See accompanying condensed notes to unaudited quarterly consolidated financial statements.
See accompanying condensed notes to unaudited quarterly consolidated financial statements.
See accompanying condensed notes to unaudited quarterly consolidated financial statements
.
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 communication-based papers. During the second quarter of 2018, the Company 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. 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 18 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 September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017 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 and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017.
The consolidated financial statements include the accounts of PCA and its majority-owned subsidiaries after elimination of intercompany balances and transactions.
2.
|
New and Recently Adopted Accounting Standards
|
Recently Adopted Accounting Standards
Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 (Topic 606):
Revenue from Contracts with Customers
. This ASU supersedes the revenue recognition requirements in Topic 605
Revenue Recognition
(Topic 605) and requires entities to recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and estimates, and changes in those estimates. The Company adopted the standard utilizing the modified retrospective method, in which case the cumulative effect was recognized at the date of initial application on January 1, 2018. The adoption of the standard did not have a material effect on the Company’s financial position or results of operations; however, the following adjustment and reclassification of certain costs were made for the three and nine months ended September 30, 2018:
a. The Company ships a portion of its products to customers under consignment agreements. These products do not have an alternative use, and, under the new standard, revenue associated with these products is required to be recognized earlier than under prior revenue recognition standards. Utilizing the modified retrospective method, the cumulative impact of adopting the new standard resulted in an increase of approximately $1.6 million, net of tax, to opening retained earnings as of January 1, 2018.
b. The new revenue standard also provides additional clarity concerning contract fulfillment costs, which resulted in certain costs being classified as cost of sales rather than selling, general and administrative expenses beginning January 1, 2018. For the three and nine months ended September 30, 2018, this amount totaled $6.9 million and $20.0 million, respectively.
See Note 3, Revenue, for more information.
Effective January 1, 2018, the Company adopted ASU 2017-07,
Compensation: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
The guidance in this update requires that an employer disaggregate the service cost component from the other components of net benefit cost. Non-service cost components of net periodic benefit cost
are required to be presented in the income statement separately from the service cost component and outside the subtotal of operating income. The update also allows only the service cost component to be eligible for capitalization for internally developed capital projects. The amendments in this update are applied retrospectively for the income statement presentations and prospectively for the capitalization of service costs.
4
The adoption of this ASU retrospectively resulted in a $0.3 million
and $0
.9
million
reclassification between cost of sales and sel
ling, general and administrative expenses (both components of income from operations) and interest expense, net and other (a component outside of income from operations) for the three
and
nine
months ended
September
30
, 2017
, respectively
.
Effective January 1, 2018, the Company adopted ASU 2017-09,
Compensation - Stock Compensation
(Topic 718):
Scope of Modification Accounting
, which clarifies what changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. T
his ASU will be applied prospectively when changes to the terms or conditions of a share-based payment award occur.
Effective January 1, 2018, the Company adopted
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 will be applied prospectively to any transactions subsequent to adoption.
Effective January 1, 2018, the Company adopted
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. The adoption of this guidance did not have a material impact on the Company's financial condition, results of operations, or cash flows.
New Accounting Standards Not Yet Adopted
In August 2018, the
Financial Accounting Standards Board (“FASB”)
issued ASU 2018-14,
Compensation – Retirement Benefits – Defined Benefit Plans – General
(Subtopic 715-20):
Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans
. ASU 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. The ASU is effective for annual periods beginning after December 31, 2020, with early adoption permitted. The amendments in ASU 2018-14 would need to be applied on a retrospective basis. The Company is currently evaluating the impact this guidance will have on its related disclosures.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement
(Topic 820):
Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.
ASU 2018-13 removes or modifies certain disclosure requirements and adds additional requirements to improve the usefulness of the fair value measurement disclosure for financial statement users. The ASU is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Certain amendments of ASU 2018-13 are required to be applied prospectively for the first interim period of the initial year of adoption. All other amendments need to be applied retrospectively.
The Company is currently evaluating the impact of the new guidance.
In February 2018, the FASB issued ASU 2018-02 (Topic 220):
Income Statement –
R
eporting Comprehensive Income
–
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, which allows for optional reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the enactment of H.R.1 (P.L. 115-97), originally known as the “Tax Cuts and Jobs Act,” in December 2017. An entity that elects to reclassify these amounts must reclassify stranded tax effects related to the change in federal tax rate for all items accounted for in other comprehensive income (e.g., pension and postretirement benefits and cash flow hedges). Entities may also elect to reclassify other stranded tax effects that relate to the Act but do not directly relate to the change in the federal tax rate (e.g., state taxes). Upon adoption of ASU 2018-02, entities are required to disclose their policy for releasing the income tax effects from accumulated other comprehensive income. ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect this ASU to have a material impact on the Company’s financial position, results of operations, or cash flow.
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. Additionally, the guidance requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU 2018-10:
Codification Improvements to Topic 842, Leases
and ASU 2018-11:
Leases (Topic 842): Targeted Improvements
. These ASUs provide clarification to the lease standard and allow entities an optional transition method for implementing ASU 2016-02 and a lessor practical expedient for separating lease and non-lease components. The optional transition method allows companies the option to use the effective date as the date of initial application on transition. The Company plans to elect this transition method, and as a result, we will not adjust our comparative period financial information or make the new required lease disclosures for periods before the effective date.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. We are in the process of implementing changes to our systems and processes in conjunction with our review of existing lease agreements, which primarily consist of equipment and real estate leases. In addition, we are currently working with a vendor to implement a technology tool to assist with the accounting and reporting requirements of the new standard. We will adopt Topic 842 effective January 1, 2019 and expect to elect certain available transitional practical expedients. We are still in the process of determining the effects on our financial statements but do expect to recognize a liability and corresponding asset associated with in-scope operating leases.
5
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.
