UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
(Exact Name of Registrant as Specified in its Charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
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(Zip Code) |
Registrant's telephone number, including area code
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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.
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).
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.
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Accelerated filer |
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Emerging growth company |
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Non-accelerated filer |
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Smaller reporting company |
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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
As of October 29, 2021 the Registrant had outstanding
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 |
Table of Contents
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PART I |
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Item 1. |
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1 |
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Item 2. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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31 |
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Item 4. |
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31 |
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PART II |
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Item 1. |
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32 |
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Item 1A. |
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32 |
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Item 2. |
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32 |
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Item 3. |
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32 |
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Item 4. |
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32 |
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Item 5. |
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32 |
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Item 6. |
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33 |
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)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Statements of Income: |
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Net sales |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling, general and administrative expenses |
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Goodwill impairment |
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Other expense, net |
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Income from operations |
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Non-operating pension income |
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Interest expense, net |
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Income before taxes |
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Provision for income taxes |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Net income per common share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Dividends declared per common share |
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$ |
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$ |
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$ |
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$ |
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Statements of Comprehensive Income: |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income, net of tax: |
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Foreign currency translation adjustment |
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Changes in unrealized gains (losses) on marketable debt securities, |
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Amortization of pension and postretirement plans actuarial loss and |
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Other comprehensive income |
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Comprehensive income |
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$ |
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$ |
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$ |
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$ |
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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)
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September 30, |
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December 31, |
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2021 |
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2020 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term marketable debt securities |
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Accounts receivable, net of allowance for credit losses and customer deductions |
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Inventories |
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Prepaid expenses and other current assets |
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Federal and state income taxes receivable |
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Total current assets |
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Property, plant, and equipment, net |
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Goodwill |
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Other intangible assets, net |
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Operating lease right-of-use assets |
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Long-term marketable debt securities |
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Other long-term assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Current maturities of long-term debt |
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$ |
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$ |
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Operating lease obligations |
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Finance lease obligations |
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Accounts payable |
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Dividends payable |
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Accrued liabilities |
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Accrued interest |
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Total current liabilities |
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Long-term liabilities: |
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Long-term debt |
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Operating lease obligations |
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Finance lease obligations |
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Deferred income taxes |
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Compensation and benefits |
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Other long-term liabilities |
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Total long-term liabilities |
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Stockholders' equity: |
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Common stock, par value $ |
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Additional paid in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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See accompanying condensed notes to unaudited quarterly consolidated financial statements.
2
Packaging Corporation of America
Consolidated Statements of Cash Flows
(unaudited, dollars in millions)
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Nine Months Ended |
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September 30, |
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2021 |
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2020 |
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Cash Flows from Operating Activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation, depletion, and amortization of intangibles |
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Amortization of deferred financing costs |
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Share-based compensation expense |
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Deferred income tax provision |
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Loss on asset disposals |
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Goodwill impairment |
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Pension and post-retirement benefits expense, net of contributions |
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( |
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Other, net |
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Changes in operating assets and liabilities: |
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(Increase) decrease in assets — |
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Accounts receivable |
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( |
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Inventories |
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( |
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Prepaid expenses and other current assets |
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( |
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Increase (decrease) in liabilities — |
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Accounts payable |
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Accrued liabilities |
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Federal and state income taxes payable / receivable |
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( |
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Net cash provided by operating activities |
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Cash Flows from Investing Activities: |
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Additions to property, plant, and equipment |
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( |
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( |
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Additions to other long term assets |
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( |
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( |
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Proceeds from asset disposals |
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Purchases of marketable debt securities |
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( |
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Proceeds from sales of marketable debt securities |
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Proceeds from maturities of marketable debt securities |
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Net cash used for investing activities |
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( |
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( |
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Cash Flows from Financing Activities: |
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Repayments of debt and finance lease obligations |
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( |
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( |
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Proceeds from issuance of debt |
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Financing costs paid |
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( |
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Common stock dividends paid |
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( |
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( |
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Shares withheld to cover employee restricted stock taxes |
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( |
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( |
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Net cash provided by (used for) financing activities |
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( |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period |
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$ |
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$ |
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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)
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Common Stock |
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Additional |
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Retained |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Balance at July 1, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common stock withheld and retired |
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( |
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( |
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( |
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( |
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Common stock dividends declared |
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— |
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( |
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Share-based compensation and other |
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Comprehensive income |
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— |
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Balance at September 30, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common Stock |
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Additional |
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Retained |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Balance at July 1, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common stock withheld and retired to |
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( |
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( |
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Common stock dividends declared |
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— |
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( |
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Share-based compensation and other |
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( |
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Comprehensive income |
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— |
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Balance at September 30, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common Stock |
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Additional |
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Retained |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Balance at January 1, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common stock withheld and retired to |
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( |
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( |
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( |
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( |
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( |
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Common stock dividends declared |
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— |
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( |
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Share-based compensation and other |
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Comprehensive income |
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— |
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Balance at September 30, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common Stock |
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Additional |
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Retained |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Balance at January 1, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Common stock withheld and retired to |
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( |
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( |
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( |
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( |
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Common stock dividends declared |
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— |
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( |
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Share-based compensation and other |
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Comprehensive income |
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— |
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Balance at September 30, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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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
We report our business in
During the fourth quarter of 2020, in order to meet strong packaging demand and maintain appropriate inventory levels, we temporarily began producing linerboard on the No. 3 machine at our Jackson, Alabama mill. In the first quarter of 2021, we announced the discontinuation of production of uncoated freesheet paper grades on the machine and the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities. Before October 2020, operating results for the Jackson mill were included in the Paper segment. Beginning in October 2020, operating results for the Jackson mill are included in both the Packaging and Paper segments.
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, 2021 and for the three and nine months ended September 30, 2021 and 2020 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 consolidated financial statements include the accounts of PCA and its majority-owned subsidiaries after elimination of intercompany balances and transactions.
2. New Accounting Standards
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The amendments in this Update are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, which extends some of the optional expedients under Topic 848 to include derivative contracts impacted by discounting transition. Companies can apply the ASU immediately. The ASU can be adopted on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to any new modification from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The optional guidance will only be available until December 31, 2022. While the Company’s fixed-rate outstanding debt will not be impacted by the reference rate reform, the Company is still evaluating the impact of this guidance on its revolving credit facility, as the interest rate associated with any future borrowings against the revolving credit facility is based on LIBOR. Overall, the Company does not expect the guidance to have a significant impact on its financial position or related disclosures.
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.
5
3. 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 |
|
|
Nine Months Ended |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Packaging |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Paper |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Packaging Revenue
Our containerboard mills produce linerboard and 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.
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
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.
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.
6
4. 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 |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
Numerator: |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Less: Distributed and undistributed earnings allocated to participating |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net income attributable to common shareholders |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average basic common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average diluted common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic income per common share |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Diluted income per common share |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
5. Other 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, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Asset disposals and write-offs |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Jackson mill conversion-related activities (a) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Facilities closure and other income (costs) (b) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Other |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
6. Income Taxes
For the three months ended September 30, 2021 and 2020, we recorded $
For the nine months ended September 30, 2021 and 2020, we recorded $
Our current effective tax rate may differ from the federal statutory income tax rate of
During the three and nine months ended September 30, 2021, 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 2020 Annual Report on Form 10-K.
7
7. 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 net realizable value. 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, |
|
||
|
|
2021 |
|
|
2020 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
Supplies and materials |
|
|
|
|
|
|
||
Inventories |
|
$ |
|
|
$ |
|
||
8. Property, Plant, and Equipment
The components of property, plant, and equipment were as follows (dollars in millions):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
Land and land improvements |
|
$ |
|
|
$ |
|
||
Buildings |
|
|
|
|
|
|
||
Machinery and equipment |
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Property, plant and equipment, at cost |
|
|
|
|
|
|
||
Less accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Property, plant, and equipment, net |
|
$ |
|
|
$ |
|
||
During the second quarter of 2020, with the exacerbated deterioration in uncoated freesheet market conditions arising from the COVID-19 pandemic and the estimated impact on our Paper segment and its projected future results of operations, we identified a triggering event indicating possible impairment of our long lived assets within our Paper segment, including property, plant, and equipment, and performed a recoverability test on the Paper reporting unit long lived assets as of May 31, 2020. The recoverability test was based on forecasts of undiscounted cash flows. The results of the recoverability test indicated that the long lived assets within our Paper segment, inclusive of property, plant, and equipment, were
Depreciation expense for the three months ended September 30, 2021 and 2020 was $
At September 30, 2021 and December 31, 2020, purchases of property, plant, and equipment included in accounts payable were $
9. Goodwill and Intangible Assets
During the second quarter of 2020, with the exacerbated deterioration in uncoated freesheet market conditions arising from the COVID-19 pandemic and the estimated impact on our Paper segment and its projected future results of operations, we identified a triggering event indicating possible impairment of goodwill and our long lived assets within our Paper reporting unit.
