Quarterly Report (10-q)

Date : 05/08/2019 @ 3:48PM
Source : Edgar (US Regulatory)
Stock : Packaging Corp (PKG)
Quote : 108.7  0.21 (0.19%) @ 4:03PM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

Commission file number 1-15399

 

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

36-4277050

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

1 North Field Court, Lake Forest, Illinois

 

60045

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant's telephone number, including area code

(847) 482-3000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

    Accelerated filer                       ☐  

Emerging growth company        

 

 

 

 

 

 

Non-accelerated filer

     Smaller reporting company   

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

 

As of May 3, 2019 the Registrant had outstanding 94,493,991 shares of common stock, par value $0.01 per share.

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

PKG

New York Stock Exchange

 

 

 

 


Table of Contents

 

 

 

PART I

 

 

 

 

 

Item 1.

 

Financial Statements

1

 

 

 

 

Item 2.

 

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

17

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

 

Item 4.

 

Controls and Procedures

24

 

 

 

 

 

 

PART II

 

 

 

 

 

Item 1.

 

Legal Proceedings

25

 

 

 

 

Item 1A.

 

Risk Factors

25

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

25

 

 

 

 

Item 4.

 

Mine Safety Disclosures

25

 

 

 

 

Item 5.

 

Other Information

25

 

 

 

 

Item 6.

 

Exhibits

26

 

All reports we file with the Securities and Exchange Commission (SEC) are available free of charge via the Electronic Data Gathering Analysis and Retrieval (EDGAR) System on the SEC website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available through our website at www.packagingcorp.com as soon as reasonably practicable after filing such material with the SEC.

 

 

 

i


PART I

FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

Packaging Corporation of America

Consolidated Statements of Income and Comprehensive Income

(unaudited, dollars in millions, except per-share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Statements of Income:

 

 

 

 

 

 

 

 

Net sales

 

$

1,733.7

 

 

$

1,690.6

 

Cost of sales

 

 

(1,312.3

)

 

 

(1,334.5

)

Gross profit

 

 

421.4

 

 

 

356.1

 

Selling, general and administrative expenses

 

 

(140.0

)

 

 

(134.9

)

Other expense, net

 

 

(6.0

)

 

 

(8.3

)

Income from operations

 

 

275.4

 

 

 

212.9

 

Non-operating pension expense

 

 

(2.0

)

 

 

(0.5

)

Interest expense, net

 

 

(24.1

)

 

 

(25.8

)

Income before taxes

 

 

249.3

 

 

 

186.6

 

Provision for income taxes

 

 

(62.5

)

 

 

(46.5

)

Net income

 

$

186.8

 

 

$

140.1

 

Net income per common share:

 

 

 

 

 

 

 

 

Basic

 

$

1.98

 

 

$

1.48

 

Diluted

 

$

1.97

 

 

$

1.48

 

Dividends declared per common share

 

$

0.79

 

 

$

0.63

 

Statements of Comprehensive Income:

 

 

 

 

 

 

 

 

Net income

 

$

186.8

 

 

$

140.1

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

(0.1

)

Reclassification adjustments to cash flow hedges included in net

   income, net of tax of $0.3 million and $0.4 million

 

 

1.0

 

 

 

1.0

 

Amortization of pension and postretirement plans actuarial loss and

   prior service cost, net of tax of $0.8 million and $1.0 million

 

 

2.3

 

 

 

3.0

 

Other comprehensive income

 

 

3.3

 

 

 

3.9

 

Comprehensive income

 

$

190.1

 

 

$

144.0

 

 

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

1


Packaging Corporation of America

Consolidated Balance Sheets

(unaudited, dollars and shares in millions, except per-share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

442.4

 

 

$

361.5

 

Accounts receivable, net of allowance for doubtful accounts and customer deductions

   of $13.4 million and $13.6 million as of March 31, 2019, and December 31, 2018, respectively

 

 

930.3

 

 

 

901.9

 

Inventories

 

 

831.7

 

 

 

795.6

 

Prepaid expenses and other current assets

 

 

58.0

 

 

 

39.4

 

Federal and state income taxes receivable

 

 

 

 

 

16.7

 

Total current assets

 

 

2,262.4

 

 

 

2,115.1

 

Property, plant, and equipment, net

 

 

3,109.8

 

 

 

3,108.6

 

Operating lease right-of-use assets

 

 

217.3

 

 

 

 

