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EX-32 - EX-32 - PACKAGING CORP OF AMERICApkg-ex32_303.htm
EX-31.2 - EX-31.2 - PACKAGING CORP OF AMERICApkg-ex312_304.htm
EX-31.1 - EX-31.1 - PACKAGING CORP OF AMERICApkg-ex311_305.htm
EX-10.3 - EX-10.3 - PACKAGING CORP OF AMERICApkg-ex103_302.htm
EX-10.2 - EX-10.2 - PACKAGING CORP OF AMERICApkg-ex102_301.htm
EX-10.1 - EX-10.1 - PACKAGING CORP OF AMERICApkg-ex101_300.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2017

or

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

For the transition period from          to          

Commission file number 1-15399

 

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

36-4277050

(State or Other Jurisdiction of

Incorporation or Organization)

 

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

 

 

 

1955 West Field Court, Lake Forest, Illinois

 

60045

(Address of Prinicpal Executive Offices)

 

(Zip Code)

 

Registrant's telephone number, including area code

(847) 482-3000

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

Emerging growth company

 

 

 

 

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

 

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

As of July 28, 2017 the Registrant had outstanding 94,351,468 shares of common stock, par value $0.01 per share.

 

 

 

 

 


 

Table of Contents

 

 

 

PART I

 

 

 

 

 

Item 1.

 

Financial Statements

1

 

 

 

 

Item 2.

 

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

15

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

 

Item 4.

 

Controls and Procedures

25

 

 

 

 

 

 

PART II

 

 

 

 

 

Item 1.

 

Legal Proceedings

27

 

 

 

 

Item 1A.

 

Risk Factors

27

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

27

 

 

 

 

Item 4.

 

Mine Safety Disclosures

27

 

 

 

 

Item 5.

 

Other Information

27

 

 

 

 

Item 6.

 

Exhibits

28

 

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

 

 

 

i


 

PART I

FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

Packaging Corporation of America

Consolidated Statements of Income and Comprehensive Income

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Statements of Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,584.0

 

 

$

1,417.4

 

 

$

3,120.5

 

 

$

2,818.4

 

Cost of sales

 

 

(1,219.4

)

 

 

(1,097.3

)

 

 

(2,417.3

)

 

 

(2,199.3

)

Gross profit

 

 

364.6

 

 

 

320.1

 

 

 

703.2

 

 

 

619.1

 

Selling, general, and administrative expenses

 

 

(130.2

)

 

 

(114.8

)

 

 

(258.7

)

 

 

(229.1

)

Other expense, net

 

 

(0.6

)

 

 

(5.1

)

 

 

(7.6

)

 

 

(9.0

)

Income from operations

 

 

233.8

 

 

 

200.2

 

 

 

436.9

 

 

 

381.0

 

Interest expense, net

 

 

(25.2

)

 

 

(22.5

)

 

 

(49.2

)

 

 

(44.1

)

Income before taxes

 

 

208.6

 

 

 

177.7

 

 

 

387.7

 

 

 

336.9

 

Provision for income taxes

 

 

(65.4

)

 

 

(61.8

)

 

 

(127.1

)

 

 

(117.3

)

Net income

 

$

143.2

 

 

$

115.9

 

 

$

260.6

 

 

$

219.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.52

 

 

$

1.23

 

 

$

2.76

 

 

$

2.32

 

Diluted

 

$

1.52

 

 

$

1.23

 

 

$

2.76

 

 

$

2.32

 

Dividends declared per common share

 

$

0.63

 

 

$

0.55

 

 

$

1.26

 

 

$

1.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statements of Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

143.2

 

 

$

115.9

 

 

$

260.6

 

 

$

219.6

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(0.1

)

 

 

 

 

 

(0.3

)

 

 

 

Reclassification adjustments to cash flow hedges included in net income, net of tax of $0.6 million, $0.6 million, $1.2 million, and $1.1 million

 

 

0.8

 

 

 

0.8

 

 

 

1.6

 

 

 

1.7

 

Amortization of pension and postretirement plans actuarial loss and prior service cost, net of tax of $1.2 million, $1.0 million, $2.3 million, and $2.0 million