Goodwill
Due to the triggering event identified above an interim quantitative impairment analysis was performed as of May 31, 2020 for the Paper reporting unit, which is the same as our Paper reportable segment. We estimated the fair value of the Paper reporting unit using a combination of the income approach and the market approach, as further described below. Based on the evaluation performed, we determined that the carrying value of the Paper reporting unit exceeded its fair value, which resulted in a goodwill impairment charge totaling $
8
For purposes of our goodwill impairment analysis, we estimated the fair value of the Paper reporting unit using a combination of the income approach and the market approach applying an equal weighting. The income approach incorporated the estimated future cash flows and a terminal value discounted to their present value using an appropriate risk-adjusted discount rate. The estimated future cash flows and terminal value were based on internal forecasts and industry trends, including the long-term outlook for the paper industry. Our expected cash flows include assumptions about industry pricing, expected paper demand, and anticipated input and conversion costs. The rate in the income approach was
The valuation of our Paper reporting unit requires significant judgment in evaluating recent indicators of market activity and estimated future cash flows, discount rates, and other factors. Our impairment analysis contains inherent uncertainties due to uncontrollable events that could positively or negatively impact anticipated future economic and operating conditions. In making these estimates, the weighted-average cost of capital is utilized to calculate the present value of future cash flows and terminal value. Many variables go into estimating future cash flows, including estimates of our future revenue growth and operating results. When estimating our projected revenue growth and future operating results, we considered industry trends, economic data, and our competitive situation.
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 September 30, 2021 and December 31, 2020, we had $
Intangible Assets
Intangible assets are primarily comprised of customer relationships and trademarks and trade names. As a result of the triggering event described above, we also performed a recoverability test on our long-lived assets within the Paper segment, including long lived intangible assets, as of May 31, 2020. The recoverability test was based on forecasts of undiscounted cash flows. The results of the recoverability test indicated that the long lived assets within our Paper segment, inclusive of the long lived intangible assets, were
The weighted average remaining useful life, gross carrying amount, and accumulated amortization of our intangible assets were as follows (dollars in millions):
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||||||||||||||||||
|
|
Weighted |
|
|
Gross |
|
|
Accumulated |
|
|
Weighted |
|
|
Gross |
|
|
Accumulated |
|
||||||
Customer relationships |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
||||||
Trademarks and trade names |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total intangible assets (excluding goodwill) |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
||||||
10. Accrued Liabilities
The components of accrued liabilities were as follows (dollars in millions):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
Compensation and benefits |
|
$ |
|
|
$ |
|
||
Customer rebates and other credits |
|
|
|
|
|
|
||
Medical insurance and workers’ compensation |
|
|
|
|
|
|
||
Property, franchise, sales and use taxes |
|
|
|
|
|
|
||
Environmental liabilities and asset retirement obligations |
|
|
|
|
|
|
||
Severance, retention, and relocation |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
9
11. Debt
At September 30, 2021 and December 31, 2020, our long-term debt and interest rates on that debt were as follows (dollars in millions):
|
|
September 30, |
|
|
December 31, |
|
|
||
|
|
2021 |
|
|
2020 |
|
|
||
Revolving Credit Facility, due August 2021, terminated |
|
$ |
|
|
$ |
|
|
||
Revolving Credit Facility, due |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Total |
|
|
|
|
|
|
|
||
Less current portion (a) |
|
|
|
|
|
|
|
||
Less unamortized debt issuance costs |
|
|
|
|
|
|
|
||
Total long-term debt |
|
$ |
|
|
$ |
|
|
||
(a)
On September 21, 2021, the Company issued $
Although PCA communicated its intent to extinguish the old
On October 8, 2021, PCA completed the redemption of the old
10
New Revolving Credit Agreement
On
The New Revolving Credit Agreement is a $
Loans under the New Revolving Credit Agreement bear interest at LIBOR plus an applicable margin. The applicable margin is determined based upon the public ratings of PCA's senior long-term unsecured debt or PCA's gross leverage ratio. The New Revolving Credit Agreement contains customary LIBOR successor rate provisions.
The New Revolving Credit Agreement contains customary affirmative and negative covenants, including limitations on our ability to incur indebtedness at the subsidiary level and liens on our assets, and restrictions on our ability to engage in certain transactions involving mergers, consolidations, and sales of all or substantially all of our assets or the assets of a subsidiary guarantor. The New Revolving Credit Agreement has two financial covenants, a maximum leverage ratio and a minimum interest coverage ratio, each calculated on a consolidated basis. At September 30, 2021, we were in compliance with these covenants.
PCA may prepay loans under the New Revolving Credit Agreement at any time without premium or penalty.
Repayments, Interest, and Other
For the nine months ended September 30, 2021 and 2020, cash payments for interest were $
Included in interest expense, net is the amortization of financing costs. For both the three months ended September 30, 2021 and 2020, amortization of financing costs was $
At September 30, 2021, we had $
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 2020 Annual Report on Form 10-K.
12. Cash, Cash Equivalents, and Marketable Debt Securities
The following table shows the Company’s cash and available-for-sale (AFS) debt securities by major asset category at September 30, 2021 and December 31, 2020 (in millions):
|
|
September 30, 2021 |
|
|||||||||||||||||||||||||
|
|
Adjusted |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Cash and |
|
|
Short-Term |
|
|
Long-Term |
|
|||||||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Level 1 (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Money market funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
U.S. Treasury securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Subtotal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Level 2 (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Certificates of deposit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
U.S. government agency securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Corporate debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Subtotal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
11
|
|
December 31, 2020 |
|
|||||||||||||||||||||||||
|
|
Adjusted |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Cash and |
|
|
Short-Term |
|
|
Long-Term |
|
|||||||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Level 1 (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Money market funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
U.S. Treasury securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Subtotal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Level 2 (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Certificates of deposit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Commercial paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
U.S. government agency securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Corporate debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Subtotal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
For the three and nine months ended September 30, 2021 and 2020, net realized gains and losses on the sales and maturities of certain marketable debt securities were insignificant.
The Company invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy requires securities to be investment grade and limits the amount of credit exposure to any one issuer. The maturities of the Company’s long-term marketable debt securities generally range from to
Fair values were determined for each individual marketable debt security in the investment portfolio. When evaluating a marketable debt security for impairment, PCA reviews factors such as the duration and extent to which the fair value of the marketable debt security is less than its cost, the financial condition of the issuer and any changes thereto, the general market condition in which the issuer operates, and PCA’s intent to sell, or whether it will be more likely than not be required to sell, the marketable debt security before recovery of its amortized cost basis.
As of September 30, 2021 and December 31, 2020, we do
The following table provides information about the Company’s marketable debt securities that have been in a continuous loss position as of September 30, 2021 and December 31, 2020 (in millions, except number of marketable debt securities in a loss position):
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||||||||||||||||||
|
|
Fair Value of |
|
|
Number of Marketable |
|
|
Unrealized |
|
|
Fair Value of |
|
|
Number of Marketable |
|
|
Unrealized |
|
||||||
Corporate debt securities |
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
||||||
U.S. Treasury securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. government agency securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Certificates of deposit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Commercial paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
||||||
12
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 |
|
|
Nine Months Ended |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net amortization of unrecognized amounts |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Actuarial loss |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net periodic benefit cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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 and nine months ended September 30, 2021 and 2020, payments to our nonqualified pension plans were insignificant. During both the three and nine months ended September 30, 2021, we made contributions of $
For the three and nine months ended September 30, 2021 and 2020, the net periodic benefit cost for our postretirement plans was insignificant.
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. On February 25, 2020, our board of directors approved and, on May 5, 2020, our stockholders approved, the amendment and restatement of the plan. The amendment extended the plan’s term to
As of September 30, 2021, assuming performance units are paid out at the target level of performance,
The following table presents restricted stock and performance unit award activity for the nine months ended September 30, 2021:
|
|
Restricted Stock |
|
|
Performance Units |
|
||||||||||
|
|
Shares |
|
|
Weighted |
|
|
Shares |
|
|
Weighted |
|
||||
Outstanding at January 1, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vested (a) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Forfeitures |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Outstanding at September 30, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
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, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Restricted stock |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Performance units |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income tax benefit |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Share-based compensation expense, net of tax benefit |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
13
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 granted to certain key employees 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 2021 and 2020, in terms of grant date value,
The unrecognized compensation expense for all share-based awards at September 30, 2021 was as follows (dollars in millions):
|
|
September 30, 2021 |
|
|||||
|
|
Unrecognized |
|
|
Remaining |
|
||
Restricted stock |
|
$ |
|
|
|
|
||
Performance units |
|
|
|
|
|
|
||
Total unrecognized share-based compensation expense |
|
$ |
|
|
|
|
||
15. Stockholders' Equity
Dividends
During the nine months ended September 30, 2021, we paid $
Repurchases of Common Stock
On February 25, 2016, PCA announced that its Board of Directors authorized the repurchase of $
The Company did
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 |
|
|
Unrealized Loss |
|
|
Unrealized Loss |
|
|
Unfunded |
|
|
Total |
|
|||||
Balance at January 1, 2021 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive income before reclassifications, |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Amounts reclassified from AOCI, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance at September 30, 2021 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
||
14
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 |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
|
||||
Unfunded employee benefit obligations (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of prior service costs |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
See (a) below |
Amortization of actuarial losses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
See (a) below |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total before tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit |
||||
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Net of tax |
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
Louisiana Timber Procurement Company, L.L.C. (LTP) is a variable-interest entity that is
During the three months ended September 30, 2021 and 2020, fiber purchases from related parties were $
18. Segment Information
We report our business in
During the fourth quarter of 2020, in order to meet strong packaging demand and maintain appropriate inventory levels, we temporarily began producing linerboard on the No. 3 machine at our Jackson, Alabama mill. In the first quarter of 2021, we announced the discontinuation of production of uncoated freesheet paper grades on the machine and the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities. Before October 2020, operating results for the Jackson mill were included in the Paper segment. Beginning in October 2020, operating results for the Jackson mill are included in both the Packaging and Paper segments.