Goodwill

 

 

917.3

 

 

 

917.3

 

Other intangible assets, net

 

 

368.7

 

 

 

378.2

 

Other long-term assets

 

 

53.1

 

 

 

50.5

 

Total assets

 

$

6,928.6

 

 

$

6,569.7

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Finance lease obligations

 

$

1.5

 

 

$

1.4

 

Operating lease obligations

 

 

57.2

 

 

 

 

Accounts payable

 

 

405.1

 

 

 

382.2

 

Dividends payable

 

 

76.2

 

 

 

76.1

 

Federal and state income taxes payable

 

 

12.7

 

 

 

 

Accrued liabilities

 

 

160.9

 

 

 

222.4

 

Accrued interest

 

 

27.1

 

 

 

11.5

 

Total current liabilities

 

 

740.7

 

 

 

693.6

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term debt

 

 

2,484.6

 

 

 

2,483.7

 

Finance lease obligations

 

 

17.2

 

 

 

17.6

 

Operating lease obligations

 

 

165.4

 

 

 

 

Deferred income taxes

 

 

305.7

 

 

 

285.2

 

Compensation and benefits

 

 

363.5

 

 

 

357.5

 

Other long-term liabilities

 

 

56.9

 

 

 

59.7

 

Total long-term liabilities

 

 

3,393.3

 

 

 

3,203.7

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.01 per share, 300.0 million shares authorized, 94.5 million

   shares issued as of March 31, 2019, and December 31, 2018, respectively

 

 

0.9

 

 

 

0.9

 

Additional paid in capital

 

 

501.4

 

 

 

494.5

 

Retained earnings

 

 

2,427.8

 

 

 

2,315.8

 

Accumulated other comprehensive loss

 

 

(135.5

)

 

 

(138.8

)

Total stockholders' equity

 

 

2,794.6

 

 

 

2,672.4

 

Total liabilities and stockholders' equity

 

$

6,928.6

 

 

$

6,569.7

 

 

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

2


Packaging Corporation of America

Consolidated Statements of Cash Flows

(unaudited, dollars in millions)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

186.8

 

 

$

140.1

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion, and amortization of intangibles

 

 

94.8

 

 

 

108.1

 

Amortization of deferred financing costs

 

 

2.2

 

 

 

2.3

 

Share-based compensation expense

 

 

6.9

 

 

 

5.1

 

Deferred income tax provision

 

 

18.8

 

 

 

15.9

 

Pension and post-retirement benefits expense, net of contributions

 

 

7.3

 

 

 

3.9

 

Other, net

 

 

4.2

 

 

 

(1.0

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Increase in assets —

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(28.4

)

 

 

(22.9

)

Inventories

 

 

(36.1

)

 

 

(8.4

)

Prepaid expenses and other current assets

 

 

(19.7

)

 

 

(17.0

)

Increase (decrease) in liabilities —

 

 

 

 

 

 

 

 

Accounts payable

 

 

13.2

 

 

 

(1.0

)

Accrued liabilities

 

 

(44.0

)

 

 

(42.9

)

Federal and state income taxes payable / receivable

 

 

30.0

 

 

 

20.3

 

Net cash provided by operating activities

 

 

236.0

 

 

 

202.5

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Additions to property, plant, and equipment

 

 

(78.8

)

 

 

(108.0

)

Additions to other long term assets

 

 

(1.3

)

 

 

(1.9

)

Proceeds from disposals

 

 

 

 

 

0.1

 

Other, net

 

 

 

 

 

2.6

 

Net cash used for investing activities

 

 

(80.1

)

 

 

(107.2

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Repayments of debt and finance lease obligations

 

 

(0.3

)

 

 

(150.3

)

Common stock dividends paid

 

 

(74.7

)

 

 

(59.4

)

Shares withheld to cover employee restricted stock taxes

 

 

 

 

 

(0.1

)

Net cash used for financing activities

 

 

(75.0

)

 

 

(209.8

)

Net increase (decrease) in cash and cash equivalents

 

 

80.9

 

 

 

(114.5

)

Cash and cash equivalents, beginning of period

 

 

361.5

 

 

 

216.9

 

Cash and cash equivalents, end of period

 

$

442.4

 

 

$

102.4

 

 

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

3


Packaging Corporation of America

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited, dollars in millions and shares in thousands)

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at January 1, 2019

 

 

94,497

 

 

$

0.9

 

 

