 acres of land for a fiber farm, located near our Wallula mill, where we plant, grow, and harvest fiber.

Our corporate headquarters is located in Lake Forest, Illinois. The headquarter facility is owned, and we lease additional neighboring office space through the next three years with provisions for two additional five year lease extensions.

Item 3.

LEGAL PROCEEDINGS

Information concerning legal proceedings can be found in Note 19, Commitments, Guarantees, Indemnifications, and Legal Proceedings, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Item 4.

MINE SAFETY DISCLOSURE

Not applicable.

 

12


 

PART II

Item 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

PCA’s common stock is listed on the New York Stock Exchange (NYSE) under the symbol “PKG”.

 

Stockholders

On February 22, 2019, there were 78 holders of record of our common stock.

Purchases of Equity Securities

Stock Repurchase Program

On February 25, 2016, PCA announced that its Board of Directors authorized the repurchase of $200.0 million of the Company's outstanding common stock. At the time of the announcement, there was no remaining authority under previously announced programs. 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 not repurchase any shares of its common stock under this authority during the years ended December 31, 2018 and 2017. In 2016, we paid $100.3 million to repurchase 1,987,187 shares of common stock, which fully depleted the $93.3 million of repurchase authority under previous authorizations by our board of directors. As of December 31, 2018, we are authorized to repurchase $193.0 million of the Company’s common stock.

Pursuant to its equity incentive plan, the Company withholds shares from vesting employee equity awards to cover employee tax liabilities. Total shares withheld in 2018 were 69,255 to cover $7.9 million in employee tax liabilities. Total shares withheld in 2017 were 97,946 to cover $10.8 million of employee tax liabilities. Total shares withheld in 2016 were 172,438 for $11.2 million. Shares withheld are included in the number of shares repurchased in the table below.

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 December 31, 2018:

 

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)

 

October 1-31, 2018

 

 

 

 

 

$

 

 

 

 

 

$

193.0

 

November 1-30, 2018

 

 

186

 

 

 

 

88.05

 

 

 

 

 

 

193.0

 

December 1-31, 2018

 

 

449

 

 

 

 

83.46

 

 

 

 

 

 

193.0

 

Total

 

 

635

 

(a)

 

$

84.80

 

 

 

 

 

$

193.0

 

 

(a)

635 shares were withheld from employees to cover income and payroll taxes on equity awards that vested during the period.

Performance Graph

The graph below compares PCA’s cumulative 5-year total shareholder return on common stock with the cumulative total returns of the S&P 500 index; the S&P Midcap 400 index; a New Peer Group that includes three publicly-traded companies, which are International Paper Company, WestRock Company, and Domtar Corporation; and an Old Peer Group that includes two publicly-traded companies, which are International Paper Company and KapStone Paper and Packaging Corporation. Peer group members WestRock Company and Domtar Corporation were added to the New Peer Group because they are primarily

13


 

domestic integrated packaging and paper companies who, similar to PCA, produce and sell corrugated and paper products, respectively. In addition, these two companies are included in the competitive group for executive compensation purposes in PCA’s Proxy Statement. Old Peer Group member KapStone Paper and Packaging Corporation was acquired by New Peer Group member WestRock Company in 2018. The graph tracks the performance of a $100 investment (including the reinvestment of all dividends) in our common stock, in each index, and in each peer group's common stock from December 31, 2013, through December 31, 2018. The stock price performance included in this graph is not necessarily indicative of future stock price performance.

 

 


 

 

Cumulative Total Return

 

 

 

December 31,

 

 

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

Packaging Corporation of America

 

$

100.00

 

 

$

126.09

 

 

$

105.18

 

 

$

146.29

 

 

$

212.84

 

 

$

151.41

 

S&P 500

 

 

100.00

 

 

 

113.69

 

 

 

115.26

 

 

 

129.05

 

 

 

157.22

 

 

 

150.33

 

S&P Midcap 400

 

 

100.00

 

 

 

109.77

 

 

 

107.38

 

 

 

129.65

 

 

 

150.71

 

 

 

134.01

 

2017 Peer Group

 

 

100.00

 

 

 

114.15

 

 

 

83.10

 

 

 

122.09

 

 

 

138.07

 

 

 

99.79

 

2018 Peer Group

 

 

100.00

 

 

 

111.00

 

 

 

83.42

 

 

 

113.97

 

 

 

136.22

 

 

 

93.20

 

 

The information in the graph and table above is not deemed “filed” with the Securities and Exchange Commission and is not to be incorporated by reference in any of PCA’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date of this Annual Report on Form 10-K, except to the extent that PCA specifically incorporates such information by reference.

14


 

Item 6.