Each segment’s profits and losses are measured on operating profits before interest expense, net, non-operating pension income, and income taxes. For certain allocated expenses, the related assets and liabilities remain in the Corporate and Other segment.
15
Selected financial information by reportable segment was as follows (dollars in millions):
|
|
Sales, net |
|
|
|
|
|
||||||||||
Three Months Ended September 30, 2021 |
|
Trade |
|
|
Intersegment |
|
|
Total |
|
|
Operating Income (Loss) |
|
|
||||
Packaging |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
(a) |
||||
Paper |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
||||
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
(a) |
|||
Intersegment eliminations |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
||
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|||
Non-operating pension income |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
(a) |
|||
Income before taxes |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
|
|
Sales, net |
|
|
|
|
|
||||||||||
Three Months Ended September 30, 2020 |
|
Trade |
|
|
Intersegment |
|
|
Total |
|
|
Operating Income (Loss) |
|
|
||||
Packaging |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
(b) |
||||
Paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|||
Intersegment eliminations |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
||
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|||
Non-operating pension income |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|||
Income before taxes |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
|
|
Sales, net |
|
|
|
|
|
||||||||||
Nine Months Ended September 30, 2021 |
|
Trade |
|
|
Intersegment |
|
|
Total |
|
|
Operating Income (Loss) |
|
|
||||
Packaging |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
(a) |
||||
Paper |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
||||
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
(a) |
|||
Intersegment eliminations |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
||
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|||
Non-operating pension income |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
(a) |
|||
Income before taxes |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
|
|
Sales, net |
|
|
|
|
|
||||||||||
Nine Months Ended September 30, 2020 |
|
Trade |
|
|
Intersegment |
|
|
Total |
|
|
Operating Income (Loss) |
|
|
||||
Packaging |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
(b)(c) |
||||
Paper |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
(c)(d) |
|||
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|||
Intersegment eliminations |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
||
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|||
Non-operating pension income |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|||
Income before taxes |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
||||
16
(a) |
The three and nine months ended September 30, 2021 include the following: |
|
|
1. |
$ |
|
2. |
$ |
|
3. |
$ |
|
|
|
(b) |
The three and nine months ended September 30, 2020 include the following: |
|
|
1. |
$ |
|
2. |
$ |
|
|
|
(c) |
The nine months ended September 20, 2020 include $ |
|
|
|
|
(d) |
During the second quarter of 2020, with the exacerbated deterioration in uncoated freesheet market conditions and the estimated impact on our Paper reporting unit arising from the COVID-19 pandemic, as well as projected future results of operations, we identified a triggering event indicating possible impairment of goodwill within our Paper reporting unit. The Company performed an interim quantitative impairment analysis as of May 31, 2020, and, based on the evaluation performed, we determined that goodwill was fully impaired for the Paper reporting unit and recognized a non-cash impairment charge of $ |
|
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 10, Debt, and Note 20, 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 2020 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, 2021, we are not aware of any material liabilities arising from any guarantee, indemnification, or financial assurance we have provided. If we determined such a liability was probable and subject to reasonable determination, we would accrue for it at that time.
DeRidder Mill Incident
On
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 $
The EPA investigation is ongoing. In May 2017, the EPA conducted an on-site inspection of the facility to assess compliance with the Clean Air Act, Risk Management Program (RMP). The Company provided additional information to the EPA promptly after the inspection to address certain areas of concern (AOCs) observed during the inspection. In January 2021, the EPA and U.S. Department of Justice (DOJ) initiated civil judicial enforcement discussions with PCA. These discussions are ongoing. As of the date of filing of this report, no complaint has been filed. PCA continues to cooperate with the agencies. Since the inspection in 2017, PCA performed several voluntary activities to address the AOCs presented in the EPA’s inspection report and has removed the RMP covered process from the facility.
17
Environmental Matters
On August 8, 2019, the EPA issued a notice of violation (NOV) alleging violations of the Clean Air Act, resulting from an inspection of our Wallula, Washington mill in September 2018. PCA denies the violations set forth in the NOV and has requested that the EPA’s Office of Air Quality Planning and Standards provide an applicability determination to clarify that the relevant operations of PCA have not violated the regulations at issue in the NOV. The EPA denied our request in 2020. We intend to vigorously defend any enforcement action and, on July 27, 2020, filed a petition with the EPA to reconsider its denial of our applicability determination and filed petitions in U.S. federal court to review the agency’s denial of our applicability determination as well as the rule at issue. While we cannot predict with certainty the ultimate resolution of this matter, we believe that we have a meritorious position that our operations have not violated the Clean Air Act, that we have taken appropriate action to address the matters raised by the EPA in the NOV, and that this matter will not result in a material adverse effect on our financial condition, results of operations, or cash flows.
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.
20. Subsequent Events
The Company has disclosed the following subsequent events in accordance with Accounting Standards Codification (ASC) 855, Subsequent Events. Subsequent events have been evaluated through the filing date of this Form 10-Q.
On October 22, 2021, we entered into a definitive agreement to acquire substantially all of the assets of Advance Packaging Corporation, an independent corrugated products producer, in a cash-free, debt-free transaction, for a cash purchase price of $
The operating results of Advance Packaging will be included in PCA's results upon closing of the transaction.
18
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis includes statements regarding our expectations with respect to our future performance, expected business conditions, liquidity, and capital resources. Such statements, along with any other statements that are not historical in nature, are forward-looking. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in our 2020 Annual Report on Form 10-K, as well as those factors listed in other documents we file with the Securities and Exchange Commission (SEC). We do not assume any obligation to update any forward-looking statement. Our actual results may differ materially from those contained in or implied by any of the forward-looking statements in this Form 10-Q. Please see “Forward Looking Statements” elsewhere in this Item 2.
Overview
PCA is the third largest producer of containerboard products and a leading producer of uncoated freesheet paper in North America. We operate eight mills and 89 corrugated products manufacturing plants. Our containerboard mills produce linerboard and corrugating medium, which are papers primarily used in the production of corrugated products. Our corrugated products manufacturing plants produce a wide variety of corrugated packaging products, including conventional shipping containers used to protect and transport manufactured goods, multi-color boxes and displays with strong visual appeal that help to merchandise the packaged product in retail locations, and honeycomb protective packaging. In addition, we are a large producer of packaging for meat, fresh fruit and vegetables, processed food, beverages, and other industrial and consumer products. We also manufacture and sell uncoated freesheet papers, including both commodity and specialty papers, which may have custom or specialized features such as colors, coatings, high brightness, and recycled content. We are headquartered in Lake Forest, Illinois and operate primarily in the United States.
This Item 2 is intended to supplement, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2020 Annual Report on Form 10-K.
Executive Summary
Third quarter net sales were $2.00 billion in 2021 and $1.69 billion in 2020. We reported $251 million of net income, or $2.63 per diluted share, during the third quarter of 2021, compared to $139 million, or $1.46 per diluted share, during the same period in 2020. Net income included $6 million of expense for special items in the third quarter of 2021, compared to $10 million of expense for special items in 2020 (discussed below). Excluding special items, net income was $257 million, or $2.69 per diluted share, during the third quarter of 2021, compared to $149 million, or $1.57 per diluted share, in the third quarter of 2020. The increase in net income was driven primarily by higher prices and mix and volume in our Packaging segment, higher production volume and prices and mix in our Paper segment, lower non-operating pension expense, and lower interest expense. These items were partially offset by higher operating costs, higher freight and logistics expenses, higher converting costs, higher scheduled outage expenses, and lower sales volume in our Paper segment. For additional detail on special items included in reported GAAP results, as well as segment income (loss) excluding special items, earnings before non-operating pension income (expense), interest, income taxes, and depreciation, amortization, and depletion (EBITDA), and EBITDA excluding special items, see “Item 2. Reconciliations of Non-GAAP Financial Measures to Reported Amounts.”