$

494.5

 

 

$

2,315.8

 

 

$

(138.8

)

 

$

2,672.4

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

(74.8

)

 

 

 

 

 

(74.8

)

Share-based compensation

 

 

(3

)

 

 

 

 

 

6.9

 

 

 

 

 

 

 

 

 

6.9

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

186.8

 

 

 

3.3

 

 

 

190.1

 

Balance at March 31, 2019

 

 

94,494

 

 

$

0.9

 

 

$

501.4

 

 

$

2,427.8

 

 

$

(135.5

)

 

$

2,794.6

 

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at January 1, 2018

 

 

94,350

 

 

$

0.9

 

 

$

471.2

 

 

$

1,867.4

 

 

$

(156.9

)

 

$

2,182.6

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

(59.5

)

 

 

 

 

 

(59.5

)

Share-based compensation

 

 

(2

)

 

 

 

 

 

5.1

 

 

 

 

 

 

 

 

 

5.1

 

Adoption of ASC 606

 

 

 

 

 

 

 

 

 

 

 

1.6

 

 

 

 

 

 

1.6

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

140.1

 

 

 

3.9

 

 

 

144.0

 

Balance at March 31, 2018

 

 

94,348

 

 

$

0.9

 

 

$

476.3

 

 

$

1,949.6

 

 

$

(153.0

)

 

$

2,273.8

 

 

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

4


Condensed Notes to Unaudited Quarterly Consolidated Financial Statements

1.

Nature of Operations and Basis of Presentation

Packaging Corporation of America ("we," "us," "our," PCA," or the "Company") was incorporated on January 25, 1999. In April 1999, PCA acquired the containerboard and corrugated packaging products business of Pactiv Corporation (Pactiv), formerly known as Tenneco Packaging, Inc., a wholly owned subsidiary of Tenneco Inc. We are a large diverse manufacturer of both packaging and paper products. We are headquartered in Lake Forest, Illinois and we operate primarily in the United States.

We report our business in three reportable segments: Packaging, Paper, and Corporate and Other. Our Packaging segment produces a wide variety of containerboard and corrugated packaging products. The Paper segment manufactures and sells a range of communication-based papers. Corporate and other includes support staff services and related assets and liabilities, transportation assets, and activity related to other ancillary support operations. For more information about our segments, see Note 19, 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, 2019 and for the three months ended March 31, 2019 and 2018 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 notes required by accounting principles generally accepted in the United States for complete audited financial statements. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018.

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, 2019, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02 (Topic 842): Leases , which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The original guidance required application on a modified retrospective basis with the earliest period presented. In July 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842 , which included an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases , as the date of initial application of transition, which we elected. As a result of the adoption of ASC 842 on January 1, 2019, we recorded operating lease liabilities of $228 million, with corresponding right of use (“ROU”) assets of the same amount. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed us to carry forward the historical lease classification and not to reassess whether existing or expired contracts contain a lease. We also elected the short-term lease recognition exemption, which permits us to exclude short-term leases (i.e. leases with terms of 12 months or less) from the recognition requirements of this standard, and we elected to account for lease and non-lease components as a single lease component for all classes of underlying assets except for embedded leases. The adoption of ASC 842 had an immaterial impact on our consolidated net earnings, liquidity and debt covenants under our current agreements for the three-month period ended March 31, 2019. See Note 3, Leases, for more information.

Effective January 1, 2019, we adopted ASU 2018-02 (Topic 220 ): Income Statement—Reporting Comprehensive Income – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which allows for optional reclassification from Accumulated Other Comprehensive Income (“AOCI”) to retained earnings for the stranded tax effects resulting from the Tax Cuts and Jobs Act in December 2017 (“Tax Act”). Stranded tax effects are the difference in deferred taxes between the amount initially recorded to other comprehensive income (“OCI”) at historical corporate income tax rates and the amount recorded using the newly-enacted corporate income tax rate. The cumulative tax rate adjustment to deferred taxes was required to be recorded through income tax expense from continuing operations in the period of enactment as opposed to OCI, resulting in the stranded tax effects in AOCI. The Company elected to not reclassify the stranded tax effects related to the Tax Act. As a result, the adoption did not have an impact on the Company's financial position, results of operations, or cash flow.  

New Accounting Standards Not Yet Adopted

 

In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans . ASU 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. The ASU is effective for annual periods beginning after December 31, 2020, with early adoption permitted. The amendments in ASU 2018-14 would need to be applied on a retrospective basis.  The Company is currently evaluating the impact this guidance will have on its related disclosures.

