Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

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Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

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(a) The following documents are filed as a part of this report:

(1) The financial statements listed in the “Index to Financial Statements.”

(2) Financial Statement Schedule.

The following consolidated financial statement schedule of PCA for the years ended December 31, 2012, 2011 and 2010 is included in this report.

Schedule II — Packaging Corporation of America — Valuation and Qualifying Accounts.

DescriptionBalance Beginning of YearCharged to ExpensesDeductionsBalance End of Year
(Dollars in thousands)
Year ended December 31, 2012:
Deducted from assets accounts:
Allowance for doubtful accounts$1,906$1,043$(1,040)(1)$1,909
Reserve for customer deductions3,12831,045(30,729)(2)3,444
Total$5,034$32,088$(31,769)$5,353
Year ended December 31, 2011:
Deducted from assets accounts:
Allowance for doubtful accounts$2,493$143$(730)(1)$1,906
Reserve for customer deductions2,92030,009(29,801)(2)3,128
Total$5,413$30,152$(30,531)$5,034
Year ended December 31, 2010:
Deducted from assets accounts:
Allowance for doubtful accounts$3,909$(937)$(479)(1)$2,493
Reserve for customer deductions2,43927,007(26,526)(2)2,920
Total$6,348$26,070$(27,005)$5,413
(1)Consists primarily of uncollectable accounts written off, net of recoveries, during the year.
(2)Consists primarily of discounts taken by customers during the year.

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or not material, or the information called for thereby is otherwise included in the financial statements or the accompanying notes to the financial statements and therefore, have been omitted.

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(b)Exhibits
Exhibit NumberDescription
2.1Contribution Agreement, dated as of January 25, 1999, among Pactiv Corporation (formerly known as Tenneco Packaging Inc.) (“Pactiv”), PCA Holdings LLC (“PCA Holdings”) and Packaging Corporation of America (“PCA”). (Incorporated herein by reference to Exhibit 2.1 to PCA’s registration Statement on Form S-4, Registration No. 333-79511).
2.2Letter Agreement Amending the Contribution Agreement, dated as of April 12, 1999, among Pactiv, PCA Holdings and PCA. (Incorporated herein by reference to Exhibit 2.2 to PCA’s Registration Statement on Form S-4, Registration No. 333-79511).
3.1Restated Certificate of Incorporation of PCA. (Incorporated herein by reference to Exhibit 3.1 to PCA’s Registration Statement on Form S-4, Registration No. 333-79511).
3.2Certificate of Amendment to Restated Certificate of Incorporation of PCA. (Incorporated herein by reference to Exhibit 3.2 to PCA’s Registration Statement on Form S-4, Registration No. 333-109437.)
3.3Amended and Restated By-laws of PCA. (Incorporated herein by reference to Exhibit 3.1 to PCA’s Current Report on Form 8-K filed December 7, 2012, File No. 1-15399.)
4.1Form of certificate representing shares of common stock. (Incorporated herein by reference to Exhibit 4.9 to PCA’s Registration Statement on Form S-1, Registration No. 333-86963.)
4.2Indenture, dated as of July 21, 2003, between PCA and U.S. Bank National Association. (Incorporated herein by reference to Exhibit 4.2 to PCA’s Quarterly Report on Form 10-Q for the period ended June 30, 2003, File No. 1-15399.)
4.3First Supplemental Indenture, dated as of July 21, 2003, between PCA and U.S. Bank National Association. (Incorporated herein by reference to Exhibit 4.3 to PCA’s Quarterly Report on Form 10-Q for the period ended June 30, 2003, File No. 1-15399.)
4.4Form of Rule 144A Global Note. (Incorporated herein by reference to Exhibit 4.5 to PCA’s Quarterly Report on Form 10-Q for the period ended June 30, 2003, File No. 1-15399.)
4.5Officers’ Certificate, dated March 25, 2008, pursuant to Section 301 of the Indenture, dated July 21, 2003, by and between PCA and U.S. Bank National Association (Incorporated herein by reference to Exhibit 4.1 to PCA’s Current Report on Form 8-K filed March 25, 2008, File No. 1-15399.)
4.66.50% Senior Notes due 2018. (Incorporated herein by reference to Exhibit 4.2 to PCA’s Current Report on Form 8-K filed March 25, 2008, File No. 1-15399.)
4.7Officers’ Certificate and 3.90% Senior Notes due 2022. (Incorporated herein by reference to Exhibit 4.2 to PCA’s Current Report of Form 8-K filed June 26, 2012, File No. 1-15399)
10.1Five Year Credit Agreement, dated as of October 11, 2011, by and among PCA and the lenders and agents named therein. (Incorporated herein by reference to Exhibit 10.1 to PCA’s Current Report on Form 8-K filed October 12, 2011, File No. 1-15399.)
10.2Amended and Restated Credit and Security Agreement, dated as of September 19, 2008, by and among PCA and the lenders and agents named therein. (Incorporated herein by reference to Exhibit 10.2 to PCA’s Quarterly Report on Form 10-Q for the period ended September 30, 2010, File No. 1-15399.)
10.3Amendment No. 1 to Amended and Restated Credit and Security Agreement, dated as of April 14, 2009, by and among PCA and the lenders and agents named therein. (Incorporated herein by reference to Exhibit 10.1 to PCA’s Current Report on Form 8-K filed April 16, 2009, File No. 1-15399.)
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Exhibit NumberDescription
10.4Amendment No. 2 to Amended and Restated Credit and Security Agreement, dated as of April 20, 2010, by and among PCA and the lenders and agents named therein. (Incorporated herein by reference to Exhibit 10.1 to PCA’s Current Report on Form 8-K filed April 15, 2010, File No. 1-15399.)
10.5Amendment No. 3 to Amended and Restated Credit and Security Agreement, dated as of March 1, 2011, by and among PCA and the lenders and agents named therein. (Incorporated herein by reference to Exhibit 10.1 to PCA’s Current Report on Form 8-K filed March 2, 2011, File No. 1-15399.)
10.6Amendment No. 4 to Amended and Restated Credit and Security Agreement, dated as of October 11, 2011, by and among PCA and the lenders and agents named therein. (Incorporated herein by reference to Exhibit 10.1 to PCA’s Current Report on Form 8-K filed October 12, 2011, File No. 1-15399.)
10.7Receivables Sale Agreement, dated as of November 29, 2000, between PCC and PCA. (Incorporated herein by reference to Exhibit 10.24 to PCA’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, File No. 1-15399.)
10.8Purchase and Sale Agreement, dated as of November 29, 2000, between PCC and PRC. (Incorporated herein by reference to Exhibit 10.25 to PCA’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001. File No. 1-15399.)
10.9Packaging Corporation of America Thrift Plan for Hourly Employees and First Amendment of Packaging Corporation of America Thrift Plan for Hourly Employees, effective February 1, 2000. (Incorporated herein by reference to Exhibit 4.5 to PCA’s Registration Statement on Form S-8, Registration No. 333-33176.)*
10.10Packaging Corporation of America Retirement Savings Plan, effective February 1, 2000. (Incorporated herein by reference to Exhibit 4.6 to PCA’s Registration Statement on Form S-8, Registration No. 333-33176.)*
10.11Form of Stock Option Agreement for employees under the Amended and Restated 1999 Long-term Equity Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to PCA’s Current Report on Form 8-K, dated March 14, 2006, File No. 1-15399.)*
10.12Form of Stock Option Agreement for non-employee directors under the Amended and Restated 1999 Long-term Equity Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to PCA’s Current Report on Form 8-K, dated March 14, 2006, File No. 1-15399.)*
10.13Form of Restricted Stock Award Agreement for employees and non-employee directors under the Amended and Restated 1999 Long-term Equity Incentive Plan. (Incorporated herein by reference to Exhibit 10.3 to PCA’s Current Report on Form 8-K, dated March 14, 2006, File No. 1-15399.)*
10.14Packaging Corporation of America Supplemental Executive Retirement Plan, as Amended and Restated Effective as of January 1, 2005. (Incorporated herein by reference to Exhibit 10.31 to PCA’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-15399.)*
10.15Packaging Corporation of America Deferred Compensation Plan, effective as of January 1, 2009. (Incorporated herein by reference to Exhibit 10.15 to PCA’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-15399.)*
10.16Packaging Corporation of America Amended and Restated Executive Incentive Compensation Plan, effective as of February 28, 2007. (Incorporated herein by reference to Exhibit 10.32 to PCA’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-15399.)*
10.17First Amendment of Packaging Corporation of America Supplemental Executive Retirement Plan, effective as of January 1, 2008. (Incorporated herein by reference to Exhibit 10.17 to PCA’s Annual Report on Form 10-K for the year ended December 31, 2008, file No. 1-15399.)*
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Exhibit NumberDescription
10.18Amended and Restated 1999 Long-Term Equity Incentive Plan, effective as of May 27, 2009. (Incorporated herein by reference to Appendix A to PCA’s Definitive Proxy Statement on Schedule 14A, filed with the Commission on April 21, 2009, File No 1-15399.)*
10.19PCA Performance Incentive Plan, effective as of May 11, 2010. (Incorporated herein by reference to Appendix A to PCA’s Definitive Proxy Statement on Schedule 14A, filed with the Commission on March 30, 2010, File No. 1-15399.)*
10.20Employment Agreement, dated June 28, 2010, between Packaging Corporation of America and Paul T. Stecko. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K, dated June 29, 2010, File No. 1-15399.)*
10.21Form of Restricted Stock Award Agreement for February 22, 2011 Retention Awards to Mark W. Kowlzan and Thomas A. Hassfurther. (Incorporated herein by reference to Exhibit 10.22 to PCA’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, File No. 1-15399.)*
10.22Second Amendment of Packaging Corporation of America Supplemental Executive Retirement Plan, effective as of February 28, 2013.*†
10.23Third Amendment of Packaging Corporation of America Supplemental Executive Retirement Plan, effective as of February 28, 2013.*†
12.1Statement Regarding Computation of Ratio of Earnings to Fixed Charges†
21.1Subsidiaries of the Registrant.†
23.1Consent of Ernst & Young LLP.†
24.1Powers of Attorney.†
31.1Certification of Chief Executive Officer, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.†
31.2Certification of Chief Financial Officer, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.†
32.1Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†
32.2Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†
101The following financial information from Packaging Corporation of America’s Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2012 and 2011, (ii) Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2010, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2012, 2011 and 2010, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010, (v) the Notes to Consolidated Financial Statements, and (vi) Financial Statement Schedule-Valuation and Qualifying Accounts.
*Management contract or compensatory plan or arrangement.
†Filed herewith.
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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 28, 2013.