Packaging segment income from operations was $365 million in the third quarter of 2021, compared to $222 million in the third quarter of 2020. Packaging segment EBITDA excluding special items was $467 million in the third quarter of 2021 compared to $324 million in the third quarter of 2020. The increase in EBITDA excluding special items was due primarily to higher prices and mix and higher sales and production volumes, partially offset by higher operating and converting costs, higher annual outage expense, and higher freight and logistic expenses. We continued to experience strong demand during the quarter, driving record volumes in terms of box shipments and record containerboard production. We also continued to experience cost inflation across our business, including in the areas of labor and benefits, recycled fiber, energy, repairs, materials, and supplies, as well as higher transportation costs, driven by higher fuel costs, tight supply, driver shortages, and higher spot prices. Our sales prices were higher as we implemented price increases on containerboard and corrugated products that we previously communicated to our customers. We continue to deploy capital to improve productivity and efficiencies at our facilities and believe that our success in doing so is helping us to manage cost inflation and better serve our customers.
Paper segment income from operations was $11 million in the third quarter of 2021, compared to $7 million in the third quarter of 2020. Paper segment EBITDA excluding special items was $18 million in the third quarter of 2021, compared to $17 million in the third quarter of 2020. The increase in EBITDA excluding special items was due to higher production volumes, higher prices and mix, and lower annual outage costs, partially offset by higher operating costs, higher freight and logistic expenses, and lower sales volume.
19
Sales and production volumes in the Paper segment significantly declined after the first quarter of 2020 as the COVID-19 pandemic caused lower demand for our paper products. During the second and third quarters of 2020, in response to such lower demand, we temporary idled both machines at our Jackson Alabama mill. During the fourth quarter of 2020, in order to meet strong packaging demand and maintain appropriate inventory levels in the packaging segment, we temporarily began producing linerboard on the number 3 machine at the mill and we have produced linerboard on the machine since that time. In the first quarter of 2021, we announced the discontinuation of production of uncoated freesheet paper grades on the machine and our plans to permanently convert the machine to produce linerboard in a phased approach over the next three years. Demand for paper products has improved since the beginning of the pandemic, but our sales and production in the paper segment will remain below pre-pandemic levels as we will no longer be producing paper products on the machine. In the third quarter of 2021, we began to produce corrugating medium on the number 1 machine at the Jackson mill (which had produced uncoated freesheet paper in the past) in order to help satisfy our demand for containerboard, build necessary inventories, and evaluate the capability of the machine to produce containerboard on a cost-effective basis. We expect to continue to produce corrugating medium on the machine during the fourth quarter. Before October 2020, operating results for the Jackson mill were included in the Paper segment. Beginning in October 2020, operating results for the Jackson mill are included in both the Packaging and Paper segments.
Packaging segment income from operations was $940 million in the first nine months of 2021, compared to $620 million in the same period in 2020. Packaging segment EBITDA excluding special items was $1,228 million in the first nine months of 2021 compared to $926 million in the first nine months of 2020. The increase in EBITDA excluding special items was due primarily to higher prices and mix and higher sales and production volumes, partially offset by higher operating and converting costs, higher freight and logistic expenses, and higher annual outage expense.
Paper segment income from operations was $22 million in the first nine months of 2021, compared to a loss of $22 million in the first nine months of 2020. Paper segment EBITDA excluding special items was $46 million in the first nine months of 2021, compared to $64 million in the same period in 2020. The decrease in EBITDA excluding special items was due to lower sales and production volumes and higher freight and logistic expenses, partially offset by lower operating costs and lower annual outage expense, while prices and mix were flat.
Special Items and Earnings per Diluted Share, Excluding Special Items
A reconciliation of reported earnings per diluted share to earnings per diluted share, excluding special items, for the three and nine months ended September 30, 2021 and 2020 are as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Earnings per diluted share, as reported |
|
$ |
2.63 |
|
|
$ |
1.46 |
|
|
$ |
6.55 |
|
|
$ |
3.54 |
|
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Facilities closure and other costs (a) |
|
|
0.02 |
|
|
|
0.03 |
|
|
|
— |
|
|
|
0.19 |
|
Jackson mill conversion-related activities (b) |
|
|
0.03 |
|
|
|
— |
|
|
|
0.07 |
|
|
|
— |
|
Debt refinancing (c) |
|
|
0.01 |
|
|
|
— |
|
|
|
0.01 |
|
|
|
— |
|
Hurricane Laura impact (d) |
|
|
— |
|
|
|
0.08 |
|
|
|
— |
|
|
|
0.08 |
|
Goodwill impairment (e) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.58 |
|
Incremental costs for COVID-19 (f) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.06 |
|
Total special items |
|
|
0.06 |
|
|
|
0.11 |
|
|
|
0.08 |
|
|
|
0.91 |
|
Earnings per diluted share, excluding special items |
|
$ |
2.69 |
|
|
$ |
1.57 |
|
|
$ |
6.63 |
|
|
$ |
4.45 |
|
20
Included in this Item 2 are various non-GAAP financial measures, including diluted EPS excluding special items, segment income excluding special items and EBITDA excluding special items. Management excludes special items as it believes these items are not necessarily reflective of the ongoing results of operations of our business. We present these measures because they provide a means to evaluate the performance of our segments and our Company on an ongoing basis using the same measures that are used by our management, because these measures assist in providing a meaningful comparison between periods presented and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. A reconciliation of diluted EPS to diluted EPS excluding special items is included above and the reconciliations of other non-GAAP measures used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, to the most comparable measure reported in accordance with GAAP, are included in Item 2 under “Reconciliations of Non-GAAP Financial Measures to Reported Amounts.” Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such.
Industry and Business Conditions
Trade publications reported North American industry-wide corrugated products shipments per work day were up 0.1% during the third quarter of 2021 compared to the same quarter of 2020. Reported industry containerboard production increased 3.9% compared to the third quarter of 2020. Reported industry containerboard inventories at the end of the third quarter of 2021 were approximately 2.7 million tons, up 16.6% compared to the same period in 2020. Reported containerboard export shipments were up 9.7% compared to the third quarter of 2020. Prices reported by trade publications increased by $20 per ton for linerboard and $30 per ton for corrugating medium in March 2021, $40 per ton for linerboard and corrugating medium in April 2021, and a further $50 per ton for linerboard and $60 per ton for corrugating medium in August 2021.
Trade publications reported North American uncoated freesheet paper shipments were up 3.0% in the third quarter of 2021, compared to the same quarter of 2020. Average prices reported by a trade publication for cut size office papers were higher by $50 per ton, or 4.4%, in the third quarter of 2021, compared to the second quarter of 2021, and higher by $120 per ton, or 11.3%, compared to the third quarter of 2020. Average prices reported by a trade publication for cut size office papers increased $20 per ton in March, $40 per ton in April, $30 per ton in June, and $30 per ton in July 2021.
Outlook
Looking ahead to the fourth quarter, we will continue to implement our previously announced price increases for domestic containerboard, corrugated packaging, and paper, and, based upon conditions in the export markets into which we sell, we also expect an increase in average export containerboard prices compared to the third quarter. Packaging segment volume will be lower due to three less shipping days as well as a scheduled maintenance outage that we are taking at our DeRidder mill, and Paper segment volume will be lower as we do not expect to produce any uncoated grades at the Jackson mill. With higher natural gas prices and anticipated colder weather, we expect energy costs to increase. Wood costs, especially in our southern mills, are expected to be higher due to the previous wet weather, low inventory, and high demand for wood fiber. We also expect inflation to continue with most of our other operating and converting costs, along with continued higher freight and logistics expenses. We also expect scheduled outage costs to be higher than the third quarter. Considering these items, we expect fourth quarter earnings to be lower than third quarter earnings.
