Condensed Notes to Unaudited Quarterly Consolidated Financial Statements
1
.
Nature of Operations and Basis of Presentation
Packaging Corporation of America ("we," "us," "our," PCA," or the "Company") was incorporated on January 25, 1999. In April 1999, PCA acquired the containerboard and corrugated packaging products business of Pactiv Corporation (Pactiv), formerly known as Tenneco Packaging, Inc., a wholly owned subsidiary of Tenneco Inc. We are a large diverse manufacturer of both packaging and paper products. We are headquartered in Lake Forest, Illinois and we operate primarily in the United States.
We report our business in
three
reportable segments: Packaging, Paper, and Corporate and Other. Our Packaging segment produces a wide variety of corrugated packaging products. The Paper segment manufactures and sells a range of white papers, including communication-based papers and pressure sensitive papers. Corporate and Other includes support staff services and related assets and liabilities, transportation assets, and activity related to other ancillary support operations. For more information about our segments, see Note 16
Segment Information
.
In these consolidated financial statements, certain amounts in prior periods' consolidated financial statements have been reclassified to conform with the current period presentation.
The consolidated financial statements of PCA as of
March 31, 2017
and for the
three
months ended
March 31, 2017
and
2016
are unaudited but include all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of such financial statements. The preparation of the consolidated financial statements involves the use of estimates and accruals. Actual results may vary from those estimates. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete audited financial statements. Operating results for the
three
months ended
March 31, 2017
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2017
. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2016
.
The consolidated financial statements include the accounts of PCA and its majority-owned subsidiaries after elimination of intercompany balances and transactions.
2
.
Acquisitions
TimBar Acquisition
On August 29, 2016, PCA acquired substantially all of the assets of TimBar Corporation (“TimBar”), a large independent corrugated products producer with
six
corrugated products production facilities, for a purchase price of
$385.6 million
, net of cash acquired. We financed the acquisition with a new
$385.0 million
five
-year term loan facility. TimBar provides solutions to customers in the higher margin retail, industrial packaging and display and fulfillment markets with a focus on a multi-color graphics and technical innovation. TimBar financial results are included in the Packaging segment from the date of acquisition.
The Company accounted for TimBar using the acquisition method of accounting in accordance with ASC 805,
Business Combinations
. The total purchase price has been preliminarily allocated to tangible and intangible assets acquired and liabilities assumed based on respective fair values, as follows (dollars in millions):
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|
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|
|
|
|
|
|
|
|
|
|
|
12/31/16 Allocation
|
|
Adjustments
|
|
Revised Allocation
|
Goodwill
|
$
|
157.3
|
|
|
$
|
(1.1
|
)
|
|
$
|
156.2
|
|
Other intangible assets
|
94.4
|
|
|
|
|
94.4
|
|
Property, plant and equipment
|
95.3
|
|
|
|
|
95.3
|
|
Other net assets
|
38.6
|
|
|
|
|
38.6
|
|
Net assets acquired
|
$
|
385.6
|
|
|
$
|
(1.1
|
)
|
|
$
|
384.5
|
|
During the first quarter of 2017, we received
$1.1 million
from the seller related to a working capital adjustment. We recorded the adjustment as a decrease to goodwill which lowered the purchase price to
$384.5 million
. The purchase price allocation presented above is preliminary and is subject to the finalization of working capital adjustments. Our current estimates and assumptions may change as more information becomes available. We expect to finalize the valuations within the 12-month period following the acquisition date.
Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. Among the factors that contributed to the recognition of goodwill were TimBar's commitment to continuous improvement and innovation in their operations, as well as the expected increases in PCA's containerboard integration levels. Goodwill is deductible for tax purposes.
Other intangible assets, primarily customer relationships, were assigned an estimated weighted average useful life of
14.2 years
.
Property, plant and equipment were assigned estimated useful lives ranging from
two
to
24 years
.
Columbus Container Acquisition
On November 30, 2016, PCA acquired substantially all of the assets of Columbus Container, Inc., an independent corrugated products producer with one production facility and five warehousing facilities, for a purchase price of
$99.7 million
, net of cash acquired. We paid the purchase price with available cash on hand. Columbus Container, Inc. is a full-service provider of corrugated packaging products utilizing state-of-the-art technologies and design centers to provide customers a solution for nearly any packaging need. Columbus Container financial results are included in the Packaging segment from the date of acquisition.