Packaging Corporation of America
By:/S/ MARK W. KOWLZAN
Name:Mark W. Kowlzan
Title:Chief Executive Officer
By:/S/ RICHARD B. WEST
Name:Richard B. West
Title:Senior Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 28, 2013.

SignatureTitle
/s/ MARK W. KOWLZAN Mark W. KowlzanChief Executive Officer and Director (Principal Executive Officer)
/S/ RICHARD B. WEST Richard B. WestSenior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
* Paul T. SteckoExecutive Chairman
* Cheryl K. BeebeDirector
* Hasan JameelDirector
* Robert C. LyonsDirector
* Samuel M. MencoffDirector
* Roger B. PorterDirector
* Thomas S. SoulelesDirector
* James D. WoodrumDirector
*By:/s/ RICHARD B. WEST
Richard B. West (Attorney-In-Fact)
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INDEX TO FINANCIAL STATEMENTS

Packaging Corporation of America Consolidated Financial Statements
Report of independent registered public accounting firmF-2
Consolidated balance sheets as of December 31, 2012 and 2011F-4
Consolidated statements of income and comprehensive income for the years ended December 31, 2012, 2011 and 2010F-5
Consolidated statements of changes in stockholders’ equity for the years ended December 31, 2012, 2011 and 2010F-6
Consolidated statements of cash flows for the years ended December 31, 2012, 2011 and 2010F-7
Notes to consolidated financial statementsF-8

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Packaging Corporation of America

Board of Directors and Stockholders

We have audited the accompanying consolidated balance sheets of Packaging Corporation of America (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Packaging Corporation of America at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Packaging Corporation of America’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2013 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Chicago, Illinois

February 28, 2013

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Packaging Corporation of America

Board of Directors and Stockholders

We have audited Packaging Corporation of America’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Packaging Corporation of America’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Packaging Corporation of America maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Packaging Corporation of America as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012, and our report dated February 28, 2013, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Chicago, Illinois

February 28, 2013

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Packaging Corporation of America

Consolidated Balance Sheets

As of December 31, 2012 and 2011

20122011
(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents$207,393$156,313
Accounts receivable, net of allowance for doubtful accounts and customer deductions of $5,353 and $5,034 as of December 31, 2012 and 2011, respectively352,142319,988
Inventories268,767254,675
Prepaid expenses and other current assets20,91518,298
Federal and state income taxes receivable65,488—
Deferred income taxes22,32862,789
Total current assets937,033812,063
Property, plant and equipment, net1,366,0691,476,654
Goodwill67,16058,214
Other intangible assets, net38,28325,042
Other long-term assets45,22340,526
Total assets$2,453,768$2,412,499
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt$15,000$15,000
Capital lease obligations964718
Accounts payable117,510154,855
Dividends payable—19,680
Accrued interest3,67612,584
Federal and state income taxes payable—10,404
Accrued liabilities122,696163,259
Total current liabilities259,846376,500
Long-term liabilities:
Long-term debt778,630793,448
Capital lease obligations24,90421,114
Deferred income taxes125,10911,924
Pension and postretirement benefit plans164,538148,686
Cellulosic biofuel tax reserve102,051102,051
Other long-term liabilities29,22929,866
Total long-term liabilities1,224,4611,107,089
Stockholders’ equity:
Common stock, par value $0.01 per share, 300,000,000 shares authorized, 98,142,782 and 98,324,974 shares issued as of December 31, 2012 and 2011, respectively981983
Additional paid in capital378,794351,804
Retained earnings703,728673,960
Accumulated other comprehensive loss, net of tax:
Unrealized loss on treasury locks, net(31,651)(23,289)
Unrealized loss on foreign exchange contracts(392)(413)
Unfunded employee benefit obligations(81,999)(74,076)
Total accumulated other comprehensive loss(114,042)(97,778)
Common stock held in treasury, at cost (2,355 shares as of December 31, 2011)—(59)
Total stockholders’ equity969,461928,910
Total liabilities and stockholders’ equity$2,453,768$2,412,499

See notes to consolidated financial statements.

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Packaging Corporation of America

Consolidated Statements of Income and Comprehensive Income

Year Ended December 31,
201220112010
(In thousands, except per share amounts)
Statement of Income:
Net sales$2,843,877$2,620,111$2,435,606
Cost of sales(2,204,248)(2,078,165)(1,903,406)
Gross profit639,629541,946532,200
Selling and administrative expenses(210,773)(193,939)(182,489)
Corporate overhead(69,108)(64,535)(58,100)
Alternative fuel mixture credits95,500—(86,265)
Other expense, net(11,789)(10,723)(19,964)
Income from operations443,459272,749185,382
Interest expense, net(62,900)(29,245)(32,278)
Income before taxes380,559243,504153,104
(Provision) benefit for income taxes(216,739)(85,477)52,331
Net income$163,820$158,027$205,435
Weighted average common shares outstanding
Basic96,38499,281101,678
Diluted97,497100,376102,608
Net income per common share
Basic$1.70$1.59$2.02
Diluted$1.68$1.57$2.00
Dividends declared per common share$1.00$0.80$0.60
Statement of Comprehensive Income:
Net income$163,820$158,027$205,435
Other comprehensive income (loss), net of tax:
Fair value adjustments to cash flow hedges, net of tax of $6.5 million, $15.3 million and $2.3 million for 2012, 2011 and 2010, respectively(10,183)(24,134)(1,646)
Reclassification adjustment for cash flow hedges included in net income, net of tax of $1.2 million, $0.7 million and $0.5 million for 2012, 2011 and 2010, respectively1,842(1,125)(1,309)
Amortization of pension and postretirement plans actuarial loss and prior service cost, net of tax of $4.3 million, $2.4 million and $2.3 million for 2012, 2011 and 2010, respectively6,6893,8063,583
Unfunded employee benefit obligations, net of tax of $9.3 million, $20.3 million and $5.7 million for 2012, 2011 and 2010, respectively(14,612)(31,944)(8,973)
Other comprehensive income (loss)(16,264)(53,397)(8,345)
Comprehensive income$147,556$104,630$197,090

See notes to consolidated financial statements.

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Packaging Corporation of America

Consolidated Statements of Changes in Stockholders’ Equity

For the Period January 1, 2010 through December 31, 2012

Additional Paid in CapitalRetained EarningsAccumulated Other Comprehensive Loss
Total Stockholders’ Equity
Common StockTreasury Stock
SharesAmountSharesAmount
Balance at January 1, 2010103,018,358$1,030—$—$387,496$546,355$(36,036)$898,845
Common stock repurchases and retirements(1,665,392)(17)——(40,834)——(40,851)
Common stock dividends declared—————(61,679)—(61,679)
Restricted stock grants and cancellations560,8456——507——513
Exercise of stock options394,4204——8,033——8,037
Share-based compensation expense————7,006——7,006
Other————40——40
Comprehensive income—————205,435(8,345)197,090
Balance at December 31, 2010102,308,2311,023——362,248690,111(44,381)1,009,001
Common stock repurchases and retirements(4,896,666)(49)(2,355)(59)(29,098)(93,871)—(123,077)
Common stock dividends declared—————(80,307)—(80,307)
Restricted stock grants and cancellations569,7246——506——512
Exercise of stock options343,6853——7,733——7,736
Share-based compensation expense————9,736——9,736
Other————679——679
Comprehensive income—————158,027(53,397)104,630
Balance at December 31, 201198,324,974983(2,355)(59)351,804673,960(97,778)928,910
Common stock repurchases and retirements(1,510,014)(15)2,35559(9,282)(35,924)—(45,162)
Common stock dividends declared—————(98,128)—(98,128)
Restricted stock grants and cancellations382,9534——1,611——1,615
Exercise of stock options944,8699——22,288——22,297
Share-based compensation expense————11,687——11,687
Other————686——686
Comprehensive income—————163,820(16,264)147,556
Balance at December 31, 201298,142,782$981—$—$378,794$703,728$(114,042)$969,461

See notes to consolidated financial statements.

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Packaging Corporation of America

Consolidated Statements of Cash Flows

Year Ended December 31,
201220112010
(In thousands)
Cash Flows from Operating Activities:
Net income$163,820$158,027$205,435
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization171,280163,973156,298
Amortization of financing costs1,116712648
Amortization of net loss on treasury lock2,988(1,846)(1,846)
Share-based compensation expense11,6879,7367,006
Deferred income tax provision183,20227,347(120,579)
Alternative fuel mixture credits(76,281)—127,811
Loss on disposals of property, plant and equipment7,2987,1378,865
Loss on early extinguishment of debt21,296——
Pension and postretirement benefits1,6875,72611,142
Other, net(3,090)(4,761)1,083
Changes in operating assets and liabilities (net of effects of acquisitions):
Increase in assets —
Accounts receivable(24,995)(16,946)(50,256)
Inventories(12,212)(8,333)(28,352)
Prepaid expenses and other current assets(835)(616)(3,956)
Increase (decrease) in liabilities —
Accounts payable(40,448)(694)25,367
Accrued liabilities(2,308)6,05211,254
Net cash provided by operating activities404,205345,514349,920
Cash Flows from Investing Activities:
Additions to property, plant and equipment(128,524)(280,213)(320,200)
Acquisitions of businesses(35,393)(57,340)—
Treasury grant proceeds57,399——
Additions to other long term assets(1,070)(13,055)(2,627)
Proceeds from disposals of property, plant and equipment784431,513
Net cash used for investing activities(107,510)(350,165)(321,314)
Cash Flows from Financing Activities:
Proceeds from long-term debt397,044150,000—
Payments on long-term debt(437,184)(670)(626)
Financing costs paid(876)(2,041)—
Settlement of treasury lock(65,500)9,910—
Common stock dividends paid(117,851)(76,012)(61,798)
Repurchases of common stock(45,162)(125,027)(38,901)
Proceeds from exercise of stock options19,8987,0167,496
Excess tax benefits from share-based awards4,0161,2321,052
Net cash used for financing activities(245,615)(35,592)(92,777)
Net increase (decrease) in cash and cash equivalents51,080(40,243)(64,171)
Cash and cash equivalents, beginning of year156,313196,556260,727
Cash and cash equivalents, end of year$207,393$156,313$196,556

See notes to consolidated financial statements.