21
Results of Operations
Three Months Ended September 30, 2021, compared to Three Months Ended September 30, 2020
The historical results of operations of PCA for the three months ended September 30, 2021 and 2020 are set forth below (dollars in millions):
|
|
Three Months Ended |
|
|
|
|
||||||
|
|
September 30, |
|
|
|
|
||||||
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|||
Packaging |
|
$ |
1,829.4 |
|
|
$ |
1,501.1 |
|
|
$ |
328.3 |
|
Paper |
|
|
150.3 |
|
|
|
178.1 |
|
|
|
(27.8 |
) |
Corporate and Other |
|
|
61.3 |
|
|
|
48.8 |
|
|
|
12.5 |
|
Intersegment eliminations |
|
|
(40.9 |
) |
|
|
(34.3 |
) |
|
|
(6.6 |
) |
Net sales |
|
$ |
2,000.1 |
|
|
$ |
1,693.7 |
|
|
$ |
306.4 |
|
|
|
|
|
|
|
|
|
|
|
|||
Packaging |
|
$ |
365.2 |
|
|
$ |
222.4 |
|
|
$ |
142.8 |
|
Paper |
|
|
11.0 |
|
|
|
7.3 |
|
|
|
3.7 |
|
Corporate and Other |
|
|
(23.4 |
) |
|
|
(20.2 |
) |
|
|
(3.2 |
) |
Income from operations |
|
$ |
352.8 |
|
|
$ |
209.5 |
|
|
$ |
143.3 |
|
Non-operating pension income |
|
|
5.0 |
|
|
|
0.6 |
|
|
|
4.4 |
|
Interest expense, net |
|
|
(23.9 |
) |
|
|
(24.4 |
) |
|
|
0.5 |
|
Income before taxes |
|
|
333.9 |
|
|
|
185.7 |
|
|
|
148.2 |
|
Income tax provision |
|
|
(83.2 |
) |
|
|
(46.6 |
) |
|
|
(36.6 |
) |
Net income |
|
$ |
250.7 |
|
|
$ |
139.1 |
|
|
$ |
111.6 |
|
Non-GAAP Measures (a) |
|
|
|
|
|
|
|
|
|
|||
Net income excluding special items |
|
$ |
256.5 |
|
|
$ |
149.2 |
|
|
$ |
107.3 |
|
Consolidated EBITDA |
|
|
458.4 |
|
|
|
309.9 |
|
|
|
148.5 |
|
Consolidated EBITDA excluding special items |
|
|
464.0 |
|
|
|
322.8 |
|
|
|
141.2 |
|
Packaging EBITDA |
|
|
461.4 |
|
|
|
311.0 |
|
|
|
150.4 |
|
Packaging EBITDA excluding special items |
|
|
466.9 |
|
|
|
323.9 |
|
|
|
143.0 |
|
Paper EBITDA |
|
|
18.1 |
|
|
|
16.9 |
|
|
|
1.2 |
|
Paper EBITDA excluding special items |
|
|
18.1 |
|
|
|
16.9 |
|
|
|
1.2 |
|
Net Sales
Net sales increased $306 million, or 18.1%, to $2,000 million during the three months ended September 30, 2021, compared to $1,694 million during the same period in 2020.
Packaging. Net sales increased $328 million, or 21.9%, to $1,829 million, compared to $1,501 million in the third quarter of 2020 due to higher prices and mix ($241 million) and higher containerboard and corrugated products volume ($88 million). In the third quarter of 2021, our domestic containerboard prices were 24.4% higher, while export prices were 46.1% higher, than the same period in 2020. In the third quarter of 2021, export and domestic containerboard outside shipments increased 51.6% compared to the third quarter of 2020. Our total and per day corrugated products shipments were up 2.3% compared to the same period in 2020, driven by strong demand.
Paper. Net sales decreased $28 million, or 15.6%, to $150 million, compared to $178 million in the third quarter of 2020, due to lower volume ($34 million), partially offset by higher prices and mix ($6 million). In the fourth quarter of 2020, the Jackson mill No. 3 machine began producing linerboard. The Jackson mill was idled for two months during the second quarter of 2020.
Gross Profit
Gross profit increased $165 million during the three months ended September 30, 2021, compared to the same period in 2020. The increase was driven primarily by higher prices and mix and volume in our Packaging segment, and higher production volume and prices and mix in our Paper segment. These items were partially offset by higher operating costs, higher freight and logistics expenses, higher converting costs, higher annual outage expenses, and lower sales volume in our Paper segment. In the three months ended September 30, 2021, gross profit included $3 million of special items for charges related to the Jackson mill conversion and other paper-to-containerboard conversion related activities and facility closure costs. In the three months ended September 30, 2020, gross profit included $10 million of special items for charges related to the impact of Hurricane Laura at our DeRidder mill.
22
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) increased $17 million during the three months ended September 30, 2021, compared to the same period in 2020. The increase was primarily due to higher employee salaries and fringes and incentives.
Other Expense, Net
Other income (expense), net, for the three months ended September 30, 2021 and 2020 are set forth below (dollars in millions):
|
|
Three Months Ended |
|
|||||
|
|
September 30, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Asset disposals and write-offs |
|
$ |
(6.4 |
) |
|
$ |
(5.5 |
) |
Jackson mill conversion-related activities |
|
|
(3.2 |
) |
|
|
— |
|
Facilities closure and other costs |
|
|
(0.7 |
) |
|
|
(2.9 |
) |
Other |
|
|
(3.1 |
) |
|
|
(0.4 |
) |
Total |
|
$ |
(13.4 |
) |
|
$ |
(8.8 |
) |
We discuss these items in more detail in Note 5, Other Expense, Net, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this Form 10-Q.
Income from Operations
Income from operations increased $143 million, or 68.4%, during the three months ended September 30, 2021, compared to the same period in 2020. The third quarter of 2021 included $7 million of special items expense primarily related to corrugated facility closures and costs from the Jackson mill conversion from uncoated freesheet paper to linerboard and other paper-to-containerboard conversion related activities, compared to $13 million of special items expense related to the impact of Hurricane Laura at our DeRidder mill and corrugated facilities closure costs in the third quarter of 2020.
Packaging. Packaging segment income from operations increased $143 million to $365 million, compared to $222 million during the three months ended September 30, 2020. The increase related primarily to higher containerboard and corrugated products prices and mix ($203 million), higher sales and production volumes ($79 million), partially offset by higher operating and converting costs ($112 million), higher freight expenses ($23 million), higher annual outage expenses ($7 million), higher depreciation expense ($8 million), and other costs. Special items during the third quarter of 2021 included $6 million of expense for the Jackson mill conversion-related activities and corrugated facility closures, compared to $10 million of special items expense related to the impact of Hurricane Laura at our DeRidder mill and $3 million of corrugated facility closure costs.
Paper. Paper segment income from operations increased $4 million to $11 million, compared to $7 million during the three months ended September 30, 2020. The increase primarily related to higher prices and mix ($6 million), higher sales and production volumes ($5 million), lower depreciation expense ($4 million), and lower annual outage expenses ($1 million), partially offset by higher freight expenses ($6 million), and higher operating costs ($4 million). Special items during the third quarter of 2021 included $1 million of expense for the Jackson mill conversion-related activities. There were no material special items during the third quarter of 2020.
Non-Operating Pension Income, Interest Expense, Net and Income Taxes
Non-operating pension income increased $4 million during the three months ended September 30, 2021, compared to the same period in 2020. The increase in non-operating pension income was primarily related to the favorable 2020 asset performance.
Interest expense, net for the three months ended September 30, 2021 was relatively flat when compared to the same period in 2020. The slight decrease in interest expense, net was primarily related to lower earnings on deferred compensation balances in the third quarter of 2021, partially offset by lower interest income due to lower rates on invested cash balances, lower capitalized interest in the third quarter of 2021, and higher interest expense related to the Company's September 2021 debt refinancing.
During the three months ended September 30, 2021, we recorded $83 million of income tax expense, compared to $47 million of expense during the three months ended September 30, 2020. The effective tax rate for the three months ended September 30, 2021 and 2020 was 24.9% and 25.0%, respectively. The decrease in our effective tax rate for the three months ended September 30, 2021 compared to the same period in 2020 was primarily due to the favorable state rate impact of a subsidiary merger during the three months ended September 30, 2021 compared to September 30, 2020.
23
Nine Months Ended September 30, 2021, compared to Nine Months Ended September 30, 2020
The historical results of operations of PCA for the nine months ended September 30, 2021 and 2020 are set forth below (dollars in millions):
|
|
Nine Months Ended |
|
|
|
|
||||||
|
|
September 30, |
|
|
|
|
||||||
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|||
Packaging |
|
$ |
5,171.4 |
|
|
$ |
4,378.5 |
|
|
$ |
792.9 |
|
Paper |
|
|
457.1 |
|
|
|
518.7 |
|
|
|
(61.6 |
) |
Corporate and Other |
|
|
171.8 |
|
|
|
159.7 |
|
|
|
12.1 |
|
Intersegment eliminations |
|
|
(113.2 |
) |
|
|
(112.9 |
) |
|
|
(0.3 |
) |
Net sales |
|
$ |
5,687.1 |
|
|
$ |
4,944.0 |
|
|
$ |
743.1 |
|
|
|
|
|
|
|
|
|
|
|
|||
Packaging |
|
$ |
940.3 |
|
|
$ |
619.9 |
|
|
$ |
320.4 |
|
Paper |
|
|
22.3 |
|
|
|
(21.7 |
) |
|
|
44.0 |
|
Corporate and Other |
|
|
(76.9 |
) |
|
|
(63.5 |
) |
|
|
(13.4 |
) |
Income from operations |
|
$ |
885.7 |
|
|
$ |
534.7 |
|
|
$ |
351.0 |
|
Non-operating pension income |
|
|
14.8 |
|
|
|
1.7 |
|
|
|
13.1 |
|
Interest expense, net |
|
|
(72.2 |
) |
|
|
(69.1 |
) |
|
|
(3.1 |
) |
Income before taxes |
|
|
828.3 |
|
|
|
467.3 |
|
|
|
361.0 |
|
Income tax provision |
|
|
(203.7 |
) |
|
|
(129.9 |
) |
|
|
(73.8 |
) |
Net income |
|
$ |
624.6 |
|
|
$ |
337.4 |
|
|
$ |
287.2 |
|
Non-GAAP Measures (a) |
|
|
|
|
|
|
|
|
|
|||
Net income excluding special items |
|
$ |
632.1 |
|
|
$ |
423.5 |
|
|
$ |
208.6 |
|
Consolidated EBITDA |
|
|
1,196.7 |
|
|
|
843.7 |
|
|
|
353.0 |
|
Consolidated EBITDA excluding special items |
|
|
1,202.6 |
|
|
|
932.3 |
|
|
|
270.3 |
|
Packaging EBITDA |
|
|
1,223.4 |
|
|
|
893.5 |
|
|
|
329.9 |
|
Packaging EBITDA excluding special items |
|
|
1,227.8 |
|
|
|
926.3 |
|
|
|
301.5 |
|
Paper EBITDA |
|
|
43.4 |
|
|
|
7.8 |
|
|
|
35.6 |
|
Paper EBITDA excluding special items |
|
|
45.5 |
|
|
|
63.6 |
|
|
|
(18.1 |
) |
Net Sales
Net sales increased $743 million, or 15.0%, to $5,687 million during the nine months ended September 30, 2021, compared to $4,944 million during the same period in 2020.