PCA allocated the total purchase price to the Columbus Container assets as follows:
$36.9 million
to goodwill,
$26.3 million
to intangible assets,
$27.2 million
to property, plant, & equipment, and
$9.3 million
to other net assets. The allocation presented is preliminary and is subject to the finalization of various valuations and assessments, primarily related to property, plant, and equipment and intangible assets. Our current estimates and assumptions may change as more information becomes available. We expect to finalize the valuations within the 12-month period following the acquisition date.
Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. Among the factors that contributed to the recognition of goodwill were Columbus Container's commitment to continuous improvement and
innovation in their operations, as well as the expected increases in PCA's containerboard integration levels. Goodwill is deductible for tax purposes.
Other intangible assets, primarily customer relationships, were assigned an estimated weighted average useful life of
14.4 years
.
Property, plant and equipment were assigned estimated useful lives ranging from
one
to
32 years
.
3
.
Earnings Per Share
The following table sets forth the computation of basic and diluted income per common share for the periods presented (dollars and shares in millions, except per share data):
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|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
2017
|
|
2016
|
|
Numerator:
|
|
|
|
|
Net income
|
$
|
117.4
|
|
|
$
|
103.7
|
|
|
Less: distributed and undistributed earnings allocated to participating securities
|
(1.0
|
)
|
|
(1.1
|
)
|
|
Net income attributable to common shareholders
|
$
|
116.4
|
|
|
$
|
102.6
|
|
|
Denominator:
|
|
|
|
|
Weighted average basic common shares outstanding
|
93.4
|
|
|
94.1
|
|
|
Effect of dilutive securities
|
0.2
|
|
|
0.1
|
|
|
Weighted average diluted common shares outstanding
|
93.6
|
|
|
94.2
|
|
|
Basic income per common share
|
$
|
1.25
|
|
|
$
|
1.09
|
|
|
Diluted income per common share
|
$
|
1.24
|
|
|
$
|
1.09
|
|
|
4
.
Other Income (Expense), Net
The components of other income (expense), net, were as follows (dollars in millions):
|
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|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
2017
|
|
2016
|
|
Hexacomb working capital adjustment (a)
|
$
|
2.3
|
|
|
$
|
—
|
|
|
DeRidder mill incident (b)
|
(5.0
|
)
|
|
—
|
|
|
Asset disposals and write-offs
|
(2.3
|
)
|
|
(1.8
|
)
|
|
Integration-related, facilities closure and other costs (c)
|
(0.8
|
)
|
|
(2.0
|
)
|
|
Other
|
(1.2
|
)
|
|
(0.1
|
)
|
|
Total
|
$
|
(7.0
|
)
|
|
$
|
(3.9
|
)
|
|
___________
|
|
(a)
|
The three months ended March 31, 2017 include
$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.
|
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(b)
|
The three months ended March 31, 2017 include
$5.0 million
of costs for the property damage and business interruption insurance deductible corresponding to the Februrary 2017 explosion at our DeRidder, LA mill.
|
|
|
(c)
|
The three months ended March 31, 2017 include
$0.8 million
of charges consisting of closure costs related to corrugated products facilities, integration costs related to the TimBar Corporation and Columbus Container, Inc. acquisitions, and costs related to a lump sum settlement payment of a multiemployer pension plan withdrawal liability for one of our corrugated products facilities.
|
The three months ended March 31, 2016 include
$2.0 million
of facilities closure costs.
5
.
Income Taxes
For the
three months ended March 31,
2017
and
2016
we recorded
$61.7 million
and
$55.5 million
of income tax expense and had an effective tax rate of
34.5%
and
34.8%
, respectively. The decrease in our effective tax rate for the three months ended March 31, 2017 compared with the same period in 2016, was primarily due to the adoption of ASU 2016-09 (Topic 718):
Improvements to Employee Share-Based Payment Accounting
, which requires all excess tax benefits and deficiencies from share-based payment awards to be recognized in the income statement as opposed to additional paid in capital.
Our effective tax rate may differ from the federal statutory income tax rate of
35.0%
, due primarily to the
effect of the domestic manufacturing deduction and state and local income taxes.
During the
three
months ended
March 31, 2017
there were no significant changes to our uncertain tax positions. For more information, see Note 6, Income Taxes, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our
2016
Annual Report on Form 10-K.