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration expected to be entitled in exchange for those goods or services. Sales, value added, and other taxes collected concurrently with revenue-producing activities are excluded from revenue.
The following table presents our revenues disaggregated by product line (dollars in millions):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017 (a)
|
|
|
2018
|
|
|
2017 (a)
|
|
Packaging
|
|
$
|
1,535.1
|
|
|
$
|
1,346.6
|
|
|
$
|
4,434.2
|
|
|
$
|
3,915.0
|
|
Paper
|
|
|
254.3
|
|
|
|
271.4
|
|
|
|
774.5
|
|
|
|
784.3
|
|
Corporate and other
|
|
|
20.5
|
|
|
|
22.1
|
|
|
|
59.4
|
|
|
|
61.3
|
|
Total revenue
|
|
$
|
1,809.9
|
|
|
$
|
1,640.1
|
|
|
$
|
5,268.1
|
|
|
$
|
4,760.6
|
|
(a)
|
Prior periods have not been adjusted under the modified retrospective method for Topic 606.
|
Packaging Revenue
Our containerboard mills produce linerboard and semi-chemical corrugating medium which are papers primarily used in the production of corrugated products. The majority of our containerboard production is used internally by our corrugated products manufacturing facilities. The remaining containerboard is sold to outside domestic and export customers. Our corrugated products manufacturing plants produce a wide variety of corrugated packaging products and retail merchandise displays. We sell corrugated products to national, regional and local accounts, which are broadly diversified across industries and geographic locations.
The Company recognizes revenue for its packaging products when performance obligations under the terms of a contract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time. Based on our express terms and conditions of the sale of products to our customers, as well as terms included in contractual arrangements with our customers, we do not have an enforceable right of payment that includes a reasonable profit throughout the duration of the contract for products that do not have an alternative use. Revenue is recognized when the product is shipped from the mill or from our manufacturing facility to our customer. Certain customers may receive volume-based incentives, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue recognized.
Certain customers receive a portion of their packaging products as consigned inventory with billing triggered once the customer uses or consumes the designated product. Prior to invoicing, these amounts are handled as unbilled receivables. Total unbilled receivables, which are immaterial in amount, are included in the accounts receivable financial statement caption.
Paper Revenue
We manufacture and sell a range of communication-based papers. Communication papers consist of cut-size office papers, and printing and converting papers. Pressure sensitive papers, including release liners, are used for specialty applications such as consumer and commercial product labels.
The Company recognizes revenue for its paper products when performance obligations under the terms of a contract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time. Revenue is recognized when the product is shipped from the mill or from our manufacturing facility or distribution center to our customer. Certain customers may receive volume-based incentives, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue recognized.
Corporate and Other Revenue
Revenue in this segment primarily relates to Louisiana Timber Procurement Company, L.L.C. (LTP), a variable-interest entity that is 50% owned by PCA and 50% owned by Boise Cascade Company (Boise Cascade). PCA is the 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. See Note 17, Transactions With Related Parties, for more information related to LTP.
The Company recognizes revenue within this segment when performance obligations under the terms of a contract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time.
6
Practical Expedients and Exemption
Shipping and handling fees billed to a customer are recorded on a gross basis in "Net sales" with the corresponding shipping and handling costs included in "Cost of sales" in the concurrent period as the revenue is recorded. We expense sales commissions when incurred because the amortization period is one year or less. Sales commissions are recorded in "Selling, general, and administrative expenses".
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
Sacramento Container Acquisition
On October 2, 2017, PCA 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 referred to as “Sacramento Container”) for a purchase price of $274 million, including working capital adjustments. Funding for the $274 million purchase price came from available cash on hand. Assets acquired include full-line corrugated products and sheet feeder operations in both McClellan, California and Kingsburg, California. Sacramento Container provides packaging solutions to customers serving portions of California’s strong agricultural market. Sacramento Container’s financial results are included in the Packaging segment from the date of acquisition.
The Company accounted for the Sacramento Container acquisition using the acquisition method of accounting in accordance with ASC 805,
Business Combinations
. The total purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed based on respective fair values, as follows (dollars in millions):
|
|
12/31/2017 Allocation
|
|
|
Adjustments
|
|
|
Revised Allocation
|
|
Goodwill
|
|
$
|
151.1
|
|
|
$
|
5.5
|
|
|
$
|
156.6
|
|
Other intangible assets
|
|
|
72.6
|
|
|
|
(5.5
|
)
|
|
|
67.1
|
|
Property, plant and equipment
|
|
|
26.7
|
|
|
|
—
|
|
|
|
26.7
|
|
Other net assets
|
|
|
23.4
|
|
|
|
—
|
|
|
|
23.4
|
|
Net assets acquired
|
|
$
|
273.8
|
|
|
$
|
—
|
|
|
$
|
273.8
|
|
During the second quarter ended June 30, 2018, we made a $5.5 million net adjustment based on the final valuation of the intangible assets. We recorded the adjustment as a decrease to other intangible assets with an offset to goodwill.
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 Sacramento Container’s commitment to continuous improvement and regional synergies, 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 9.6 years.
Property, plant, and equipment were assigned estimated useful lives ranging from one to 13 years.
