The following discussion and analysis of historical results of operations and financial condition should be read in conjunction with the audited financial statements and the notes thereto which appear elsewhere in this Form 10-K. This discussion includes forward-looking statements regarding our expectations with respect to our future performance, liquidity, and capital resources. Such statements, along with any other non-historical statements in the discussion, are forward-looking. See our discussion regarding forward-looking statements included under "Part I, Item 1A. Risk Factors" of this Form 10-K. For our discussion and analysis of our results of operations, financial condition and cash flows for the year endedDecember 31, 2017 , the earliest of the years presented in the accompanying audited financial statements included in Item 8 herein, please refer to our Annual Report on Form 10-K for the year endedDecember 31, 2018 , filed with theSecurities and Exchange Commission onFebruary 28, 2019 . Such information is presented in Item 7 of such report under the subcaptions "Results of Operations -Year EndedDecember 31, 2018 , Compared with Year EndedDecember 31, 2017 " and "Liquidity and Capital Resources" and is incorporated by reference herein.
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 95 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 UFS 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 . Executive Summary Net sales were$6.96 billion for the year endedDecember 31, 2019 and$7.01 billion in 2018. We reported$696 million of net income, or$7.34 per diluted share, in 2019, compared to$738 million , or$7.80 per diluted share, in 2018. Net income included$29 million of expense for special items in 2019, compared to$22 million of expense for special items in 2018. Special items in both periods are described later in this section. Excluding special items, we recorded$726 million of net income, or$7.65 per diluted share, in 2019, compared to$760 million , or$8.03 per diluted share, in 2018. The decrease was driven primarily by lower prices and mix in our Packaging segment, lower volumes in our Paper segment, and higher operating and converting costs, partially offset by higher volumes in our Packaging segment, higher prices and mix in our Paper segment, lower annual outage expense, and lower freight and logistic expenses. 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 7. Reconciliations of Non-GAAP Financial Measures to Reported Amounts." Packaging segment income from operations was$963 million in 2019, compared to$1,045 million in 2018. Packaging segment EBITDA excluding special items was$1,310 million in 2019, compared to$1,401 million in 2018. The decrease was driven primarily by lower domestic and export containerboard prices and mix and higher operating and converting costs, partially offset by higher sales and production volumes, higher corrugated products prices and mix, lower annual outage expense, and lower freight and logistic expenses. Paper segment income from operations was$175 million in 2019, compared to$98 million in 2018. Paper segment EBITDA excluding special items was$213 million in 2019, compared to$165 million in 2018. The increase was due primarily to higher paper prices and mix, lower operating costs, and lower freight and logistic expenses, partially offset by lower sales and production volumes, and higher annual outage expense. During the second quarter of 2018, the Company discontinued production of paper grades at itsWallula, Washington mill and converted the No. 3 paper machine to a 400,000 ton-per-year virgin kraft linerboard machine. The Company incurred charges in the Packaging and Paper segments relating to these activities during 2019 and 2018 as described below under "Special Items and Earnings per Diluted Share, Excluding Special Items." 19 --------------------------------------------------------------------------------
Special Items and Earnings per Diluted Share, Excluding Special Items
Earnings per diluted share, excluding special items, in 2019 and 2018 were as follows: Year Ended December 31, 2019 2018 Earnings per diluted share$ 7.34 $ 7.80 Special items: Debt refinancing (a) 0.28 - DeRidder mill fixed asset disposals (b) 0.02
-
Wallula mill restructuring (c) 0.01
0.24
Facilities closure and other costs (d) - 0.01 Tax reform (e) - (0.02 ) Total special items expense 0.31 0.23
Earnings per diluted share, excluding special items
8.03
(a) Includes
refinancing, which included premiums paid to redeem the debt being refinanced
and the write-offs of remaining balances of treasury locks and unamortized
debt issuance costs. Also includes
the stranded tax effects in Accumulated Other Comprehensive Income related to
the write-offs of the treasury locks in connection with the debt refinancing.
(b) Includes
the containerboard mill conversion at our
(c) For 2019 and 2018, includes
charges related to the second quarter 2018 discontinuation of uncoated free
sheet and coated one-side paper grades at the
associated with the conversion of the No. 3 paper machine to produce virgin
kraft linerboard.
(d) Includes
corrugated products facilities and a corporate administration facility.