During the
three months ended March 31,
2017
and
2016
cash paid for taxes, net of refunds received, was
$9.7 million
and
$5.2 million
, respectively.
6
.
Inventories
We value our raw materials, work in process, and finished goods inventories using lower of cost, as determined by the average cost method, or market. Supplies and materials are valued at the first-in, first-out (FIFO) or average cost methods.
The components of inventories were as follows (dollars in millions):
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|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Raw materials
|
$
|
282.2
|
|
|
$
|
271.9
|
|
Work in process
|
13.7
|
|
|
12.9
|
|
Finished goods
|
212.8
|
|
|
206.5
|
|
Supplies and materials
|
235.8
|
|
|
232.3
|
|
Inventories
|
$
|
744.5
|
|
|
$
|
723.6
|
|
7
.
Property, Plant, and Equipment
The components of property, plant, and equipment were as follows (dollars in millions):
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|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Land and land improvements
|
$
|
154.1
|
|
|
$
|
149.7
|
|
Buildings
|
723.7
|
|
|
717.1
|
|
Machinery and equipment
|
4,987.7
|
|
|
4,951.4
|
|
Construction in progress
|
133.3
|
|
|
125.4
|
|
Other
|
66.2
|
|
|
66.7
|
|
Property, plant, and equipment, at cost
|
6,065.0
|
|
|
6,010.3
|
|
Less accumulated depreciation
|
(3,177.8
|
)
|
|
(3,114.6
|
)
|
Property, plant, and equipment, net
|
$
|
2,887.2
|
|
|
$
|
2,895.7
|
|
Depreciation expense for the
three months ended March 31, 2017
and
2016
was
$82.4 million
and
$80.7 million
, respectively. During the three months ended March 31, 2016, we recognized
$0.1 million
of incremental depreciation expense from shortening the useful lives of assets related to facilities closures.
At
March 31, 2017
and
December 31, 2016
purchases of property, plant, and equipment included in accounts payable were
$30.4 million
and
$12.8 million
, respectively.
8
.
Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. At
March 31, 2017
and
December 31, 2016
we had
$681.9 million
and
$682.7 million
of goodwill recorded in our Packaging segment, respectively. At both March 31, 2017 and December 31, 2016 we had
$55.2 million
of goodwill recorded in our Paper segment.
Changes in the carrying amount of our goodwill are as follows (dollars in millions):
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|
|
|
|
|
Goodwill
|
Balance at January 1, 2017
|
$
|
737.9
|
|
Acquisition adjustments (a)(b)
|
(0.8
|
)
|
Balance at March 31, 2017
|
$
|
737.1
|
|
___________
|
|
(a)
|
During the quarter ended March 31, 2017, the Company received
$1.1 million
from the seller related to a working capital adjustment. This adjustment was recorded as a decrease to the goodwill balance for the Company's August 2016 acquisition of TimBar Corporation.
|
|
|
(b)
|
During the quarter ended March 31, 2017, the Company recorded a
$0.3 million
opening balance sheet adjustment to increase the goodwill balance for the Company's November 2016 acquisition of Columbus Container, Inc.
|
Intangible Assets
Intangible assets are primarily comprised of customer relationships and trademarks and trade names.
The weighted average remaining useful life, gross carrying amount, and accumulated amortization of our intangible assets were as follows (dollars in millions):
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|
March 31, 2017
|
|
December 31, 2016
|
|
Weighted Average Remaining Useful Life (in Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Weighted Average Remaining Useful Life (in Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Customer relationships
|
12.9
|
|
$
|
424.5
|
|
|
$
|
86.8
|
|
|
13.1
|
|
$
|
424.5
|
|
|
$
|
79.8
|
|
Trademarks and trade names
|
10.7
|
|
27.7
|
|
|
9.3
|
|
|
10.5
|
|
27.7
|
|
|
8.1
|
|
Other
|
4.3
|
|
4.2
|
|
|
1.5
|
|
|
4.3
|
|
4.2
|
|
|
1.4
|
|
Total intangible assets (excluding goodwill)
|
12.7
|
|
$
|
456.4
|
|
|
$
|
97.6
|
|
|
12.9
|
|
$
|
456.4
|
|
|
$
|
89.3
|
|
During the
three months ended March 31, 2017
and
2016
, amortization expense was
$8.3 million
and
$5.7 million
, respectively.