The following table sets forth the computation of basic and diluted income per common share for the periods presented (dollars and shares in millions, except per share data):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Numerator:
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income
|
|
$
|
206.7
|
|
|
$
|
139.1
|
|
|
$
|
533.4
|
|
|
$
|
399.7
|
|
Less: distributed and undistributed earnings allocated to
participating securities
|
|
|
(1.6
|
)
|
|
|
(1.1
|
)
|
|
|
(4.1
|
)
|
|
|
(3.4
|
)
|
Net income attributable to common shareholders
|
|
$
|
205.1
|
|
|
$
|
138.0
|
|
|
$
|
529.3
|
|
|
$
|
396.3
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
93.7
|
|
|
|
93.6
|
|
|
|
93.7
|
|
|
|
93.5
|
|
Effect of dilutive securities
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Weighted average diluted common shares outstanding
|
|
|
94.0
|
|
|
|
93.8
|
|
|
|
93.9
|
|
|
|
93.7
|
|
Basic income per common share
|
|
$
|
2.19
|
|
|
$
|
1.47
|
|
|
$
|
5.65
|
|
|
$
|
4.24
|
|
Diluted income per common share
|
|
$
|
2.18
|
|
|
$
|
1.47
|
|
|
$
|
5.64
|
|
|
$
|
4.23
|
|
7
6
.
|
Other Income (Expense), Net
|
The components of other income (expense), net, were as follows (dollars in millions):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Asset disposals and write-offs
|
|
$
|
(5.1
|
)
|
|
$
|
(3.9
|
)
|
|
$
|
(14.4
|
)
|
|
$
|
(8.6
|
)
|
Wallula mill restructuring (a)
|
|
|
(3.7
|
)
|
|
|
(22.7
|
)
|
|
|
(11.6
|
)
|
|
|
(22.7
|
)
|
Facilities closure and other costs (b)
|
|
|
(1.5
|
)
|
|
|
(0.9
|
)
|
|
|
(1.6
|
)
|
|
|
(1.9
|
)
|
Acquisition and integration related costs (c)
|
|
|
(0.1
|
)
|
|
|
(0.5
|
)
|
|
|
(0.1
|
)
|
|
|
(0.8
|
)
|
Insurance deductible for property damage (d)
|
|
|
(0.5
|
)
|
|
|
—
|
|
|
|
(0.5
|
)
|
|
|
—
|
|
DeRidder mill incident (e)
|
|
|
—
|
|
|
|
2.6
|
|
|
|
—
|
|
|
|
0.1
|
|
Hexacomb working capital adjustment (f)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.3
|
|
Other
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
(4.0
|
)
|
|
|
(0.8
|
)
|
Total
|
|
$
|
(10.5
|
)
|
|
$
|
(24.8
|
)
|
|
$
|
(32.2
|
)
|
|
$
|
(32.4
|
)
|
(a)
|
Includes charges related to the discontinuation of production of uncoated free sheet and coated one-side grades at the Wallula, Washington mill in the second quarter of 2018 and the conversion of the No. 3 paper machine to a high-performance 100% virgin kraft linerboard machine.
|
(b)
|
For 2018, includes charges consisting of closure costs related to corrugated products facilities. For 2017, includes charges consisting of closure costs related to corrugated products facilities and a paper administration facility and costs related to a lump sum settlement payment of a multiemployer pension plan for one of our corrugated products facilities.
|
(c)
|
Includes charges related to recent acquisitions and the integration of recent acquisitions.
|
(d)
|
For 2018, includes charges for the property damage insurance deductible for a weather-related incident at one of our corrugated products facilities.
|
(e)
|
Includes the property damage and business interruption insurance recoveries and corresponding costs related to the February 2017 explosion at our DeRidder, Louisiana mill.
|
(f)
|
Includes income related to a working capital adjustment from the April 2015 sale of our Hexacomb corrugated manufacturing operations in Europe and Mexico.
|
On December 22, 2017, the President signed into law H.R.1 (P.L. 115-97), originally known as the “Tax Cuts and Jobs Act” (the “Tax Act”). The Tax Act significantly revises the U.S. tax code by, among other items, reducing the federal corporate tax rate from 35% to 21%, providing for the full expensing of certain depreciable property, eliminating the corporate alternative minimum tax, limiting the deductibility of interest expense, further limiting the deductibility of certain executive compensation, limiting the use of net operating loss carryforwards created in tax years beginning after December 31, 2017, and implementing a territorial tax system imposing a deemed repatriation transition tax (“Transition Tax”) on earnings of foreign subsidiaries.
The SEC staff issued Staff Accounting Bulletin (“SAB”) 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act,
which provides guidance on accounting for the effects and includes a measurement period that ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting of the Tax Act, which cannot extend beyond one year. In accordance with SAB 118, the Company recorded provisional estimates of the income tax effects of the Tax Act in the 2017 Form 10-K.
During the three and nine months ended September 30, 2018, we have recorded an immaterial favorable adjustment for the Transition Tax originally recorded with the measurement period provisional estimates at December 31, 2017. We expect to record our final adjustment for the income tax effects of the Tax Act after the completion and filing of our 2017 federal and state income tax returns during the fourth quarter and before the SAB 118 measurement period ends. We estimate this final adjustment, primarily from favorable timing item differences, to also be immaterial.
For the three months ended September 30, 2018 and 2017, we recorded $67.4 million and $77.8 million of income tax expense and had an effective tax rate of 24.6% and 35.9%, respectively. For the nine months ended September 30, 2018 and 2017, we recorded $172.6 million and $204.9 million of income tax expense and had an effective tax rate of 24.4% and 33.9%, respectively. The decrease in our effective tax rate for both the three and nine months ended September 30, 2018 compared with the same periods in 2017 was primarily due to the Tax Act (P.L. 115-97), which included a reduction in the federal tax rate of 14.0% offset by the loss of the Domestic Production Activities Deduction benefit of about 3.2% and a reduction in the federal benefit of state tax deductions of about 0.8%, as well as an internal legal entity consolidation that took place in the third quarter of 2017, partially offset by lower excess tax benefits from employee share-based payment awards under ASU 2016-09 in 2018 compared to the same periods in 2017.
Our effective tax rate may differ from the federal statutory income tax rate of 21.0% due primarily to the effect of state and local income taxes.