(e) Includes
deferred tax liability for the reduction in the
statutory income tax rate related to our 2017 measurement period adjustments
in accordance with
Tax Accounting Implications of the Tax Cuts and Jobs Act. 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 earnings per share to diluted earnings per share 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 later in Item 7 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 total shipments were flat during 2019, compared to 2018. Reported industry containerboard production decreased 3.7% compared to 2018, and reported industry containerboard inventories at the end of 2019 were approximately 2.5 million tons, down 5.1% compared to 2018. Reported containerboard export shipments decreased 13.1% compared to 2018. Prices reported by trade publications decreased by$10 per ton for linerboard in March, May, andJune 2019 , and corrugating medium decreased$20 per ton in January and$10 per ton in May andJune 2019 . Additionally, prices decreased by$10 per ton for linerboard and$15 per ton for corrugating medium inJanuary 2020 . The market for communication papers competes heavily with electronic data transmission and document storage alternatives. Increasing shifts to these alternatives have reduced usage of traditional print media and communication papers. Trade publications reported North American uncoated freesheet paper shipments were down 10.9% in 2019, compared to 2018. Average copy paper prices reported by a trade publication for cut size office papers increased$3 per ton in the first quarter and 20
--------------------------------------------------------------------------------
Outlook
Looking ahead to the first quarter of 2020, in our Packaging segment we expect lower prices as the remaining impact of the published domestic containerboard price decreases from 2019 are fully realized as well as the negative impact from the decreases in the published index prices for kraft linerboard and medium reported inJanuary 2020 . We also expect export prices to continue to decline. Containerboard volumes will be lower due to scheduled maintenance outages at our three largest mills during the quarter, but we do expect higher corrugated products shipments driven by higher demand. In our Paper segment, volumes are expected to be lower partly due to timing, as we shipped higher than expected volumes during the fourth quarter as well as the scheduled outage we have at ourJackson Mill . Expenses relating to our scheduled maintenance outage activities will be significantly higher with four outages scheduled in the first quarter versus one in the fourth quarter of 2019. Freight costs will be higher due to rail rate increases in certain areas and scheduled outage-related increases. Labor and benefits costs will be higher with annual wage increases and other timing-related expenses. We also expect input cost inflation with purchased electricity and most of our chemical and repair and materials costs, while seasonally colder weather will increase energy and wood costs. We also expect our tax rate and depreciation expense to be slightly higher. Considering these items, we expect first quarter earnings to be lower than fourth quarter 2019.
Results of Operations
Year Ended
The historical results of operations of PCA for the years ended
Year Ended December 31, 2019 2018 Change Packaging$ 5,932.2 $ 5,938.5 $ (6.3 ) Paper 964.3 1,002.0 (37.7 ) Corporate and other and eliminations 67.8 74.1 (6.3 ) Net sales$ 6,964.3 $ 7,014.6 $ (50.3 ) Packaging$ 963.4 $ 1,045.4 $ (82.0 ) Paper 175.4 97.7 77.7 Corporate and other (85.1 ) (75.4 ) (9.7 ) Income from operations 1,053.7 1,067.7 (14.0 ) Non-operating pension expense (7.9 ) (2.1 ) (5.8 ) Interest expense, net (128.8 ) (95.1 ) (33.7 ) Income before taxes 917.0 970.5 (53.5 ) Income tax expense (220.6 ) (232.5 ) 11.9 Net income$ 696.4 $ 738.0 $ (41.6 ) Net income excluding special items (a)$ 725.5 $ 760.4 $ (34.9 ) EBITDA (a)$ 1,441.2 $ 1,478.6 $
(37.4 )
EBITDA excluding special items (a)
(a) See "Reconciliations of Non-GAAP Financial Measures to Reported Amounts"
included in this Item 7 for a reconciliation of non-GAAP measures to the most comparable GAAP measure.
Net sales decreased
Packaging. Net sales decreased$7 million , or 0.1%, to$5,932 million , compared to$5,939 million in 2018, due to lower prices and mix ($31 million ), primarily for domestic and export containerboard, partially offset by increased volumes ($24 million ), primarily due to corrugated products. In 2019, our domestic containerboard prices decreased 3.6% and export prices decreased 20.5% compared to 2018. Containerboard outside shipments decreased 12.2%, and total corrugated products shipments were up 0.9% in total and per day workday, compared to 2018. Prices reported by trade publications decreased by 21 --------------------------------------------------------------------------------$10 per ton for linerboard in March, May, andJune 2019 , and corrugating medium decreased$20 per ton in January and$10 per ton in May andJune 2019 , which drove lower selling prices for containerboard and corrugated products.
Paper. Net sales decreased
Gross Profit
Gross profit decreased$1 million in 2019, compared to 2018. The decrease was driven primarily by lower prices and mix in our Packaging segment, lower volumes in our Paper segment, and higher operating and converting costs, partially offset by higher volumes in our Packaging segment, higher prices and mix in our Paper segment, lower annual outage expense, and lower freight and logistic expenses. In 2019, gross profit included no significant special items, compared to$15 million related to the conversion of the No. 3 machine at theWallula mill in 2018.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses (SG&A) increased
Other Expense, Net
Other expense, net for the years endedDecember 31, 2019 and 2018 are set forth below (dollars in millions): Year Ended December 31, 2019 2018 Asset disposals and write-offs$ (25.0 ) $ (17.3 ) Wallula mill restructuring (0.7 ) (14.9 ) Facilities closure and other costs (0.3 ) (1.6 ) Insurance deductible for property damage - (0.5 ) Acquisition and integration related costs - (0.2 ) Other (6.7 ) (6.7 ) Total$ (32.7 ) $ (41.2 ) We discuss these items in more detail in Note 7, Other (Expense) Income, Net of the Condensed Notes to the Consolidated Financial Statements in "Part II, Item 8. Financial Statements" of this Form 10-K.