Packaging. Net sales increased $793 million, or 18.1%, to $5,171 million, compared to $4,378 million in the nine months ended September 30, 2020, due to higher containerboard and corrugated products prices and mix ($441 million) and higher containerboard and corrugated products volume ($352 million). In the first nine months of 2021, our domestic containerboard prices were 14.5% higher, while export prices were 31.5% higher, than the same period in 2020. In the first nine months of 2021, export and domestic containerboard outside shipments increased 70.6% compared to the first nine months of 2020. Total corrugated products shipments were up 6.1% with one less workday, and up 6.7% per day compared to the same period in 2020.
Paper. Net sales during the nine months ended September 30, 2021 decreased $62 million, or 11.9%, to $457 million, compared to $519 million in the nine months ended September 30, 2020, due to decreased volume ($61 million) and lower prices and mix ($1 million), primarily related to the Jackson mill conversion from uncoated freesheet paper to linerboard and other paper-to-containerboard conversion related activities.
Gross Profit
Gross profit increased $327 million during the nine months ended September 30, 2021, compared to the same period in 2020. The increase was driven primarily by higher prices and mix and higher volumes in our Packaging segment, partially offset by lower volume in our Paper segment, higher operating and converting costs, higher freight and logistic expenses, and higher annual outage expense. In the nine months ended September 30, 2021, gross profit included $6 million of special items expense for the Jackson mill conversion and other paper-to-containerboard conversion related activities and facility closure costs. In the nine months ended September 30, 2020, gross profit included $10 million of special items expense related to the impact of Hurricane Laura at our DeRidder mill, $7 million for incremental out-of-pocket costs related to the COVID-19 pandemic, including supplies, cleaning and sick pay, and $3 million of accelerated depreciation associated with the closure of our San Lorenzo, California facility.
24
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) increased $26 million during the nine months ended September 30, 2021, compared to the same period in 2020. The increase was primarily due to higher employee compensation and fringes.
Goodwill Impairment
During the nine months ended September 30, 2020, with the exacerbated deterioration in uncoated freesheet market conditions and the estimated impact on our Paper reporting unit arising from the COVID-19 pandemic, as well as projected future results of operations, we identified a triggering event indicating possible impairment of goodwill within our Paper reporting unit. The Company performed an interim quantitative impairment analysis as of May 31, 2020, and, based on the evaluation performed, we determined that goodwill was fully impaired for the Paper reporting unit and recognized a non-cash impairment charge of $55 million in the second quarter of 2020.
Other Expense, Net
Other income (expense), net, for the nine months ended September 30, 2021 and 2020 are set forth below (dollars in millions):
|
|
Nine Months Ended |
|
|||||
|
|
September 30, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Asset disposals and write-offs |
|
$ |
(27.3 |
) |
|
$ |
(16.5 |
) |
Jackson mill conversion-related activities |
|
|
(6.1 |
) |
|
|
— |
|
Facilities closure and other income (costs) |
|
|
2.7 |
|
|
|
(16.6 |
) |
Other |
|
|
(11.0 |
) |
|
|
(3.8 |
) |
Total |
|
$ |
(41.7 |
) |
|
$ |
(36.9 |
) |
We discuss these items in more detail in Note 5, Other Expense, Net, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this Form 10-Q.
Income from Operations
Income from operations increased $351 million, or 65.6%, during the nine months ended September 30, 2021, compared to the same period in 2020. The first nine months of 2021 included $10 million of special items expense related to Jackson mill conversion costs and other paper-to-containerboard conversion related activities and facility closure costs, compared to $96 million of special items expense for the Paper reporting unit goodwill impairment; Hurricane Laura impact at our DeRidder mill; incremental, out-of-pocket costs related to COVID-19; and facility closure costs in the same period in 2020.
Packaging. Packaging segment income from operations increased $320 million to $940 million during the first nine months of 2021, compared to the same period last year. The increase related primarily to higher containerboard and corrugated products prices and mix ($373 million), higher sales and production volumes ($233 million), partially offset by higher operating and converting costs ($234 million), higher freight expenses ($49 million), higher annual outage expenses ($23 million), and higher depreciation expense ($17 million). Special items during the first nine months of 2021 included $4 million of costs for the Jackson mill conversion-related activities and $1 million of facility closure costs, compared to $24 million of expense related to facility closure costs; $10 million of expense related to the Hurricane Laura impact at our DeRidder mill, and $6 million of incremental, out-of-pocket costs related to COVID-19 in the first nine months of 2020.
Paper. Paper segment income from operations increased $44 million to $22 million, compared to the nine months ended September 30, 2020. Special items during the first nine months of 2021 included $5 million of expense for Jackson mill conversion-related activities, compared to $55 million of goodwill impairment and $1 million of incremental, out-of-pocket costs related to COVID-19 in the first nine months of 2020. The decrease, excluding special items, primarily related to lower sales and production volumes ($27 million), and higher freight and other expenses ($23 million), partially offset by lower operating costs ($24 million), lower annual outage expenses ($8 million), and lower depreciation expense ($11 million).
Non-Operating Pension Income, Interest Expense, Net and Income Taxes
Non-operating pension income increased $13 million during the nine months ended September 30, 2021, compared to the same period in 2020. The increase in non-operating pension income was primarily related to the favorable 2020 asset performance.
Interest expense, net increased $3 million during the nine months ended September 30, 2021, compared to the same period in 2020. The increase in interest expense, net was primarily related to lower interest income due to lower rates on invested cash balances in 2021 and higher interest expense related to the Company's September 2021 debt refinancing, partially offset by lower earnings on deferred compensation balances in 2021.
25
During the nine months ended September 30, 2021, we recorded $204 million of income tax expense, compared to $130 million of expense during the nine months ended September 30, 2020. The effective tax rate for the nine months ended September 30, 2021 and 2020 was 24.6% and 27.8%, respectively. The decrease in our effective tax rate for the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to the nondeductible goodwill impairment charge associated with our Paper reporting unit recognized during the nine months ended September 30, 2020 with no corresponding charge during the nine months ended September 30, 2021.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of liquidity are net cash provided by operating activities, cash on hand, and available borrowing capacity under our revolving credit facility. At September 30, 2021, we had $1.7 billion of cash and cash equivalents, $146 million of marketable debt securities, and $326 million of unused borrowing capacity under the revolving credit facility, net of letters of credit. On October 8, 2021, we redeemed our $700 million of outstanding 4.50% notes due November 1, 2023, using the proceeds of new notes we issued in September 2021 and cash-on-hand. See Note 11, Debt, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item 1. Financial Statements" of this Form 10-Q as well as the information provided below under "—Financing Activities" for further information.
Currently, our primary uses of cash are for operations, capital expenditures, common stock dividends, debt service, acquisitions, and repurchases of common stock. We believe that net cash generated from operating activities, cash on hand, available borrowings under our revolving credit facility, and available capital through access to capital markets will be adequate to meet our liquidity and capital requirements, including payments of any declared common stock dividends, for the foreseeable future. As our debt or credit facilities become due, we will need to repay, refinance, extend, or replace such debt or credit facilities. Our ability to do so will be subject to future economic conditions and financial, business, and other factors, many of which are beyond our control.
Below is a summary table of our cash flows, followed by a discussion of our sources and uses of cash through operating activities, investing activities, and financing activities (dollars in millions):
|
|
Nine Months Ended |
|
|
|
|
||||||
|
|
September 30, |
|
|
|
|
||||||
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|||
Net cash provided by (used for): |
|
|
|
|
|
|
|
|
|
|||
Operating activities |
|
$ |
703.4 |
|
|
$ |
761.7 |
|
|
$ |
(58.3 |
) |
Investing activities |
|
|
(365.0 |
) |
|
|
(255.9 |
) |
|
|
(109.1 |
) |
Financing activities |
|
|
389.9 |
|
|
|
(236.2 |
) |
|
|
626.1 |
|
Net increase in cash and cash equivalents |
|
$ |
728.3 |
|
|
$ |
269.6 |
|
|
$ |
458.7 |
|
Operating Activities
Our operating cash flow is primarily driven by our earnings and changes in operating assets and liabilities, such as accounts receivable, inventories, accounts payable and other accrued liabilities, as well as factors described below. Cash requirements for operating activities are subject to PCA’s operating needs and the timing of collection of receivables and payments of payables and expenses.