9
.
Accrued Liabilities
The components of accrued liabilities were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Compensation and benefits
|
$
|
73.6
|
|
|
$
|
120.4
|
|
Medical insurance and workers’ compensation
|
28.8
|
|
|
28.8
|
|
Franchise, property, and sales and use taxes
|
15.5
|
|
|
16.7
|
|
Customer volume discounts and rebates
|
14.7
|
|
|
18.9
|
|
Environmental liabilities and asset retirement obligations
|
5.9
|
|
|
6.4
|
|
Severance, retention, and relocation
|
3.3
|
|
|
3.0
|
|
Other
|
5.3
|
|
|
7.0
|
|
Total
|
$
|
147.1
|
|
|
$
|
201.2
|
|
10
.
Debt
During the
three months ended March 31, 2017
, we made principal payments of
$29.8 million
and
$1.6 million
on our
five
-year term loan due August 2021 and our
seven
-year term loan due October 2020, respectively. For the
three months ended March 31,
2017
and
2016
, cash payments for interest were
$18.0 million
and
$15.8 million
, respectively.
Included in interest expense, net, are amortization of treasury lock settlements and amortization of financing costs. For both the
three months ended March 31, 2017
and
2016
, amortization of treasury lock settlements was
$1.4 million
. For the
three months ended March 31, 2017
and
2016
, amortization of financing costs was
$0.5 million
and
$0.4 million
, respectively.
At
March 31, 2017
we had
$1,647.6 million
of fixed-rate senior notes and
$979.3 million
of variable-rate term loans outstanding. At
March 31, 2017
the fair value of our fixed-rate debt was estimated to be
$1,721.9 million
. The difference between the book value and fair value is due to the difference between the period-end market interest rate and the stated rate of our fixed-rate debt. We estimated the fair value of our fixed-rate debt using quoted market prices (Level 2 inputs) within the fair value hierarchy, which is further defined in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our
2016
Annual Report on Form 10-K. The fair value of our variable-rate term debt approximates the carrying amount as our cost of borrowing is variable and approximates current market rates.
For more information on our long-term debt and interest rates on that debt, see Note 9, Debt, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our
2016
Annual Report on Form 10-K.
11
.
Employee Benefit Plans and Other Postretirement Benefits
The components of net periodic benefit cost for our pension plans were as follows (dollars in millions):
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|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Three Months Ended March 31
|
|
|
2017
|
|
2016
|
|
Service cost
|
$
|
6.1
|
|
|
$
|
6.1
|
|
|
Interest cost
|
10.4
|
|
|
10.2
|
|
|
Expected return on plan assets
|
(13.5
|
)
|
|
(12.4
|
)
|
|
Net amortization of unrecognized amounts
|
|
|
|
|
Prior service cost
|
1.5
|
|
|
1.4
|
|
|
Actuarial loss
|
1.9
|
|
|
1.4
|
|
|
Net periodic benefit cost
|
$
|
6.4
|
|
|
$
|
6.7
|
|
|
PCA makes pension plan contributions that are sufficient to fund its actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA). From time to time, PCA may make additional discretionary contributions based on the funded status of the plans, tax deductibility, income from operations, and other factors. For the three months ended March 31, 2017, we made contributions of
$3.7 million
to our qualified pension plans. We did not make contributions to our qualified plans during the three months ended March 31, 2016.
We expect to contribute at least the estimated required minimum contributions to our qualified plans of approximately
$8.0 million
in 2017.
The components of net periodic benefit cost for our postretirement plans were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Postretirement Plans
|
|
|
Three Months Ended March 31
|
|
|
2017
|
|
2016
|
|
Service cost
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
Interest cost
|
0.1
|
|
|
0.2
|
|
|
Amortization of actuarial (income) loss
|
—
|
|
|
(0.2
|
)
|
|
Net periodic benefit cost
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
12
.
Share-Based Compensation
The Company has a long-term equity incentive plan, which allows for grants of restricted stock, performance awards, stock appreciation rights, and stock options to directors, officers, and employees, as well as others who engage in services for PCA. The plan, as amended, terminates
May 1, 2023
and authorizes
10.6 million
shares of common stock for grant over the life of the plan. As of
March 31, 2017
,
1.2 million
shares were available for future issuance under the plan. Forfeitures are added back to the pool of shares of common stock available to be granted at a future date.