 

 

2.1

 

 

 

1.6

 

 

 

4.3

 

 

 

3.2

 

Changes in unfunded employee benefit obligation net of tax of $0.0 million, $2.0 million, $0.0 million and $2.0 million

 

 

 

 

 

3.1

 

 

 

 

 

 

3.1

 

Other comprehensive income

 

 

2.8

 

 

 

5.5

 

 

 

5.6

 

 

 

8.0

 

Comprehensive income

 

$

146.0

 

 

$

121.4

 

 

$

266.2

 

 

$

227.6

 

 

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

 

1


 

Packaging Corporation of America

Consolidated Balance Sheets

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

321.0

 

 

$

239.3

 

Accounts receivable, net of allowance for doubtful accounts and customer deductions of $10.2 million and $10.1 million as of June 30, 2017, and December 31, 2016, respectively

 

 

755.2

 

 

 

689.2

 

Inventories

 

 

734.4

 

 

 

723.6

 

Prepaid expenses and other current assets

 

 

52.8

 

 

 

30.3

 

Federal and state income taxes receivable

 

 

 

 

 

13.9

 

Total current assets

 

 

1,863.4

 

 

 

1,696.3

 

Property, plant, and equipment, net

 

 

2,872.5

 

 

 

2,895.7

 

Goodwill

 

 

731.1

 

 

 

737.9

 

Intangible assets, net

 

 

356.2

 

 

 

367.1

 

Other long-term assets

 

 

80.0

 

 

 

80.0

 

Total assets

 

$

5,903.2

 

 

$

5,777.0

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

156.5

 

 

$

25.8

 

Capital lease obligations

 

 

1.3

 

 

 

1.3

 

Accounts payable

 

 

349.2

 

 

 

323.8

 

Dividends payable

 

 

60.1

 

 

 

59.9

 

Federal and state income taxes payable

 

 

2.5

 

 

 

 

Accrued liabilities

 

 

177.5

 

 

 

201.2

 

Accrued interest

 

 

13.1

 

 

 

13.4

 

Total current liabilities

 

 

760.2

 

 

 

625.4

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term debt

 

 

2,457.3

 

 

 

2,620.0

 

Capital lease obligations

 

 

19.7

 

 

 

20.3

 

Deferred income taxes

 

 

342.7

 

 

 

334.7

 

Compensation and benefits

 

 

356.3

 

 

 

357.2

 

Other long-term liabilities

 

 

60.4

 

 

 

59.6

 

Total long-term liabilities

 

 

3,236.4

 

 

 

3,391.8

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.01 per share, 300.0 million shares authorized, 94.4 million and 94.2 million shares issued as of June 30, 2017, and December 31, 2016, respectively

 

 

0.9

 

 

 

0.9

 

Additional paid in capital

 

 

460.9

 

 

 

451.4

 

Retained earnings

 

 

1,578.8

 

 

 

1,447.1

 

Accumulated other comprehensive loss

 

 

(134.0

)

 

 

(139.6

)

Total stockholders' equity

 

 

1,906.6

 

 

 

1,759.8

 

Total liabilities and stockholders' equity

 

$

5,903.2

 

 

$

5,777.0

 

 

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

 

2


 

Packaging Corporation of America

Consolidated Statements of Cash Flows

(unaudited, dollars in millions)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

260.6

 

 

$

219.6

 

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

 

 

 

 

 

 

 

 

Depreciation, depletion, and amortization of intangibles

 

 

186.2

 

 

 

176.3

 

Amortization of deferred financing costs

 

 

4.0

 

 

 

3.8

 

Share-based compensation expense

 

 

10.2

 

 

 

10.3

 

Deferred income tax provision

 

 

3.9

 

 

 

1.3

 

Pension and post retirement benefits expense, net of contributions

 

 

4.9

 

 

 

8.7

 

Other, net

 

 

0.7

 

 

 

4.2

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

(Increase) decrease in assets —

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(66.1

)

 

 

(26.9

)

Inventories

 

 

(10.8

)

 

