PACKAGING CORPORATION OF AMERICA 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 2019 Annual Report on Form 10-K, as well as those factors listed in other documents we file with theSecurities 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 the third largest producer of uncoated freesheet paper inNorth America . We operate six containerboard mills, two paper mills, and 93 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 inLake Forest, Illinois and operate primarily inthe 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 2019 Annual Report on Form 10-K.
Executive Summary
Second quarter net sales were$1.54 billion in 2020 and$1.76 billion in 2019. We reported$57 million of net income, or$0.59 per diluted share, during the second quarter of 2020, compared to$194 million , or$2.04 per diluted share, during the same period in 2019. Net income included$75 million of expense for special items in the second quarter of 2020, compared to no income or expense for special items in 2019 (discussed below). Special items primarily included the non-cash goodwill impairment charge as described in Note 9,Goodwill and Intangible Assets, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item 1. Financial Statements" of this Form 10-Q, charges related to the closure of theSan Lorenzo, California corrugated products facility, and incremental costs to address the COVID-19 pandemic. Excluding special items, net income was$132 million , or$1.38 per diluted share, during the second quarter of 2020. The decrease was driven primarily by lower prices and mix in our Packaging and Paper segments, lower volumes in our Paper segment, and higher depreciation expense. These items were partially offset by lower operating costs, lower annual outage expenses, lower converting costs, lower freight expense, and other costs. PCA's facilities have been permitted to continue to operate as "essential operations" during the COVID-19 pandemic. PCA did not experience significant disruptions in its operations as a result of the pandemic and has maintained adequate availability of its workforce and supply of raw materials and services. 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 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$198 million in the second quarter of 2020, compared to$264 million in the second quarter of 2019. Packaging segment EBITDA excluding special items was$313 million in the second quarter of 2020 compared to$349 million in the second quarter of 2019. The decrease in EBITDA excluding special items was due primarily to lower prices and mix, partially offset by lower operating and converting costs, lower annual outage expenses, and lower freight and logistic expenses. Demand for our Packaging products remained strong in the second quarter. We cannot predict the future impact of the pandemic on our packaging operations, economic and operating conditions affecting our packaging business or demand for our packaging products. Paper segment loss from operations was$61 million in the second quarter of 2020, compared to income of$39 million in the second quarter of 2019. Paper segment EBITDA excluding special items was$5 million in the second quarter of 2020, compared to$48 million in the second quarter of 2019. The decrease in EBITDA excluding special items was due to lower sales and production volumes and lower prices and mix, partially offset by lower operating costs and lower annual outage expenses. Reported results in our Paper segment included the goodwill impairment charge described above. Sales were 48% lower than last year, as demand for our paper products has been affected by nationwide responses to address the COVID-19 pandemic, including school and office closures. Operations at ourJackson, Alabama paper mill were temporarily idled in late April and are expected to remain idled at least through the end of August. Packaging segment income from operations was$398 million in the first six months of 2020, compared to$513 million in the same period in 2019. Packaging segment EBITDA excluding special items was$602 million in the first six months of 2020 compared to$682 million in the first six months of 2019. The decrease in EBITDA excluding special items was due primarily to lower prices and mix, partially offset by higher sales and production volumes, lower operating and converting costs, lower annual outage expense, and lower freight and logistic expenses. Paper segment loss from operations was$29 million in the first six months of 2020, compared to income of$84 million in the first six months of 2019. Paper segment EBITDA excluding special items was$47 million in the first six months of 2020, compared to$103 million in the same 18 -------------------------------------------------------------------------------- period in 2019. The decrease in EBITDA excluding special items was due to lower sales and production volumes and lower prices and mix, partially offset by lower operating costs and lower annual outage expenses.