The following table presents restricted stock and performance unit award activity for the
three months ended March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Performance Units
|
|
Shares
|
|
Weighted Average Grant- Date Fair Value
|
|
Shares
|
|
Weighted Average Grant- Date Fair Value
|
Outstanding at January 1, 2017
|
786,079
|
|
|
$
|
63.44
|
|
|
232,088
|
|
|
$
|
62.68
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Vested
|
(18,950
|
)
|
|
67.64
|
|
|
—
|
|
|
—
|
|
Forfeitures
|
(2,153
|
)
|
|
64.59
|
|
|
—
|
|
|
—
|
|
Outstanding at March 31, 2017
|
764,976
|
|
|
$
|
63.33
|
|
|
232,088
|
|
|
$
|
62.68
|
|
Compensation Expense
Our share-based compensation expense is recorded in "Selling, general, and administrative expenses". Compensation expense for share-based awards recognized in the Consolidated Statements of Income, net of forfeitures, was as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
2017
|
|
2016
|
|
Restricted stock
|
$
|
3.4
|
|
|
$
|
4.9
|
|
|
Performance units
|
1.2
|
|
|
0.7
|
|
|
Total share-based compensation expense
|
4.6
|
|
|
5.6
|
|
|
Income tax benefit
|
(1.8
|
)
|
|
(2.2
|
)
|
|
Share-based compensation expense, net of tax benefit
|
$
|
2.8
|
|
|
$
|
3.4
|
|
|
The fair value of restricted stock and performance units is determined based on the closing price of the Company’s common stock on the grant date. As PCA’s Board of Directors has the ability to accelerate vesting of share-based awards upon an employee’s retirement, the Company accelerates the recognition of compensation expense for certain employees approaching normal retirement age.
The unrecognized compensation expense for all share-based awards at
March 31, 2017
was as follows (dollars in millions):
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Unrecognized Compensation Expense
|
|
Remaining Weighted Average Recognition Period (in years)
|
Restricted stock
|
$
|
23.7
|
|
|
2.6
|
Performance units
|
7.2
|
|
|
2.7
|
Total unrecognized share-based compensation expense
|
$
|
30.9
|
|
|
2.6
|
13
.
Stockholders' Equity
Dividends
During the
three months ended March 31, 2017
, we paid
$59.4 million
of dividends to shareholders. On February 28, 2017 PCA's Board of Directors declared a regular quarterly cash dividend of
$0.63
per share of common stock, which was paid on April 14, 2017 to shareholders of record as of March 15, 2017. The April 2017 dividend payment was
$59.4 million
.
Repurchases of Common Stock
On February 25, 2016, PCA announced that its Board of Directors authorized the repurchase of an additional
$200.0 million
of the Company’s outstanding common stock. Repurchases may be made from time to time in open market or privately negotiated transactions in accordance with applicable securities regulations. The timing and amount of repurchases will be determined by the Company in its discretion based on factors such as PCA’s stock price and market and business conditions.
The Company did not repurchase any shares of its common stock during the three months ended March 31, 2017.
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) (AOCI) by component were as follows (dollars in millions). Amounts in parentheses indicate losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss On Treasury Locks, Net
|
|
Unrealized Loss on Foreign Exchange Contracts
|
|
Unfunded Employee Benefit Obligations
|
|
Total
|
Balance at January 1, 2017
|
|
$
|
(17.8
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
(121.4
|
)
|
|
$
|
(139.6
|
)
|
Amounts reclassified from AOCI, net of tax
|
|
0.9
|
|
(a)
|
(0.2
|
)
|
|
2.2
|
|
(b)
|
2.9
|
|
Balance at March 31, 2017
|
|
$
|
(16.9
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(119.2
|
)
|
|
$
|
(136.7
|
)
|
Reclassifications out of AOCI were as follows (dollars in millions). Amounts in parentheses indicate expenses in the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from AOCI
|
|
|
|
|
Three Months Ended March 31
|
|
Affected Line Item in the Statement Where Net Income is Presented
|
Details about AOCI Components
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
Unrealized loss on treasury locks, net
|
|
$
|
(1.4
|
)
|
|
$
|
(1.4
|
)
|
|
See (a) below
|
|
|
0.5
|
|
|
0.5
|
|
|
Tax benefit
|
|
|
$
|
(0.9
|
)
|
|
$
|
(0.9
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
Unfunded employee benefit obligations
|
|
|
|
|
|
|
Amortization of prior service costs
|
|
$
|
(1.5
|
)
|
|
$
|
(1.4
|
)
|
|
See (b) below
|
Amortization of actuarial losses
|
|
(1.9
|
)
|
|
(1.2
|
)
|
|
See (b) below
|
|
|
(3.4
|
)
|
|
(2.6
|
)
|
|
Total before tax
|
|
|
1.2
|
|
|
1.0
|
|
|
Tax benefit
|
|
|
$
|
(2.2
|
)
|
|
$
|
(1.6
|
)
|
|
Net of tax
|
____________
|
|
(a)
|
This AOCI component is included in interest expense, net. Amount relates to the amortization of the effective portion of treasury lock derivative instruments recorded in AOCI. The net amount of settlement gains or losses on derivative instruments included in AOCI to be amortized over the next 12 months is a net loss of
$5.7 million
(
$3.5 million
after tax). For a discussion of treasury lock derivative instrument activity, see Note 13, Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our
2016
Annual Report on Form 10-K.