5


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 beginni ng 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.

There were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.

 

3.

Leases

 

We group our leases into two primary lease types, real estate and equipment, and into various asset classes within each type. Real estate leases primarily include manufacturing locations, office space, warehouses, and design centers, while equipment leases primarily include manufacturing equipment.

 

Leases with an initial term of 12 months or less and certain month-to-month leases are not recorded on the balance sheet. The lease expense for these types of leases is recognized on a straight-line basis over the lease term.

 

To determine the lease term, we include the non-cancellable period of the lease together with the following: all periods covered by an option to extend the lease, if we are reasonably certain to exercise that option; any periods covered by an option to terminate the lease if we are reasonably certain not to exercise that option; and any periods covered by an option to extend or not to terminate the lease that are controlled by the lessor. The exercising of lease renewal options is based on whether future economic benefit is expected to be derived from the renewal. Most of our real estate leases contain at least one renewal option. Renewal options generally range from 1 to 5 years. Although equipment leases may also contain renewal options, we typically do not expect to extend and/or exercise these renewal options unless a compelling business reason is provided to management.

 

Our leases may contain fixed and variable costs. Fixed costs determine the right-of-use asset. Variable costs are those costs which will vary month to month and are excluded from the calculation of the right-of-use asset. Variable lease costs are recorded to lease expense in the period in which they are incurred.

 

Our leases do not provide an implicit borrowing rate of return. Therefore, we use our incremental borrowing rate to calculate the present value of lease payments at inception of the lease or when a lease is modified.

 

Supplemental balance sheet information related to our leases was as follows (dollars in millions):

 

 

March 31, 2019

 

Operating leases:

 

 

 

Operating lease right-of-use assets

$

217.3

 

 

 

 

 

Current portion of operating lease obligations

$

57.2

 

Long-term portion of operating lease obligations

 

165.4

 

Total operating lease obligations

$

222.6

 

 

 

 

 

Finance leases:

 

 

 

Buildings

$

0.3

 

Machinery and equipment

 

28.5

 

Total

 

28.8

 

Less accumulated amortization

 

(17.0

)

Total

$

11.8

 

 

 

 

 

Current portion of finance lease obligations

$

1.5

 

Long-term portion of finance lease obligations

 

17.2

 

Total finance lease obligations

$

18.7

 

 

 

 

 

Weighted-average remaining lease term (years):

 

 

 

Operating leases

 

5.7

 

Finance leases

 

9.5

 

Weighted-average discount rate:

 

 

 

Operating leases

 

4.49

%

Finance leases

 

6.66

%

 

6


The components of lease expense were as follows (dollars in millions):

 

 

Three Months Ended

 

 

March 31, 2019

 

Finance lease cost:

 

 

 

Amortization of finance lease assets

$

0.4

 

Interest on lease liabilities

 

0.3

 

Total finance lease cost

 

0.7

 

Operating lease cost

 

17.4

 

Short-term lease cost

 

4.3

 

Variable lease cost

 

5.9

 

Total lease cost

$

28.3

 

 

Supplemental cash flow information related to leases was as follows (dollars in millions):

 

 

Three Months Ended

 

 

March 31, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flows for operating leases

$

(14.8

)

Operating cash flows for finance leases

 

(0.4

)

Financing cash flows for finance leases

 

(0.3

)

Right-of-use assets obtained in exchange for new lease obligations:

 

 

 

Operating leases

$

(5.1

)

Finance leases

 

 

 

 

 

 

Supplemental non-cash information on changes in lease liabilities

$

4.3

 

Supplemental non-cash information on changes in right-of-use assets

$

10.7

 

 

The maturities of lease liabilities for operating and finance leases at March 31, 2019 were as follows (dollars in millions):

 

 

 

Operating Leases

 

 

Finance Leases

 

2019

 

$

50.5

 

 

$

2.0

 

2020

 

 

57.5

 

 

 

2.7

 

2021

 

 

47.2

 

 

 

2.7

 

2022

 

 

31.2

 

 

 

2.7

 

2023

 

 

19.1

 

 

 

2.7

 

Thereafter

 

 

48.4

 

 

 

12.5

 

Total lease payments

 

 

253.9

 

 

 

25.3

 

Less imputed interest (a)

 

 

(31.3

)

 

 

(6.6

)

Present value of lease liabilities

 

$

222.6

 

 

$

18.7

 

 

 

(a)

Calculated using the incremental borrowing rate for each lease applied to the future payments.