Special Items and Earnings per Diluted Share, Excluding Special Items
A reconciliation of reported earnings per diluted share to earnings per diluted share, excluding special items, for the three and six months endedJune 30, 2020 and 2019 are as follows: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019
Earnings per diluted share, as reported
Goodwill impairment (a) 0.58 - 0.58 - Facilities closure and other costs (b) 0.16 - 0.17 - Incremental costs for COVID-19 (c) 0.05 - 0.05 - Total special items 0.79 - 0.80 - Earnings per diluted share, excluding special items$ 1.38 $ 2.04 $ 2.88 $ 4.02 (a) 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
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 $55.2 million .
(b) For the three and six months ended
and
related to corrugated products facilities, substantially all of which
relates to the previously announced closure of the
facility during the second quarter, partially offset by income related to
the sale of a corrugated products facility.
(c) For the three and six months ended
the COVID-19 pandemic, including supplies, cleaning and sick pay.
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 down 1.4% during the second quarter of 2020 compared to the same quarter of 2019. Reported industry containerboard production increased 3.0% compared to the second quarter of 2019. Reported industry containerboard inventories at the end of the second quarter of 2020 were approximately 2.5 million tons, flat compared to the same period in 2019. Reported containerboard export shipments were up 25.0% compared to the second quarter of 2019. Prices reported by trade publications decreased by$10 per ton for linerboard and$15 per ton for corrugating medium inJanuary 2020 ; there were no additional price changes reported in the second quarter of 2020. Trade publications reported North American uncoated freesheet paper shipments were down 32.3% in the second quarter of 2020, compared to the same quarter of 2019. Average prices reported by a trade publication for cut size office papers were lower by$17 per ton, or 1.5%, in the second quarter of 2020 compared to the first quarter of 2020, and lower by$65 per ton, or 5.7%, compared to the second quarter of 2019. 19
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Results of Operations
Three Months Ended
The historical results of operations of PCA for the three months ended
Three Months Ended
June 30,
2020 2019 Change
Packaging $ 1,409.9 $ 1,504.6 $ (94.7 )
Paper 123.3 237.8 (114.5 )
Corporate and Other 50.5 55.8 (5.3 )
Intersegment eliminations (42.1 ) (38.3 ) (3.8 )
Net sales $ 1,541.6 $ 1,759.9 $ (218.3 )
Packaging $ 197.6 $ 263.9 $ (66.3 )
Paper (61.4 ) 38.8 (100.2 )
Corporate and Other (20.1 ) (22.3 ) 2.2
Income from operations $ 116.1 $ 280.4 $ (164.3 )
Non-operating pension income (expense) 0.6 (2.0 ) 2.6
Interest expense, net (25.1 ) (22.4 ) (2.7 )
Income before taxes 91.6 256.0 (164.4 )
Income tax provision (34.9 ) (62.4 ) 27.5
Net income $ 56.7 $ 193.6 $ (136.9 )
Non-GAAP Measures (a)
Net income excluding special items $ 131.8 $ 193.6 $ (61.8 )
Consolidated EBITDA 224.4 376.2 (151.8 )
Consolidated EBITDA excluding special items 299.0 376.2 (77.2 )
Packaging EBITDA 293.6 348.6 (55.0 )
Packaging EBITDA excluding special items 312.5 348.6 (36.1 )
Paper EBITDA (51.0 ) 48.2 (99.2 )
Paper EBITDA excluding special items 4.7 48.2 (43.5 )
(a) See "Reconciliations of Non-GAAP Financial Measures to Reported Amounts"
included in this Item 2 for a reconciliation of non-GAAP measures to the most
comparable GAAP measure.
Net Sales
Net sales decreased $218 million , or 12.4%, to $1,542 million during the three
months ended June 30, 2020 , compared to $1,760 million during the same period in
2019.
Packaging. Net sales decreased $95 million , or 6.3%, to $1,410 million , compared
to $1,505 million in the second quarter of 2019 due to lower containerboard and
corrugated products prices and mix ($97 million ), partially offset by higher
containerboard and corrugated products volume ($2 million ). In the second
quarter of 2020, our domestic containerboard prices were 7.7% lower, while
export prices were 15.4% lower, than the same period in 2019. In the second
quarter of 2020, export and domestic containerboard outside shipments decreased
7.1% compared to the second quarter of 2019. Total corrugated products shipments
were up 1.2% with the same number of workdays compared to the same period in
2019.