|
|
|
(b)
|
These AOCI components are included in the computation of net pension and postretirement benefit costs. See Note
11
,
Employee Benefit Plans and Other Postretirement Benefits
, for additional information.
|
14
.
Concentrations of Risk
Our Paper segment has had a long-standing commercial and contractual relationship with Office Depot, our largest customer in the paper business. This relationship exposes us to a significant concentration of business and financial risk. Our sales to Office Depot represent approximately
7%
and
9%
of our total Company sales revenue, for the three months ended March 31, 2017 and 2016, respectively, and approximately
44%
of our Paper segment sales revenue for both of those periods. At
March 31, 2017
and
December 31, 2016
we had
$38.3 million
and
$31.8 million
of accounts receivable due from Office Depot, which represents
5%
of our total Company accounts receivable for both of those periods.
In 2016, sales to Office Depot represented
42%
of our Paper segment sales. If these sales are reduced, we would need to find new customers. We may not be able to fully replace any lost sales, and any new sales may be at lower prices or higher costs. Any significant deterioration in the financial condition of Office Depot affecting its ability to pay or any other change that affects its willingness to purchase our products will harm our business and results of operations.
15
.
Transactions With Related Parties
Louisiana Timber Procurement Company, L.L.C. (LTP) is a variable-interest entity that is
50%
owned by PCA and
50%
owned by Boise Cascade Company (Boise Cascade). LTP procures sawtimber, pulpwood, residual chips, and other residual wood fiber to meet the wood and fiber requirements of PCA and Boise Cascade in Louisiana. PCA is the primary beneficiary of LTP, and has the power to direct the activities that most significantly affect the economic performance of LTP. Therefore, we consolidate 100% of LTP in our financial statements in our Corporate and Other segment. The carrying amounts of LTP's assets and liabilities (which relate primarily to noninventory working capital items) on our Consolidated Balance Sheets were
$3.8 million
at
March 31, 2017
and
$5.0 million
at
December 31, 2016
. During the three months ended March 31, 2017 and 2016, we recorded
$23.5 million
and
$22.3 million
, respectively, of LTP sales to Boise Cascade in "Net Sales" in the Consolidated Statements of Income and approximately the same amount of expenses in "Cost of Sales".
During the three months ended
March 31, 2017
and
2016
, fiber purchases from related parties were
$5.0 million
and
$4.7 million
,
respectively. Most of these purchases related to chip and log purchases by LTP from Boise Cascade's wood products business. These purchases are recorded in "Cost of Sales" in the Consolidated Statements of Income.
16
.
Segment Information
We report our business in
three
reportable segments: Packaging, Paper, and Corporate and Other. These segments represent distinct businesses that are managed separately because of differing products and services. Each of these businesses requires distinct operating and marketing strategies.
Each segment's profits and losses are measured on operating profits before interest expense, net, and income taxes. For many of these allocated expenses, the related assets and liabilities remain in the Corporate and Other segment.