During the nine months ended September 30, 2021, net cash provided by operating activities was $703 million, compared to $762 million in the same period in 2020, a decrease of $58 million. Cash from operations excluding changes in cash used for operating assets and liabilities increased $269 million primarily due to higher income from operations in 2021 as discussed above. Cash decreased by $327 million due to changes in operating assets and liabilities, primarily due to the following:
These changes were partially offset by the following:
26
Investing Activities
We used $365 million for investing activities during the nine months ended September 30, 2021 compared to $256 million during the same period in 2020. We spent $366 million for internal capital investments during the nine months ended September 30, 2021, compared to $254 million during the same period in 2020.
We expect capital investments in 2021 to be approximately $550 million, including capital spending related to the conversion of the No. 3 paper machine to containerboard at our Jackson mill. These expenditures could increase or decrease as a result of a number of factors, including our financial results, strategic opportunities, future economic conditions, and our regulatory compliance requirements. We currently estimate capital expenditures to comply with environmental regulations will be about $20 million in 2021. Our estimated environmental expenditures could vary significantly depending upon the enactment of new environmental laws and regulations, including those related to greenhouse gas emissions and industrial boilers. For additional information, see “Environmental Matters” in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Annual Report on Form 10-K.
Financing Activities
During the nine months ended September 30, 2021, net cash provided by financing activities was $390 million, compared to net cash used for financing activities of $236 million during the same period in 2020. During the nine months ended September 30, 2021, we issued $700 million of 3.05% Senior Notes due 2051 (the "New Notes") through a registered public offering and notified the holders of our $700 million of 4.50% Senior Notes due November 1, 2023 (the "Old Notes") that we would redeem those notes in October 2021. On October 8, 2021, we completed the redemption of the Old Notes for $770 million, which included a redemption premium of $56 million and $14 million of accrued and unpaid interest. We used the proceeds of the offering of the New Notes and cash on hand to fund the redemption and the $8 million of debt issuance costs associated with the New Notes.
In addition to the $8 million of issuance costs associated with the debt refinancing paid in the first nine months of 2021, we paid an additional $1 million of issuance costs related to the New Revolving Credit Agreement that was entered into on June 8, 2021. In the first nine months of 2021, we paid $285 million of dividends compared to $225 million of dividends paid during the first nine months of 2020.
In addition to the items discussed in Note 11, Debt, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item 1. Financial Statements" of this Form 10-Q, for more information about our debt, see Note 10, Debt, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 2020 Annual Report on Form 10-K.
Contractual Obligations
There have been no material changes to the contractual obligations table disclosed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Annual Report on Form 10-K.
Reconciliations of Non-GAAP Financial Measures to Reported Amounts
Income from operations excluding special items, net income excluding special items, EBITDA, and EBITDA excluding special items are non-GAAP financial measures. Management excludes special items, as it believes that these items are not necessarily reflective of the ongoing operations of our business. These measures are presented because they provide a means to evaluate the performance of our segments and our Company on an ongoing basis using the same measures that are used by our management, because these measures assist in providing a meaningful comparison between periods and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such. Reconciliations of the non-GAAP measures to the most comparable measure reported in accordance with GAAP for the three and nine months ended September 30, 2021 and 2020 follow (dollars in millions):
|
|
Three Months Ended September 30, |
|
|||||||||||||||||||||
|
|
2021 |
|
|
2020 |
|
||||||||||||||||||
|
|
Income |
|
|
Income |
|
|
Net |
|
|
Income |
|
|
Income |
|
|
Net |
|
||||||
As reported in accordance with GAAP |
|
$ |
333.9 |
|
|
$ |
(83.2 |
) |
|
$ |
250.7 |
|
|
$ |
185.7 |
|
|
$ |
(46.6 |
) |
|
$ |
139.1 |
|
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Facilities closure and other costs (a) |
|
|
2.7 |
|
|
|
(0.7 |
) |
|
|
2.0 |
|
|
|
3.3 |
|
|
|
(0.8 |
) |
|
|
2.5 |
|
Jackson mill conversion-related activities (b) |
|
|
4.5 |
|
|
|
(1.1 |
) |
|
|
3.4 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Debt refinancing (c) |
|
|
0.5 |
|
|
|
(0.1 |
) |
|
|
0.4 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Hurricane Laura impact (d) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10.0 |
|
|
|
(2.4 |
) |
|
|
7.6 |
|
Total special items |
|
|
7.7 |
|
|
|
(1.9 |
) |
|
|
5.8 |
|
|
|
13.3 |
|
|
|
(3.2 |
) |
|
|
10.1 |
|
Excluding special items |
|
$ |
341.6 |
|
|
$ |
(85.1 |
) |
|
$ |
256.5 |
|
|
$ |
199.0 |
|
|
$ |
(49.8 |
) |
|
$ |
149.2 |
|
27
|
|
Nine Months Ended September 30, |
|
|||||||||||||||||||||
|
|
2021 |
|
|
2020 |
|
||||||||||||||||||
|
|
Income |
|
|
Income |
|
|
Net |
|
|
Income |
|
|
Income |
|
|
Net |
|
||||||
As reported in accordance with GAAP |
|
$ |
828.3 |
|
|
$ |
(203.7 |
) |
|
$ |
624.6 |
|
|
$ |
467.3 |
|
|
$ |
(129.9 |
) |
|
$ |
337.4 |
|
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Facilities closure and other costs (a) |
|
|
0.1 |
|
|
|
— |
|
|
|
0.1 |
|
|
|
24.1 |
|
|
|
(6.0 |
) |
|
|
18.1 |
|
Jackson mill conversion-related activities (b) |
|
|
9.4 |
|
|
|
(2.4 |
) |
|
|
7.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Debt refinancing (c) |
|
|
0.5 |
|
|
|
(0.1 |
) |
|
|
0.4 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Goodwill impairment (e) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
55.2 |
|
|
|
— |
|
|
|
55.2 |
|
Hurricane Laura impact (d) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10.0 |
|
|
|
(2.4 |
) |
|
|
7.6 |
|
Incremental costs for COVID-19 (f) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6.9 |
|
|
|
(1.7 |
) |
|
|
5.2 |
|
Total special items |
|
|
10.0 |
|
|
|
(2.5 |
) |
|
|
7.5 |
|
|
|
96.2 |
|
|
|
(10.1 |
) |
|
|
86.1 |
|
Excluding special items |
|
$ |
838.3 |
|
|
$ |
(206.2 |
) |
|
$ |
632.1 |
|
|
$ |
563.5 |
|
|
$ |
(140.0 |
) |
|
$ |
423.5 |
|
The following table reconciles net income to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Net income |
|
$ |
250.7 |
|
|
$ |
139.1 |
|
|
$ |
624.6 |
|
|
$ |
337.4 |
|
Non-operating pension income |
|
|
(5.0 |
) |
|
|
(0.6 |
) |
|
|
(14.8 |
) |
|
|
(1.7 |
) |
Interest expense, net |
|
|
23.9 |
|
|
|
24.4 |
|
|
|
72.2 |
|
|
|
69.1 |
|
Income tax provision |
|
|
83.2 |
|
|
|
46.6 |
|
|
|
203.7 |
|
|
|
129.9 |
|
Depreciation, amortization, and depletion |
|
|
105.6 |
|
|
|
100.4 |
|
|
|
311.0 |
|
|
|
309.0 |
|
EBITDA |
|
$ |
458.4 |
|
|
$ |
309.9 |
|
|
$ |
1,196.7 |
|
|
$ |
843.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Facilities closure and other costs (income) |
|
|
2.3 |
|
|
|
2.9 |
|
|
|
(0.5 |
) |
|
|
16.5 |
|
Jackson mill conversion-related activities |
|
|
3.3 |
|
|
|
— |
|
|
|
6.4 |
|
|
|
— |
|
Hurricane Laura impact |
|
|
— |
|
|
|
10.0 |
|
|
|
— |
|
|
|
10.0 |
|
Goodwill impairment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
55.2 |
|
Incremental costs for COVID-19 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6.9 |
|
Total special items |
|
|
5.6 |
|
|
|
12.9 |
|
|
|
5.9 |
|
|
|
88.6 |
|
EBITDA excluding special items |
|
$ |
464.0 |
|
|
$ |
322.8 |
|
|
$ |
1,202.6 |
|
|
$ |
932.3 |
|
28
The following table reconciles segment income (loss) to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Packaging |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Segment income |
|
$ |
365.2 |
|
|
$ |
222.4 |
|
|
$ |
940.3 |
|
|
$ |
619.9 |
|
Depreciation, amortization, and depletion |
|
|
96.2 |
|
|
|
88.6 |
|
|
|
283.1 |
|
|
|
273.6 |
|
EBITDA |
|
|
461.4 |
|
|
|
311.0 |
|
|
|
1,223.4 |
|
|
|
893.5 |
|
Facilities closure and other costs |
|
|
2.3 |
|
|
|
2.9 |
|
|
|
0.3 |
|
|
|
16.5 |
|
Jackson mill conversion-related activities |
|
|
3.2 |
|
|
|
— |
|
|
|
4.1 |
|
|
|
— |
|
Hurricane Laura impact |
|
|
— |
|
|
|
10.0 |
|
|
|
— |
|
|
|
10.0 |
|
Incremental costs for COVID-19 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6.3 |
|
EBITDA excluding special items |
|
$ |
466.9 |
|
|
$ |
323.9 |
|
|
$ |
1,227.8 |
|
|
$ |
926.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Paper |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Segment income (loss) |
|
$ |
11.0 |
|
|
$ |
7.3 |
|
|
$ |
22.3 |
|
|
$ |
(21.7 |
) |
Depreciation, amortization, and depletion |
|
|
7.1 |
|
|
|
9.6 |
|
|
|
21.1 |
|
|
|
29.5 |
|
EBITDA |
|
|
18.1 |
|
|
|
16.9 |
|
|
|
43.4 |
|
|
|
7.8 |
|
Jackson mill conversion-related activities |
|
|
— |
|
|
|
— |
|
|
|
2.1 |
|
|
|
— |
|
Goodwill impairment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
55.2 |
|
Incremental costs for COVID-19 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.6 |
|
EBITDA excluding special items |
|
$ |
18.1 |
|
|
$ |
16.9 |
|
|
$ |
45.5 |
|
|
$ |
63.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Segment loss |
|
$ |
(23.4 |
) |
|
$ |
(20.2 |
) |
|
$ |
(76.9 |
) |
|
$ |
(63.5 |
) |
Depreciation, amortization, and depletion |
|
|
2.3 |
|
|
|
2.2 |
|
|
|
6.8 |
|
|
|
5.9 |
|
EBITDA |
|
|
(21.1 |
) |
|
|
(18.0 |
) |
|
|
(70.1 |
) |
|
|
(57.6 |
) |
Jackson mill conversion-related activities |
|
|