During the nine months ended September 30, 2018 and 2017, cash paid for taxes, net of refunds received, was $73.2 million and $208.3 million,
8
respectively. The decrease in cash tax payments between the periods is due to the lower statutory tax rate and a federal overpayment carryforward from the 20
17 tax year into the 2018 tax year as a result of Tax Act related changes.
During the three and nine months ended September 30, 2018, 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 2017 Annual Report on Form 10-K.
We value our raw materials, work in process, and finished goods inventories using lower of cost, as determined by the average cost method, or market. Supplies and materials are valued at the first-in, first-out (FIFO) or average cost methods.
The components of inventories were as follows (dollars in millions):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
317.9
|
|
|
$
|
279.8
|
|
Work in process
|
|
|
14.9
|
|
|
|
12.6
|
|
Finished goods
|
|
|
180.4
|
|
|
|
217.0
|
|
Supplies and materials
|
|
|
267.4
|
|
|
|
253.1
|
|
Inventories
|
|
$
|
780.6
|
|
|
$
|
762.5
|
|
9
.
|
Property, Plant, and Equipment
|
The components of property, plant, and equipment were as follows (dollars in millions):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Land and land improvements
|
|
$
|
162.0
|
|
|
$
|
156.0
|
|
Buildings
|
|
|
756.2
|
|
|
|
729.8
|
|
Machinery and equipment
|
|
|
5,356.7
|
|
|
|
5,162.5
|
|
Construction in progress
|
|
|
240.6
|
|
|
|
194.5
|
|
Other
|
|
|
72.8
|
|
|
|
68.4
|
|
Property, plant and equipment, at cost
|
|
|
6,588.3
|
|
|
|
6,311.2
|
|
Less accumulated depreciation
|
|
|
(3,523.2
|
)
|
|
|
(3,386.3
|
)
|
Property, plant, and equipment, net
|
|
$
|
3,065.1
|
|
|
$
|
2,924.9
|
|
Depreciation expense for the three months ended September 30, 2018 and 2017 was $89.0 million and $87.0 million, respectively. During the nine months ended September 30, 2018 and 2017, depreciation expense was $275.3 million and $253.0 million, respectively. We recognized $14.0 million
of incremental depreciation expense during the nine months ended September 30, 2018 as a result of shortening the useful lives of certain assets related to the Wallula mill restructuring and a corporate administration facility.
At September 30, 2018 and December 31, 2017, purchases of property, plant, and equipment included in accounts payable were $46.2 million and $29.8 million, respectively.
10
.
|
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 September 30, 2018 and December 31, 2017 we had $833.5 million and $828.0 million of goodwill recorded in our Packaging segment, respectively. At both September 30, 2018 and December 31, 2017, we had $55.2 million of goodwill recorded in our Paper segment.
9
Changes in the carrying amount of our goodwill are as follows (dollars in millions):
|
|
Goodwill
|
|
Balance at January 1, 2018
|
|
$
|
883.2
|
|
Acquisitions (a)
|
|
|
5.5
|
|
Balance at September 30, 2018
|
|
$
|
888.7
|
|
(a)
|
During the nine months ended September 30, 2018, the Company recorded a $5.5 million adjustment to increase the goodwill balance for the Company’s October 2017 acquisition of Sacramento Container.
|
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):
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
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 (a)
|
|
11.2
|
|
$
|
491.4
|
|
|
$
|
135.5
|
|
|
11.8
|
|
$
|
497.8
|
|
|
$
|
109.8
|
|
Trademarks and trade names (a)
|
|
10.4
|
|
|
33.9
|
|
|
|
17.6
|
|
|
9.8
|
|
|
32.9
|
|
|
|
13.2
|
|
Other (a)
|
|
3.1
|
|
|
4.3
|
|
|
|
2.6
|
|
|
3.6
|
|
|
4.3
|
|
|
|
2.0
|
|
Total intangible assets (excluding goodwill)
|
|
11.1
|
|
$
|
529.6
|
|
|
$
|
155.7
|
|
|
11.7
|
|
$
|
535.0
|
|
|
$
|
125.0
|
|
(a)
|
In connection with the October 2017 acquisition of Sacramento Container, the Company recorded intangible assets of $68.4 million for customer relationships, $4.1 million for trade names, and $0.1 million for other intangibles. During the second quarter ended June 30, 2018, the Company made a $5.5 million net adjustment based on the final valuation received for the intangible assets. This adjustment resulted in a revision to the original allocations for customer relationships and trade names. As of June 30, 2018, the revised allocations for customer relationships and trade names were $61.9 million and $5.1 million, respectively.
|
During the three months ended September 30, 2018 and 2017, amortization expense was $10.2 million and $8.4 million, respectively. During the nine months ended September 30, 2018 and 2017, amortization expense was $30.7 million and $25.3 million, respectively.
