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.
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 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.
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
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.
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.
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
|
|
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
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.
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
|
|
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
|
|
$
|
6.2
|
|
|
$
|
6.2
|
|
Interest cost
|
|
|
11.7
|
|
|
|
10.6
|
|
Expected return on plan assets
|
|
|
(13.0
|
)
|
|
|
(14.2
|
)
|
Net amortization of unrecognized amounts
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
1.6
|
|
|
|
1.8
|
|
Actuarial loss
|
|
|
1.7
|
|
|
|
2.3
|
|
Net periodic benefit cost
|
|
$
|
8.2
|
|
|
$
|
6.7
|
|
PCA makes pension plan contributions that are sufficient to fund its actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA). From time to time, PCA may make additional discretionary contributions based on the funded status of the plans, tax deductibility, income from operations, and other factors. During the three ended March 31, 2019 and 2018, payments to our nonqualified pension plans were insignificant. For the three months ended March 31, 2019, we made contributions of $0.7 million to our qualified pension plans. We made contributions of $2.2 million to our qualified plans during the three months ended March 31, 2018. We expect to contribute at least the estimated required minimum contributions to our qualified pension plans of approximately $15.8 million in 2019.
For the three months ended March 31, 2019 and 2018, the net periodic benefit cost for our postretirement plans was insignificant.
1
5
.
|
Share-Based Compensation
|
The Company has a long-term equity incentive plan, which allows for grants of restricted stock, performance awards, stock appreciation rights, and stock options to directors, officers, and employees, as well as others who engage in services for PCA. The plan, as amended, terminates May 1, 2023 and authorizes 10.6 million
shares of common stock for grant over the life of the plan. As of March 31, 2019, 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 three months ended March 31, 2019:
|
|
Restricted Stock
|
|
|
Performance Units
|
|
|
|
Shares
|
|
|
Weighted Average Grant-
Date Fair Value
|
|
|
Shares
|
|
|
Weighted Average Grant-
Date Fair Value
|
|
Outstanding at January 1, 2019
|
|
|
743,591
|
|
|
$
|
86.90
|
|
|
|
266,704
|
|
|
$
|
90.01
|
|
Vested
|
|
|
(699
|
)
|
|
|
80.75
|
|
|
|
—
|
|
|
|
—
|
|
Forfeitures
|
|
|
(2,720
|
)
|
|
|
91.44
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at March 31, 2019
|
|
|
740,172
|
|
|
$
|
86.89
|
|
|
|
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 March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Restricted stock
|
|
$
|
4.9
|
|
|
$
|
3.9
|
|
Performance units
|
|
|
2.0
|
|
|
|
1.2
|
|
Total share-based compensation expense
|
|
|
6.9
|
|
|
|
5.1
|
|
Income tax benefit
|
|
|
(1.7
|
)
|
|
|
(1.3
|
)
|
Share-based compensation expense, net of tax benefit
|
|
$
|
5.2
|
|
|
$
|
3.8
|
|
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.
12
Performance
unit
awards are earned based on the achievement of defined
performance rankings
of Return o
n 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 performance measure and 50% used ROIC as the performance measure
.
All units a
warded before 2018 used ROIC as the performance measure.
The ROIC component of performance
unit
awards
is
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 aw
ards
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 component 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 the award
.
The unrecognized compensation expense for all share-based awards at March 31, 2019 was as follows (dollars in millions):
|
|
March 31, 2019
|
|
|
|
Unrecognized
Compensation
Expense
|
|
|
Remaining
Weighted
Average
Recognition
Period
(in years)
|
|
Restricted stock
|
|
$
|
26.6
|
|
|
2.3
|
|
Performance units
|
|
|
12.5
|
|
|
|
2.4
|
|
Total unrecognized share-based compensation expense
|
|
$
|
39.1
|
|
|
|
2.3
|
|
1
6
.
|
Stockholders' Equity
|
Dividends
During the three months ended March 31, 2019, we paid $74.7 million of dividends to shareholders. On February 27, 2019, PCA’s Board of Directors declared a regular quarterly cash dividend of $0.79 per share of common stock, which was paid on April 15, 2019 to shareholders of record as of March 15, 2019. 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 months ended March 31, 2019. At March 31, 2019, $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, 2019
|
|
$
|
(0.4
|
)
|
|
$
|
(10.2
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(127.9
|
)
|
|
$
|
(138.8
|
)
|
Amounts reclassified from AOCI, net of tax
|
|
|
—
|
|
|
|
1.0
|
|
|
|
—
|
|
|
|
2.3
|
|
|
|
3.3
|
|
Balance at March 31, 2019
|
|
$
|
(0.4
|
)
|
|
$
|
(9.2
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(125.6
|
)
|
|
$
|
(135.5
|
)
|
13
Reclassifications out of AOCI were as follows (dollars in millions). Amounts in parentheses indic
ate expenses in the Consolidated Statements of Income:
|
|
Amounts Reclassified from AOCI
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
Details about AOCI Components
|
|
2019
|
|
|
2018
|
|
|
|
Unrealized loss on treasury locks, net (a)
|
|
$
|
(1.3
|
)
|
|
$
|
(1.4
|
)
|
|
See (a) below
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
Tax benefit
|
|
|
$
|
(1.0
|
)
|
|
$
|
(1.0
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded employee benefit obligations (b)
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs
|
|
$
|
(1.5
|
)
|
|
$
|
(1.7
|
)
|
|
See (b) below
|
Amortization of actuarial gains / (losses)
|
|
|
(1.6
|
)
|
|
|
(2.3
|
)
|
|
See (b) below
|
|
|
|
(3.1
|
)
|
|
|
(4.0
|
)
|
|
Total before tax
|
|
|
|
0.8
|
|
|
|
1.0
|
|
|
Tax benefit
|
|
|
$
|
(2.3
|
)
|
|
$
|
(3.0
|
)
|
|
Net of tax
|
(a)
|
This AOCI component is included in interest expense, net. Amount relates to the amortization of the effective portion of treasury lock derivative instruments recorded in AOCI. The net amount of settlement gains or losses on derivative instruments included in AOCI to be amortized over the next 12 months is a net loss of $5.2 million ($3.9 million after tax). For a discussion of treasury lock derivative instrument activity, see Note 14, Derivative Instruments and Hedging Activities, 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.