SELECTED FINANCIAL DATA

The following table sets forth selected historical financial data of PCA (dollars and shares in millions, except per share data). The information contained in the table should be read in conjunction with the disclosures in “Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

Statement of Income Data (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

7,014.6

 

 

$

6,444.9

 

 

$

5,779.0

 

 

$

5,741.7

 

 

$

5,852.6

 

Net Income

 

 

738.0

 

 

 

668.6

 

 

 

449.6

 

 

 

436.8

 

 

 

392.6

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

— basic

 

 

7.82

 

 

 

7.09

 

 

 

4.76

 

 

 

4.47

 

 

 

3.99

 

— diluted

 

 

7.80

 

 

 

7.07

 

 

 

4.75

 

 

 

4.47

 

 

 

3.99

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

— basic

 

 

93.7

 

 

 

93.5

 

 

 

93.5

 

 

 

96.6

 

 

 

97.0

 

— diluted

 

 

93.9

 

 

 

93.7

 

 

 

93.7

 

 

 

96.7

 

 

 

97.1

 

Cash dividends declared per common share

 

 

3.00

 

 

 

2.52

 

 

 

2.36

 

 

 

2.20

 

 

 

1.60

 

Balance Sheet Data (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

6,569.7

 

 

$

6,197.5

 

 

$

5,777.0

 

 

$

5,272.3

 

 

$

5,258.7

 

Total debt obligations

 

 

2,502.7

 

 

 

2,650.7

 

 

 

2,667.4

 

 

 

2,319.7

 

 

 

2,365.2

 

Stockholders' equity

 

 

2,672.4

 

 

 

2,182.6

 

 

 

1,759.8

 

 

 

1,633.3

 

 

 

1,521.4

 

 

(a)

Effective January 1, 2016, the Company adopted Accounting Standards Update (ASU) 2015-03 (Topic 835): Simplifying the Presentation of Debt Issuance Costs. We applied this guidance retrospectively, as required, and reclassified the debt issuance costs from “Other long-term assets” to “Long-term debt” on our Consolidated Balance Sheet to conform with current period presentation. Total assets for all periods presented have been updated to reflect this adoption.

 

Effective December 31, 2015, the Company adopted Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes. The guidance eliminates the requirement to classify deferred taxes between current and noncurrent and requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. Our total assets for all periods presented have been updated to reflect this adoption.

 

Effective January 1, 2014, the Company changed its method of accounting for inventories from lower of cost, as determined by the LIFO method, or market, to lower of cost, as determined by the average cost method, or market. The Company applied the change retrospectively to all prior periods presented herein in accordance with US generally accepted accounting principles (GAAP) relating to accounting changes.

 

Net income and net income per common share are impacted by a lower U.S. corporate federal statutory income tax rate of 21% in 2018 and 35% in in all prior years presented in this table. In addition, both 2018 and 2017 include a tax benefit of $2.0 million and $122.1 million, respectively, related to the enactment in December 2017 of the Tax Cuts and Jobs Act (H.R.1). See Note 7, Income Taxes, for more information.

15


 

Item 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of historical results of operations and financial condition should be read in conjunction with the audited financial statements and the notes thereto which appear elsewhere in this Form 10-K. This discussion includes forward-looking statements regarding our expectations with respect to our future performance, liquidity, and capital resources. Such statements, along with any other non-historical statements in the discussion, are forward-looking. See our discussion regarding forward-looking statements included under “Part I, Item 1A. Risk Factors” of this Form 10-K.

Overview

PCA is the third largest producer of containerboard products and the third largest producer of uncoated freesheet paper in North America. We operate six containerboard mills, two paper mills, and 95 corrugated products manufacturing plants. Our containerboard mills produce linerboard and corrugating medium, which are papers primarily used in the production of corrugated products. Our corrugated products manufacturing plants produce a wide variety of corrugated packaging products, including conventional shipping containers used to protect and transport manufactured goods, multi-color boxes and displays with strong visual appeal that help to merchandise the packaged product in retail locations, and honeycomb protective packaging. In addition, we are a large producer of packaging for meat, fresh fruit and vegetables, processed food, beverages, and other industrial and consumer products. We also manufacture and sell white papers, including both commodity and specialty papers, which may have custom or specialized features such as colors, coatings, high brightness, and recycled content. We are headquartered in Lake Forest, Illinois and operate primarily in the United States.

Executive Summary

Net sales were $7.01 billion for the year ended December 31, 2018 and $6.44 billion in 2017. We reported $738 million of net income, or $7.80 per diluted share, in 2018, compared to $669 million, or $7.07 per diluted share, in 2017. Net income included $22 million of expense for special items in 2018, compared to $100 million of income for special items in 2017, including $122 million of estimated income tax benefit related to the enactment in December 2017 of the Tax Cut and Jobs Act (H.R.1). Special items in both periods are described later in this section. Excluding special items, we recorded $760 million of net income, or $8.03 per diluted share, in 2018, compared to $569 million, or $6.02 per diluted share, in 2017. The increase was driven primarily by higher prices and mix and volumes in our Packaging segment, higher prices and mix in our Paper segment, lower taxes, and lower wood and recycled fiber costs, partially offset by lower volumes in our Paper segment, higher operating and converting costs, higher freight and logistic expenses, and higher annual outage expense, and other costs. For additional detail on special items included in reported GAAP results and other non-GAAP measures, see “Item 7. Reconciliations of Non-GAAP Financial Measures to Reported Amounts.”

Packaging segment income from operations was $1,045 million in 2018, compared to $950 million in 2017. Packaging segment EBITDA excluding special items was $1,401 million in 2018, compared to $1,264 million in 2017. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes driven by strong demand, and lower recycled fiber costs; partially offset by higher operating and converting costs; higher freight and logistic expense; and higher annual outage expense.