Selected financial information by reportable segment was as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
Operating Income (Loss)
|
|
Three Months Ended March 31, 2017
|
|
Trade
|
|
Inter-segment
|
|
Total
|
|
|
Packaging
|
|
$
|
1,251.3
|
|
|
$
|
5.7
|
|
|
$
|
1,257.0
|
|
|
$
|
190.8
|
|
(a)
|
Paper
|
|
259.2
|
|
|
—
|
|
|
259.2
|
|
|
29.8
|
|
|
Corporate and Other
|
|
26.0
|
|
|
28.2
|
|
|
54.2
|
|
|
(17.5
|
)
|
(a)
|
Intersegment eliminations
|
|
—
|
|
|
(33.9
|
)
|
|
(33.9
|
)
|
|
—
|
|
|
|
|
$
|
1,536.5
|
|
|
$
|
—
|
|
|
$
|
1,536.5
|
|
|
203.1
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
(24.0
|
)
|
|
Income before taxes
|
|
|
|
|
|
|
|
$
|
179.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
Operating Income (Loss)
|
|
Three Months Ended March 31, 2016
|
|
Trade
|
|
Inter-segment
|
|
Total
|
|
|
Packaging
|
|
$
|
1,093.8
|
|
|
$
|
1.7
|
|
|
$
|
1,095.5
|
|
|
$
|
161.5
|
|
(b)
|
Paper
|
|
280.5
|
|
|
—
|
|
|
280.5
|
|
|
36.1
|
|
(b)
|
Corporate and Other
|
|
26.7
|
|
|
36.0
|
|
|
62.7
|
|
|
(16.8
|
)
|
|
Intersegment eliminations
|
|
—
|
|
|
(37.7
|
)
|
|
(37.7
|
)
|
|
—
|
|
|
|
|
$
|
1,401.0
|
|
|
$
|
—
|
|
|
$
|
1,401.0
|
|
|
180.8
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
(21.6
|
)
|
|
Income before taxes
|
|
|
|
|
|
|
|
$
|
159.2
|
|
|
___________
|
|
(a)
|
The three months ended March 31, 2017 include the following:
|
|
|
1.
|
$0.8 million
of charges consisting of closure costs related to corrugated products facilities, integration costs related to the TimBar Corporation and Columbus Container, Inc. acquisitions, and costs related to a lump sum settlement payment of a multiemployer pension plan withdrawal liability for one of our corrugated products facilities.
|
|
|
2.
|
$5.0 million
of costs for the property damage and business interruption insurance deductible corresponding to the February 2017 explosion at our DeRidder, LA mill.
|
|
|
3.
|
$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.
|
|
|
(b)
|
The three months ended March 31, 2016 include charges of
$2.8 million
for facilities closure costs recorded within "Other expense, net" and "Cost of sales" as appropriate.
|
17
.
New and Recently Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09 (Topic 606):
Revenue from Contracts with Customers
. This ASU amends the guidance for revenue recognition to replace numerous industry-specific
requirements. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers.
There are two permitted transition methods under the standard: full retrospective method, in which case the cumulative effect of applying the standard would be recognized in the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The standard will be effective for reporting periods beginning after December 15, 2017.
We have established a transition team to analyze the impact of the standard on our revenue contracts by reviewing our current accounting policies and practices and identifying potential differences that would result from applying the requirements of the new standard. Specifically, we have identified significant revenue streams within each of our reportable segments and are reviewing representative contracts to identify corresponding purchase obligations, variable consideration, acquisition costs and fulfillment costs. In addition, we are in the process of identifying appropriate changes to our business processes, systems and controls to support revenue recognition and disclosures under the new standard. This team has reported its findings and progress of the project to management and the Audit Committee on a periodic basis over the last year.
We are still assessing the impact of ASU 2014-09, the related updates as mentioned above, and the most appropriate transition method but we do not believe they will have a material effect on the Company’s financial position or its results of operations. We expect to finalize both our assessment and determine our adoption method by June 30, 2017. The new standard becomes effective for us as of January 1, 2018, with the option to early adopt the standard for annual periods beginning on or after December 15, 2016. We did not early adopt the standard.