0.1 |
|
|
|
— |
|
|
|
0.2 |
|
|
|
— |
|
Facilities closure and other costs |
|
|
— |
|
|
|
— |
|
|
|
(0.8 |
) |
|
|
— |
|
EBITDA excluding special items |
|
$ |
(21.0 |
) |
|
$ |
(18.0 |
) |
|
$ |
(70.7 |
) |
|
$ |
(57.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
EBITDA |
|
$ |
458.4 |
|
|
$ |
309.9 |
|
|
$ |
1,196.7 |
|
|
$ |
843.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
EBITDA excluding special items |
|
$ |
464.0 |
|
|
$ |
322.8 |
|
|
$ |
1,202.6 |
|
|
$ |
932.3 |
|
Market Risk and Risk Management Policies
PCA is exposed to the impact of interest rate changes and changes in the market value of its financial instruments. We periodically enter into derivatives to minimize these risks, but not for trading purposes. We were not a party to any derivatives-based arrangements at September 30, 2021. For a discussion of derivatives and hedging activities, see Note 15, Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 2020 Annual Report on Form 10-K.
At September 30, 2021, interest rates on 100% of PCA’s outstanding debt are fixed.
Off-Balance-Sheet Activities
The Company does not have any off-balance sheet arrangements as of September 30, 2021.
Environmental Matters
There have been no material changes to the disclosure set forth in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters” filed with our 2020 Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, PCA evaluates its estimates, including those related to business combinations, pensions and other postretirement benefits, goodwill and intangible assets, long-lived asset impairment, environmental liabilities, and income taxes, among others. PCA bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
29
PCA has included in its 2020 Annual Report on Form 10-K a discussion of its critical accounting policies and estimates which require management’s most difficult, subjective, or complex judgments used in the preparation of its consolidated financial statements. PCA has not had any changes to these critical accounting estimates during the first nine months of 2021.
New and Recently Adopted Accounting Standards
For a listing of our new and recently adopted accounting standards, see Note 2, New and Recently Adopted Accounting Standards, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this Form 10-Q.
Forward-Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q, and in particular, statements found in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our expectations regarding our future liquidity, earnings, expenditures, and financial condition. These statements are often identified by the words “will,” “should,” “anticipate,” “believe,” “expect,” “intend,” “estimate,” “hope,” or similar expressions. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties. There are important factors that could cause actual results to differ materially from those in forward-looking statements, many of which are beyond our control. These factors, risks and uncertainties include the following:
Our actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do occur, what impact they will have on our results of operations or financial condition. Given these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We expressly disclaim any obligation to publicly revise any forward-looking statements that have been made to reflect the occurrence of events after the date hereof. For a discussion of other factors, risks and uncertainties that may affect our business, see Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2020.
30
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of market risks related to PCA, see Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Risk and Risk Management Policies” in this Quarterly Report on Form 10-Q.
Item 4. CONTROLS AND PROCEDURES
PCA maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in PCA’s filings under the Securities Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to PCA’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Prior to filing this report, PCA completed an evaluation under the supervision and with the participation of PCA’s management, including PCA’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of PCA’s disclosure controls and procedures as of September 30, 2021. The evaluation of PCA’s disclosure controls and procedures included a review of the controls’ objectives and design, PCA’s implementation of the controls, and the effect of the controls on the information generated for use in this report. Based on this evaluation, PCA’s Chief Executive Officer and Chief Financial Officer concluded that PCA’s disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2021.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the most recent fiscal quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
31
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The disclosure set forth under the caption "Legal Proceedings" in Note 19, Commitments, Guarantees, Indemnifications and Legal Proceedings, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item 1. Financial Statements" of this Form 10-Q is incorporated herein by reference.
Item 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in “Part I, Item IA. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information related to our repurchases of common stock made under repurchase plans authorized by PCA's Board of Directors, and shares withheld to cover taxes on vesting of equity awards, during the three months ended September 30, 2021:
Issuer Purchases of Equity Securities |
|
|||||||||||||||
Period |
|
Total |
|
|
Average |
|
|
Total Number |
|
|
Approximate |
|
||||
July 1-31, 2021 |
|
|
10,435 |
|
|
$ |
132.75 |
|
|
|
— |
|
|
$ |
193.0 |
|
August 1-31, 2021 |
|
|
344 |
|
|
|
139.43 |
|
|
|
— |
|
|
|
193.0 |
|
September 1-30, 2021 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
193.0 |
|
Total |
|
|
10,779 |
|
|
$ |
132.97 |
|
|
|
— |
|
|
$ |
193.0 |
|
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
None.
32
Item 6. EXHIBITS
Exhibit Number |
|
Description |
|
|
|
4.1 |
|
|
|
|
|
4.2 |
|
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32 |
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. † |
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document. † |
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. † |
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. † |
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document. † |
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. † |
|
|
|
104 |
|
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). † |
† Filed herewith.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Packaging Corporation of America |
|
|
|
|
|
/s/ PAMELA A. BARNES |
|
|
Pamela A. Barnes Senior Vice President, Finance and Controller |
|
|
|
Date: November 4, 2021
34
Exhibit 31.1
CEO CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Mark W. Kowlzan, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Packaging Corporation of America (PCA);
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of PCA as of, and for, the periods presented in this report;
(4) PCA’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for PCA and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to PCA, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of PCA’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in PCA’s internal control over financial reporting that occurred during PCA’s most recent fiscal quarter (PCA’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, PCA’s internal control over financial reporting; and
(5) PCA’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to PCA’s auditors and the Audit Committee of PCA’s Board of Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect PCA’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in PCA’s internal control over financial reporting.
/s/ Mark W. Kowlzan |
Mark W. Kowlzan Chairman and Chief Executive Officer |
Date: November 4, 2021
Exhibit 31.2
CFO CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Robert P. Mundy, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Packaging Corporation of America (PCA);
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of PCA as of, and for, the periods presented in this report;
(4) PCA’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for PCA and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to PCA, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of PCA’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in PCA’s internal control over financial reporting that occurred during PCA’s most recent fiscal quarter (PCA’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, PCA’s internal control over financial reporting; and
(5) PCA’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to PCA’s auditors and the Audit Committee of PCA’s Board of Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect PCA’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in PCA’s internal control over financial reporting.
/s/ Robert P. Mundy |
Robert P. Mundy Executive Vice President and Chief Financial Officer |
Date: November 4, 2021
Exhibit 32
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
_______________________________________
I, Mark W. Kowlzan, Chief Executive Officer of Packaging Corporation of America (the “Company”), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Quarterly Report of the Company on Form 10-Q for the period ended September 30, 2021 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Mark W. Kowlzan |
Mark W. Kowlzan |
Chairman and Chief Executive Officer |
Date: November 4, 2021
I, Robert P. Mundy, Chief Financial Officer of Packaging Corporation of America (the “Company”), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Quarterly Report of the Company on Form 10-Q for the period ended September 30, 2021 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Robert P. Mundy |
Robert P. Mundy |
Executive Vice President and Chief Financial Officer |
Date: November 4, 2021