Income from Operations
Income from operations decreased$14 million , or 1.3%, for the year endedDecember 31, 2019 , compared to 2018. Income from operations in 2019 included$4 million of expense for special items compared to$32 million in 2018. Special items in 2019 consisted of$3 million of charges for the disposal of fixed assets related to the containerboard mill conversion at ourDeRidder, Louisiana mill and$1 million of charges related to the conversion of theWallula, Washington mill No. 3 paper machine. 2018 special items included$30 million of charges related to the conversion of the Wallula No. 3 paper machine and$2 million related to facilities closures and other costs. Packaging. Segment income from operations decreased$82 million to$963 million , compared to$1,045 million in 2018. The decrease in 2019 related primarily to higher operating and converting costs ($101 million ), lower domestic and export containerboard prices and mix ($63 million ), and other fixed costs ($26 million ), partially offset by higher containerboard and corrugated products sales and production volumes ($69 million ), lower annual outage expense ($24 million ), and higher corrugated products prices and mix ($4 million ). Special items in 2019 included expense of$3 million for the disposal of fixed assets related to the containerboard mill conversion at ourDeRidder, Louisiana mill and$1 million of charges related to the conversion of the Wallula No. 3 paper machine. Special items in 2018 included$12 million of charges related to the conversion of the Wallula No. 3 paper machine and$2 million related to facilities closures and other costs. Paper. Segment income from operations increased$78 million to$175 million , compared to$98 million in 2018. The increase primarily related to higher paper prices and mix ($58 million ), lower operating costs ($22 million ), lower depreciation expense ($12 million ), and lower freight expense ($6 million ), partially offset by lower sales and production volumes ($31 million ), higher annual outage expense ($4 million ), and other fixed costs ($3 million ). There were an insignificant amount of 22 --------------------------------------------------------------------------------
special items in the Paper segment in 2019, compared to
Non-Operating Pension Expense, Interest Expense, Net and Income Taxes
During 2019, non-operating pension expense increased
Interest expense, net, during 2019 increased$34 million compared to 2018. The increase is primarily related to the$38 million of charges from the Company'sNovember 2019 debt refinancing, partially offset by higher interest income as a result of higher cash balances in 2019 and lower interest, as the Company repaid$150 million of notes inMarch 2018 . During 2019, we recorded$221 million of income tax expense, compared with$232 million of income tax expense during 2018. The effective tax rate for 2019 and 2018 was 24.1% and 24.0%, respectively.
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. We ended the year with$680 million of cash and cash equivalents,$146 million of marketable debt securities, and$329 million of unused borrowing capacity under the revolving credit facility, net of letters of credit. Currently, our primary uses of cash are for operations, capital expenditures, acquisitions, debt service, common stock dividends, and repurchases of common stock. We believe that net cash generated from operating activities, cash on hand, available borrowings under our revolving credit facility and available capital through access to capital markets will be adequate to meet our liquidity and capital requirements, including payments of any declared common stock dividends, for the foreseeable future. As our debt or credit facilities become due, we will need to repay, extend or replace such facilities. Our ability to do so will be subject to future economic conditions and financial, business, and other factors, many of which are beyond our control.
Below is a summary table of our cash flows, followed by a discussion of our sources and uses of cash through operating activities, investing activities, and financing activities (dollars in millions):
Year Ended December 31, 2019 2018 Net cash provided by (used for): Operating activities$ 1,207.4 $ 1,180.1 Investing activities (546.6 ) (608.2 ) Financing activities (342.8 ) (427.3 ) Net increase (decrease) in cash and cash equivalents$ 318.0 $ 144.6 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 other 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 2019, net cash provided by operating activities was$1,207 million , compared to$1,180 million for 2018, an increase of$27 million . Cash increased by$62 million due to favorable changes in operating assets and liabilities, primarily due to the following: a) a decrease in accounts receivable in 2019 compared to 2018 due to lower net sales in 2019 as previously discussed and the timing of collections in the Packaging segment, and b) a net decrease in inventory in 2019 compared to 2018 primarily due to less containerboard inventory on hand in the Packaging segment, partially offset by higher levels of finished goods in the Paper segment. 23
--------------------------------------------------------------------------------
These favorable changes were partially offset by the following:
a) higher taxes paid in 2019 compared to 2018 due to the 2018 use of a
federal overpayment from the 2017 tax year resulting from
Federal Tax
Reform, and
b) a larger decrease in accounts payable levels in 2019 compared to 2018
related to the timing of payments. Cash from operations excluding changes in cash used for operating assets and liabilities decreased$35 million , primarily due to lower income from operations as discussed above, as well as higher pension contributions made in 2019 compared to 2018 of$36 million , partially offset by a higher deferred tax provision in 2019 compared to 2018.
Investing Activities
We used$547 million for investing activities in 2019, compared to$608 million in 2018. In 2019, we spent$400 million for internal capital investments, compared to$552 million in 2018. During 2019, we did not acquire any businesses, compared to$56 million for acquisitions in 2018 (Englander dZignPak). InOctober 2019 , we used$146 million of cash-on-hand to invest in available-for-sale (AFS) marketable debt securities. For more information, see Note 12, Cash, Cash Equivalents, andMarketable Debt Securities , of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Form 10-K.