Paper. Net sales during the three months ended
Gross Profit
Gross profit decreased$102 million during the three months endedJune 30, 2020 , compared to the same period in 2019. The decrease was driven primarily by lower prices and mix in our Packaging and Paper segments, and lower volumes in our Paper segment. These items were partially offset by lower operating costs, lower annual outage expenses, lower converting costs, lower freight expense, and other costs. In the three months endedJune 30, 2020 , gross profit included$6 million of special items 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 ourSan Lorenzo, California facility. There were no significant special items in the three months endedJune 30, 2019 . 20
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Selling, General, and Administrative Expenses
Selling, general, and administrative expenses ("SG&A") decreased
Goodwill Impairment
During the three months endedJune 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 ofMay 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 .
Other Expense, Net
Other expense, net, for the three months ended
Three Months Ended
June 30,
2020 2019
Asset disposals and write-offs $ (5.0 ) $ (4.5 )
Facilities closure and other costs (13.3 ) -
Wallula mill restructuring - -
Other 0.1 0.7
Total $ (18.2 ) $ (3.8 ) 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 decreased$164 million , or 58.6%, during the three months endedJune 30, 2020 , compared to the same period in 2019. The second quarter of 2020 included$82 million of special items expense for Paper reporting unit goodwill impairment, facility closures, and incremental, out-of-pocket costs related to COVID-19, compared to no special items in the second quarter of 2019. Packaging. Packaging segment income from operations decreased$66 million to$198 million , compared to$264 million during the three months endedJune 30, 2019 . The decrease related primarily to lower containerboard and corrugated products prices and mix ($83 million ) and higher depreciation expense ($4 million ), partially offset by lower operating and converting costs ($35 million ), lower annual outage expense ($6 million ), and lower freight expenses ($5 million ). Special items during the second quarter of 2020 included$20 million of facility closure costs and$6 million of incremental, out-of-pocket costs related to COVID-19, compared to no special items in the Packaging segment in the second quarter of 2019. Paper. Paper segment income from operations decreased$100 million to a loss of$61 million , compared to income of$39 million during the three months endedJune 30, 2019 . The decrease primarily related to lower sales and production volumes ($50 million ), lower prices and mix ($6 million ), partially offset by lower operating costs ($7 million ), lower annual outage expenses ($7 million ). Special items during the second quarter of 2020 included$55 million of goodwill impairment and$1 million of incremental, out-of-pocket costs related to COVID-19, compared to no special items in the Packaging segment in the second quarter of 2019.
Non-Operating Pension Expense, Interest Expense, Net and Income Taxes
Non-operating pension expense decreased$3 million during the three months endedJune 30, 2020 , compared to the same period in 2019. The decrease in non-operating pension expense was primarily related to the favorable 2019 asset performance, partially offset by assumption changes. Interest expense, net increased$3 million during the three months endedJune 30, 2020 , compared to the same period in 2019. The increase in interest expense, net was primarily related to higher earnings on deferred compensation balances in the second quarter of 2020, lower interest income due to lower rates on invested cash balances in the second quarter of 2020, partially offset by no treasury lock amortization due to the write-off of the remaining balances of treasury locks in connection with the Company's debt refinancing completed inDecember 2019 . During the three months endedJune 30, 2020 , we recorded$35 million of income tax expense, compared to$62 million of expense during the three months endedJune 30, 2019 . The effective tax rate for the three months endedJune 30, 2020 and 2019 was 38.2% and 24.4%, respectively. The increase in our effective tax rate was primarily due to the nondeductible goodwill impairment charge associated with our Paper reporting unit slightly offset by the favorable impact of employee restricted stock and performance unit vests with higher excess tax benefits (ASU 2016-09) during the three months endedJune 30, 2020 compared toJune 30, 2019 . 21