 

5.5

 

Prepaid expenses and other current assets

 

 

(20.0

)

 

 

(27.5

)

Increase (decrease) in liabilities —

 

 

 

 

 

 

 

 

Accounts payable

 

 

18.8

 

 

 

(4.0

)

Accrued liabilities

 

 

(24.1

)

 

 

(23.3

)

Federal and state income taxes payable / receivable

 

 

17.3

 

 

 

28.2

 

Net cash provided by operating activities

 

 

385.6

 

 

 

376.2

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Additions to property, plant, and equipment

 

 

(139.4

)

 

 

(121.8

)

Additions to other long term assets

 

 

(5.5

)

 

 

(6.2

)

Proceeds from disposals

 

 

2.9

 

 

 

0.3

 

Other, net

 

 

1.1

 

 

 

 

Net cash used for investing activities

 

 

(140.9

)

 

 

(127.7

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Repayments of debt and capital lease obligations

 

 

(33.7

)

 

 

(3.8

)

Common stock dividends paid

 

 

(118.8

)

 

 

(104.9

)

Repurchases of common stock

 

 

 

 

 

(100.3

)

Shares withheld to cover employee restricted stock taxes

 

 

(10.5

)

 

 

(10.1

)

Net cash used for financing activities

 

 

(163.0

)

 

 

(219.1

)

Net increase in cash and cash equivalents

 

 

81.7

 

 

 

29.4

 

Cash and cash equivalents, beginning of period

 

 

239.3

 

 

 

184.2

 

Cash and cash equivalents, end of period

 

$

321.0

 

 

$

213.6

 

 

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

 

3


 

Condensed Notes to Unaudited Quarterly Consolidated Financial Statements

1.

Nature of Operations and Basis of Presentation

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

We report our business in three reportable segments: Packaging, Paper, and Corporate and Other. Our Packaging segment produces a wide variety of corrugated packaging products. The Paper segment manufactures and sells a range of white papers, including communication-based papers and pressure sensitive papers. Corporate and Other includes support staff services and related assets and liabilities, transportation assets, and activity related to other ancillary support operations. For more information about our segments, see Note 16 Segment Information.

In these consolidated financial statements, certain amounts in prior periods' consolidated financial statements have been reclassified to conform with the current period presentation.

The consolidated financial statements of PCA as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016 are unaudited but include all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of such financial statements. The preparation of the consolidated financial statements involves the use of estimates and accruals. Actual results may vary from those estimates. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete audited financial statements. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016.

The consolidated financial statements include the accounts of PCA and its majority-owned subsidiaries after elimination of intercompany balances and transactions.

2.

Acquisitions

TimBar Acquisition

On August 29, 2016, PCA acquired substantially all of the assets of TimBar Corporation (“TimBar”), a large independent corrugated products producer with six corrugated products production facilities, for a purchase price of $385.6 million, net of cash acquired. We financed the acquisition with a new $385.0 million five-year term loan facility. TimBar provides solutions to customers in the higher margin retail, industrial packaging and display and fulfillment markets with a focus on a multi-color graphics and technical innovation. TimBar’s financial results are included in the Packaging segment from the date of acquisition.

The Company accounted for the TimBar acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations. The total purchase price has been preliminarily allocated to tangible and intangible assets acquired and liabilities assumed based on respective fair values, as follows (dollars in millions):

 

 

 

12/31/16 Allocation

 

 

Adjustments

 

 

Revised Allocation

 

Goodwill

 

$

157.3

 

 

$

(1.1

)

 

$

156.2

 

Other intangible assets

 

 

94.4

 

 

 

-

 

 

94.4

 

Property, plant and equipment

 

 

95.3

 

 

 

-

 

 

95.3

 

Other net assets

 

 

38.6

 

 

 

-

 

 

38.6

 

Net assets acquired

 

$

385.6

 

 

$

(1.1

)

 

$

384.5

 

 

During the first quarter of 2017, we received $1.1 million from the seller related to a working capital adjustment. We recorded the adjustment as a decrease to goodwill which lowered the purchase price to $384.5 million. The purchase price allocation presented above is preliminary and is subject to the finalization of working capital adjustments. Our current estimates and assumptions may change as more information becomes available. We expect to finalize the allocations within the 12-month period following the acquisition date.

Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. Among the factors that contributed to the recognition of goodwill were TimBar's commitment to continuous improvement and innovation in their operations, as well as the expected increases in PCA's containerboard integration levels. Goodwill is deductible for tax purposes.

4


 

Other intangible assets, primarily customer relationships, were assigned an estimated weighted average useful life of 14.2 years.

Property, plant and equipment were assigned estimated useful lives ranging from two to 24 years.

Columbus Container Acquisition

On November 30, 2016, PCA acquired substantially all of the assets of Columbus Container, Inc., an independent corrugated products producer with one production facility and five warehousing facilities, for a purchase price of $99.7 million, net of cash acquired. We paid the purchase price with available cash on hand. Columbus Container, Inc. is a full-service provider of corrugated packaging products utilizing state-of-the-art technologies and design centers to provide customers a solution for nearly any packaging need. Columbus Container’s financial results are included in the Packaging segment from the date of acquisition.

The Company accounted for the Columbus Container acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations. The total purchase price has been preliminarily allocated to tangible and intangible assets acquired and liabilities assumed based on respective fair values, as follows (dollars in millions):

 

 

 

12/31/16 Allocation

 

 

Adjustments

 

 

Revised Allocation

 

Goodwill

 

$

36.6

 

 

$

(5.7

)

 

$

30.9

 

Other intangible assets

 

 

26.3

 

 

 

6.0

 

 

 

32.3

 

Property, plant and equipment

 

 

27.2

 

 

 

-

 

 

 

27.2

 

Other net assets

 

 

9.6

 

 

 

(0.3

)

 

 

9.3

 

Net assets acquired

 

$

99.7

 

 

$

 

 

$

99.7

 

        The purchase price allocation presented above is preliminary and is subject to the finalization of various valuations and assessments, primarily related to property, plant, and equipment and intangible assets. Our current estimates and assumptions may change as more information becomes available. We expect to finalize the valuations within the 12-month period following the acquisition date.

Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. Among the factors that contributed to the recognition of goodwill were Columbus Container's commitment to continuous improvement and innovation in their operations, as well as the expected increases in PCA's containerboard integration levels. Goodwill is deductible for tax purposes.

Other intangible assets, primarily customer relationships, were assigned an estimated weighted average useful life of 14.1 years.

Property, plant and equipment were assigned estimated useful lives ranging from one to 32 years.

3.

Earnings Per Share

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

Numerator:

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

143.2

 

 

$

115.9

 

 

$

260.6

 

 

$

219.6

 

Less: distributed and undistributed earnings allocated to

participating securities

 

 

(1.2

)

 

 

(1.2

)

 

 

(2.3

)

 

 

(2.3

)

Net income attributable to common shareholders

 

$

142.0

 

 

$

114.7

 

 

$

258.3

 

 

$

217.3

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

93.4

 

 

 

93.2

 

 

 

93.4

 

 

 

93.6

 

Effect of dilutive securities

 

 

0.2

 

 

 

0.1

 

 

 

0.2

 

 

 

0.1

 

Weighted average diluted common shares outstanding

 

 

93.6

 

 

 

93.3

 

 

 

93.6

 

 

 

93.7

 

Basic income per common share

 

$

1.52

 

 

$

1.23

 

 

$

2.76

 

 

$

2.32

 

Diluted income per common share

 

$

1.52

 

 

$

1.23

 

 

$

2.76

 

 

$

2.32

 

 

5


 

4.