The components of accrued liabilities were as follows (dollars in millions):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Compensation and benefits
|
|
$
|
131.1
|
|
|
$
|
127.5
|
|
Medical insurance and workers’ compensation
|
|
|
27.0
|
|
|
|
23.9
|
|
Customer volume discounts and rebates
|
|
|
21.5
|
|
|
|
23.4
|
|
Franchise, property, sales and use taxes
|
|
|
21.3
|
|
|
|
16.0
|
|
Environmental liabilities and asset retirement obligations
|
|
|
4.7
|
|
|
|
4.0
|
|
Severance, retention, and relocation
|
|
|
3.3
|
|
|
|
3.1
|
|
Other
|
|
|
14.5
|
|
|
|
5.3
|
|
Total
|
|
$
|
223.4
|
|
|
$
|
203.2
|
|
10
At September 30, 2018 and December 31, 2017, our long-term debt and interest rates on that debt were as follows (dollars in millions):
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Amount
|
|
|
Interest Rate
|
|
|
Amount
|
|
|
Interest Rate
|
|
6.50% Senior Notes due March 2018
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
150.0
|
|
|
|
6.50
|
%
|
2.45% Senior Notes, net of discount of $0.4 million and
$0.5 million as of September 30, 2018 and
December 31, 2017, respectively, due December 2020
|
|
|
499.6
|
|
|
|
2.45
|
%
|
|
|
499.5
|
|
|
|
2.45
|
%
|
3.90% Senior Notes, net of discount of $0.1 million and
$0.2 million as of September 30, 2018 and
December 31, 2017, respectively, due June 2022
|
|
|
399.9
|
|
|
|
3.90
|
%
|
|
|
399.8
|
|
|
|
3.90
|
%
|
4.50% Senior Notes, net of discount of $1.1 million and
$1.2 million as of September 30, 2018 and
December 31, 2017, respectively, due November 2023
|
|
|
698.9
|
|
|
|
4.50
|
%
|
|
|
698.8
|
|
|
|
4.50
|
%
|
3.65% Senior Notes, net of discount of $0.7 million and
$0.8 million as of September 30, 2018 and
December 31, 2017, respectively, due September 2024
|
|
|
399.3
|
|
|
|
3.65
|
%
|
|
|
399.2
|
|
|
|
3.65
|
%
|
3.40% Senior Notes, net of discount of $1.5 million and
$1.6 million as of September 30, 2018 and
December 31, 2017, respectively, due December 2027
|
|
|
498.5
|
|
|
|
3.40
|
%
|
|
|
498.4
|
|
|
|
3.40
|
%
|
Total
|
|
|
2,496.2
|
|
|
|
3.64
|
%
|
|
|
2,645.7
|
|
|
|
3.80
|
%
|
Less current portion
|
|
|
—
|
|
|
|
—
|
%
|
|
|
150.0
|
|
|
|
6.50
|
%
|
Less unamortized debt issuance costs
|
|
|
13.3
|
|
|
|
|
|
|
|
15.3
|
|
|
|
|
|
Total long-term debt
|
|
$
|
2,482.9
|
|
|
|
3.64
|
%
|
|
$
|
2,480.4
|
|
|
|
3.64
|
%
|
During the nine months ended September 30, 2018, we used cash on hand to repay debt outstanding of $150.0 million under the 6.50% Senior Notes due March 2018. For the nine months ended September 30, 2018 and 2017, cash payments for interest were $58.6 million
and $67.2 million, respectively.
Included in interest expense, net and other, are amortization of treasury lock settlements and amortization of financing costs. For the three months ended September 30, 2018 and 2017, amortization of treasury lock settlements was $1.3 million
and $1.4 million, respectively, and for the nine months ended September 30, 2018 and 2017, amortization of treasury locks was $4.0 million and $4.2 million, respectively. For the three months ended September 30, 2018 and 2017, amortization of financing costs was
$0.7 million and $0.5 million, respectively, and during the nine months ended September 30, 2018 and 2017, amortization of financing costs was $2.0 million
and $1.5 million, respectively.
At September 30, 2018, we had $2,496.2 million of fixed-rate senior notes outstanding. The fair value of our fixed-rate debt was estimated to be $2,478.0 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 2017 Annual Report on Form 10-K.
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 2017 Annual Report on Form 10-K.
13
.
|
Employee Benefit Plans and Other Postretirement Benefits
|
The components of net periodic benefit cost for our pension plans were as follows (dollars in millions):
|
|
Pension Plans
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Service cost
|
|
$
|
6.3
|
|
|
$
|
5.8
|
|
|
$
|
18.8
|
|
|
$
|
18.0
|
|
Interest cost
|
|
|
10.6
|
|
|
|
10.4
|
|
|
|
31.8
|
|
|
|
31.1
|
|
Expected return on plan assets
|
|
|
(14.2
|
)
|
|
|
(13.5
|
)
|
|
|
(42.5
|
)
|
|
|
(40.5
|
)
|
Net amortization of unrecognized amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
1.8
|
|
|
|
1.4
|
|
|
|
5.2
|
|
|
|
4.4
|
|
Actuarial loss
|
|
|
2.3
|
|
|
|
1.9
|
|
|
|
7.0
|
|
|
|
5.7
|
|
Net periodic benefit cost
|
|
$
|
6.8
|
|
|
$
|
6.0
|
|
|
$
|
20.3
|
|
|
$
|
18.7
|
|
11
PCA makes pension plan contri
butions 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 th
e funded status of the plans, tax deductibility, income from
operations, and other f
actors. During the three
and
nine
months ended
September
30,
2018 and 2017,
payments to our nonqualified pension plans were insignificant.
For the three
and
nine
months ended
September
30
, 2018,
we made contributions of $
1
8
.0
million
and $
21.2
million, respectively,
to our qualified pension
plans
, which exceeded our 2018 minimum pension contributions of $4.6 million
. We made
contribution
s
of $
36.2
million
and $
42.
1
million
to our qualified plans during the
three
and
nine
months ended
September
30
, 2017
, respectively
.