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Six Months Ended
The historical results of operations of PCA for the six months ended
Six Months Ended
June 30,
2020 2019 Change
Packaging $ 2,877.4 $ 2,982.2 $ (104.8 )
Paper 340.7 477.5 (136.8 )
Corporate and Other 110.7 112.5 (1.8 )
Intersegment eliminations (78.5 ) (78.6 ) 0.1
Net sales $ 3,250.3 $ 3,493.6 $ (243.3 )
Packaging $ 397.5 $ 513.4 $ (115.9 )
Paper (29.0 ) 84.4 (113.4 )
Corporate and Other (43.3 ) (42.0 ) (1.3 )
Income from operations $ 325.2 $ 555.8 $ (230.6 )
Non-operating pension income (expense) 1.1 (4.1 ) 5.2
Interest expense, net (44.6 ) (46.4 ) 1.8
Income before taxes 281.7 505.3 (223.6 )
Income tax provision (83.4 ) (124.9 ) 41.5
Net income $ 198.3 $ 380.4 $ (182.1 )
Non-GAAP Measures (a)
Net income excluding special items $ 274.3 $ 380.9 $ (106.6 )
Consolidated EBITDA 533.7 746.4 (212.7 )
Consolidated EBITDA excluding special items 609.5 746.8 (137.3 )
Packaging EBITDA 582.3 682.2 (99.9 )
Packaging EBITDA excluding special items 602.3 682.4 (80.1 )
Paper EBITDA (9.1 ) 102.9 (112.0 )
Paper EBITDA excluding special items 46.7 103.1 (56.4 )
(a) See "Reconciliations of Non-GAAP Financial Measures to Reported Amounts"
included in this Item 2 for a reconciliation of non-GAAP measures to the most
comparable GAAP measure.
Net Sales Net sales decreased
Packaging. Net sales decreased$105 million , or 3.5%, to$2,877 million , compared to$2,982 million in the six months endedJune 30, 2019 , due to lower containerboard and corrugated products prices and mix ($191 million ), partially offset by higher containerboard and corrugated products volume ($86 million ). In the first six months of 2020, our domestic containerboard prices were 7.8% lower, while export prices were 20.5% lower, than the same period in 2019. In the first six months of 2020, export and domestic containerboard outside shipments increased 2.7% compared to the first six months of 2019. Total corrugated products shipments were up 3.4% with one additional workday, and up 2.6% per day compared to the same period in 2019. Paper. Net sales during the six months endedJune 30, 2020 decreased$137 million , or 28.6%, to$341 million , compared to$478 million in the six months endedJune 30, 2019 , due to decreased volume ($126 million ) and lower prices and mix ($12 million ), primarily related to the COVID-19 pandemic.
Gross Profit
Gross profit decreased$159 million during the six months endedJune 30, 2020 , compared to the same period in 2019. The decrease was driven primarily by lower prices and mix in our Packaging and Paper segments, lower volume in our Paper segment, partially offset by higher volumes in our Packaging segment, lower operating and converting costs, lower annual outage expense, and lower freight and logistic expenses. In the six months endedJune 30, 2020 , gross profit included$7 million of special items 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 ourSan Lorenzo, California facility. There were no significant special items in the six months endedJune 30, 2019 . 22
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Selling, General, and Administrative Expenses
Selling, general, and administrative expenses ("SG&A") decreased $2 million
during the six months ended June 30, 2020 , compared to the same period in 2019.
The decrease was primarily due to lower employee compensation and fringes and
travel and entertainment expenses.
Goodwill Impairment
During the six months endedJune 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 ofMay 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 .