The details of capital expenditures for property and equipment, excluding
acquisitions, by segment for the years ended
Year Ended December 31, 2019 2018 Packaging$ 367.4 $ 504.0 Paper 23.8 12.6 Corporate and Other 8.3 34.8$ 399.5 $ 551.4 We expect capital investments in 2020 to be between$400 million and$425 million . 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 regulations. For additional information, see "Environmental Matters" in this Management's Discussion and Analysis of Financial Condition and Results of Operations. AtDecember 31, 2019 , the Company had commitments for capital expenditures of$213 million . The Company believes that cash-on-hand combined with cash flow from operations will be sufficient to fund these commitments.
Financing Activities
In 2019, net cash used for financing activities was$343 million , compared to$427 million of cash used for financing activities in 2018, a decrease of$84 million . We paid$31 million more in dividends on our common stock in 2019 ($299 million in total) than in 2018 ($268 million in total) and paid$124 million less in 2019 than in 2018 on our long-term debt, net of proceeds received. In 2019, we refinanced$900 million principal amount of our long term debt. Payments to redeem our old debt, including redemption premiums, exceeded the proceeds received from issuing the new debt by$27 million . We also paid$8 million of debt issuance costs. See Note 11 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for more information on the debt refinancing. In 2018, we repaid at maturity$150 million principal amount of long-term debt from cash on hand. 24 --------------------------------------------------------------------------------
Commitments Contractual Obligations The table below sets forth our enforceable and legally binding obligations as ofDecember 31, 2019 for the categories described below. Some of the amounts included in the table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in the table. Purchase orders made in the ordinary course of business are excluded from the table below. Any amounts for which we are liable under purchase orders are reflected on the Consolidated Balance Sheets as accounts payable and accrued liabilities (dollars in millions): Payments Due by Period Less Than More Than 5 1 Year 1-3 Years 3-5 Years Years 2025 & Total 2020 2021-2022 2023-2024 After 4.50% Senior Notes, due November 2023$ 700.0 $ - $ -$ 700.0 $ - 3.65% Senior Notes, due September 2024 400.0 - - 400.0 - 3.40% Senior Notes, due December 2027 500.0 - - - 500.0 3.00% Senior Notes, due December 2029 500.0 - - - 500.0 4.05% Senior Notes, due December 2049 400.0 - - - 400.0 Total long-term debt (a) 2,500.0 - - 1,100.0 1,400.0 Interest on long-term debt (b) 973.1 96.4 188.6 157.1 531.0 Finance lease obligations, including interest 23.2 2.7 5.4 5.4 9.7 Operating leases (c) 271.5 71.2 103.4 48.9 48.0 Capital commitments 212.6 212.6 - - - Purchase commitments: Raw materials (d) 288.6 39.1 79.3 63.7 106.5 Energy related (e) 30.4 12.8 11.1 3.7 2.8 Other liabilities reflected on our Consolidated Balance Sheet (f): Compensation and benefits (g) 378.2 55.6 121.9 135.6 65.1 Other (h) 66.3 13.6 8.3 2.8 41.6$ 4,743.9 $ 504.0 $ 518.0 $ 1,517.2 $ 2,204.7
(a) The table assumes our long-term debt is held to maturity. See Note 11, Debt,
of the Notes to Consolidated Financial Statements in "Part II, Item 8.
Financial Statements and Supplementary Data" of this Form 10-K. Amounts
reported are gross amounts and do not include unamortized debt discounts of
(b) Amounts represent estimated future interest payments as of
assuming our long-term debt is held to maturity. All interest rates are
fixed.
(c) We enter into operating leases for real estate and equipment in the normal
course of business. Some lease agreements provide us with the option to renew
the lease or purchase the leased property. In calculating our future
operating lease obligations, we include the obligations associated with the
non-cancellable period of the lease along with all the additional obligations
covered by an option to extend the lease, if we are reasonably certain to exercise that option. The exercising of lease renewal options is based on
whether future economic benefit is expected to be derived from the lease
renewal.
(d) Included among our raw materials purchase obligations are contracts to
purchase approximately
most of these agreements are set quarterly, semiannually, or annually based
on regional market prices, and the estimate is based on contract terms or
first quarter 2020 pricing. Except for deposits required pursuant to wood
supply contracts, these obligations are not recorded in our consolidated
financial statements until contract payment terms take effect. Our log,
fiber, and wood chip obligations are subject to change based on, among other
things, the effect of governmental laws and regulations, disruptions to our
manufacturing operations, and log and fiber availability. 25
--------------------------------------------------------------------------------
(e) We enter into utility contracts for the purchase of electricity and natural
gas. We also purchase these services under utility tariffs. The contractual
and tariff arrangements include multiple-year commitments and minimum annual
purchase requirements. Our payment obligations were based upon prices in
effect on
(f) Long-term deferred income taxes of
benefits of
this table, because the timing of their future cash outflows are uncertain.
(g) Amounts primarily consist of pension and postretirement obligations. We have
minimum qualified pension contributions of approximately
2020. See Note 13, Employee Benefit Plans and Other Postretirement Benefits,
of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Form 10-K, for additional information.