The components of net periodic benefit cost for our postretirement plans were as follows (dollars in millions):
|
|
Postretirement Plans
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Service cost
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
Interest cost
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.5
|
|
Net amortization of unrecognized amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
Actuarial income
|
|
|
—
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
Net periodic benefit cost
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
$
|
0.5
|
|
14
.
|
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 September 30, 2018, 0.7 million shares were available for future grants 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 nine months ended September 30, 2018:
|
|
Restricted Stock
|
|
|
Performance Units
|
|
|
|
Shares
|
|
|
Weighted Average Grant-
Date Fair Value
|
|
|
Shares
|
|
|
Weighted Average Grant-
Date Fair Value
|
|
Outstanding at January 1, 2018
|
|
|
739,732
|
|
|
$
|
77.23
|
|
|
|
226,558
|
|
|
$
|
77.07
|
|
Granted
|
|
|
173,144
|
|
|
|
114.63
|
|
|
|
87,022
|
|
|
|
115.33
|
|
Vested
|
|
|
(163,436
|
)
|
|
|
67.28
|
|
|
|
(46,876
|
)
|
|
|
74.46
|
|
Forfeitures
|
|
|
(3,738
|
)
|
|
|
81.04
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2018
|
|
|
745,702
|
|
|
$
|
88.07
|
|
|
|
266,704
|
|
|
$
|
90.01
|
|
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Restricted stock
|
|
$
|
4.9
|
|
|
$
|
3.8
|
|
|
$
|
13.9
|
|
|
$
|
11.3
|
|
Performance units
|
|
|
1.7
|
|
|
|
1.4
|
|
|
|
3.5
|
|
|
|
4.1
|
|
Total share-based compensation expense
|
|
|
6.6
|
|
|
|
5.2
|
|
|
|
17.4
|
|
|
|
15.4
|
|
Income tax benefit
|
|
|
(1.6
|
)
|
|
|
(2.0
|
)
|
|
|
(4.4
|
)
|
|
|
(5.9
|
)
|
Share-based compensation expense, net of tax benefit
|
|
$
|
5.0
|
|
|
$
|
3.2
|
|
|
$
|
13.0
|
|
|
$
|
9.5
|
|
The fair value of restricted stock is determined based on the closing price of the Company’s stock on the grant date. Compensation expense, net of estimated forfeitures, is recorded over the requisite service period. As PCA’s Board of Directors has the ability to accelerate the vesting of these awards upon an employee’s retirement, the Company accelerates the recognition of compensation expense for certain employees approaching normal retirement age.
Performance unit awards are earned based on the achievement of defined performance rankings of Return on Invested Capital (ROIC) or Total Shareholder Return (TSR) compared to ROIC and TSR for peer companies. For performance unit awards made in 2018, 50% used TSR as the
12
performance measure and 50% used ROIC as the performance measure. All units awarded before 2018 used ROIC as the performance measure.
The ROIC component of perfo
rmance
unit
awards are valued based on the closing price of the stock on the grant date.
As the ROIC component contains a performance condition, compensation expense, net of estimated forfeitures, is recorded over the requisite service period based on the
most probable number of awards expected to vest.
The TSR component
of performance unit awards
is valued using a Monte Carlo simulation as the TSR component contains a market condition. The Monte Carlo simulation estimates the fair value of the TSR componen
t based on the expected term of the award, a risk-free
interest
rate, expected dividends, and expected volatility
of
the Company
’s common stock and the common stock of the peer companies
.
Compensation expense is recorded ratably over the expected term of t
he award
.
The unrecognized compensation expense for all share-based awards at September 30, 2018 was as follows (dollars in millions):
|
|
September 30, 2018
|
|
|
|
Unrecognized
Compensation
Expense
|
|
|
Remaining
Weighted Average
Recognition
Period (in years)
|
|
Restricted stock
|
|
$
|
36.5
|
|
|
2.5
|
|
Performance units
|
|
|
15.7
|
|
|
|
3.1
|
|
Total unrecognized share-based compensation expense
|
|
$
|
52.2
|
|
|
|
2.7
|
|
1
5
.
|
Stockholders' Equity
|
Dividends
During the nine months ended September 30, 2018, we paid $193.4 million of dividends to shareholders. On May 15, 2018, PCA announced an increase of its quarterly cash dividend on its common stock from an annual payout of $2.52 per share to $3.16 per share. On August 30, 2018, PCA’s Board of Directors declared a regular quarterly cash dividend of $0.79 per share of common stock, which was paid on October 15, 2018 to shareholders of record as of September 14, 2018. The dividend payment was $74.7 million.
Repurchases of Common Stock
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. 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 three and nine months ended September 30, 2018. At September 30, 2018, $193.0 million of the authorized amount remained available for repurchase of the Company’s common stock.
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) (AOCI) by component were as follows (dollars in millions). Amounts in parentheses indicate losses:
|
|
Foreign Currency Translation Adjustments
|
|
|
Unrealized Loss On Treasury Locks, Net
|
|
|
Unrealized Loss on Foreign Exchange Contracts
|
|
|
Unfunded Employee Benefit Obligations
|
|
|
Total
|
|
Balance at January 1, 2018
|
|
$
|
(0.3
|
)
|
|
$
|
(14.2
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(142.1
|
)
|
|
$
|
(156.9
|
)
|
Amounts reclassified from AOCI, net of tax
|
|
|
(0.1
|
)
|
|
|
3.0
|
|
|
|
—
|
|
|
|
8.9
|
|
|
|
11.8
|
|
Balance at September 30, 2018
|
|
$
|
(0.4
|
)
|
|
$
|
(11.2
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(133.2
|
)
|
|
$
|
(145.1
|
)
|
13
Reclassifications out of AOCI were as follows (dollars in millions). Amounts in parentheses indicate expenses in the Consolidated Statements of Income:
|
|
|
|
Amounts Reclassified from AOCI
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
Details about AOCI Components
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
Unrealized loss on treasury locks, net (a)
|
|
|
|
$
|
(1.3
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
(4.0
|
)
|
|
$
|
(4.2
|
)
|
|
See (a) below
|
|
|
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
1.0
|
|
|
|
1.6
|
|
|
Tax benefit
|
|
|
|
|
$
|
(1.0
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
(3.0
|
)
|
|
$
|
(2.6
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded employee benefit obligations (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs
|
|
|
|
$
|
(1.7
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(5.0
|
)
|
|
$
|
(4.3
|
)
|
|
See (b) below
|
Amortization of actuarial gains / (losses)
|
|
|
|
|
(2.3
|
)
|
|
|
(1.8
|
)
|
|
|
(6.9
|
)
|
|
|
(5.6
|
)
|
|
See (b) below
|
|
|
|
|
|
(4.0
|
)
|
|
|
(3.1
|
)
|
|
|
(11.9
|
)
|
|
|
(9.9
|
)
|
|
Total before tax
|
|
|
|
|
|
1.0
|
|
|
|
1.2
|
|
|
|
3.0
|
|
|
|
3.7
|
|
|
Tax benefit
|
|
|
|
|
$
|
(3.0
|
)
|
|
$
|
(1.9
|
)
|
|
$
|
(8.9
|
)
|
|
$
|
(6.2
|
)
|
|
Net of tax
|
(a)
|
This AOCI component is included in interest expense, net and other. 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 $5.2 million ($3.9 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 2017 Annual Report on Form 10-K.