Paper segment income from operations was $98 million in 2018, compared to $54 million in 2017. Paper segment EBITDA excluding special items was $165 million in 2018, compared to $145 million in 2017. The increase was due primarily to higher paper prices and mix, lower operating costs, and lower annual outage expense, partially offset by higher freight and logistic expense and higher fiber costs.

During the second quarter of 2018, the Company discontinued production of uncoated freesheet and coated one-side grades at its Wallula, Washington mill and converted the No. 3 paper machine to a 400,000 ton-per-year virgin kraft linerboard machine. The Company incurred charges in the Packaging and Paper segments relating to these activities during 2017 and 2018 as described below under “Special Items and Earnings per Diluted Share, Excluding Special Items.”

In October 2017, the Company acquired substantially all of the assets of Sacramento Container Corporation, and 100% of the membership interests of Northern Sheets, LLC and Central California Sheets, LLC (collectively the “Sacramento Container acquisition”) for $274 million with cash on hand. The acquired companies operate two full-line corrugated product operations and sheet feeders in McClellan, California and Kingsburg, California. The operating results of the companies acquired in the Sacramento Container acquisition are included in our results and reported in the Packaging segment from and after October 2017. These operations have been substantially integrated into our business and have helped drive growth in our corrugated products volumes during 2018.

16


 

Special Items and Earnings per Diluted Share, Excluding Special Items

Earnings per diluted share, excluding special items, in 2018 and 2017 were as follows:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

Earnings per diluted share

 

$

7.80

 

 

$

7.07

 

Special items:

 

 

 

 

 

 

 

 

Wallula mill restructuring (a)

 

 

0.24

 

 

 

0.21

 

Facilities closure and other costs (b)

 

 

0.01

 

 

 

(0.04

)

Tax reform (c)

 

 

(0.02

)

 

 

(1.29

)

Internal legal entity consolidation (d)

 

 

 

 

 

0.04

 

DeRidder mill incident (e)

 

 

 

 

 

0.03

 

Acquisition and integration related costs (f)

 

 

 

 

 

0.01

 

Deferred debt issuance costs (g)

 

 

 

 

 

0.01

 

Expiration of timberland repurchase option (h)

 

 

 

 

 

(0.01

)

Hexacomb working capital adjustment (i)

 

 

 

 

 

(0.01

)

Total special items (income) expense

 

 

0.23

 

 

 

(1.05

)

Earnings per diluted share, excluding special items

 

$

8.03

 

 

$

6.02

 

 

(a)

For 2018 and 2017, includes $30.0 million and $33.4 million, respectively, of charges related to the second quarter 2018 discontinuation of uncoated free sheet and coated one-side grades at the Wallula, Washington mill associated with the conversion of the No. 3 paper machine to a high-performance 100% virgin kraft linerboard machine.

(b)

For 2018, includes $1.8 million of charges consisting of closure costs related to corrugated products facilities and a corporate administration facility. For 2017, includes $5.8 million of income primarily related to the sale of land corresponding to the closure of a corrugated products facility, partially offset by closure costs related to corrugated products facilities, a paper administration facility, a corporate administration facility, and a lump sum settlement of a multiemployer pension plan withdrawal liability for one of our corrugated products facilities.  

(c)

For 2018 and 2017, includes $2.0 million and $122.1 million, respectively, of income tax benefit for the re-measurement of our net deferred tax liability for the reduction in the U.S. corporate federal statutory income tax rate related to our 2017 measurement period adjustments in accordance with SEC Staff Accounting Bulletin No. 118 (SAB 118), Income Tax Accounting Implications of the Tax Cuts and Jobs Act.

(d)

Includes $3.3 million of tax expense for the change in value of deferred taxes as a result of an internal legal entity consolidation that will simplify future operating activities.

(e)

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

(f)

Includes $1.7 million of charges for acquisition and integration costs related to recent acquisitions.  

(g)

Includes $1.8 million of expense related to the write-off of deferred debt issuance costs in connection with the December 2017 debt refinancing.

(h)

Includes a $2.0 million gain related to the expiration of a repurchase option corresponding to timberland previously sold.

(i)

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

 

Management excludes special items, as it believes these items are not necessarily reflective of the ongoing results of operations of our business. We present these measures because they provide a means to evaluate the performance of our segments and our company on an ongoing basis using the same measures that are used by our management, because these measures assist in providing a meaningful comparison between periods presented and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. A reconciliation of diluted EPS to diluted EPS excluding special items is included above and the reconciliations of other non-GAAP measures used in this Management's Discussion and Analysis of Financial Condition and Results of Operations, to the most comparable measure reported in accordance with GAAP, are included later in Item 7 under “Reconciliations of Non-GAAP Financial Measures to Reported Amounts.” Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such.

17


 

Industry and Business Conditions

Trade publications reported North American industry-wide corrugated products total shipments increased 1.7% during 2018, compared to 2017. Reported industry containerboard production increased 1.7% compared to 2017, and reported industry containerboard inventories at the end of 2018 were approximately 2.7 million tons, up 11.7% compared to 2017.  Reported containerboard export shipments were flat compared to 2017. In March 2018, trade publications reported a $50 price per ton increase on linerboard and corrugating medium. In January 2019, trade publications reported a $10 price per ton decrease on corrugating medium.