(h) Amounts primarily consist of workers compensation, environmental, and asset
retirement obligations.
Off-Balance-Sheet Arrangements
The Company does not have any off-balance sheet arrangements as of
Inflation and Other General Cost Increases
We are subject to both contractual, inflation, and other general cost increases. If we are unable to offset these cost increases by price increases, growth, and/or cost reductions in our operations, these inflation and other general cost increases could have a material adverse effect on our operating cash flows, profitability, and liquidity. In 2019, our total company costs including cost of sales (COS) and selling, general, and administrative expenses (SG&A) was$5.9 billion , and excluding non-cash costs (depreciation, depletion and amortization, pension and postretirement expense, and share-based compensation expense) was$5.4 billion . A 1% increase in COS and SG&A costs would increase costs by$59 million and cash costs by$54 million .
Certain items of product input costs have historically been subject to more cost volatility including fiber, purchased energy, and chemicals.
Energy
In 2019, our mills, including both packaging and paper mills, consumed about 97 million MMBTU's of fuel, including internally generated and externally purchased, to produce both steam and electricity. The following table for 2019 provides the total MMBTU's purchased externally by fuel type each quarter and the average cost per MMBTU by fuel type for the year. Our mills represent about 90% of our total purchased fuel costs. The cost per MMBTU includes the cost of the fuel plus our transportation and delivery costs. 2019 Fuel Purchased (millions of MMBTU's) 2019 Avg. First Second Third Fourth Full Cost / Fuel Type Quarter Quarter Quarter Quarter Year MMBTU Natural gas 7.53 6.56 5.77 6.80 26.66$ 3.35 Purchased bark 1.92 1.89 1.82 2.05 7.68 2.34 Other purchased fuels 0.23 0.19 0.17 0.19 0.78 5.19 Total mills 9.68 8.64 7.76 9.04 35.12$ 3.17 In addition, the mills purchased 23.02 million CkWh (hundred kilowatt-hours) of electricity in 2019. The purchases by quarter and the average cost per CkWh were as follows: 2019 Purchased Electricity (millions of CkWh) 2019 Avg. First Second Third Fourth Full Cost / Quarter Quarter Quarter Quarter Year CkWh Purchased electricity 5.67 5.71
5.96 5.68 23.02$ 5.29 26
--------------------------------------------------------------------------------
Environmental Matters
Environmental compliance requirements are a significant factor affecting our business. We employ processes in the manufacture of containerboard, paper, and pulp, which result in various discharges, emissions and waste disposal. These processes are subject to numerous federal, state, local and foreign environmental laws and regulations. We operate and expect to continue to operate, under environmental permits and similar authorizations from various governmental authorities that regulate such discharges, emissions, and waste disposal. The most significant of these laws affecting the Company are: • Resource Conservation and Recovery Act (RCRA); • Clean Water Act (CWA); • Clean Air Act (CAA); • The Emergency Planning and Community Right-to-Know-Act (EPCRA); • Toxic Substance Control Act (TSCA); and • Safe Drinking Water Act (SDWA). We believe that we are currently in material compliance with these and all applicable environmental rules and regulations. Because environmental regulations are constantly evolving, the Company has incurred, and will continue to incur, costs to maintain compliance with these and other environmental laws. The Company works diligently to anticipate and budget for the impact of applicable environmental regulations, and does not currently expect that future environmental compliance obligations will materially affect its business or financial condition. For the years endedDecember 31, 2019 , 2018, and 2017, we spent$41 million ,$40 million , and$39 million , respectively, to comply with the requirements of these and other environmental laws. Additionally, we had$9 million of environmental capital expenditures in 2019,$7 million in 2018, and$9 million in 2017. InJanuary 2013 , theU.S. Environmental Protection Agency (the "EPA ") established a three-year deadline for compliance with the Boiler MACT regulations, establishing air emissions standards and certain other requirements for industrial boilers. PCA's compliance actions involved modifying or replacing certain boilers, and all PCA mills are in full compliance with Boiler MACT requirements. OnJuly 29, 2016 , theU.S. Court of Appeals for the District of Columbia Circuit issued a ruling on the consolidated cases challenging Boiler MACT. The court vacated key portions of the rule, including emission limits for certain subcategories of solid fuel boilers, and remanded issues to theEPA for further rulemaking. At this time, we cannot predict with certainty how this decision will impact our existing Boiler MACT compliance efforts or whether we will incur additional costs to comply with any revised standards. As is the case with any industrial operation, PCA has, in the past, incurred costs associated with the remediation of soil or groundwater contamination, as required by the federal Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the federal "Superfund" law, and analogous state laws. Cleanup requirements arise with respect to properties the Company currently owns or operates, former facilities and off-site facilities where the Company has disposed of hazardous substances. As part of the sale to PCA of the containerboard and corrugated products business ofPactiv Corporation inApril 1999 , Pactiv agreed to retain all liability for all former facilities and all sites associated with pre-closing off-site waste disposal. Pactiv also retained environmentally impaired real property inFiler City, Michigan unrelated to current mill operations. In addition, OfficeMax (now an indirect, wholly owned subsidiary of Office Depot) retains responsibility for certain environmental liabilities related to some of the businesses, facilities, and assets we acquired fromBoise . Generally, this responsibility relates to hazardous substance releases and other environmental incidents that arose before 2004. Some of these liabilities could be significant; however, Office Depot may not have sufficient funds to satisfy its indemnification