|
(b)
|
These AOCI components are included in the computation of net pension and postretirement benefit costs. See Note 14, Employee Benefit Plans and Other Postretirement Benefits, for additional information.
|
1
7
.
|
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 the three month periods ended March 31, 2019 and 2018 and approximately
52% and 45% of our Paper segment sales revenue for both of those periods, respectively. For full year 2018, sales to Office Depot represented 47% of our Paper segment sales. At March 31, 2019 and December 31, 2018, we had $83.6 million and $66.7 million of accounts receivable due from Office Depot, respectively, which represents 9% and 7% of our total Company accounts receivable, respectively.
1
8
.
|
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 $3.6 million at March 31, 2019 and $2.7 million at December 31, 2018. During the three months ended March 31, 2019 and 2018, we recorded $20.0 million and $20.5 million, respectively, of LTP sales to Boise Cascade in "Net Sales" in the Consolidated Statements of Income and approximately the same amount of expenses in "Cost of Sales".
During the three months ended March 31, 2019 and 2018, fiber purchases from related parties were $4.4 million and $4.0 million
,
respectively. Most of these purchases related to chip and log purchases by LTP from Boise Cascade's wood products business. These purchases are recorded in "Cost of Sales" in the Consolidated Statements of Income.
14
1
9
.
|
Segment Infor
mation
|
We report our business in three reportable segments: Packaging, Paper, and Corporate and Other. These segments represent distinct businesses that are managed separately because of differing products and services. Each of these businesses requires distinct operating and marketing strategies.
Each segment’s profits and losses are measured on operating profits before interest expense, net, non-operating pension expense, 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 March 31, 2019
|
|
Trade
|
|
|
Intersegment
|
|
|
Total
|
|
|
Operating Income
(Loss)
|
|
|
Packaging
|
|
$
|
1,470.8
|
|
|
$
|
6.8
|
|
|
$
|
1,477.6
|
|
|
$
|
249.6
|
|
(a)
|
Paper
|
|
|
239.7
|
|
|
|
—
|
|
|
|
239.7
|
|
|
|
45.6
|
|
(a)
|
Corporate and other
|
|
|
23.2
|
|
|
|
33.5
|
|
|
|
56.7
|
|
|
|
(19.8
|
)
|
|
Intersegment eliminations
|
|
|
—
|
|
|
|
(40.3
|
)
|
|
|
(40.3
|
)
|
|
|
—
|
|
|
|
|
$
|
1,733.7
|
|
|
$
|
—
|
|
|
$
|
1,733.7
|
|
|
|
275.4
|
|
|
Non-operating pension expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.0
|
)
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24.1
|
)
|
|
Income before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
249.3
|
|
|
|
|
Sales, net
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
Trade
|
|
|
Intersegment
|
|
|
Total
|
|
|
Operating Income
(Loss) (a)
|
|
|
Packaging
|
|
$
|
1,396.6
|
|
|
$
|
6.3
|
|
|
$
|
1,402.9
|
|
|
$
|
224.7
|
|
(b)
|
Paper
|
|
|
269.4
|
|
|
|
—
|
|
|
|
269.4
|
|
|
|
7.2
|
|
(b)
|
Corporate and Other
|
|
|
24.6
|
|
|
|
29.0
|
|
|
|
53.6
|
|
|
|
(19.0
|
)
|
(b)
|
Intersegment eliminations
|
|
|
—
|
|
|
|
(35.3
|
)
|
|
|
(35.3
|
)
|
|
|
—
|
|
|
|
|
$
|
1,690.6
|
|
|
$
|
—
|
|
|
$
|
1,690.6
|
|
|
|
212.9
|
|
|
Non-operating pension expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25.8
|
)
|
|
Income before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
186.6
|
|
|
(a)
|
Includes $0.6 million of charges related to the announced second quarter 2018 discontinuation of uncoated free sheet and coated one-side grades at the Wallula, Washington mill associated with the conversion of the No. 3 paper machine to a high-performance 100% virgin kraft linerboard machine.
|
(b
)
|
Includes $8.8 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 and $0.3 million of charges consisting of closure costs related to corrugated products facilities and a corporate administration facility.
|
20
.
|
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 10, Debt, and Note 19, Commitments, Guarantees, Indemnifications, and Legal Proceedings, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our 2018 Annual Report on Form 10-K.
Guarantees and Indemnifications
We provide guarantees, indemnifications, and other assurances to third parties in the normal course of our business. These include tort indemnifications, product guarantees, environmental assurances, and representations and warranties in commercial agreements. At March 31, 2019, 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.
15
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.
16