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Packaging Corporation of America

Notes to Consolidated Financial Statements

December 31, 2012

1.NATURE OF BUSINESS

Packaging Corporation of America (“PCA” or the “Company”) was incorporated on January 25, 1999. On April 12, 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. PCA had no operations from the date of incorporation on January 25, 1999 to April 11, 1999.

The Company is comprised of mills and corrugated manufacturing operations. The mill operations (the “Mills”) consist of two kraft linerboard mills located in Counce, Tennessee, and Valdosta, Georgia, and two medium mills located in Filer City, Michigan, and Tomahawk, Wisconsin. The Mills transfer the majority of their containerboard produced to PCA’s corrugated products plants.

PCA’s corrugated manufacturing operations consist of 71 plants, with 41 operating as combining operations, or corrugated plants, and 30 as sheet plants, a technical and development center, seven graphic design centers and a complement of packaging supplies and distribution centers. All plants are located in the continental United States. Corrugated plants combine linerboard and medium into sheets that are converted into corrugated shipping containers, point-of-sale graphics packaging, point-of-purchase displays and other specialized packaging. Sheet plants purchase sheets primarily from PCA corrugated products plants to use in the finished corrugated products converting process. The corrugated manufacturing operations sell to diverse customers primarily in North America.

As of December 31, 2012, PCA had approximately 8,600 employees. Approximately 2,600 of these employees were salaried and approximately 6,000 were hourly. Approximately 75% of its hourly employees are represented by unions. The majority of its unionized employees are represented by the United Steel Workers (USW), the International Brotherhood of Teamsters (IBT), and the International Association of Machinists (IAM).

Based on an agreement reached with the USW in 2008, the existing labor agreements at PCA’s containerboard mills covering USW-represented employees (91% of mill hourly workforce) were extended five years. With this extension, the USW contracts at the Company’s mills are currently set to expire between September 2013 and June 2015. Agreements with other union mill employees (9% of mill hourly workforce) expire between October 2014 and June 2017. Based on an agreement reached with the USW in 2009, the labor agreement at 25 corrugated plants covering USW represented employees was extended up to five years. Contracts for unionized corrugated products plant employees expire between November 2012 and March 2018. The Company is currently in negotiations to renew or extend any union contracts that have recently expired or are expiring in the near future.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

The accompanying consolidated financial statements of PCA include all majority-owned subsidiaries. All intercompany transactions have been eliminated. The Company has two joint ventures that are accounted for under the equity method.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts in the financial statements and the accompanying notes. Actual results could differ from those estimates.

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Cash and Cash Equivalents

Cash and cash equivalents include all cash balances and highly liquid investments with a maturity, when acquired, of three months or less. Cash equivalents are stated at cost, which approximates market.

Accounts Receivable

The collectibility of PCA’s accounts receivable is based upon a combination of factors. In circumstances where a specific customer is unable to meet its financial obligations to PCA (e.g., bankruptcy filings, substantial downgrading of credit sources), a specific reserve for bad debts is recorded against amounts due to the Company to reduce the net recorded receivable to the amount the Company reasonably believes will be collected. For all other customers, reserves for bad debts are recognized based on historical collection experience. If collection experience deteriorates (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations to the Company), the estimate of the recoverability of amounts due could be reduced by a material amount.

The customer deductions reserve represents the estimated amount required for customer returns, allowances and earned discounts. Based on the Company’s experience, customer returns, allowances and earned discounts have averaged 1.0% of gross selling price. Accordingly, PCA reserves 1.0% of its open customer accounts receivable balance for these items.

At December 31, 2012 and 2011, the allowance for doubtful accounts was $1.9 million for both years. The reserve for customer deductions of $3.4 million and $3.1 million at December 31, 2012 and 2011, respectively, are also included as a reduction of the accounts receivable balance.

Inventories

With the exception of inventories at corrugated products plants acquired since 2004, raw materials, work in process and finished goods are valued using the last-in, first-out (“LIFO”) cost method. Inventories at the acquired plants are valued at the first-in, first-out (“FIFO”) cost method. Supplies and materials are valued using a moving average cost. All inventories are stated at the lower of cost or market and include all costs directly associated with manufacturing products: materials, labor and manufacturing overhead. Inventories valued using the LIFO method totaled $194.0 million and $197.3 million, respectively, as of December 31, 2012 and 2011, compared to total inventory values (before the LIFO inventory reserve) of $332.3 million and $324.0 million for the same respective periods.

The components of inventories are as follows:

December 31,
20122011
(In thousands)
Raw materials$125,909$126,489
Work in process8,2877,610
Finished goods78,78874,391
Supplies and materials119,284115,541
Inventories at FIFO or average cost332,268324,031
Excess of FIFO or average cost over LIFO cost(63,501)(69,356)
Inventories, net$268,767$254,675

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Property, Plant and Equipment

Property, plant and equipment are recorded at cost, and consist of the following:

December 31,
20122011
(In thousands)
Land and land improvements$107,250$102,483
Buildings390,363377,664
Machinery and equipment3,048,9323,045,145
Construction in progress67,05166,098
Other27,19627,170
Property, plant and equipment, at cost3,640,7923,618,560
Less accumulated depreciation(2,274,723)(2,141,906)
Property, plant and equipment, net$1,366,069$1,476,654

The amount of interest capitalized from construction in progress was $0.8 million, $7.1 million and $4.8 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Depreciation is computed on the straight-line basis over the estimated useful lives of the related assets. Assets under capital leases are depreciated on the straight-line method over the term of the lease or the useful life, if shorter. The following lives are used for the various categories of assets:

Buildings and land improvements5 to 40 years
Machinery and equipment3 to 25 years
Trucks and automobiles3 to 10 years
Furniture and fixtures3 to 20 years
Computers and hardware3 to 7 years
Period of the lease or
Leasehold improvementsuseful life, if shorter

The amount of depreciation expense was $166.0 million, $161.5 million and $154.0 million for the years ended December 31, 2012, 2011 and 2010, respectively. Expenditures for repairs and maintenance are expensed as incurred.

Pursuant to the terms of an industrial revenue bond, title to certain property, plant and equipment was transferred to a municipal development authority in 2009 in order to receive a property tax abatement. The title of these assets will revert back to PCA upon retirement or cancellation of the bond. The assets are included in the consolidated balance sheet under the caption “Property, plant and equipment, net” as all risks and rewards remain with the Company.

Goodwill and Intangible Assets

The Company has capitalized certain intangible assets, primarily customer relationships, covenants not to compete and goodwill, based on their estimated fair value at the date of acquisition. Amortization is provided for customer relationships on a straight-line basis over periods ranging from six to 40 years. Covenants not to compete are amortized on a straight-line basis over the terms of the respective agreements.

Goodwill, which amounted to $67.2 million and $58.2 million for the years ended December 31, 2012 and 2011, respectively, is not being amortized but is subject to an annual impairment test in accordance with

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Accounting Standards Codification (“ASC”) 350, “Intangibles — Goodwill and Other.” The Company performs the impairment test at year end or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. Recoverability of goodwill is determined by comparing the fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds the fair value, the implied fair value of the reporting unit’s goodwill is compared to the carrying amount of its goodwill to determine if a write-down to fair value is necessary. The Company concluded that no impairment of goodwill existed at the time of the annual impairment tests in 2012, 2011 and 2010.

Other Long-Term Assets

PCA has capitalized certain costs related to obtaining its financing. These costs are amortized to interest expense using the effective interest rate method over the terms of the senior credit facilities and senior notes, which range from five to ten years. Unamortized deferred financing costs were $5.0 million and $2.6 million as of December 31, 2012 and 2011, respectively.

PCA leases the cutting rights to approximately 88,000 acres of timberland and capitalizes the annual lease payments and reforestation costs associated with these leases. These costs are recorded as depletion when timber is harvested and used in PCA’s business operations or sold to customers. Capitalized long-term lease costs were $27.4 million and $26.2 million as of December 31, 2012 and 2011, respectively. The amount of depletion expense was $0.7 million, $0.04 million and $0.5 million for the years ended December 31, 2012, 2011 and 2010, respectively.

PCA capitalizes certain costs related to the purchase and development of software which is used in its business operations. The costs attributable to these software systems are amortized over their estimated useful lives based on various factors such as the effects of obsolescence, technology and other economic factors. Net capitalized software costs were $1.1 million and $1.9 million for the years ended December 31, 2012 and 2011, respectively. Software amortization expense was $0.9 million, $0.6 million and $0.6 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Impairment of Long-Lived Assets

Long-lived assets other than goodwill are reviewed for impairment in accordance with provisions of ASC 360, “Property, Plant and Equipment.” In the event that facts and circumstances indicate that the carrying amount of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset (or group of assets) would be compared to the asset’s (or group of assets’) carrying amount to determine if a write-down to fair value is required. The Company concluded that no impairment of long-lived assets existed in 2012, 2011 and 2010.