Other Income (Expense), Net

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

DeRidder mill incident (a)

 

$

2.5

 

 

$

 

 

$

(2.5

)

 

$

 

Integration-related, facilities closure and other costs (b)(c)

 

 

(0.5

)

 

 

(2.6

)

 

 

(1.3

)

 

 

(4.5

)

Hexacomb working capital adjustment (d)

 

 

 

 

 

 

 

 

2.3

 

 

 

 

Asset disposals and write-offs

 

 

(2.4

)

 

 

(1.1

)

 

 

(4.7

)

 

 

(2.9

)

Other

 

 

(0.2

)

 

 

(1.4

)

 

 

(1.4

)

 

 

(1.6

)

Total

 

$

(0.6

)

 

$

(5.1

)

 

$

(7.6

)

 

$

(9.0

)

 

(a)

The three and six months ended June 30, 2017 include $2.5 million of net recoveries and $2.5 million of costs, respectively, for the property damage and business interruption insurance recoveries and corresponding costs related to the February 2017 explosion at our DeRidder, LA mill.

(b)

The three and six months ended June 30, 2017 include $0.5 million and $1.3 million of charges consisting of closure costs related to corrugated products facilities, integration costs related to the recent acquisitions, and costs related to a lump sum settlement payment of a multiemployer pension plan withdrawal liability for one of our corrugated products facilities.

(c)

The three and six months ended June 30, 2016 include $2.6 million and $4.5 million of charges consisting of closure costs related to corrugated products facilities and a paper products facility, acquisition-related costs for the TimBar Corporation acquisition, and costs related to our withdrawal from a multiemployer pension plan for one of our corrugated products facilities.

(d)

The six months ended June 30, 2017 include $2.3 million of income related to a working capital adjustment from the April 2015 sale of our Hexacomb corrugated manufacturing operations in Europe and Mexico.

5.

Income Taxes

For the three months ended June 30, 2017 and 2016 we recorded $65.4 million and $61.8 million of income tax expense and had an effective tax rate of 31.4% and 34.8%, respectively. The decrease in our effective tax rate for the three months ended June 30, 2017 compared with the same period in 2016, was primarily due to the adoption of ASU 2016-09 (Topic 718): Improvements to Employee Share-Based Payment Accounting, which requires all excess tax benefits and deficiencies from employee share-based payment awards to be recognized in the income statement as opposed to additional paid in capital.

For the six months ended June 30, 2017 and 2016, we recorded $127.1 million and $117.3 million of income tax expense and had an effective tax rate of 32.8% and 34.8%, respectively. The decrease in our effective tax rate for the six months ended June 30, 2017 compared with the same period in 2016, was primarily due to the adoption of ASU 2016-09.

Our effective tax rate may differ from the federal statutory income tax rate of 35.0%, due primarily to the effect of employee share-based payment awards, the domestic manufacturing deduction, and state and local income taxes.

During the three and six months ended June 30, 2017 there were no significant changes to our uncertain tax positions. For more information, see Note 6, Income Taxes, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of our 2016 Annual Report on Form 10-K.

During the six months ended June 30, 2017 and 2016 cash paid for taxes, net of refunds received, was $105.7 million and $83.3 million, respectively.

6.

Inventories

We value our raw materials, work in process, and finished goods inventories using lower of cost, as determined by the average cost method, or market. Supplies and materials are valued at the first-in, first-out (FIFO) or average cost methods.

6


 

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Raw materials

 

$

257.6

 

 

$

271.9

 

Work in process

 

 

13.6

 

 

 

12.9

 

Finished goods

 

 

222.4

 

 

 

206.5

 

Supplies and materials

 

 

240.8

 

 

 

232.3

 

Inventories

 

$

734.4

 

 

$

723.6

 

 

7.

Property, Plant, and Equipment

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Land and land improvements

 

$

156.3

 

 

$

149.7

 

Buildings

 

 

725.7

 

 

 

717.1

 

Machinery and equipment

 

 

5,017.9

 

 

 

4,951.4

 

Construction in progress

 

 

152.6

 

 

 

125.4

 

Other

 

 

67.5

 

 

 

66.7

 

Property, plant and equipment, at cost

 

 

6,120.0

 

 

 

6,010.3

 

Less accumulated depreciation

 

 

(3,247.5

)

 

 

(3,114.6

)

Property, plant, and equipment, net

 

$

2,872.5

 

 

$

2,895.7

 

 

Depreciation expense for the three months ended June 30, 2017 and 2016 was $83.6 million and $79.9 million, respectively. During the six months ended June 30, 2017 and 2016, depreciation expense was $166.0 million and $160.6 million, respectively. 