 

The maturities of lease liabilities at December 31, 2018 under ASC 840 were as follows (dollars in millions):

 

 

 

Operating Leases

 

 

Finance Leases

 

2019

 

$

70.1

 

 

$

2.7

 

2020

 

 

58.7

 

 

 

2.7

 

2021

 

 

47.4

 

 

 

2.7

 

2022

 

 

29.9

 

 

 

2.7

 

2023

 

 

17.8

 

 

 

2.7

 

Thereafter

 

 

46.4

 

 

 

12.4

 

Total operating lease payments

 

$

270.3

 

 

 

25.9

 

Less imputed interest (b)

 

 

 

 

 

 

(6.9

)

Present value of lease liabilities

 

 

 

 

 

$

19.0

 

 

 

(b)

Calculated using the incremental borrowing rate for each lease applied to the future payments.

 

7


4 .

Revenue

 

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 received 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 March 31,

 

 

 

2019

 

 

2018

 

Packaging

 

$

1,477.6

 

 

$

1,402.9

 

Paper

 

 

239.7

 

 

 

269.4

 

Corporate and Other

 

 

16.4

 

 

 

18.3

 

Total revenue

 

$

1,733.7

 

 

$

1,690.6

 

 

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 customers, which are broadly diversified across industries and geographic locations.

The Company recognizes revenue for its packaging products when performance obligations under the terms of a 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.

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 18, 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.

 

8


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.

5 .

Acquisitions

 

Englander dZignPak

On October 9, 2018, PCA acquired the assets of Englander dZignPak (“Englander”), a corrugated products manufacturer, for $56.3 million. The assets include two sheet plants located in Waco, Texas and Carrollton, Texas. Sales and total assets of the acquired company are not material to our overall sales and total assets. Operating results of the acquired assets subsequent to October 9, 2018 are included in our Packaging segment’s 2018 operating results. We have estimated the allocation of the purchase price to the assets acquired and liabilities assumed based on estimates of the fair value at the date of acquisition, of which $28.6 million was allocated to goodwill (which is deductible for tax purposes) and $14.1 million to intangible assets (to be amortized over a weighted average life of approximately 9.7 years), primarily customer relationships, in the Packaging segment. The purchase price allocation continues to be preliminary and is subject to finalization of working capital adjustments. Our current estimates and assumptions may change as more information becomes available. We expect to finalize the allocations within the 12-month period following the acquisition date.

 

6 .

Earnings Per Share

The following table sets forth the computation of basic and diluted income per common share for the periods presented (dollars and shares in millions, except per share data):

 

 

 

Three Months Ended

 

 

 

March 31,

 

Numerator:

 

2019

 

 

2018

 

Net income

 

$

186.8

 

 

$

140.1

 

Less: distributed and undistributed earnings allocated to

   participating securities

 

 

(1.4

)

 

 

(1.1

)

Net income attributable to common shareholders

 

$

185.4

 

 

$

139.0

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

93.7

 

 

 

93.6

 

Effect of dilutive securities

 

 

0.3

 

 

 

0.2

 

Weighted average diluted common shares outstanding

 

 

94.0

 

 

 

93.8

 

Basic income per common share

 

$

1.98

 

 

$

1.48

 

Diluted income per common share

 

$

1.97

 

 

$

1.48

 

 

7 .

Other Expense, Net

The components of other expense, net, were as follows (dollars in millions):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Asset disposals and write-offs

 

$

(4.3

)

 

$

(5.1

)

Wallula mill restructuring (a)

 

 

(0.4

)

 

 

(0.7

)

Facilities closure and other costs (b)

 

 

 

 

 

(0.1

)

Other

 

 

(1.3

)

 

 

(2.4

)

Total

 

$

(6.0

)

 

$

(8.3

)

(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)

Includes charges consisting of closure costs related to corrugated products facilities.

 

9


8 .

Income Taxes

 

For the three months ended March 31, 2019 and 2018, we recorded $62.5 million and $46.5 million of income tax expense and had an effective tax rate of 25.1% and 24.9%, respectively. The slight increase in our effective tax rate for the three months ended March 31, 2019 compared with the same period in 2018 was primarily due to higher state and local income taxes net of the federal benefit.