Pension and Postretirement Benefits

One of the principal assumptions used to calculate net periodic pension cost is the expected long-term rate of return on plan assets. The expected long-term rate of return on plan assets may result in recognized returns that are greater or less than the actual returns on those plan assets in any given year. Over time, however, the expected long-term rate of return on plan assets is designed to approximate the actual long term returns.

The discount rate assumptions used to calculate net periodic pension and postretirement cost reflect the rates available on high-quality, fixed-income debt instruments on December 31st of each year. The rate of compensation increase is another significant assumption used to calculate net periodic pension cost and is determined by the Company based upon annual reviews.

For postretirement health care plan accounting, the Company reviews external data and its own historical trends for health care costs to determine the health care cost trend rate assumption.

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Environmental Matters

Environmental expenditures related to existing conditions resulting from past or current operations from which no current or future benefit is discernible are expensed as incurred. Environmental expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. Liabilities are recorded for environmental contingencies when such costs are probable and reasonably estimable. These liabilities are adjusted as further information develops or circumstances change.

Asset Retirement Obligations

The Company accounts for its retirement obligations related to its landfills under ASC 410, “Asset Retirement and Environmental Obligations,” which requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost is capitalized as part of the related long-lived asset and amortized to expense over the useful life of the asset.

Income Taxes

PCA utilizes the liability method of accounting for income taxes whereby it recognizes deferred tax assets and liabilities for the future tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets will be reduced by a valuation allowance if, based upon management’s estimates, it is more likely than not that a portion of the deferred tax assets will not be realized in a future period. The estimates utilized in the recognition of deferred tax assets are subject to revision in future periods based on new facts or circumstances.

PCA’s practice is to recognize interest and penalties related to unrecognized tax benefits in income tax expense.

Fair Value of Financial Instruments

PCA measures the fair value of its financial instruments in accordance with ASC 820, “Fair Value Measurements and Disclosures.” The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. It is determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes the following hierarchy that prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Valuations based on unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company measures the fair value of money market funds based on quoted prices in active markets for identical assets or liabilities. See Note 6 for information about PCA’s pension plans’ assets measured at fair value and Note 10 for information about PCA’s assets and liabilities measured at fair value.

Planned Major Maintenance Activities

The Company accounts for its planned major maintenance activities in accordance with ASC 360, “Property, Plant, and Equipment,” using the deferral method. All maintenance costs incurred during the year are expensed in the year in which the maintenance activity occurs.

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Revenue Recognition

The Company recognizes revenue as title to the products is transferred to customers. Shipping and handling billings to a customer are included in net sales. Shipping and handling costs are included in cost of sales. In addition, the Company offers volume rebates to certain of its customers. The total cost of these programs is estimated and accrued as a reduction to net sales at the time of the respective sale.

Research and Development

Research and development costs are expensed as incurred. The amount charged to expense was $11.3 million, $12.5 million and $10.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Trade Agreements

PCA regularly trades containerboard with other manufacturers primarily to reduce shipping costs. These agreements are entered into with other producers on an annual basis, pursuant to which both parties agree to ship an identical number of tons of containerboard to each other within the agreement period. These agreements lower transportation costs by allowing each party’s containerboard mills to ship containerboard to the other party’s closest corrugated products plant. PCA tracks each shipment to ensure that the other party’s shipments to PCA match PCA’s shipments to the other party during the agreement period. Such transfers are possible because containerboard is a commodity product with no distinguishing product characteristics. These transactions are accounted for at carrying value, and revenue is not recorded as the transactions do not represent the culmination of an earnings process. The transactions are recorded into inventory accounts, and no income is recorded until such inventory is converted to a finished product and sold to an end-use customer.

Segment Information

PCA is engaged in one line of business: the integrated manufacture and sale of packaging materials, boxes and containers for industrial and consumer markets. No single customer accounts for more than 10% of total net sales.

Derivative Instruments and Hedging Activities

The Company records its derivatives in accordance with ASC 815, “Derivatives and Hedging.” The guidance requires the Company to recognize derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of a derivative depends on the intended use and designation of the derivative instrument. For a derivative designated as a fair value hedge, the gain or loss on the derivative is recognized in earnings in the period of change in fair value together with the offsetting gain or loss on the hedged item. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) (“OCI”) and is subsequently recognized in earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized in earnings.

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-02, “Intangibles — Goodwill and Other (Topic 350) — Testing Indefinite-Lived Intangible Assets for Impairment.” The amendments in this ASU allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. An entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on a qualitative assessment, that it is more likely than not that the indefinite-lived intangible asset is impaired. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15,

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  1. Early adoption is permitted. The Company will comply with the provisions of ASU 2012-02 upon its adoption on January 1, 2013. The Company does not expect the adoption of this guidance to have any impact on its financial position, results of operations or cash flows.

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) — Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This ASU effectively defers only those changes in Update 2011-05 as discussed below that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income and gives the FASB additional time to redeliberate the presentation requirements for reclassification adjustments. The amendments in this ASU are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has complied with the provisions of ASU 2011-12 upon its adoption on January 1, 2012.

In September 2011, the FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350) — Testing Goodwill for Impairment,” which simplifies how entities test goodwill for impairment. The amendments in this update provide an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance on January 1, 2012 did not impact the Company’s financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income.” The amendments in this ASU require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The provisions in this update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has complied with the additional provisions of ASU 2011-05 upon its adoption on January 1, 2012. See Consolidated Statements of Income and Comprehensive Income for additional information.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments in this ASU clarify the application of existing fair value measurement and disclosure requirements, which will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have any impact on the Company’s financial position, results of operations or cash flows. See Note 10 for additional information.

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3.EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted income per common share for the periods presented.

Year Ended December 31,
201220112010
(In thousands, except per share data)
Numerator:
Net income$163,820$158,027$205,435
Denominator:
Basic common shares outstanding96,38499,281101,678
Effect of dilutive securities:
Stock options and unvested restricted stock1,1131,095930
Diluted common shares outstanding97,497100,376102,608
Basic income per common share$1.70$1.59$2.02
Diluted income per common share$1.68$1.57$2.00

Options to purchase 0.6 million shares at December 31, 2010 were not included in the computation of diluted common shares outstanding as their exercise price exceeded the average market price of the Company’s common stock for the related reporting period. All outstanding options to purchase shares at December 31, 2012 and 2011 were included in the computation of diluted common shares outstanding.

4.STOCK-BASED COMPENSATION

In October 1999, the Company adopted a long-term equity incentive plan, which allows for grants of stock options, stock appreciation rights, restricted stock and performance awards to directors, officers and employees of PCA, as well as others who engage in services for PCA. The plan, which will terminate on October 19, 2014, provides for the issuance of up to 8,550,000 shares of common stock over the life of the plan. As of December 31, 2012, options and restricted stock for 8,040,958 shares have been granted, net of forfeitures. Forfeitures are added back to the pool of shares of common stock available to be granted at a future date.

A summary of the Company’s stock option activity and related information follows:

OptionsWeighted- Average Exercise PriceWeighted- Average Remaining Contractual Term (years)Aggregate Intrinsic Value
(In thousands)
Outstanding at December 31, 20091,973,30120.92
Exercised(394,420)19.01
Forfeited(10,497)24.62
Outstanding at December 31, 20101,568,38421.38
Exercised(343,685)20.34
Outstanding at December 31, 20111,224,69921.64
Exercised(944,869)21.06
Forfeited(1,250)23.09
Outstanding and exercisable at December 31, 2012278,580$23.651.3$4,130

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The total intrinsic value of options exercised during the years ended December 31, 2012, 2011, and 2010 was $9.5 million, $2.8 million, and $2.4 million, respectively. As of December 31, 2012, there is no unrecognized compensation cost related to stock option awards granted under the Company’s equity incentive plan as all outstanding awards have vested.

A summary of the Company’s restricted stock activity follows:

201220112010
SharesFair Market Value at Date of GrantSharesFair Market Value at Date of GrantSharesFair Market Value at Date of Grant
(Dollars in thousands)
Restricted stock at January 11,817,745$40,6551,478,000$30,6001,235,505$24,718
Granted394,92810,846575,69416,005573,44012,693
Vested(429,034)(9,722)(229,979)(5,816)(318,350)(6,563)
Cancellations(11,975)(257)(5,970)(134)(12,595)(248)
Restricted stock at December 311,771,664$41,5221,817,745$40,6551,478,000$30,600

Compensation expense for both stock options, which were fully vested at June 30, 2010, and restricted stock recognized in the consolidated statements of income for the years ended December 31, 2012, 2011 and 2010 was as follows:

Year Ended December 31,
201220112010
(In thousands)
Stock options$—$—$226
Restricted stock11,6879,7366,780
Impact on income before income taxes11,6879,7367,006
Income tax benefit(4,543)(3,784)(2,721)
Impact on net income$7,144$5,952$4,285

The Company uses the Black-Scholes-Merton option-pricing model to estimate the fair value of each option grant as of the date of grant. Expected volatilities are based on historical volatility of the Company’s common stock. The expected life of the option is estimated using historical data pertaining to option exercises and employee terminations. Separate groups of employees that have similar historical exercise behavior are considered separately for estimating the expected life. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant.

The fair value of restricted stock is determined based on the closing price of the Company’s common stock on the grant date. Restricted stock awards granted to employees generally vest at the end of a four-year period, and stock awards granted to directors vest immediately. The Company generally recognizes compensation expense associated with restricted stock awards ratably over their vesting periods. As PCA’s Board of Directors has the ability to accelerate vesting of restricted stock upon an employee’s retirement, the Company accelerates the recognition of compensation expense for certain employees approaching normal retirement age. As of December 31, 2012, there was $21.1 million of total unrecognized compensation costs related to the restricted stock awards. The Company expects to recognize the cost of these stock awards over a weighted-average period of 2.5 years.