Other Expense, Net
Other expense, net, for the six months ended
Six Months Ended
June 30,
2020 2019
Asset disposals and write-offs $ (11.0 ) $ (8.8 )
Facilities closure and other costs (13.7 ) -
Wallula mill restructuring - (0.4 )
Other (3.4 ) (0.6 )
Total $ (28.1 ) $ (9.8 ) 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 decreased$231 million , or 41.5%, during the six months endedJune 30, 2020 , compared to the same period in 2019. The first six months of 2020 included$83 million of special items expense for Paper reporting unit goodwill impairment; incremental, out-of-pocket costs related to COVID-19; and facility closure costs, compared to less than$1 million of expense for special items related toWallula Mill restructuring in the same period in 2019. Packaging. Packaging segment income from operations decreased$116 million to$398 million during the first six months of 2020, compared to the same period last year. The decrease related primarily to lower containerboard and corrugated products prices and mix ($164 million ) and higher depreciation expense ($9 million ), partially offset by lower operating and converting costs ($51 million ), higher sales and production volumes ($18 million ), lower annual outage expenses ($7 million ), and lower freight expenses ($7 million ). Special items during the first six months of 2020 included$21 million of facility closure costs and$6 million of incremental, out-of-pocket costs related to COVID-19, compared to an insignificant amount of special items in the Packaging segment in the first six months of 2019. Paper. Paper segment income from operations decreased$113 million to a loss of$29 million , compared to the six months endedJune 30, 2019 . The decrease primarily related to lower sales and production volumes ($54 million ), lower prices and mix ($12 million ), and higher freight and other expenses ($5 million ), partially offset by lower operating costs ($10 million ) and lower annual outage expenses ($2 million ). Special items during the first six months of 2020 included$55 million of goodwill impairment and$1 million of incremental, out-of-pocket costs related to COVID-19. There were an insignificant amount of special items in the Paper segment in the first six months of 2019.
Non-Operating Pension Expense, Interest Expense, Net and Income Taxes
Non-operating pension expense decreased$5 million during the six months endedJune 30, 2020 , compared to the same period in 2019. The decrease in non-operating pension expense was primarily related to the favorable 2019 asset performance, partially offset by assumption changes. Interest expense, net decreased$2 million during the six months endedJune 30, 2020 , compared to the same period in 2019. The decrease in interest expense, net was primarily related to no treasury lock amortization due to the write-off of the remaining balances of treasury locks in connection with the Company's debt refinancing completed inDecember 2019 and lower earnings on deferred compensation balances in 2020, partially offset by higher interest rates on the notes issued inNovember 2019 , net of interest on the notes redeemed inDecember 2019 . During the six months endedJune 30, 2020 , we recorded$83 million of income tax expense, compared to$125 million of expense during the six months endedJune 30, 2019 . The effective tax rate for the six months endedJune 30, 2020 and 2019 was 29.6% and 24.7%, respectively. The increase in our effective tax rate was primarily due to the nondeductible goodwill impairment charge associated with our Paper reporting unit slightly offset by the favorable impact of employee restricted stock and performance unit vests with higher excess tax benefits (ASU 2016-09) during the six months endedJune 30, 2020 compared toJune 30, 2019 . 23 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of liquidity are net cash provided by operating activities and available borrowing capacity under our revolving credit facility. AtJune 30, 2020 , we had$853 million of cash and cash equivalents,$123 million of marketable debt securities, and$326 million of unused borrowing capacity under the revolving credit facility, net of letters of credit. Currently, our primary uses of cash are for operations, capital expenditures, acquisitions, debt service, common stock dividends, 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):
Six Months Ended
June 30,
2020 2019 Change
Net cash provided by (used for):
Operating activities $ 463.5 $ 538.4 $ (74.9 )
Investing activities (128.8 ) (172.8 ) 44.0
Financing activities (160.9 ) (157.7 )
(3.2 )
Net increase in cash and cash equivalents
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 six months endedJune 30, 2020 , net cash provided by operating activities was$463 million , compared to$538 million in the same period in 2019, a decrease of$75 million . Cash from operations excluding changes in cash used for operating assets and liabilities decreased$127 million , primarily due to lower income from operations as discussed above. Cash increased by$52 million due to changes in operating assets and liabilities, primarily due to the following:
a) a decrease in accounts receivables primarily due to a reduction in Paper
segment sales resulting from the pandemic,
b) a smaller decrease in accrued liabilities for 2020 compared to 2019primarily related to lower payouts and higher accruals for employee
compensation and benefits liabilities for the first half of 2020, and
c) lower Federal and state income taxes paid in the first six months of2020 compared to 2019, partially offset by a lower income tax provision
in 2020 compared to 2019 due to lower income levels in 2020.These favorable changes were partially offset by the following:
a) a larger increase in inventory levels in 2020 compared to 2019 due to
higher Paper segment finished goods levels in 2020 as a result of lower
sales resulting from the pandemic, as well as an increase in 2020 fiber
levels in the Packaging segment compared to 2019, and
b) a larger decrease in accounts payable levels in 2020 compared to 2019
primarily due to the curtailment of the Jackson Mill in the second
quarter of 2020.