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 three months ended March 31, 2019 and 2018, cash paid for taxes, net of refunds received, was $13.7 million and $10.3 million, respectively.

During the three months ended March 31, 2019, there were no significant changes to our uncertain tax positions. For more information, see Note 7, Income Taxes, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 2018 Annual Report on Form 10-K.

 

9 .

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):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Raw materials

 

$

330.1

 

 

$

307.8

 

Work in process

 

 

13.6

 

 

 

13.9

 

Finished goods

 

 

210.5

 

 

 

199.0

 

Supplies and materials

 

 

277.5

 

 

 

274.9

 

Inventories

 

$

831.7

 

 

$

795.6

 

 

10 .

Property, Plant, and Equipment

The components of property, plant, and equipment were as follows (dollars in millions):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Land and land improvements

 

$

165.6

 

 

$

161.9

 

Buildings

 

 

806.6

 

 

 

795.5

 

Machinery and equipment

 

 

5,522.0

 

 

 

5,481.6

 

Construction in progress

 

 

193.9

 

 

 

176.7

 

Other

 

 

75.9

 

 

 

75.4

 

Property, plant and equipment, at cost

 

 

6,764.0

 

 

 

6,691.1

 

Less accumulated depreciation

 

 

(3,654.2

)

 

 

(3,582.5

)

Property, plant, and equipment, net

 

$

3,109.8

 

 

$

3,108.6

 

 

Depreciation expense for the three months ended March 31, 2019 and 2018 was $85.2 million and $94.6 million, respectively. We recognized $0.2 million and $8.3 million of incremental depreciation expense during the three months ended March 31, 2019 and 2018, respectively, as a result of shortening the useful lives of certain assets primarily related to the Wallula mill restructuring.

At March 31, 2019 and December 31, 2018, purchases of property, plant, and equipment included in accounts payable were $34.3 million and $24.7 million, respectively.

10


1 1 .

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 both March 31, 2019 and December 31, 2018, we had $862.1 million of goodwill recorded in our Packaging segment and $55.2 million of goodwill recorded in our Paper segment.

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):

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

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

 

 

10.6

 

 

$

504.6

 

 

$

153.4

 

 

 

10.9

 

 

$

504.6

 

 

$

144.5

 

Trademarks and trade names

 

9.8

 

 

 

34.8

 

 

 

18.7

 

 

 

10.1

 

 

 

34.8

 

 

 

18.3

 

Other

 

 

2.7

 

 

 

4.3

 

 

 

2.9

 

 

 

3.0

 

 

 

4.3

 

 

 

2.7

 

Total intangible assets (excluding goodwill)

 

 

10.6

 

 

$

543.7

 

 

$

175.0

 

 

 

10.8

 

 

$

543.7

 

 

$

165.5

 

 

During the three months ended March 31, 2019 and 2018, amortization expense was $9.5 million and $10.4 million, respectively.

1 2 .

Accrued Liabilities

The components of accrued liabilities were as follows (dollars in millions):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Compensation and benefits

 

$

81.6

 

 

$

136.7

 

Medical insurance and workers’ compensation

 

 

26.9

 

 

 

27.5

 

Customer volume discounts and rebates

 

 

18.4

 

 

 

25.2

 

Franchise, property, sales and use taxes

 

 

17.0

 

 

 

13.4

 

Environmental liabilities and asset retirement obligations

 

 

5.3

 

 

 

5.0

 

Severance, retention, and relocation

 

 

2.0

 

 

 

2.2

 

Other

 

 

9.7

 

 

 

12.4

 

Total

 

$

160.9

 

 

$

222.4

 

 

1 3 .

Debt

 

For the three months ended March 31, 2019 and 2018, cash payments for interest were $7.3 million and $12.5 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 March 31, 2019 and 2018, amortization of treasury lock settlements was $1.3 million and $1.4 million, respectively. For both the three months ended March 31, 2019 and 2018, amortization of financing costs was $0.7 million.

At March 31, 2019, we had $2,496.5 million of fixed-rate senior notes outstanding. The fair value of our fixed-rate debt was estimated to be $2,536.8 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 2018 Annual Report on Form 10-K.

For more information on our long-term debt and interest rates on that debt, see Note 10, Debt, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our 2018 Annual Report on Form 10-K.

11


1 4 .

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 March 31,

 

 

 

2019

 

 

2018

 

Service cost

 

$