|
(b)
|
These AOCI components are included in the computation of net pension and postretirement benefit costs. See Note 13, Employee Benefit Plans and Other Postretirement Benefits, for additional information.
|
16
.
|
Concentrations of Risk
|
Our Paper segment has 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% of our total Company sales revenue for both the nine month periods ended September 30, 2018 and 2017 and approximately
46% and 42% of our Paper segment sales revenue for both of those periods, respectively. At September 30, 2018 and December 31, 2017, we had $73.5 million and $33.3 million of accounts receivable due from Office Depot, which represents 7% and 4% of our total Company accounts receivable for both of those periods, respectively. The increase in accounts receivable corresponds to a negotiated extension of credit terms effective during the first quarter of 2018.
For full year 2017, sales to Office Depot represented 43% 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.
17
.
|
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 non-inventory working capital items) on our Consolidated Balance Sheets were $3.5 million at September 30, 2018 and $3.0 million at December 31, 2017. During the three months ended September 30, 2018 and 2017, we recorded $22.4 million and $20.8 million, respectively, and during the nine months ended September 30, 2018 and 2017 we recorded $65.5 million and $66.0 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 September 30, 2018 and 2017, fiber purchases from related parties were $4.1 million and $4.0 million
,
respectively. Fiber purchases from related parties were $12.8 million
and $13.6 million, respectively, during the nine months ended September 30, 2018 and 2017. 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.
14
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.
During the second quarter of 2018, the Company 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.
Each segment’s profits and losses are measured on operating profits before interest expense, net and income taxes. For certain 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
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Trade
|
|
|
Intersegment
|
|
|
Total
|
|
|
Operating Income
(Loss) (a)
|
|
|
Packaging
|
|
$
|
1,528.3
|
|
|
$
|
6.8
|
|
|
$
|
1,535.1
|
|
|
$
|
284.4
|
|
(b)
|
Paper
|
|
|
254.3
|
|
|
|
—
|
|
|
|
254.3
|
|
|
|
32.3
|
|
(b)
|
Corporate and other
|
|
|
27.3
|
|
|
|
32.3
|
|
|
|
59.6
|
|
|
|
(18.2
|
)
|
(b)
|
Intersegment eliminations
|
|
|
—
|
|
|
|
(39.1
|
)
|
|
|
(39.1
|
)
|
|
|
—
|
|
|
|
|
$
|
1,809.9
|
|
|
$
|
—
|
|
|
$
|
1,809.9
|
|
|
|
298.5
|
|
|
Interest expense, net and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24.4
|
)
|
|
Income before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
274.1
|
|
|
|
|
Sales, net
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
Trade
|
|
|
Intersegment
|
|
|
Total
|
|
|
Operating Income
(Loss) (a)
|
|
|
Packaging
|
|
$
|
1,340.6
|
|
|
$
|
6.0
|
|
|
$
|
1,346.6
|
|
|
$
|
263.2
|
|
(c)
|
Paper
|
|
|
271.4
|
|
|
|
—
|
|
|
|
271.4
|
|
|
|
(2.6
|
)
|
(c)
|
Corporate and Other
|
|
|
28.1
|
|
|
|
33.0
|
|
|
|
61.1
|
|
|
|
(18.0
|
)
|
|
Intersegment eliminations
|
|
|
—
|
|
|
|
(39.0
|
)
|
|
|
(39.0
|
)
|
|
|
—
|
|
|
|
|
$
|
1,640.1
|
|
|
$
|
—
|
|
|
$
|
1,640.1
|
|
|
|
242.6
|
|
|
Interest expense, net and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25.7
|
)
|
|
Income before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
216.9
|
|
|
|
|
Sales, net
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
Trade
|
|
|
Intersegment
|
|
|
Total
|
|
|
Operating Income (Loss) (a)
|
|
|
Packaging
|
|
$
|
4,414.7
|
|
|
$
|
19.5
|
|
|
$
|
4,434.2
|
|
|
$
|
782.3
|
|
(b)
|
Paper
|
|
|
774.5
|
|
|
|
—
|
|
|
|
774.5
|
|
|
|
55.7
|
|
(b)
|
Corporate and Other
|
|
|
78.9
|
|
|
|
94.9
|
|
|
|
173.8
|
|
|
|
(57.0
|
)
|
(b)
|
Intersegment eliminations
|
|
|
—
|
|
|
|
(114.4
|
)
|
|
|
(114.4
|
)
|
|
|
—
|
|
|
|
|
$
|
5,268.1
|
|
|
$
|
—
|
|
|
$
|
5,268.1
|
|
|
|
781.0
|
|
|
Interest expense, net and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75.0
|
)
|
|
Income before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
706.0
|
|
|
|
|
Sales, net
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
Trade
|
|
|
Intersegment
|
|
|
Total
|
|
|
Operating Income (Loss) (a)
|
|
|
Packaging
|
|
$
|
3,897.4
|
|
|
$
|
17.6
|
|
|
$
|
3,915.0
|
|
|
$
|
681.7
|
|
(c)(d)
|
Paper
|
|
|
784.3
|
|
|
|
—
|
|
|
|
784.3
|
|
|
|
52.5
|
|
(c)
|
Corporate and Other
|
|
|
78.9
|
|
|
|
92.3
|
|
|
|
171.2
|
|
|
|
(54.1
|
)
|
(c)(d)
|
Intersegment eliminations
|
|
|
—
|
|
|
|
(109.9
|
)
|
|
|
(109.9
|
)
|
|
|
—
|
|
|
|
|
$
|
4,760.6
|
|
|
$
|
—
|
|
|
$
|
4,760.6
|
|
|
|
680.1
|
|
|
Interest expense, net and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75.5
|
)
|
|
Income before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
604.6
|
|
|
|
(a)
|
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 period reflected herein. This new standard requires the presentation of non-service cost components of net periodic benefits expense to be shown separately outside the subtotal of operating income in the income statement. See Note 2, New and Recently Adopted Accounting Standards, for more information.