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5.ACCRUED LIABILITIES

The components of accrued liabilities are as follows:

December 31,
20122011
(In thousands)
Derivative — treasury lock$—$48,829
Bonuses and incentives and related payroll taxes38,24431,480
Medical insurance and workers’ compensation18,44818,685
Vacation and holiday pay17,07316,576
Customer volume discounts and rebates13,36518,656
Franchise, property, sales and use taxes9,3378,711
Payroll and payroll taxes8,3066,409
Current portion of pension and postretirement benefits7,6236,284
Other10,3007,629
Total$122,696$163,259
6.EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS

In connection with the acquisition from Pactiv, PCA and Pactiv entered into a human resources agreement which, among other items, granted PCA employees continued participation in the Pactiv pension plan for a period of up to five years following the closing of the acquisition for an agreed upon fee.

Effective January 1, 2003, PCA adopted a mirror-image pension plan for eligible hourly employees to succeed the Pactiv pension plan in which PCA hourly employees had participated though December 31, 2002. The PCA pension plan for hourly employees recognizes service earned under both the PCA plan and the prior Pactiv plan. Benefits earned under the PCA plan are reduced by retirement benefits earned under the Pactiv plan through December 31, 2002. All assets and liabilities associated with benefits earned through December 31, 2002 for hourly employees and retirees of PCA were retained by the Pactiv plan.

Effective May 1, 2004, PCA adopted a grandfathered pension plan for eligible salaried employees who had previously participated in the Pactiv pension plan. The benefit formula for the new PCA pension plan for salaried employees is comparable to that of the Pactiv plan except that the PCA plan uses career average base pay in the benefit formula in lieu of final average base pay. The PCA pension plan for salaried employees recognizes service earned under both the PCA plan and the prior Pactiv plan. Benefits earned under the PCA plan are reduced by retirement benefits earned under the Pactiv plan through April 30, 2004. All assets and liabilities associated with benefits earned through April 30, 2004 for salaried employees and retirees of PCA were retained by the Pactiv plan.

PCA maintains a supplemental executive retirement plan (“SERP”), which augments pension benefits for eligible executives earned under the PCA pension plan for salaried employees. Benefits are determined using the same formula as the PCA pension plan but in addition to counting career average base pay, the SERP also recognizes bonuses and any pay earned in excess of IRS qualified plan compensation limits. Benefits earned under the SERP are reduced by benefits paid from the PCA salaried pension plan and any prior qualified pension and SERP benefits earned under the Pactiv plan.

PCA provides certain medical benefits for retired salaried employees and certain medical and life insurance benefits for certain hourly employees. For salaried employees, the plan covers employees retiring from PCA on or after attaining age 58 who have had at least 10 years of full-time service with PCA after attaining age 48. For

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hourly employees, the postretirement medical coverage, where applicable, is available according to the eligibility provisions in effect at the employee’s work location. Per the human resources agreement referred to above, Pactiv retained the liability relating to retiree medical and life benefits for PCA employees who had retired on or before April 12, 1999 or who were eligible to retire within two years of that date. On January 1, 2003, the Company adopted a new plan design for salaried employees incorporating annual dollar caps in determining the maximum amount of employer contributions made towards the total cost of postretirement medical coverage. Effective January 1, 2012, Pactiv curtailed the availability of retiree medical coverage to any of its salaried retirees, and their enrolled spouses, who were 65 or older. This affected approximately 50 PCA salaried retirees covered under Pactiv’s retiree medical plan. PCA permitted these retirees and covered spouses to elect medical coverage under PCA’s retiree medical plan effective January 1, 2012.

The following tables provide information related to the Company’s pension and postretirement benefit plans.

Pension PlansPostretirement Plans
201220112010201220112010
(In thousands)
Change in Benefit Obligation
Benefit obligation at beginning of period$314,155$246,985$203,292$25,937$23,215$20,080
Service cost22,42419,80818,3151,8561,5991,399
Interest cost14,80013,47312,0911,2411,1891,130
Plan amendments2,2711,8278372,266——
Actuarial loss29,33835,39915,1531,6987551,931
Participant contributions———1,055942838
Benefits paid(4,274)(3,337)(2,703)(2,247)(1,763)(2,163)
Benefit obligation at plan year end$378,714$314,155$246,985$31,806$25,937$23,215
Accumulated benefit obligation portion of above$341,729$280,820$214,676
Change in Fair Value of Plan Assets
Plan assets at fair value at beginning of period$185,122$167,033$140,065$—$—$—
Actual return on plan assets21,527(732)14,457———
Company contributions35,98422,15815,2141,1928211,325
Participant contributions———1,055942838
Benefits paid(4,274)(3,337)(2,703)(2,247)(1,763)(2,163)
Fair value of plan assets at plan year end$238,359$185,122$167,033$—$—$—

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Pension PlansPostretirement Plans
December 31, 2012December 31, 2011December 31, 2012December 31, 2011
(In thousands)
Development of Net Amount Recognized
Benefit obligation in excess of plan assets at December 31$(140,355)$(129,033)$(31,806)$(25,937)
Amounts Recognized in Statement of Financial Position
Current liabilities$(6,290)$(5,232)$(1,333)$(1,052)
Noncurrent liabilities(134,065)(123,801)(30,473)(24,885)
Accrued benefit recognized at December 31$(140,355)$(129,033)$(31,806)$(25,937)
Amounts Recognized in Accumulated Other Comprehensive (Income) Loss, Net of Tax
Prior service cost$21,309$23,573$(216)$(481)
Actuarial loss54,95145,7915,9555,193
Total$76,260$69,364$5,739$4,712
Pension PlansPostretirement Plans
201220112010201220112010
(In thousands)
Components of Net Periodic Benefit Cost
Service cost for benefits earned during the year$22,424$19,808$18,315$1,856$1,599$1,399
Interest cost on accumulated benefit obligation14,80013,47312,0911,2411,1891,130
Expected return on plan assets(12,108)(13,544)(11,207)———
Net amortization of unrecognized amounts
Prior service cost5,9935,7825,685(419)(416)(416)
Actuarial loss4,916411247452449342
Net periodic benefit cost$36,025$25,930$25,131$3,130$2,821$2,455

For the year ended December 31, 2013, the Company expects to recognize in net periodic benefit cost $6.2 million ($3.8 million net of tax) and $(0.4) million ($0.3 million net of tax) of prior service cost for pension and postretirement plans, respectively, and $6.0 million ($3.7 million net of tax) and $0.5 million ($0.3 million net of tax) of actuarial loss for pension and postretirement plans, respectively, which is included in accumulated other comprehensive income (loss) at December 31, 2012.

Pension PlansPostretirement Plans
201220112010201220112010
Weighted-Average Assumptions Used to Determine Benefit Obligations at December 31
Discount rate4.25%4.75%5.50%4.00%4.50%5.25%
Rate of compensation increase4.00%4.00%4.00%N/AN/AN/A
Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost for the Years Ended December 31
Discount rate4.75%5.50%6.00%4.50%5.25%5.75%
Expected return on plan assets6.15%7.75%7.75%N/AN/AN/A
Rate of compensation increase4.00%4.00%4.00%N/AN/AN/A

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The expected return on pension plan assets reflects the expected long-term rates of return for the categories of investments currently held in the plan as well as anticipated returns for additional contributions made in the future. The expected long-term rate of return is adjusted when there are fundamental changes in expected returns on the plan investments.

The discount rate assumptions used to calculate the present value of pension and postretirement benefit obligations reflect the rates available on high-quality, fixed-income debt instruments on December 31st. The rate of compensation increase is another significant assumption used for pension accounting and is determined by the Company based upon annual reviews.

In determining net pension and postretirement benefit costs, the Company elected to amortize prior service cost on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plans. A 10% corridor is used to determine the amount of the unrecognized net gain or loss to be amortized. The excess, if any, of the unrecognized net gain or loss over 10% of the greater of the projected benefit obligation or the market-related value of plan assets is amortized over the average remaining service period until retirement for active participants and included in the net periodic benefit cost.

The Company assumed health care cost trend rates for its postretirement benefits plans were as follows:

201220112010
Health care cost trend rate assumed for next year8.00%8.00%7.50%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)5.00%5.50%5.00%
Year that the rate reaches the ultimate trend rate202020162016

A one-percentage point change in assumed health care cost trend rates would have the following effects on the 2012 postretirement benefit obligation and the 2012 net post retirement benefit cost:

1-Percentage Point Increase1-Percentage Point Decrease
(In thousands)
Effect on postretirement benefit obligation$647$(575)
Effect on net postretirement benefit cost59(51)

PCA has retained the services of a professional advisor to oversee pension investments and provide recommendations regarding investment strategy. PCA’s overall strategy and related apportionments between equity and debt securities may change from time to time based on market conditions, external economic factors, and the funding status of the plans. Pension plans’ assets were invested in the following classes of securities at December 31, 2012 and 2011:

Percentage of Fair Value
20122011
Equity securities39%36%
Debt securities61%63%
Other—%1%

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The fair values of PCA’s pension plans’ assets at December 31, 2012 and 2011, measured on a recurring basis, by asset category are as follows:

Fair Value Measurements at December 31, 2012
Asset CategoryTotalQuoted Prices in Active Markets for identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)
(In thousands)
Short-term investments$394$—$394$—
Equity securities:
U.S. large value15,02115,021——
U.S. large growth12,02912,029——
U.S. mid-cap value2,4812,481——
U.S. mid-cap growth4,7344,734——
U.S. small blend5,033—5,033—
Foreign large blend39,20439,204——
Diversified emerging markets7,7227,722——
Real estate6,8816,881——
Debt securities:
Government bonds29,644—29,644—
Corporate bonds115,21648,69966,517—
Total$238,359$136,771$101,588$—
Fair Value Measurements at December 31, 2011
Asset CategoryTotalQuoted Prices in Active Markets for identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)
(In thousands)
Short-term investments$1,257$—$1,257$—
Equity securities:
U.S. large value11,27211,272——
U.S. large growth9,1729,172——
U.S. mid-cap value1,9141,914——
U.S. mid-cap growth3,6843,684——
U.S. small blend3,784—3,784—
Foreign large blend27,16427,164——
Diversified emerging markets5,3065,306——
Real estate5,4055,405——
Debt securities:
Government bonds24,372—24,372—
Corporate bonds91,79236,92954,863—
Total$185,122$100,846$84,276$—

The Company 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 the Company may make discretionary contributions in excess of the required minimum amounts. PCA is not required to make any pension plan contributions in 2013 under the “Moving Ahead for Progress in the 21st Century Act” that was enacted in 2012 which, among other items, provided companies with

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some pension funding relief. However, PCA currently expects to make discretionary pension contributions of $30.1 million and record pension plan expense of $38.2 million in 2013. This compares to pension contributions of $36.0 million and pension plan expense of $36.0 million in 2012.