At June 30, 2017 and December 31, 2016 purchases of property, plant, and equipment included in accounts payable were $19.0 million and $12.8 million, respectively.

8.

Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. At June 30, 2017 and December 31, 2016 we had $675.9 million and $682.7 million of goodwill recorded in our Packaging segment, respectively. At both June 30, 2017 and December 31, 2016 we had $55.2 million of goodwill recorded in our Paper segment.

Changes in the carrying amount of our goodwill are as follows (dollars in millions):

 

 

 

Goodwill

 

Balance at January 1, 2017

 

$

737.9

 

Acquisitions (a)(b)

 

 

(6.8

)

Balance at June 30, 2017

 

$

731.1

 

 

(a)

During the six months ended June 30, 2017, the Company recorded a $5.7 million opening balance sheet adjustment to decrease the goodwill balance for the Company’s November 2016 acquisition of Columbus Container, Inc.

 

(b)

During the quarter ended March 31, 2017, the Company received $1.1 million from the seller related to a working capital adjustment. This adjustment was recorded as a decrease to the goodwill balance for the Company's August 2016 acquisition of TimBar Corporation.

 

Intangible Assets

Intangible assets are primarily comprised of customer relationships and trademarks and trade names.

7


 

The weighted average remaining useful life, gross carrying amount, and accumulated amortization of our intangible assets were as follows (dollars in millions):

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

Weighted Average Remaining Useful Life (in Years)

 

Gross  Carrying Amount

 

 

Accumulated Amortization

 

 

Weighted Average Remaining Useful Life (in Years)

 

Gross  Carrying Amount

 

 

Accumulated Amortization

 

Customer relationships

 

12.7

 

$

429.4

 

 

$

93.9

 

 

13.1

 

$

424.5

 

 

$

79.8

 

Trademarks and trade names

 

10.5

 

 

28.8

 

 

 

10.6

 

 

10.5

 

 

27.7

 

 

 

8.1

 

Other

 

4.1

 

 

4.2

 

 

 

1.7

 

 

4.3

 

 

4.2

 

 

 

1.4

 

Total intangible assets (excluding goodwill)

 

12.5

 

$

462.4

 

 

$

106.2

 

 

12.9

 

$

456.4

 

 

$

89.3

 

 

During the six months ended June 30, 2017 and 2016, amortization expense was $16.9 million and $11.2 million, respectively.

9.

Accrued Liabilities

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Compensation and benefits

 

$

99.5

 

 

$

120.4

 

Medical insurance and workers’ compensation

 

 

29.1

 

 

 

28.8

 

Franchise, property, sales and use taxes

 

 

18.2

 

 

 

16.7

 

Customer volume discounts and rebates

 

 

18.0

 

 

 

18.9

 

Environmental liabilities and asset retirement obligations

 

 

4.5

 

 

 

6.4

 

Severance, retention, and relocation

 

 

3.2

 

 

 

3.0

 

Other

 

 

5.0

 

 

 

7.0

 

Total

 

$

177.5

 

 

$

201.2

 

 

10.

Debt

During the six months ended June 30, 2017, we made principal payments of $29.8 million and $3.3 million on our five-year term loan due August 2021 and our seven-year term loan due October 2020, respectively. For the six months ended June 30, 2017 and 2016, cash payments for interest were $48.1 million and $43.1 million, respectively.

Included in interest expense, net, are amortization of treasury lock settlements and amortization of financing costs. For both the three months ended June 30, 2017 and 2016, amortization of treasury lock settlements was $1.4 million, and for both the six months ended June 30, 2017 and 2016, amortization of treasury locks was $2.8 million. For both the three months ended June 30, 2017 and 2016, amortization of financing costs was $0.5 million, and during the six months ended June 30, 2017 and 2016, amortization of financing costs was $1.0 million and $0.9 million, respectively. 