Investing Activities
We used $129 million for investing activities during the six months ended June
30, 2020 compared to $173 million during the same period in 2019. We spent $151
million for internal capital investments during the six months ended June 30,
2020 , compared to $171 million during the same period in 2019. We also received
$23 million from redemptions of marketable debt securities, net of purchases
during the six months ended June 30, 2020 .
We expect capital investments in 2020 to be between $400 million and $425
million , not including acquisitions. 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 $10 million in 2020. Our estimated
environmental expenditures could vary significantly depending upon the enactment
of new environmental laws and
24
-------------------------------------------------------------------------------- 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 2019 Annual Report on Form 10-K.
Financing Activities
During the six months endedJune 30, 2020 , net cash used for financing activities was$161 million , compared to$158 million during the same period in 2019. In the first six months of 2020 we paid$150 million of dividends compared with$149 million of dividends paid during the first six months of 2019.
For more information about our debt, see Note 11, Debt, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our 2019 Annual Report on Form 10-K.
Contractual Obligations
There have been no material changes to the contractual obligations table disclosed in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2019 Annual Report on Form 10-K.
Reconciliations of Non-GAAP Financial Measures to Reported Amounts
Income from operations excluding special items, net income excluding special items, EBITDA, and EBITDA excluding special items are non-GAAP financial measures. Management excludes special items, as it believes that these items are not necessarily reflective of the ongoing operations of our business. These measures are presented because they provide a means to evaluate the performance of our segments and our Company on an ongoing basis using the same measures that are used by our management, because these measures assist in providing a meaningful comparison between periods and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such. Reconciliations of the non-GAAP measures to the most comparable measure reported in accordance with GAAP for the three and six months endedJune 30, 2020 and 2019 follow (dollars in millions): Three Months Ended June 30, 2020 2019 Income Income before Income Net before Income Net Taxes Taxes Income Taxes Taxes Income As reported in accordance with GAAP$ 91.6 $ (34.9 ) $ 56.7 $ 256.0 $ (62.4 ) $ 193.6 Special items: Goodwill impairment (a) 55.2 - 55.2 - - -
Facilities closure and other costs (b) 20.4 (5.1 ) 15.3
- - -
Incremental costs for COVID-19 (b) 6.1 (1.5 ) 4.6 - - -
Total special items 81.7 (6.6 ) 75.1 - - -
Excluding special items $ 173.3 $ (41.5 ) $ 131.8 $ 256.0 $ (62.4 ) $ 193.6
Six Months Ended June 30,
2020 2019
Income Income
before Income Net before Income Net
Taxes Taxes Income Taxes Taxes Income
As reported in accordance with GAAP $ 281.7 $ (83.4 ) $ 198.3 $ 505.3 $ (124.9 ) $ 380.4
Special items:
Goodwill impairment (a) 55.2 - 55.2 - - -
Facilities closure and other costs (b) 20.8 (5.2 ) 15.6
- - -
Incremental costs for COVID-19 (b) 6.9 (1.7 ) 5.2 - - -
Wallula mill restructuring (c) - - - 0.6 (0.1 ) 0.5
Total special items 82.9 (6.9 ) 76.0 0.6 (0.1 ) 0.5
Excluding special items $ 364.6 $ (90.3 ) $ 274.3 $ 505.9 $ (125.0 ) $ 380.9 (a) Includes
reporting unit goodwill impairment.