The following are estimated benefit payments to be paid to current plan participants by year:

Pension PlansPostretirement Plans
(In thousands)
2013$6,290$1,333
20147,9261,430
20159,7191,508
201611,5001,639
201713,3041,821
2018 — 202297,29311,707

The Company has two defined contribution benefit plans that cover all full-time salaried employees and certain hourly employees at several of the Company’s facilities. Employees can make voluntary contributions in accordance with the provisions of their respective plan. The Company made employer-matching contributions of $10.8 million, $10.4 million and $9.6 million during the years ended December 31, 2012, 2011 and 2010, respectively.

Effective January 1, 2011, PCA’s Board of Directors adopted a resolution designating the portion of the defined contribution plan’s investments held in the Company’s stock, and any future employee or employer contributions invested in the Company’s stock, as investments in an “Employee Stock Ownership Plan” (“ESOP”). The Company uses the ESOP to provide the Company’s matching contribution in the form of the Company’s stock to the plan participants (full-time salaried employees only). The Company expenses the employer-matching contributions and charges dividends on shares held by the ESOP to retained earnings. Any shares of Company stock held by the ESOP are included in basic shares for earnings-per-share computations. At December 31, 2012 and 2011, the ESOP held 2.1 million and 2.6 million shares, respectively, of the Company’s common stock.

Salaried employees who are not participants in the grandfathered pension plan, essentially those salaried employees hired on or after April 12, 1999, receive a service-related Company retirement contribution to their defined contribution plan account in addition to any employer matching contribution. This contribution increases with years of service and ranges from 3% to 5% of base pay. The Company expensed $4.3 million, $3.9 million and $3.1 million for this retirement contribution during the years ended December 31, 2012, 2011 and 2010, respectively.

7.GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

Changes in the carrying amount of goodwill for the periods ended December 31, 2012 and 2011, are as follows:

(In thousands)
Balance as of December 31, 2010$38,854
Acquisitions19,360
Balance as of December 31, 201158,214
Acquisition14,098
Adjustments related to purchase accounting(5,152)
Balance at December 31, 2012$67,160

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Other Intangible Assets

The components of other intangible assets are as follows:

Weighted Average Remaining LifeAs of December 31, 2012As of December 31, 2011
Gross Carrying AmountAccumulated AmortizationGross Carrying AmountAccumulated Amortization
(In thousands)
Customer relationships16.7 years$48,261$10,663$32,520$7,771
Other2.9 years99030534956
Total other intangible assets$49,251$10,968$32,869$7,827

The amount of amortization expense was $3.1 million, $1.4 million, and $0.8 million for the years ended December 31, 2012, 2011 and 2010, respectively. Estimated amortization expense of intangible assets over the next five years is expected to approximate $3.4 million (2013), $3.2 million (2014), $3.1 million (2015), $3.0 million (2016) and $3.0 million (2017).

See Note 17 for further discussion regarding acquisitions.

8.DEBT

A summary of debt is set forth in the following table:

December 31, 2012December 31, 2011
(In thousands)
Receivables credit facility, effective interest rate of 1.06% and 1.15% as of December 31, 2012 and December 31, 2011, respectively, due October 11, 2014$109,000$109,000
Senior credit facility — term loan, effective interest rate of 1.71% and 2.08% as of December 31, 2012 and 2011, respectively, due October 11, 2016135,000150,000
Senior notes, net of discount of $514 as of December 31, 2011, interest at 5.75% payable semi-annually, due August 1, 2013, redeemed July 26, 2012—399,486
Senior notes, net of discount of $32 and $38 as of December 31, 2012 and 2011, respectively, interest at 6.50% payable semi-annually, due March 15, 2018149,968149,962
Senior notes, net of discount of $338 as of December 31, 2012 , interest at 3.90% payable semi-annually, due June 15, 2022399,662—
Total793,630808,448
Less current portion15,00015,000
Total long-term debt$778,630$793,448

On March 25, 2008, PCA issued $150.0 million of 6.50% senior notes due March 15, 2018 through a registered public offering. PCA used the proceeds of this offering, together with cash on hand, to repay $150.0 million of outstanding notes on August 1, 2008.

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On October 11, 2011, the Company replaced its senior credit facility that was scheduled to terminate in April 2013 with a new senior credit facility that provides a $150.0 million term loan facility, which PCA fully borrowed, and a $250.0 million revolving credit facility, including a $50.0 million subfacility for letters of credit. Borrowings may be used for general corporate purposes and bear interest at LIBOR plus a margin that is determined based upon PCA’s credit ratings. The new senior credit facility will terminate on October 11, 2016. The Company had no borrowings and $13.7 million of outstanding letters of credit under the revolving credit facility, resulting in $236.3 million in unused borrowing capacity as of December 31, 2012.

Also on October 11, 2011, PCA amended its existing receivables credit facility agreement which extended the termination date to October 11, 2014 and increased the borrowing availability from $150.0 million to $200.0 million. The Company had $91.0 million in additional borrowing capacity available under this facility as of December 31, 2012.

On June 26, 2012, PCA issued $400.0 million of 3.90% senior notes due June 15, 2022 through a registered public offering and notified the holders of its $400.0 million of 5.75% senior notes due August 1, 2013 that it would redeem those notes on July 26, 2012. On July 26, 2012, PCA completed the redemption of the old 5.75% notes for $432.5 million, which included a redemption premium of $21.3 million and $11.2 million of accrued and unpaid interest. PCA used the proceeds of the offering of the new 3.90% notes and cash on hand to fund the redemption.

The instruments governing PCA’s indebtedness contain financial and other covenants that limit the ability of PCA and its subsidiaries to enter into sale and leaseback transactions, incur liens, incur indebtedness at the subsidiary level, enter into certain transactions with affiliates, merge or consolidate with any other person or sell or otherwise dispose of all or substantially all of its assets. The senior credit facility also requires PCA to comply with certain financial covenants, including maintaining a minimum interest coverage ratio and a maximum leverage ratio. A failure to comply with these restrictions could lead to an event of default, which could result in an acceleration of any outstanding indebtedness and/or prohibit the Company from drawing on the revolving credit facility. Such an acceleration may also constitute an event of default under the senior notes indenture and the receivables credit facility. At December 31, 2012, the Company was in compliance with these covenants.

Additional information regarding PCA’s variable rate debt is shown below:

Reference Interest RateApplicable Margin
December 31,December 31,
2012201120122011
Receivables credit facility0.21%0.30%0.85%0.85%
Senior credit facility0.21%0.58%1.50%1.50%

As of December 31, 2012, annual principal maturities for debt, excluding unamortized debt discount, are: $15.0 million (2013), $124.0 million (2014), $15.0 million (2015), $90.0 million (2016), and $550.0 million (2018 and after).

Interest payments in connection with the Company’s debt obligations for the years ended December 31, 2012, 2011 and 2010, amounted to $66.3 million (including the $21.3 million redemption premium), $35.2 million, and $35.3 million, respectively.

Included in interest expense, net, are amortization of financing costs and amortization of treasury lock settlements. For the years ended December 31, 2012, 2011 and 2010, amortization of treasury lock settlements was a $3.0 million net loss for 2012 and a $1.8 million net gain for each of the years 2011 and 2010. Amortization of financing costs was $1.1 million, $0.7 million and $0.6 million, respectively, for 2012, 2011 and 2010. For 2012 only, the redemption premium of $21.3 million of expense was included in interest expense, net.

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PCA has an on-balance sheet securitization program for its trade accounts receivable that is accounted for as a secured borrowing under ASC 860, “Transfers and Servicing.” To effectuate this program, the Company formed a wholly owned limited purpose subsidiary, Packaging Credit Company, LLC (“PCC”), which in turn formed a wholly owned, bankruptcy-remote, special-purpose subsidiary, Packaging Receivables Company, LLC (“PRC”), for the purpose of acquiring receivables from PCC. Both of these entities are included in the consolidated financial statements of the Company. Under this program, PCC purchases on an ongoing basis substantially all of the receivables of the Company and sells such receivables to PRC. PRC and lenders established a $200.0 million receivables-backed revolving credit facility (“Receivables Credit Facility”) through which PRC obtains funds to purchase receivables from PCC. The receivables purchased by PRC are solely the property of PRC. In the event of liquidation of PRC, the creditors of PRC would be entitled to satisfy their claims from PRC’s assets prior to any distribution to PCC or the Company. Credit available under the receivables credit facility is on a borrowing-base formula. As a result, the full amount of the facility may not be available at all times. At December 31, 2012 and 2011, $109.0 million was outstanding and included in “Long — term debt” on the consolidated balance sheet. Substantially all accounts receivable at December 31, 2012 have been sold to PRC and are included in “Accounts receivable, net of allowance for doubtful accounts and customer deductions” on the consolidated balance sheet. The highest outstanding principal balance under the receivables credit facility during 2012 was $109.0 million.

A summary of the Company’s drawings under the receivables credit facility and the revolving credit facility, including the impact of $13.7 million of outstanding letters of credit, as of December 31, 2012 follows:

CommitmentsUtilizedAvailable
(In thousands)
Receivables credit facility$200,000$109,000$91,000
Revolving credit facility250,00013,709236,291
$450,000$122,709$327,291

PCA is required to pay commitment fees on the unused portions of the credit facilities. The Company’s outstanding letters of credit at December 31, 2012 are primarily for workers’ compensation.