At June 30, 2017 we had $1,647.7 million of fixed-rate senior notes and $977.6 million of variable-rate term loans outstanding. At June 30, 2017 the fair value of our fixed-rate debt was estimated to be $1,740.4 million. The difference between the book value and fair value is due to the difference between the period-end market interest rate and the stated rate of our fixed-rate debt. We estimated the fair value of our fixed-rate debt using quoted market prices (Level 2 inputs) within the fair value hierarchy, which is further defined in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our 2016 Annual Report on Form 10-K. The fair value of our variable-rate term debt approximates the carrying amount as our cost of borrowing is variable and approximates current market rates.

For more information on our long-term debt and interest rates on that debt, see Note 9, Debt, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our 2016 Annual Report on Form 10-K.

8


 

11.

Employee Benefit Plans and Other Postretirement Benefits

The components of net periodic benefit cost for our pension plans were as follows (dollars in millions):

 

 

 

Pension Plans

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Service cost

 

$

6.1

 

 

$

6.1

 

 

$

12.2

 

 

$

12.2

 

Interest cost

 

 

10.4

 

 

 

10.2

 

 

 

20.8

 

 

 

20.4

 

Expected return on plan assets

 

 

(13.5

)

 

 

(12.4

)

 

 

(27.0

)

 

 

(24.8

)

Net amortization of unrecognized amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost

 

 

1.5

 

 

 

1.4

 

 

 

3.0

 

 

 

2.8

 

Actuarial loss

 

 

1.9

 

 

 

1.4

 

 

 

3.7

 

 

 

2.8

 

Net periodic benefit cost

 

$

6.4

 

 

$

6.7

 

 

$

12.7

 

 

$

13.4

 

 

PCA makes pension plan contributions that are sufficient to fund its actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA). From time to time, PCA may make additional discretionary contributions based on the funded status of the plans, tax deductibility, income from operations, and other factors. During the three and six months ended June 30, 2017 and 2016 payments to our nonqualified pension plans were insignificant. For the three and six months ended June 30, 2017, we made contributions of $2.2 million and $5.9 million, respectively, to our qualified pension plans. We made a contribution of $3.7 million to our qualified plans during the three and six months ended June 30, 2016. We expect to contribute at least the estimated required minimum contributions to our qualified plans of approximately $8.0 million in 2017.

The components of net periodic benefit cost for our postretirement plans were as follows (dollars in millions):

 

 

 

Postretirement Plans

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Service cost

 

$

0.1

 

 

$

0.2

 

 

$

0.2

 

 

$

0.4

 

Interest cost

 

 

0.2

 

 

 

0.2

 

 

 

0.3

 

 

 

0.4

 

Net amortization of unrecognized amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost

 

 

(0.1

)

 

 

 

 

 

(0.1

)

 

 

 

Actuarial loss

 

 

 

 

 

(0.2

)

 

 

 

 

 

(0.4

)

Net periodic benefit cost

 

$

0.2

 

 

$

0.2

 

 

$

0.4

 

 

$

0.4

 

 

 

12.

Share-Based Compensation

The Company has a long-term equity incentive plan, which allows for grants of restricted stock, performance awards, stock appreciation rights, and stock options to directors, officers, and employees, as well as others who engage in services for PCA. The plan, as amended, terminates May 1, 2023 and authorizes 10.6 million shares of common stock for grant over the life of the plan. As of June 30, 2017, 1.0 million shares were available for future issuance under the plan. Forfeitures are added back to the pool of shares of common stock available to be granted at a future date.

The following table presents restricted stock and performance unit award activity for the six months ended June 30, 2017:

 

 

 

Restricted Stock

 

 

Performance Units

 

 

 

Shares

 

 

Weighted Average Grant- Date Fair Value

 

 

Shares

 

 

Weighted Average Grant- Date Fair Value

 

Outstanding at January 1, 2017

 

 

786,079

 

 

$

63.44

 

 

 

232,088

 

 

$

62.68

 

Granted

 

 

173,199

 

 

 

107.57

 

 

 

61,861

 

 

 

108.19

 

Vested

 

 

(206,707

)

 

 

51.05

 

 

 

(67,391

)