obligations, and in some cases, we may not be entitled to such indemnification. Because liability for remediation costs under environmental laws is strict, meaning that liability is imposed without fault, joint and several, meaning that liability is imposed on each party without regard to contribution, and retroactive, PCA could receive notifications of cleanup liability in the future and this liability could be material. From 2006 through 2019, there were no significant environmental remediation costs at PCA's mills and corrugated plants. As ofDecember 31, 2019 , we maintained an environmental reserve of$24.6 million relating to on-site landfills and surface impoundments as well as ongoing and anticipated remedial projects. The Company believes that it is not reasonably possible that future environmental expenses above the$24.6 million accrued atDecember 31, 2019 , will have a material impact on its financial condition, results of operations, and cash flows. 27 -------------------------------------------------------------------------------- While legislation regarding the regulation of greenhouse gas emissions has been proposed at the federal level, it is uncertain whether such legislation will be passed and, if so, what the breadth and scope of such legislation will be. The result of the regulation of greenhouse gas emissions could be an increase in our future environmental compliance costs, through caps, taxes or additional capital expenditures to modify facilities, which may be material. However, climate change legislation and the resulting future energy policy could also provide us with opportunities if the use of renewable energy is encouraged. We currently self-generate a significant portion of our power requirements at our mills using bark, black liquor and biomass as fuel, which are derived from renewable resources. While we believe we are well-positioned to take advantage of any renewable energy incentives, it is uncertain what the ultimate costs and opportunities of any climate change legislation will be and how our business and industry will be affected.
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, goodwill and intangible assets, pensions and other postretirement benefits, environmental liabilities, income taxes, and long-lived asset impairment, 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. Critical accounting estimates are those that are most important to the portrayal of our financial condition and results. These estimates require management's most difficult, subjective, or complex judgments. We review the development, selection, and disclosure of our critical accounting estimates with the Audit Committee of our Board of Directors. The Company believes that of its significant accounting policies, the following involve a higher degree of judgment and/or complexity:
Pensions
The Company accounts for defined benefit pension plans in accordance with Accounting Standards Codification (ASC) 715, Compensation - Retirement Benefits. The calculation of pension expense and pension liabilities requires decisions about a number of key assumptions that can significantly affect expense and liability amounts, including discount rates, expected return on plan assets, expected rate of compensation increases, longevity and service lives of participants, expected contributions, and other factors. The pension assumptions used to measure pension expense and liabilities are discussed in Note 13, Employee Benefit Plans and Other Postretirement Benefits. We recognize the funded status of our pension plans on our Consolidated Balance Sheet and recognize the actuarial and experience gains and losses and the prior service costs and credits as a component of "Accumulated Other Comprehensive Loss" in our Consolidated Statement of Changes in Stockholders' Equity. Actual results that differ from assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense in future periods. AtDecember 31, 2019 , we had approximately$158.9 million of actuarial losses and prior service costs, net of tax, recorded in "Accumulated other comprehensive loss" on our Consolidated Balance Sheet. Accumulated losses in excess of 10% of the greater of the projected benefit obligation or the market-related value of assets will be recognized on a straight-line basis over the average remaining service period of active employees in PCA plans (which is between seven and ten years) and over the average remaining lifetime of inactive participants ofBoise plans (which is between 24 and 27 years), to the extent that losses are not offset by gains in subsequent years. While we believe that the assumptions used to measure our pension obligations are reasonable, differences in actual experience or changes in assumptions may materially affect our pension obligations and future expense. 28 -------------------------------------------------------------------------------- We believe that the accounting estimate related to pensions is a critical accounting estimate because it is highly susceptible to change from period to period. As discussed above, the future effects of pension plans on our financial position and results of operations will depend on economic conditions, employee demographics, mortality rates, retirement rates, investment performance, and funding decisions, among other factors. The following table presents selected assumptions used and expected to be used in the measurement of pension expense in the following periods (dollars in millions): Year Ending December 31, Year Ended December 31, 2020 2019 2018 Pension expense $ 21.9$ 32.7 $ 27.0 Assumptions Discount rate 3.25 % 4.31 % 3.66 % Expected rate of return on plan assets 5.29 % 6.06 % 6.06 % A change of 0.25% in either direction to the discount rate or the expected rate of return on plan assets would have had the following effect on 2019 and 2020 pension expense (dollars in millions):
Increase (Decrease) in Pension Expense(a)
Base Expense 0.25% Increase 0.25% Decrease 2019 Discount rate $ 32.7 $ (2.3 ) $ 2.4 Expected rate of return on plan assets 32.7 (2.2 ) 2.2
2020
Discount rate $ 21.9 $ (2.5 ) $ 2.7 Expected rate of return on plan assets 21.9 (2.7 ) 2.7
(a) The sensitivities shown above are specific to 2019 and 2020. The
sensitivities may not be additive, so the impact of changing multiple factors
simultaneously cannot be calculated by combining the individual sensitivities
shown.