The market for communication papers competes heavily with electronic data transmission and document storage alternatives. Increasing shifts to these alternatives have reduced usage of traditional print media and communication papers. Trade publications reported North American uncoated freesheet paper shipments were down 4.0% in 2018, compared to 2017. Average prices reported by a trade publication for cut size office papers increased $83 per ton, or 8.7%, in 2018, compared to 2017.

Outlook

Looking ahead to the first quarter of 2019, we expect continued strong demand in our Packaging segment for both containerboard volume and corrugated products volume, and we expect strong market conditions in our Paper segment to continue.  We anticipate higher labor and benefits costs with annual wage increases and other timing-related expenses.  Although we expect costs for freight and recycled fiber to be fairly flat, we do anticipate some inflation with most of our chemical and repair and materials costs, while seasonally colder weather will increase energy usage and wood costs. We also expect our tax rate to be slightly higher.  Finally, the recent decrease in the published price for domestic medium will have a minimal effect on earnings. Considering these items, we expect first quarter 2019 earnings, excluding special items, to be lower than fourth quarter 2018. We do not expect special items to be significant during the first quarter of 2019.

Results of Operations

Year Ended December 31, 2018, Compared with Year Ended December 31, 2017

The historical results of operations of PCA for the years ended December 31, 2018 and 2017 are set forth below (dollars in millions):

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2018

 

 

2017 (c)

 

 

Change

 

Packaging

 

$

5,938.5

 

 

$

5,312.3

 

 

$

626.2

 

Paper

 

 

1,002.0

 

 

 

1,051.8

 

 

 

(49.8

)

Corporate and other and eliminations

 

 

74.1

 

 

 

80.8

 

 

 

(6.7

)

Net sales

 

$

7,014.6

 

 

$

6,444.9

 

 

$

569.7

 

Packaging

 

$

1,045.4

 

 

$

950.3

 

 

$

95.1

 

Paper

 

 

97.7

 

 

 

54.0

 

 

 

43.7

 

Corporate and other

 

 

(75.4

)

 

 

(71.8

)

 

 

(3.6

)

Income from operations

 

 

1,067.7

 

 

 

932.5

 

 

 

135.2

 

Interest expense, net and other

 

 

(97.2

)

 

 

(103.9

)

 

 

6.7

 

Income before taxes

 

 

970.5

 

 

 

828.6

 

 

 

141.9

 

Income tax expense (a)

 

 

(232.5

)

 

 

(160.0

)

 

 

(72.5

)

Net income

 

$

738.0

 

 

$

668.6

 

 

$

69.4

 

Net income excluding special items (b)

 

$

760.4

 

 

$

569.1

 

 

$

191.3

 

EBITDA (b)

 

$

1,478.6

 

 

$

1,323.9

 

 

$

154.7

 

EBITDA excluding special items (b)

 

$

1,497.2

 

 

$

1,343.4

 

 

$

153.8

 

 

 

(a)

The U.S. corporate federal statutory income tax rate in 2018 was 21% and in 2017 was 35%. Income tax expense for 2018 and 2017 included a tax benefit of $2.0 million and $122.1 million, respectively, related to the enactment in December 2017 of the Tax Cuts and Jobs Act (H.R.1). See Note 7, Income Taxes, for more information.

 

(b)

See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 7 for a reconciliation of non-GAAP measures to the most comparable GAAP measure.

 

(c)

Effective January 1, 2018, the Company adopted ASU 2017-07, Compensation: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost and applied this standard retrospectively to the

18


 

 

prior period reflected herein. See Note 2, Summary of Significant Accounting Policies and Note 18, Segment Information, for more information.

Net Sales

Net sales increased $570 million, or 8.8%, to $7,015 million in 2018, compared to $6,445 million in 2017.

Packaging. Net sales increased $626 million, or 11.8%, to $5,939 million, compared to $5,312 million in 2017, due to increased containerboard and corrugated products volume ($367 million) and higher domestic and export containerboard and corrugated products prices and mix ($259 million). In 2018, our domestic containerboard prices increased 6.3% and export prices increased 16.3% compared to 2017. Containerboard outside shipments increased 10.7%, and total corrugated products shipments were up 5.2% per day and 5.6% in total, compared to 2017. Prices reported by trade publications increased $50 per ton on linerboard and corrugating medium in March of 2018.

Paper. Net sales decreased $50 million, or 4.7%, to $1,002 million, compared to $1,052 million in 2017. The decrease was due to lower volume ($93 million), primarily as a result of discontinuing the production and sale of the products on the No. 3 machine at the Wallula mill in connection with its conversion to linerboard production, partially offset by higher prices and mix ($43 million).