9.DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Hedging Strategy

PCA is exposed to certain risks relating to its ongoing operations. When appropriate, the Company uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary risks managed by using derivative financial instruments are interest rate and foreign currency exchange rate risks. PCA does not enter into derivative financial instruments for trading or speculative purposes. As of December 31, 2012, PCA was not a party to any derivative-based arrangement.

Interest Rate Risk

The Company has used treasury lock derivative instruments to manage interest costs and the risk associated with changing interest rates. In connection with contemplated issuances of ten-year debt securities, PCA entered into interest rate protection agreements with counterparties in 2003, 2008, 2010 and 2011 to protect against increases in the ten-year U.S. Treasury Note rate. These treasury rates served as references in determining the interest rates applicable to the debt securities the Company issued in July 2003, March 2008 and June 2012. As a result of changes in the interest rates on those treasury securities between the time PCA entered into the derivative agreements and the time PCA priced and issued the debt securities, the Company: (1) received a payment of $22.8 million from the counterparty upon settlement of the 2003 interest rate protection agreement on July 21, 2003; (2) made a payment of $4.4 million to the counterparty upon settlement of the 2008 interest rate protection agreement on March 25, 2008; (3) received a payment of $9.9 million from the counterparties upon

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settlement of the 2010 interest rate protection agreements on February 4, 2011; and (4) made a payment of $65.5 million to the counterparty upon settlement of the 2011 interest rate protection agreement on June 26, 2012. The Company recorded the effective portion of the settlements in accumulated other comprehensive income (loss) (“OCI”), and these amounts are being amortized over the terms of the respective notes.

During the second quarter of 2012, the Company recorded a charge of $3.4 million in interest expense as hedge ineffectiveness due to settling the 2011 interest rate protection agreement prior to its maturity of December 31, 2012. The Company calculated the ineffective portion of the hedge utilizing the hypothetical derivative method.

During the third quarter of 2012, the Company recorded a $2.2 million settlement gain in interest expense from the 2003 interest rate protection agreement that was written off due to the redemption of the 5.75% notes on July 26, 2012.

At December 31, 2012, the Company did not have any interest rate protection agreements outstanding.

Foreign Currency Exchange Rate Risk

In connection with the energy optimization projects at its Valdosta, Georgia mill and Counce, Tennessee mill, the Company entered into foreign currency forward contracts in 2009 and 2010 to hedge its exposure to forecasted purchases of machinery and equipment denominated in foreign currencies. The foreign currency forward contracts were properly documented and designated as cash flow hedges at inception. By the end of 2011, all contracts had been settled for a loss of $0.7 million. The loss was recorded in accumulated OCI and is being amortized into cost of sales over the lives of the respective machinery and equipment. At December 31, 2012, the Company did not have any foreign currency forward contracts outstanding.

Derivative Instruments

The impact of derivative instruments on the consolidated statements of income and accumulated OCI is as follows:

Amount of Net Gain (Loss) Recognized in Accumulated OCI (Effective Portion) December 31,
20122011
(In thousands)
Treasury locks, net of tax$(31,651)$(23,289)
Foreign currency exchange contracts, net of tax(392)(413)
Total$(32,043)$(23,702)
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Year Ended December 31,
Location201220112010
Amortization of treasury locks (included in interest expense, net)$435$1,846$1,846
Amortization of foreign currency forward contracts (included in cost of sales)(34)(7)—

The net amount of settlement gains or losses on derivative instruments included in accumulated OCI to be amortized over the next 12 months is a net loss of $5.7 million ($3.5 million after tax).

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10.FAIR VALUE MEASUREMENTS

The following presents information about PCA’s assets and liabilities measured at fair value and the valuation techniques used to determine those fair values. The inputs used in the determination of fair values are categorized according to the fair value hierarchy as being Level 1, Level 2 or Level 3 in accordance with ASC 820, “Fair Value Measurements and Disclosures.” The valuation techniques are as follows:

(a) Market approach — prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

(b) Cost approach — amount that would be required to replace the service capacity of an asset (replacement cost)

(c) Income approach — techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models)

A summary of financial instruments recognized at fair value on a recurring basis follows:

(In thousands)TotalQuoted prices in active markets for identical assets (Level 1)Other observable inputs (Level 2)Unobservable inputs (Level 3)
December 31, 2012
Cash and Cash Equivalents
Cash$3,893$3,893$—$—
Money market funds203,500203,500——
December 31, 2011
Cash and Cash Equivalents
Cash$499$499$—$—
Money market funds155,814155,814——
Accrued Liabilities
Treasury lock48,829—48,829—

PCA values its financial instruments using the market approach. No financial instruments were recognized using unobservable inputs.

There were no changes in the Company’s valuation techniques used to measure fair values on a recurring basis since December 31, 2011. PCA had no assets or liabilities that were measured on a nonrecurring basis.

Other Fair Value Measurements

Long-term debt and the current maturities of long-term debt had a carrying value of $793.6 million and a fair value of $825.0 million at December 31, 2012 compared to $808.4 million and $856.9 million, respectively, at December 31, 2011. The fair value of the Company’s senior notes is determined based on quoted market prices. The carrying value of the Company’s variable rate debt approximates its market value due to the variable interest-rate feature of the instrument. These are considered Level 2 fair value measurements.

11.STOCK REPURCHASE PROGRAM

On February 22, 2011, PCA announced that its Board of Directors had authorized the repurchase of $100.0 million of the Company’s outstanding common stock, which it completed in the first quarter of 2012. Through March 31, 2012, the Company repurchased 3,996,118 shares of common stock, with 35,563 shares repurchased for $1.0 million, or $29.40 per share, during the first quarter of 2012. All repurchased shares were retired prior to March 31, 2012.

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On December 14, 2011, the Company announced that its Board of Directors had authorized the repurchase of an additional $150.0 million of the Company’s outstanding common stock. During 2012, the Company repurchased 1,472,096 shares of common stock for $44.1 million, or $29.97 per share, under this authorization. All repurchased shares were retired prior to December 31, 2012. As of December 31, 2012, $105.9 million of the $150.0 million authorization remained available for repurchase of the Company’s common stock.

12.COMMITMENTS AND CONTINGENCIES

Capital Commitments

The Company had authorized capital commitments of approximately $27.0 million and $40.4 million as of December 31, 2012 and 2011, respectively, in connection with the expansion and replacement of existing facilities and equipment.

Lease Obligations

PCA leases space for certain of its facilities, cutting rights to approximately 88,000 acres of timberland, and equipment, primarily vehicles and rolling stock. Lease terms range from one to 11 years and may contain renewal options or escalation clauses. Some leases may require the Company to pay executory costs, which may include property taxes, maintenance and insurance. The minimum lease payments under non-cancelable operating leases with lease terms in excess of one year are as follows:

(In thousands)
2013$33,888
201430,558
201522,279
201614,927
201710,645
Thereafter66,080
Total$178,377

Total lease expense, including base rent on all leases and executory costs, such as insurance, taxes, and maintenance, for the years ended December 31, 2012, 2011 and 2010 was $49.4 million, $46.1 million and $42.0 million, respectively. These costs are included in cost of goods sold and selling and administrative expenses.

PCA was obligated under capital leases covering buildings and machinery and equipment in the amount of $25.9 million and $21.8 million at December 31, 2012 and 2011, respectively. Assets held under capital lease obligations are included in property, plant and equipment as follows:

December 31,
20122011
(In thousands)
Buildings$250$250
Machinery and equipment28,52623,602
Total28,77623,852
Less accumulated amortization(6,845)(5,028)
Total$21,931$18,824

Amortization of assets under capital lease obligations is included in depreciation expense.

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The future minimum payments under capitalized leases at December 31, 2012 are as follows:

(In thousands)
2013$2,654
20142,654
20152,654
20162,654
20172,654
Thereafter28,528
Total minimum capital lease payments41,798
Less amounts representing interest(15,930)
Present value of net minimum capital lease payments25,868
Less current maturities of capital lease obligations964
Total long-term capital lease obligations$24,904

Interest paid as part of the capital lease obligations was $1.7 million, $1.5 million, and $1.6 million during the years ended December 31, 2012, 2011 and 2010, respectively.

Purchase Commitments

The Company has entered into various purchase agreements for minimum amounts of pulpwood processing and energy over periods ranging from one to 16 years at fixed prices. Total purchase commitments are as follows:

(In thousands)
2013$5,960
20144,903
20151,486
20161,486
20171,486
Thereafter15,980
Total$31,301

The Company purchased a total of $27.7 million, $28.5 million, and $32.8 million during the years ended December 31, 2012, 2011 and 2010, respectively, under these purchase agreements.

Litigation

During September and October 2010, PCA and eight other U.S. and Canadian containerboard producers were named as defendants in five purported class action lawsuits filed in the United States District Court for the Northern District of Illinois, alleging violations of the Sherman Act. The lawsuits have been consolidated in a single complaint under the caption Kleen Products LLC v Packaging Corp. of America et al. The consolidated complaint alleges that the defendants conspired to limit the supply of containerboard, and that the purpose and effect of the alleged conspiracy was to artificially increase prices of containerboard products during the period of August 2005 to the time of filing of the complaint. The complaint was filed as a purported class action suit on behalf of all purchasers of containerboard products during such period. The complaint seeks treble damages and costs, including attorney’s fees. The defendants’ motions to dismiss the complaint were denied by the court in April 2011. PCA believes the allegations are without merit and will defend this lawsuit vigorously. However, as the lawsuit is in the document production phase of discovery, PCA is unable to predict the ultimate outcome or estimate a range of reasonably possible losses.