For more information related to our pension benefit plans, see Note 13, Employee Benefit Plans and Other Postretirement Benefits, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Form 10-K. Goodwill Impairment
We maintain two reporting units for purposes of our goodwill impairment testing, Packaging and Paper, which are the same as our operating segments discussed in Note 20, Segment Information, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Form 10-K. We test goodwill for impairment annually in the fourth quarter or sooner if events or changes in circumstances indicate that the carrying value of the asset may exceed fair value. Under ASU 2017-04 (Topic 350), Intangibles -Goodwill and Other - Simplifying the Test for Goodwill Impairment, companies are no longer required to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment, thus eliminating Step Two of the analysis that was required under the prior guidance. Under ASU 2017-04, goodwill impairment testing is performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The Company adopted this ASU prospectively beginning with its annual goodwill impairment test in the fourth quarter of 2017. 29
-------------------------------------------------------------------------------- The update to the standard does not eliminate the optional qualitative assessment of goodwill impairment that is often used to determine if the quantitative assessment is necessary. The qualitative assessment requires the evaluation of certain events and circumstances such as macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, as well as company and reporting unit specific items. If, after assessing these qualitative factors, the Company determines that it is more likely than not that the carrying value of the reporting unit is less than its fair value, then no further testing is required. Otherwise, the Company would perform a quantitative analysis. The quantitative analysis requires companies to compare the fair value of the reporting units to which goodwill was assigned to their respective carrying values. In calculating fair value, we use the income approach as our primary indicator of fair value. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. These estimates are based on a number of factors including industry experience, business expectations and the economic environment. If the fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is potentially impaired, and the carrying value of goodwill is then reduced to the implied value, or to zero if the fair value of the assets exceeds the fair value of the reporting unit, through an impairment charge. During the annual goodwill impairment test performed in the fourth quarter of 2019, we assessed qualitative factors to determine whether it was more likely than not that the fair value of each reporting unit was less than its carrying value. Based on the results of the qualitative impairment test, we determined that it was more likely than not that the carrying value was less than the fair value of the Packaging and Paper reporting units. If management's estimates of future operating results materially change or if there are changes to other assumptions, the estimated fair value of our goodwill could change significantly. Such change could result in impairment charges in future periods, which could have a significant noncash impact on our operating results and financial condition. We cannot predict the occurrence of future events that might adversely affect the reported value of our goodwill. As additional information becomes known, we may change our estimates.
Long-Lived Asset Impairment
An impairment of a long-lived asset exists when the carrying value of an asset is not recoverable through future undiscounted cash flows from operations and when the carrying value of the asset exceeds its fair value. Long-lived asset impairment is a critical accounting estimate, as it is susceptible to change from period to period. We review the carrying value of long-lived assets, including intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. For purposes of testing for impairment, we group our long-lived assets at the lowest level for which identifiable cash flows are largely independent of the cash flows from other assets and liabilities. Our asset groupings vary based on the related business in which the long-lived asset is employed and the interrelationship between those long-lived assets in producing net cash flows. Asset groupings could change in the future if changes in the operations of the business or business environment affect the way particular long-lived assets are employed or the interrelationships between assets. To estimate whether the carrying value of an asset or asset group is impaired, we estimate the undiscounted cash flows that could be generated under a range of possible outcomes. To measure future cash flows, we are required to make assumptions about future production volumes, future product pricing, and future expenses to be incurred. In addition, estimates of future cash flows may change based on the availability of fiber, environmental requirements, capital spending, and other strategic management decisions. We estimate the fair value of an asset or asset group based on quoted market prices for similar assets and liabilities or inputs that are observable either directly (Level 1 measurement) or indirectly (the amount for which the asset(s) could be bought or sold in a current transaction with a third party) when available (Level 2 measurement). When quoted market prices are not available, we use a discounted cash flow model to estimate fair value (Level 3 measurement). We periodically assess the estimated useful lives of our assets. Changes in circumstances, such as changes to our operational or capital strategy, changes in regulation, or technological advances, may result in the actual useful lives differing from our estimates. Revisions to the estimated useful lives of assets requires judgment and constitutes a change in accounting estimate, which is accounted for prospectively by adjusting or accelerating depreciation and amortization rates. In 2019 and 2018, we recognized incremental depreciation expense of$0.3 million and$14.5 million , respectively, primarily related to the second quarter 2018 discontinuation of uncoated free sheet and coated one-side white paper grades at theWallula, Washington mill associated with the conversion of the No. 3 paper machine to produce virgin kraft linerboard. Additionally, in conjunction with the conversion of the No. 3 paper machine, we recognized an impairment loss of$3.1 million associated with the fiber farm asset group during 2018. 30
--------------------------------------------------------------------------------
New and Recently Adopted Accounting Standards
For a listing of our new and recently adopted accounting standards, see Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Form 10-K.