Gross Profit

Gross profit increased $175 million in 2018, compared to 2017. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes, higher paper prices and mix, and lower wood and recycled fiber costs, partially offset by lower volumes in our Paper segment and higher operating and converting costs. In 2018, gross profit included special items of $15 million related to the conversion of the No. 3 machine at the Wallula mill, compared to $11 million related to the conversion of the No. 3 machine at the Wallula mill and acquisition-related costs in 2017.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (SG&A) increased $17 million in 2018, compared to 2017. The increase in 2018 was primarily due to higher employee salaries and fringes ($18 million), the Sacramento Container acquisition ($8 million), outside professional services ($6 million) and other administrative expenses individually insignificant ($10 million).  These increases were partially offset by certain expenses that were previously recorded in SG&A for 2017 which are now recorded in cost of sales for 2018 ($25 million). Effective January 1, 2018, the Company adopted ASU 2014-09 (Topic 606): Revenue from Contracts with Customers using the modified retrospective method. The new standard provides additional clarity concerning contract fulfillment costs, which resulted in certain costs being classified as cost of sales rather than SG&A for 2018.   

Other (Expense) Income, Net

Other (expense) income, net for the years ended December 31, 2018 and 2017 are set forth below (dollars in millions):

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

Asset disposals and write-offs

 

$

(17.3

)

 

$

(10.5

)

Wallula mill restructuring

 

 

(14.9

)

 

 

(23.1

)

Facilities closure and other costs

 

 

(1.6

)

 

 

5.9

 

Insurance deductible for property damage

 

 

(0.5

)

 

 

 

Acquisition and integration related costs

 

 

(0.2

)

 

 

(0.8

)

DeRidder mill incident

 

 

 

 

 

9.7

 

Hexacomb working capital adjustment

 

 

 

 

 

2.3

 

Expiration of timberland repurchase option

 

 

 

 

 

2.0

 

Other

 

 

(6.7

)

 

 

(3.9

)

Total

 

$

(41.2

)

 

$

(18.4

)

 

We discuss these items in more detail in Note 6, Other (Expense) Income, Net of the Condensed Notes to the Consolidated Financial Statements in “Part II, Item 8. Financial Statements” of this Form 10-K.

19


 

Income from Operations

Income from operations increased $135 million, or 14.5%, for the year ended December 31, 2018, compared to 2017. Income from operations in 2018 included $32 million of expense for special items compared to $30 million in 2017. Special items in 2018 consist of $30 million of charges related to the conversion of the Wallula No. 3 paper machine and $2 million related to facilities closures and other costs. 2017 special items included $33 million of charges related to the conversion of the Wallula No. 3 paper machine, $5 million for the property damage and business interruption insurance deductible related to the DeRidder mill incident, $2 million for integration-related costs, and $11 million in net gains related to facility closures and land sales, an adjustment to Hexacomb working capital, and the expiration of a repurchase option to timberland previously sold.

Packaging. Segment income from operations increased $95 million to $1,045 million, compared to $950 million in 2017. The increase in 2018 related primarily to higher containerboard and corrugated products prices and mix ($237 million), higher containerboard and corrugated products sales and production volumes ($141 million), and lower wood and recycled fiber costs ($25 million), partially offset by higher operating and converting costs ($177 million), higher annual outage expense ($36 million), higher freight expense ($26 million), higher depreciation expense ($24 million), Wallula No. 3 paper machine conversion-related costs ($5 million), and other expenses primarily related to the disposition of fixed assets ($8 million) and a 2017 insurance recovery related to the DeRidder incident ($13 million). Special items in 2018 included expense of $12 million of charges related to the conversion of the Wallula No. 3 paper machine and $2 million related to facilities closures and other costs. Special items in 2017 included expense of $5 million for property damage and business interruption insurance deductible related to the DeRidder mill incident, $2 million in integration-related costs, and $11 million in net gains related to facility closures, land sales, an adjustment to Hexacomb working capital and the expiration of a repurchase option corresponding to timberland previously sold.

Paper. Segment income from operations increased $44 million to $98 million, compared to $54 million in 2017. The increase primarily related to higher paper prices and mix ($43 million), lower operating costs ($19 million), lower annual outage expense ($19 million), and lower depreciation expense ($6 million), partially offset by lower sales and production volumes ($35 million), higher freight expense ($12 million), and higher wood and recycled fiber costs ($12 million). Special items during 2018 included expense of $18 million compared to $33 million in 2017 related to the conversion of the Wallula No. 3 paper machine to kraft linerboard.

Interest Expense, Net and Other, and Income Taxes

Interest expense, net and other, during 2018 decreased $7 million compared to 2017. The decrease is primarily related to our repayment of the 6.50% Senior Notes in March 2018 and our term loans in December 2017, partially offset by interest expense on the new notes related to the December 2017 refinancing.

During 2018, income tax expense increased $73 million compared to 2017, primarily due to the 2017 income tax benefit of $122.1 million recorded for the re-measurement of our net deferred tax liability to the lower federal income tax rate as a result of H.R. 1 (P.L. 115-97), originally known as the “Tax Cuts and Jobs Act”, which the President signed into law on December 22, 2017. For additional information regarding the 2017 impact of the Tax Act, see Note 7, Income Taxes, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K. Excluding the tax reform related income tax benefits of $2.0 million in 2018 and $122.1 million in 2017, the 2018 income tax expense would have decreased $48 million compared to 2017, primarily as a result of the reduction in the U.S. corporate federal statutory income tax rate. The effective tax rate for 2018 and 2017 was 24.0% and 19.3%, respectively. Excluding the tax reform related income tax benefits of $2.0 million in 2018 and $122.1 million in 2017, the effective tax rate for 2018 and 2017 would have been 24.2% and 34.1%, respectively.