Effective January 1, 2017, the Company adopted ASU 2016-09 (Topic 718):
Improvements to Employee Share-Based Payment Accounting
, which is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. This ASU requires all excess tax benefits and deficiencies from share-based payment awards (including tax benefits of dividends on share-based payment awards) to be recognized in the income statement when the awards vest or are settled. Excess tax benefits and deficiencies were previously recognized in additional paid in capital in our consolidated balance sheet. Additionally, the guidance requires these excess tax benefits and deficiencies to be presented as an operating activity in the statement of cash flows rather than as a financing activity. As a result of this adoption, the Company recorded
$0.3 million
of excess tax benefits from share-based compensation as an income tax benefit in the income statement for the three months ended March 31, 2017. The Company also retrospectively reclassified excess tax benefits and deficiencies as an operating activity rather than as a financing activity on its consolidated statements of cash flows. The Company will continue to estimate forfeitures at the time of the grant. The Company had no unrecognized excess tax benefits from prior periods to record upon the adoption of this ASU, and all other adopted amendments did not have a material impact on the Company's financial position, results of operations and cash flow.
Effective January 1, 2017, the Company prospectively adopted ASU 2015-11 (Topic 330):
Simplifying the Measurement of Inventory
, as part of its simplification initiative. Under the ASU, inventory is measured at the "lower of cost and net realizable value" and other options that currently exist for market value will be eliminated. ASU 2015-11 defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. No other changes were made to the current guidance on inventory measurement. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations and cash flow.
In January 2017, the FASB issued ASU 2017-04 (Topic 350):
Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment
, eliminating the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under ASU 2017-04, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. This ASU is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption is permitted. This ASU will be applied prospectively to our future goodwill impairment tests.
In January 2017, the FASB issued ASU 2017-01 (Topic 805),
Clarifying the Definition of a Business
, which amends the guidance in ASC 805, “Business Combinations”. The ASU changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Under the new guidance, an entity first determines
whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If it is not met, the entity then evaluates whether the set meets the requirements that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The ASU defines an output as “the result of inputs and processes applied to those inputs that provide goods or services to customers, investment income (such as dividends or interest), or other revenues.” The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods, and early adoption is permitted. The ASU will be applied prospectively to any transactions subsequent to adoption.
In August 2016, the FASB issued ASU 2016-15 (Topic 230),
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
. This ASU adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. It is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted. The Company does not expect this ASU to have a material impact on the Company's financial condition, results of operations, or cash flows.
In February 2016, the FASB issued ASU 2016-02 (Topic 842):
Leases
. This ASU amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. This ASU will be effective for us beginning in our first quarter of 2019 and early adoption is permitted. This ASU is required to be adopted using a modified retrospective approach. We are evaluating the timing and effects of the adoption of this ASU on our financial statements.
There were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.
18
.
Commitments, Guarantees, Indemnifications and Legal Proceedings
We have financial commitments and obligations that arise in the ordinary course of our business. These include long-term debt, capital commitments, lease obligations, and purchase commitments for goods and services, and legal proceedings, all of which are discussed in Note 9, Debt, and Note 18, Commitments, Guarantees, Indemnifications, and Legal Proceedings, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our
2016
Annual Report on Form 10-K.
Guarantees and Indemnifications
We provide guarantees, indemnifications, and other assurances to third parties in the normal course of our business. These include tort indemnifications, product guarantees, environmental assurances, and representations and warranties in commercial agreements. At
March 31, 2017
we are not aware of any material liabilities arising from any guarantee, indemnification, or financial assurance we have provided. If we determined such a liability was probable and subject to reasonable determination, we would accrue for it at that time.
DeRidder Mill Incident
On February 8, 2017, a tank located in the pulp mill at the Company's DeRidder, Louisiana facility exploded, resulting in three contractor fatalities and other injuries. The Company has been served one lawsuit and is on notice of additional claims. The Company maintains liability insurance subject to a $1.0 million deductible; however, the incident is under investigation and the Company is unable to estimate a range of reasonable possible losses at this time.
The Company has also incurred property damage and business interruption losses and will claim these losses, subject to a $5.0 million deductible, under its property damage and business interruption insurance policy. The Company expects to resolve the claim with the insurance carrier over the next several months.
The Company is cooperating with investigations from the U.S. Occupational Health and Safety Administration, the U.S. Chemical Safety Board and the Environmental Protection Agency relating to the incident.
Legal Proceedings
We are party to other legal actions arising in the ordinary course of our business. These legal actions include commercial liability claims, premises liability claims, commercial disputes, and employment-related claims, among others. As of the date of this filing, we believe it is not reasonably possible that any of the legal actions against us will, either individually or in the aggregate, have a material adverse effect on our financial condition, results of operations, or cash flows.