|
15
The components of our financial statements affected by the change in presentation of operating and non-operating pension expense as originally reported in 2017 and as adjusted for the requirements per the new standard are as follows (dollars in millions):
Segment income (loss)
|
|
Three Months Ended
September 30, 2017
As Reported
|
|
|
Non-Operating Pension Adjustment
|
|
|
Three Months Ended
September 30, 2017
Adjusted
|
|
Packaging
|
|
$
|
261.5
|
|
|
$
|
1.7
|
|
|
$
|
263.2
|
|
Paper
|
|
|
(0.7
|
)
|
|
|
(1.9
|
)
|
|
|
(2.6
|
)
|
Corporate
|
|
|
(18.5
|
)
|
|
|
0.5
|
|
|
|
(18.0
|
)
|
Income from operations
|
|
|
242.3
|
|
|
|
0.3
|
|
|
|
242.6
|
|
Interest expense, net and other
|
|
|
(25.4
|
)
|
|
|
(0.3
|
)
|
|
|
(25.7
|
)
|
Income before taxes
|
|
$
|
216.9
|
|
|
$
|
—
|
|
|
$
|
216.9
|
|
Segment income (loss)
|
|
Nine Months Ended September 30, 2017
As Reported
|
|
|
Non-Operating Pension Adjustment
|
|
|
Nine Months Ended September 30, 2017
Adjusted
|
|
Packaging
|
|
$
|
676.8
|
|
|
$
|
4.9
|
|
|
$
|
681.7
|
|
Paper
|
|
|
58.1
|
|
|
|
(5.6
|
)
|
|
|
52.5
|
|
Corporate
|
|
|
(55.7
|
)
|
|
|
1.6
|
|
|
|
(54.1
|
)
|
Income from operations
|
|
|
679.2
|
|
|
|
0.9
|
|
|
|
680.1
|
|
Interest expense, net and other
|
|
|
(74.6
|
)
|
|
|
(0.9
|
)
|
|
|
(75.5
|
)
|
Income before taxes
|
|
$
|
604.6
|
|
|
$
|
—
|
|
|
$
|
604.6
|
|
|
(b)
|
The three and nine months ended September 30, 2018 include:
|
|
1.
|
$4.0 million and $26.4 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.
|
|
2.
|
$1.3 million and $1.8 million, respectively, of charges consisting of closure costs related to corrugated products facilities and a corporate administration facility.
|
|
3.
|
$0.5 million of costs for the property damage insurance deductible for a weather-related incident at one of the corrugated products facilities.
|
|
4.
|
$0.1 million of charges related to the Sacramento Container acquisition and integration.
|
|
(c)
|
The three and nine months ended September 30, 2017 include:
|
|
1.
|
$0.9 million and $1.9 million, respectively, of charges consisting of closure costs related to corrugated products facilities, a paper administration facility, and a lump sum settlement of a multiemployer pension plan withdrawal liability for one of our corrugated products facilities.
|
|
2.
|
$0.5 million and $0.8 million, respectively, of charges related to the Sacramento Container Corporation acquisition and integration costs related to other recent acquisitions.
|
|
3.
|
$25.3 million 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
.
|
|
(
d
)
|
The nine months ended September 30, 2017 include:
|
|
1.
|
$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.
|
|
2
.
|
$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.
|
19
.
|
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 2017 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 September 30, 2018, 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.
16
DeRidder Mill Incident
On February 8, 2017, a tank located in the pulp mill at the Company's DeRidder, Louisiana facility exploded, resulting in three contractor fatalities and other injuries. The Company has been served with multiple lawsuits involving the decedents and other allegedly injured parties, alleging negligence on the part of the Company and claiming compensatory and punitive damages. The Company is vigorously defending these lawsuits. The Company believes that these suits are covered by its liability insurance policies, subject to an aggregate $1.0 million deductible. The incident remains under investigation and all lawsuits are in the early stages. Accordingly, 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 has claimed these losses, subject to a $5.0 million deductible, under its property damage and business interruption insurance policy. As of December 31, 2017, the Company finalized the claim with the insurance carrier and received $17.0 million in insurance proceeds during the first quarter of 2018. The insurance proceeds are included in net cash provided by operating activities ($14.5 million) and in net cash used for investing activities ($2.5 million) based on the nature of the reimbursement.
The Company has cooperated with investigations from the U.S. Occupational Health and Safety Administration (OSHA), the U.S. Chemical Safety Board (CSB) and the U.S. Environmental Protection Agency (EPA). The U.S. Chemical Safety Board completed its investigation and issued its report during the second quarter of 2018. The Company settled with OSHA during the second quarter of 2018 and paid approximately $40,000 in penalties for citations. The EPA investigation is ongoing.
Legal Proceedings
We are also a party to various legal actions arising in the ordinary course of our business. These legal actions include commercial liability claims, premises liability claims, 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.