20


 

Year Ended December 31, 2017, Compared with Year Ended December 31, 2016

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2017 (c)

 

 

2016 (c)

 

 

Change

 

Packaging

 

$

5,312.3

 

 

$

4,584.8

 

 

$

727.5

 

Paper

 

 

1,051.8

 

 

 

1,093.9

 

 

 

(42.1

)

Corporate and other and eliminations

 

 

80.8

 

 

 

100.3

 

 

 

(19.5

)

Net sales

 

$

6,444.9

 

 

$

5,779.0

 

 

$

665.9

 

Packaging

 

$

950.3

 

 

$

718.5

 

 

$

231.8

 

Paper

 

 

54.0

 

 

 

131.7

 

 

 

(77.7

)

Corporate and other

 

 

(71.8

)

 

 

(66.9

)

 

 

(4.9

)

Income from operations

 

 

932.5

 

 

 

783.3

 

 

 

149.2

 

Interest expense, net and other

 

 

(103.9

)

 

 

(94.8

)

 

 

(9.1

)

Income before taxes

 

 

828.6

 

 

 

688.5

 

 

 

140.1

 

Income tax expense (a)

 

 

(160.0

)

 

 

(238.9

)

 

 

78.9

 

Net income

 

$

668.6

 

 

$

449.6

 

 

$

219.0

 

Net income excluding special items (b)

 

$

569.1

 

 

$

462.0

 

 

$

107.1

 

EBITDA (b)

 

$

1,323.9

 

 

$

1,141.3

 

 

$

182.6

 

EBITDA excluding special items (b)

 

$

1,343.4

 

 

$

1,157.5

 

 

$

185.9

 

 

 

(a)

Income tax expense in 2017 included a tax benefit of $122.1 million related to the enactment in December 2017 of the Tax Cuts and Jobs Act (H.R.1). See Note 7, Income Taxes, for more information.

 

(b)

See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 7 for a reconciliation of non-GAAP measures to the most comparable GAAP measure.

 

(c)

Effective January 1, 2018, the Company adopted ASU 2017-07, Compensation: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost and applied this standard retrospectively to the prior periods reflected herein. See Note 2, Summary of Significant Accounting Policies and Note 18, Segment Information, for more information.

Net Sales

Net sales increased $666 million, or 11.5%, to $6,445 million in 2017, compared to $5,779 million in 2016.

Packaging. Net sales increased $728 million, or 15.9%, to $5,312 million, compared to $4,585 million in 2016, due to increased containerboard and corrugated products volume ($428 million) and higher domestic and export containerboard and corrugated products prices and mix ($299 million). In 2017, our domestic containerboard prices increased 11.1% and export prices increased 17.2% compared to 2016. Containerboard outside shipments increased 7.9%, and total corrugated products shipments were up 8.6%, compared to 2016. Prices reported by trade publications increased $50 per ton on linerboard in April; corrugating medium increased $50, $20, and $10 per ton in April, July, and August respectively.

Paper. Net sales decreased $42 million, or 3.8%, to $1,052 million, compared to $1,094 million in 2016. The decrease was due to lower pulp volume ($47 million) as a result of the December 2016 shutdown of our market pulp operations at our Wallula mill, and unfavorable changes in prices and mix ($7 million), partially offset by higher white paper volume ($12 million).

Gross Profit

Gross profit increased $195 million in 2017, compared to 2016. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes, partially offset by lower Paper segment prices and mix and sales and production volumes, and higher input and operating costs. In 2017, gross profit included special items of $10 million related to the conversion of the No. 3 machine at the Wallula mill and $1 million of acquisition-related costs, compared to $5 million in 2016 for facility closure and acquisition-related costs.

21


 

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased $51 million in 2017, compared to 2016. The increase in 2017 was due primarily to higher administrative costs corresponding to the acquisitions of TimBar and Columbus Container in the second half of 2016 and Sacramento Container in the fourth quarter of 2017.  

Other (Expense) Income, Net

Other (expense) income, net for the years ended December 31, 2017 and 2016 are set forth below (dollars in millions):

 

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

Wallula mill restructuring

 

$

(23.1

)

 

$

 

Asset disposals and write-offs

 

 

(10.5

)

 

 

(11.9

)

Acquisition and integration related costs

 

 

(0.8

)

 

 

(3.3

)

Expiration of timberland repurchase option

 

 

2.0

 

 

 

 

Hexacomb working capital adjustment

 

 

2.3

 

 

 

 

Facilities closure and other costs

 

 

5.9

 

 

 

(10.3

)

DeRidder mill incident

 

 

9.7

 

 

 

 

Ceased production of market pulp at Wallula

 

 

 

 

 

(0.6

)

Other

 

 

(3.9

)

 

 

1.8

 

Total

 

$

(18.4

)

 

$

(24.3

)

 

We discuss these items in more detail in Note 6, Other (Expense) Income, Net of the Condensed Notes to the Consolidated Financial Statements in “Part II, Item 8. Financial Statements” of this Form 10-K.