Reconciliations of Non-GAAP Financial Measures to Reported Amounts
Net income excluding special items, EBITDA, and EBITDA excluding special items are non-GAAP financial measures. Management excludes special items, as it believes that these items are not necessarily reflective of the ongoing operations of our business. These measures are presented because they provide a means to evaluate the performance of our segments and our Company on an ongoing basis using the same measures that are used by our management, because these measures assist in providing a meaningful comparison between periods and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such. Reconciliations of the non-GAAP measures to the most comparable measure reported in accordance with GAAP for the years endedDecember 31, 2019 and 2018 follow (dollars in millions): Year Ended December 31, 2019 2018 Income Income Net Income Income Net before Taxes Taxes Income before Taxes Taxes Income As reported in accordance with GAAP$ 917.0 $ (220.6 ) $ 696.4 $ 970.5 $ (232.5 ) $ 738.0 Special items: Wallula mill restructuring (a) 1.0 (0.3 ) 0.7 30.0 (7.5 ) 22.5 Facilities closure and other costs (b) 0.3 (0.1 ) 0.2 1.8 (0.5 ) 1.3 Debt refinancing (c) 38.7 (12.8 ) 25.9 - - -DeRidder fixed asset disposals (d) 3.0 (0.7 ) 2.3 - - - Insurance deductible for property damage (e) - - - 0.5 (0.1 ) 0.4 Acquisition and integration related costs (f) - - - 0.2 - 0.2 Tax reform (g) - - - - (2.0 ) (2.0 ) Total special items 43.0 (13.9 ) 29.1 32.5 (10.1 ) 22.4 Excluding special items$ 960.0 $ (234.5 ) $ 725.5 $ 1,003.0 $ (242.6 ) $ 760.4
(a) Includes charges related to the second quarter 2018 discontinuation of
uncoated free sheet and coated one-side paper grades at the
produce virgin kraft linerboard.
(b) For 2019, includes charges consisting of closure costs related to corrugated
products facilities, partially offset by income from the sale of a building
related to a closed corrugated products facility. For 2018, includes charges
consisting of closure costs related to corrugated products facilities and a
corporate administration facility.
(c) Includes charges related to the Company's
which included redemption premiums and the write-offs of remaining balances
of treasury locks and unamortized debt issuance costs. Also includes income
tax benefit from the stranded tax effects in Accumulated Other Comprehensive
Income related to the write-offs of the treasury locks in connection with the
debt refinancing.
(d) Includes charges for the disposal of fixed assets related to the
containerboard mill conversion at our
(e) Includes costs for the property damage insurance deductible for a
weather-related incident at one of the corrugated products facilities.
(f) Includes charges for acquisition and integration costs related to recent
acquisitions.
(g) Includes
deferred tax liability for the reduction in the
statutory income tax rate related to our 2017 measurement period adjustments
in accordance with
Tax Accounting Implications of the Tax Cuts and Jobs Act. 31
--------------------------------------------------------------------------------
The following table reconciles net income to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):
Year Ended December 31, 2019 2018 Net income$ 696.4 $ 738.0 Non-operating pension expense 7.9 2.1 Interest expense, net 128.8 95.1 Provision for income taxes (a) 220.6 232.5 Depreciation, amortization, and depletion 387.5 410.9 EBITDA$ 1,441.2 $ 1,478.6 Special items: Wallula mill restructuring$ 0.7 $ 16.3 Facilities closure and other costs 0.3 1.6 DeRidder mill fixed asset disposals 3.0 - Acquisition and integration related costs - 0.2 Insurance deductible for property damage - 0.5 EBITDA excluding special items$ 1,445.2 $ 1,497.2
(a) The
was 21%. Income tax expense for 2019 included a tax benefit of
from the stranded tax effects in Accumulated Other Comprehensive Income
related to the write-offs of the treasury locks in connection with the
Company's
included a tax benefit of
2017 of the Tax Cuts and Jobs Act (H.R.1). See Note 8, Income Taxes, for more
information.
The following table reconciles segment income (loss) to EBITDA and EBITDA excluding special items (dollars in millions):
Year Ended December 31, 2019 2018 Packaging Segment income$ 963.4 $ 1,045.4 Depreciation, amortization, and depletion 342.8 342.0 EBITDA 1,306.2 1,387.4 Facilities closure and other costs 0.3 1.6 Wallula mill restructuring 0.5 11.3 DeRidder mill fixed asset disposals 3.0 - Acquisition and integration related costs - 0.2 Insurance deductible for property damage - 0.5 EBITDA excluding special items$ 1,310.0 $ 1,401.0
Paper
Segment income$ 175.4 $ 97.7 Depreciation, amortization, and depletion 37.7 62.0 EBITDA 213.1 159.7 Wallula mill restructuring 0.2 5.0 EBITDA excluding special items$ 213.3 $ 164.7 Corporate and Other Segment loss$ (85.1 ) $ (75.4 ) Depreciation, amortization, and depletion 7.0 6.9 EBITDA (78.1 ) (68.5 ) EBITDA excluding special items$ (78.1 ) $ (68.5 ) EBITDA$ 1,441.2 $ 1,478.6 EBITDA excluding special items$ 1,445.2 $ 1,497.2 32
--------------------------------------------------------------------------------
© Edgar Online, source