(b) The three and six months ended
25
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1.
related to corrugated products facilities, substantially all of which
relates to the previously announced closure of the
facility during the second quarter, partially offset by income related to
the sale of a corrugated products facility.
2.
costs related to COVID-19, including supplies, cleaning and sick pay.
(c) Includes $0.6 million of charges related to the second quarter 2018
discontinuation of uncoated free sheet and coated one-side grades at the
machine to produce virgin kraft linerboard.
The following table reconciles net income to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net income $ 56.7 $ 193.6 $ 198.3 $ 380.4
Non-operating pension (income) expense (0.6 ) 2.0 (1.1 ) 4.1
Interest expense, net 25.1 22.4 44.6 46.4
Income tax provision 34.9 62.4 83.4 124.9
Depreciation, amortization, and depletion 108.3 95.8 208.5 190.6
EBITDA $ 224.4 $ 376.2 $ 533.7 $ 746.4
Special items:
Goodwill impairment 55.2 - 55.2 -
Facilities closure and other costs 13.3 - 13.7 -
Incremental costs for COVID-19 6.1 - 6.9 -
Wallula mill restructuring - - - 0.4
Total special items 74.6 - 75.8 0.4
EBITDA excluding special items $ 299.0 $ 376.2 $ 609.5 $ 746.8
26
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The following table reconciles segment income (loss) to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Packaging
Segment income $ 197.6 $ 263.9 $ 397.5 $ 513.4
Depreciation, amortization, and depletion 96.0 84.7 184.8 168.8
EBITDA 293.6 348.6 582.3 682.2
Facilities closure and other costs 13.3 - 13.7 -
Incremental costs for COVID-19 5.6 - 6.3 -
Wallula mill restructuring - - - 0.2
EBITDA excluding special items $ 312.5 $ 348.6 $ 602.3 $ 682.4
Paper
Segment income $ (61.4 ) $ 38.8 $ (29.0 ) $ 84.4
Depreciation, amortization, and depletion 10.4 9.4 19.9 18.5
EBITDA (51.0 ) 48.2 (9.1 ) 102.9
Goodwill impairment 55.2 - 55.2 -
Incremental costs for COVID-19 0.5 - 0.6 -
Wallula mill restructuring - - - 0.2
EBITDA excluding special items $ 4.7 $ 48.2 $ 46.7 $ 103.1
Corporate and Other
Segment loss $ (20.1 ) $ (22.3 ) $ (43.3 ) $ (42.0 )
Depreciation, amortization, and depletion 1.9 1.7 3.8 3.3
EBITDA (18.2 ) (20.6 ) (39.5 ) (38.7 )
EBITDA excluding special items $ (18.2 ) $ (20.6 ) $ (39.5 ) $ (38.7 )
EBITDA $ 224.4 $ 376.2 $ 533.7 $ 746.4
EBITDA excluding special items $ 299.0 $ 376.2 $ 609.5 $ 746.8 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 atJune 30, 2020 . For a discussion of derivatives and hedging activities, see Note 16, Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our 2019 Annual Report on Form 10-K.
At
Off-Balance-Sheet Activities
The Company does not have any off-balance sheet arrangements as of
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 2019 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 inthe 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 27
-------------------------------------------------------------------------------- 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.
PCA has included in its 2019 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 six months of 2020.
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:
• the impact of general economic conditions;
• the impact of the COVID-19 pandemic on the health of our employees, on our
vendors and customers and on economic conditions affecting our business;
• the impact of acquired businesses and risks and uncertainties regarding
operation, expected benefits and integration of such businesses;
• containerboard, corrugated products, and white paper general industry
conditions, including competition, product demand, product pricing, and
input costs;
• fluctuations in wood fiber and recycled fiber costs;
• fluctuations in purchased energy costs;
• the possibility of unplanned outages or interruptions at our principal
facilities;
• legislative or regulatory actions or requirements, particularly concerning
environmental or tax matters.
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 endedDecember 31, 2019 , as supplemented by Part II, Item 1A. Risk Factors included in our Quarterly Report on Form 10-Q for the first quarter of 2020. 28
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