Income from Operations

Income from operations increased $149 million, or 19.0%, for the year ended December 31, 2017, compared to 2016. 2017 income from operations included $30 million of expense for special items compared to $19 million of expense in 2016. Special items in 2017 consist of $33 million of charges related to the conversion of the Wallula No. 3 paper machine, $5 million for the property damage and business interruption insurance deductible related to the DeRidder mill incident, $2 million for integration-related costs, and $11 million in net gains related to facility closures and land sales, an adjustment to Hexacomb working capital, and the expiration of a repurchase option corresponding to timberland previously sold. 2016 special items included $11 million of facility closure costs related to corrugated manufacturing facilities and a paper distribution center, $4 million of TimBar and Columbus Container acquisition-related costs, $3 million related to shutdown of market pulp operations at our Wallula mill, and $1 million related to our withdrawal from a multiemployer pension plan for one of our corrugated products facilities.

Packaging. Segment income from operations increased $232 million to $950 million, compared to $718 million in 2016. The increase in 2017 related primarily to higher containerboard and corrugated products prices and mix ($223 million), and higher containerboard and corrugated products sales and production volumes ($81 million), partially offset by higher costs for input costs ($49 million), labor and fringes ($21 million), freight ($13 million), converting and other costs ($8 million), and higher depreciation expense ($12 million). Special items in 2017 included expense of $5 million for property damage and business interruption insurance deductible related to the DeRidder mill incident, $2 million in integration-related costs, and $11 million in net gains related to facility closures and land sales, an adjustment to Hexacomb working capital, and the expiration of a repurchase option corresponding to timberland previously sold. Special items in 2016 included $9 million of facility closure costs, $4 million of TimBar and Columbus Container acquisition-related costs, and $1 million related to our withdrawal from a multiemployer pension plan for one of our corrugated products facilities.

Paper. Segment income from operations decreased $78 million to $54 million, compared to $132 million in 2016. The decrease primarily related to lower sales and production volumes ($17 million), lower paper prices and mix ($8 million), and higher costs for energy ($12 million) and annual outage expenses ($10 million). Special items during 2017 included expense of $33 million related to the conversion of the Wallula No. 3 machine to kraft linerboard, compared to $4 million related to the shutdown of market pulp operations at our Wallula mill and facilities closures in 2016.

22


 

Interest Expense, Net and Other, and Income Taxes

Interest expense, net and other, during 2017 increased $9 million compared to 2016. The increase in interest expense was primarily due to interest on term loan borrowings for the TimBar acquisition made in August 2016, higher interest rates on variable rate debt due to higher LIBOR in 2017 compared to 2016, and interest on the new notes related to the December 2017 refinancing.

During 2017, income tax expense decreased $79 million compared to 2016 primarily due to a $122.1 million tax benefit as a result of H.R. 1 (P.L. 115-97), originally known as the “Tax Cuts and Jobs Act” (the “Tax Act”), which the President signed into law on December 22, 2017. The effective tax rate for 2017 and 2016 was 19.3% and 34.7%, respectively. For additional information regarding the impact of the Tax Act, see Note 7, Income Taxes, in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Liquidity and Capital Resources

Sources and Uses of Cash

Our primary sources of liquidity are net cash provided by operating activities and available borrowing capacity under our revolving credit facility. We ended the year with $362 million of cash and $327 million of unused borrowing capacity under the revolving credit facility, net of letters of credit. Currently, our primary uses of cash are for operations, capital expenditures, acquisitions, debt service, common stock dividends, and repurchases of common stock. We believe that net cash generated from operating activities, cash on hand, available borrowings under our revolving credit facility and available capital through access to capital markets will be adequate to meet our liquidity and capital requirements, including payments of any declared common stock dividends, for the foreseeable future. As our debt or credit facilities become due, we will need to repay, extend or replace such facilities. Our ability to do so will be subject to future economic conditions and financial, business, and other factors, many of which are beyond our control.

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

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

Net cash provided by (used for):

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

1,180.1

 

 

$

856.1

 

 

$

806.9

 

Investing activities

 

 

(608.2

)

 

 

(609.1

)

 

 

(769.6

)

Financing activities

 

 

(427.3

)

 

 

(269.4

)

 

 

17.8

 

Net increase (decrease) in cash and cash equivalents

 

$

144.6

 

 

$

(22.4

)

 

$

55.1

 

 

Operating Activities

Our operating cash flow is primarily driven by our earnings and changes in operating assets and liabilities, such as accounts receivable, inventories, accounts payable and other accrued liabilities, as well as other factors described below. Cash requirements for operating activities are subject to PCA's operating needs and the timing of collection of receivables and payments of payables and expenses.

2018

During 2018, net cash provided by operating activities was $1,180 million, compared to $856 million for 2017, an increase of $324 million. Cash from operations excluding changes in cash used for operating assets and liabilities increased $231 million. The increase was primarily due to higher income from operations in 2018 as discussed above and lower qualified pension plan contributions of $20 million made in 2018 compared to the same period in 2017. Cash increased by $93 million due to changes in operating assets and liabilities. The increase was primarily due to the following: (a) a reduction in taxes paid in 2018 as a result of the lower U.S. corporate federal statutory income tax rate of 21% and the utilization in 2018 of a federal overpayment from 2017 as a result of Federal Tax Reform, (b) lower accounts receivables levels in 2018 compared to 2017 due to fewer shipping days in December 2018 compared to December 2017, as well as timing of collections, and (c) the receipt of the DeRidder insurance proceeds in the first quarter of 2018. These changes were partially offset by lower accounts payable levels in 2018 compared to 2017 primarily related to timing of payments.

23


 

2017

During 2017, net cash provided by operating activities was $856 million, compared to $807 million for 2016, an increase of $49 million. Cash from operations excluding changes in cash used for operating assets and liabilities increased $200 million. The increase was primarily due to higher income from operations in 2017 as discussed above. Cash decreased by $151 million due to changes in operating assets and liabilities. The decrease was primarily due to higher accounts receivable levels in 2017 compared to 2016 because of increased sales and timing of collections; and a higher federal and state income tax receivable in 2017 compared to 2016 primarily due to an overpayment of required taxes made in 2017 prior to the enactment of tax reform. These changes were partially offset by an increase in accounts payable levels in 2017 compared to 2016 primarily related to timing of payments.

Investing Activities

2018

We used $608 million for investing activities in 2018, compared to $609 million in 2017. In 2018, we spent $552 million for internal capital investments, compared to $343 million in 2017. During 2018, we spent $56 million for acquisitions (Englander dZignPak), compared to $274 million for acquisitions in 2017 (Sacramento Container).

The details of capital expenditures for property and equipment, excluding acquisitions, by segment for the years ended December 31, 2018, 2017, and 2016, are included in the table below (dollars in millions).

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

Packaging

 

$

504.0

 

 

$

305.1

 

 

$

239.9

 

Paper

 

 

12.6

 

 

 

22.6

 

 

 

31.6

 

Corporate and Other

 

 

34.8

 

 

 

15.3

 

 

 

2.8

 

 

 

$

551.4

 

 

$

343.0

 

 

$

274.3

 

 

We expect capital investments in 2019 to be between $390 million and $410 million. These expenditures could increase or decrease as a result of a number of factors, including our financial results, strategic opportunities, future economic conditions, and our regulatory compliance requirements. We currently estimate capital expenditures to comply with environmental regulations will be about $10 million in 2019. Our estimated environmental expenditures could vary significantly depending upon the enactment of new environmental laws and regulations. For additional information, see “Environmental Matters” in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

At December 31, 2018, the Company had commitments for capital expenditures of $113 million. The Company believes that cash-on-hand combined with cash flow from operations will be sufficient to fund these commitments.

2017

We used $609 million for investing activities in 2017, compared to $770 million in 2016. In 2017, we spent $343 million for internal capital investments, compared to $274 million in 2016. During 2017, we spent $274 million for acquisitions (Sacramento Container), compared to $485 million for acquisitions in 2016 (TimBar and Columbus Container).

Financing Activities

2018

In 2018, net cash used for financing activities was $427 million, compared to $269 million of cash used for financing activities in 2017, an increase of $158 million. The increase primarily relates to higher debt repayments and dividends in 2018. In March 2018, we repaid from cash $150 million of our maturing 6.5% senior notes. We paid $268 million of dividends in 2018 compared to $238 million in 2017.

2017

In 2017, net cash used for financing activities was $269 million, compared to $18 million of cash provided by financing activities in 2016, a change of $287 million. In 2017, we paid down approximately $14 million of debt, including scheduled principal payments on our term loan borrowings and the refinancing of those borrowings as described below. In 2016, we increased our debt, as we borrowed $385 million to finance the TimBar acquisition. In addition, in 2016, we repurchased $100

24


 

million of shares, with no such repurchase activity in 2017. We paid $238 million of dividends in 2017 compared to $216 million in 2016.

To reduce exposure to variable interest rates, in December 2017, we issued a total of $1 billion in three-year and ten-year notes with fixed interest rates of 2.45% and 3.40%, respectively, and used the proceeds to fully pay down our five-year and seven-year term loans.

For more information about our debt, treasury lock derivative instruments, and commitments, see Note 10, Debt,  Note 14, Derivative Instruments and Hedging Activities, and Note 19, Commitments, Guarantees, Indemnifications, and Legal Proceedings, respectively, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Commitments

Contractual Obligations

The table below sets forth our enforceable and legally binding obligations as of December 31, 2018 for the categories described below. Some of the amounts included in the table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in the table. Purchase orders made in the ordinary course of business are excluded from the table below. Any amounts for which we are liable under purchase orders are reflected on the Consolidated Balance Sheets as accounts payable and accrued liabilities (dollars in millions):

 

 

 

Payments Due by Period

 

 

 

 

 

 

 

Less Than

1 Year

 

 

1-3 Years

 

 

3-5 Years

 

 

More Than  5 Years

 

 

 

Total

 

 

2019

 

 

2020-2021

 

 

2022-2023

 

 

2024 & After

 

2.45% Senior Notes, due December 2020

 

$

500.0

 

 

$

 

 

$

500.0

 

 

$

 

 

$

 

3.90% Senior Notes, due June 2022

 

 

400.0

 

 

 

 

 

 

 

 

 

400.0

 

 

 

 

4.50% Senior Notes, due November 2023

 

 

700.0