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PCA is a party to various other legal actions arising in the ordinary course of business. These legal actions cover a broad variety of claims spanning our entire business. As of the date of this filing, the Company believes it is not reasonably possible that the resolution of these legal actions will, individually or in the aggregate, have a material adverse effect on its financial position, results of operations, or cash flows.

Environmental Liabilities

The potential costs for various environmental matters are uncertain due to such factors as the unknown magnitude of possible cleanup costs, the complexity and evolving nature of governmental laws and regulations and their interpretations, and the timing, varying costs and effectiveness of alternative cleanup technologies. From 1994 through 2012, remediation costs at the Company’s mills and corrugated plants totaled approximately $3.2 million. As of December 31, 2012, the Company maintained an environmental reserve of $11.7 million (of which $11.1 million is included in “Other long-term liabilities” on PCA’s consolidated balance sheet), relating to on-site landfills (see Note 13) and surface impoundments as well as ongoing and anticipated remedial projects. Liabilities recorded for environmental contingencies are estimates of the probable costs based upon available information and assumptions. Because of these uncertainties, PCA’s estimates may change. As of the date of this filing, the Company believes that it is not reasonably possible that future environmental expenditures for remediation costs and asset retirement obligations above the $11.7 million accrued as of December 31, 2012, will have a material impact on its financial condition, results of operations, or cash flows.

13.ASSET RETIREMENT OBLIGATIONS

Asset retirement obligations consist primarily of landfill capping and closure and post-closure costs. PCA is legally required to perform capping and closure and post-closure care on the landfills at each of the Company’s mills. In accordance with ASC 410, “Asset Retirement and Environmental Obligations,” PCA recognizes the fair value of these liabilities as an asset retirement obligation for each landfill and capitalizes that cost as part of the cost basis of the related asset. The liability is accreted to its estimated value of the asset retirement obligation over time, and the related assets are depreciated on a straight-line basis over their useful lives. Upon settlement of the liability, PCA will recognize a gain or loss for any difference between the settlement amount and the recorded liability.

The following table describes changes to PCA’s asset retirement obligation liability:

20122011
(In thousands)
Asset retirement obligation, January 1$5,095$4,884
Accretion expense50211
Asset retirement obligation, December 31$5,145$5,095

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14.INCOME TAXES

Following is an analysis of the components of the consolidated income tax provision:

201220112010
(In thousands)
Current —
U.S.$27,100$41,452$44,595
State and local6,43716,67823,653
Total current provision for taxes33,53758,13068,248
Deferred —
U.S.180,99729,895(117,945)
State and local2,205(2,548)(2,634)
Total deferred provision for taxes183,20227,347(120,579)
Total provision (benefit) for taxes$216,739$85,477$(52,331)

The effective tax rate varies from the U.S. Federal statutory tax rate principally due to the following:

201220112010
(In thousands)
Provision computed at U.S. Federal statutory rate of 35%$133,196$85,226$53,586
Alternative fuel mixture and cellulosic biofuel producer credits81,695—(104,785)
State and local taxes, net of federal benefit9,1357,5047,694
Domestic manufacturers deduction(7,155)(7,670)(7,540)
Other(132)417(1,286)
Total$216,739$85,477$(52,331)

Tax expense in 2012 included $81.7 million for the reallocation of gallons from the cellulosic biofuel producer credit to the alternative fuel mixture credit claimed in the 2009 amended federal and state income tax returns filed in 2012. Tax benefits recorded in 2010 included $104.8 million for the reallocation of gallons from the alternative fuel mixture credit to the cellulosic biofuel producer credit claimed in the 2009 federal tax return, and also included a reserve for unrecognized tax benefits of $102.0 million. For further discussion regarding the alternative fuel mixture and cellulosic biofuel producer credits recorded during 2012 and 2010, see Note 15.

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Deferred income tax assets and liabilities at December 31 are summarized as follows:

December 31,
20122011
(In thousands)
Deferred tax assets:
Accrued liabilities$7,332$5,287
Employee benefits and compensation16,00215,100
Inventories—6,809
Stock options and restricted stock8,3898,596
Pension and postretirement benefits65,52060,455
Derivatives20,38115,072
Cellulosic biofuel tax credit carryforward—167,452
Total deferred tax assets$117,624$278,771
Deferred tax liabilities:
Property, plant and equipment$(210,486)$(216,109)
Goodwill and intangible assets(7,267)(10,676)
Inventories(1,533)—
Investment in joint venture(1,119)(1,121)
Total deferred tax liabilities$(220,405)$(227,906)
Net deferred tax assets (liabilities)$(102,781)$50,865

The net deferred tax assets (liabilities) at December 31 are classified in the balance sheet as follows:

December 31,
20122011
(In thousands)
Current deferred tax assets$22,328$62,789
Non-current deferred tax liabilities(125,109)(11,924)
Net deferred tax assets (liabilities)$(102,781)$50,865

Cash payments for both federal and state income taxes were $9.7 million, $52.7 million and $19.1 million for the years ended December 31, 2012, 2011 and 2010, respectively.

The following table summarizes the changes related to PCA’s gross unrecognized tax benefits excluding interest:

20122011
(In thousands)
Balance as of January 1$(111,013)$(112,311)
Increases related to prior years’ tax positions(128)(56)
Increases related to current year tax positions(1,267)(624)
Settlements with taxing authorities——
Expiration of the statute of limitations1,1051,978
Balance at December 31$(111,303)$(111,013)

During the third and fourth quarters of 2012, various state statutes of limitations expired. As a result of these events, the reserve for unrecognized tax benefits decreased by $1.1 million gross or $0.7 million net of the federal benefit for state taxes during the third and fourth quarters of 2012. At December 31, 2012, PCA had

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recorded a $111.3 million reserve for unrecognized tax benefits, excluding interest and penalties. Of the total, $107.0 million (net of the federal benefit for state taxes) would impact the effective tax rate if recognized. The increase in reserve in 2010 is attributable to alternative energy tax credits as described in Note 15.

PCA recognizes interest and penalties related to unrecognized tax benefits as part of its income tax expense. During the years ended December 31, 2012 and 2011, PCA recorded $0.3 million gross ($0.2 million net) and $0.2 million gross ($0.16 million net), respectively, in its statement of income, increasing the accrual for interest to $2.5 million gross ($1.6 million net) and $2.2 million gross ($1.4 million, net) at December 31, 2012 and 2011, respectively. Less than $0.1 million of accrual for penalties was made.

PCA and its subsidiaries are subject to U.S. federal income taxes, as well as income taxes of multiple state and city jurisdictions. A federal examination of the tax years 2002 and 2004 has been concluded. The tax years 2008 — 2012 remain open to federal examination. The tax years 2002 — 2012 remain open to state examinations. During March of 2011, the Internal Revenue Service (IRS) started an audit of PCA’s 2008 and 2009 tax years. PCA expects the reserve for unrecognized tax benefits for alternative energy tax credits related to the Filer City mill process to change significantly within the next twelve months due to the anticipated conclusion of the IRS exam. PCA estimates the change in reserve for unrecognized tax benefits to be between $0 and $105.0 million.

15.ALTERNATIVE ENERGY TAX CREDITS

The Company generates black liquor as a by-product of its pulp manufacturing process, which entitled it to certain federal income tax credits. When black liquor is mixed with diesel, it is considered an alternative fuel that was eligible for a $0.50 per gallon refundable alternative fuel mixture credit for gallons produced before December 31, 2009. Black liquor is also eligible for a $1.01 per gallon taxable cellulosic biofuel producer credit for gallons of black liquor produced and used in 2009. The Company first recorded income relating to these credits in its income statement for the year ended December 31, 2009.

During 2010, the Internal Revenue Service (IRS) released guidance related to the alternative energy credits which resulted in: (1) the Company releasing a reserve that was established in 2009 for ambiguity in the calculation of the alternative fuel mixture credit; (2) reallocation of gallons of black liquor from the alternative fuel mixture credit to the cellulosic biofuel credit; and (3) the determination that the Company’s proprietary biofuel process at its Filer City, Michigan mill would likely qualify for the cellulosic biofuel producer credit. The Company amended its 2009 federal income tax return in December 2010 to claim the additional Filer City gallons. As a result of these changes, the Company recorded a charge of $(86.3) million in “Alternative fuel mixture credits” and a $135.5 million benefit in the “(Provision) benefit for income taxes.” Additional expenses of $1.6 million related to the alternative energy tax credits were also recorded, resulting in total income of $47.7 million recorded in 2010. In addition, the Company recorded in 2010 a reserve for unrecognized tax benefits under ASC 740, “Income Taxes,” of $102.0 million (net of the federal benefit for state taxes) because the IRS guidelines do not specifically address the unique and proprietary nature of the Filer City mill process and uncertainty exists.

The cellulosic biofuel producer credit is a taxable credit. However, the laws governing the taxability of the alternative fuel mixture credit are not completely defined. The IRS has not issued definitive guidance regarding such taxability. PCA believes that the manner in which the credit was claimed will not subject the Company to federal or state income taxes on such benefits. If it is determined that any of the alternative fuel mixture credits are subject to taxation, PCA will be required to pay those taxes and take a corresponding charge to its net income.

On February 3, 2012, PCA again amended its 2009 federal tax return to reallocate claimed gallons from cellulosic biofuel producer credits to alternative fuel mixture credits. As a result of this change, the Company recorded a charge of $(118.5) million in “(Provision) benefit for income taxes” and income of $95.5 million in “Alternative fuel mixture credits,” together resulting in a first quarter 2012 non-cash, after-tax charge of $23.0

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million. In the fourth quarter of 2012, PCA recorded after-tax income of $3.4 million for the amendment of the 2009 state income tax returns related to the federal amendment filed in February 2012. The net impact of these changes resulted in a non-cash, after-tax charge of $19.6 million for the year ended December 31, 2012.

As discussed in Note 14, the IRS began its review of PCA’s 2008 and 2009 federal income tax returns including the alternative energy tax credits claimed. Pending the outcome of this audit, PCA expects the reserve for unrecognized tax benefits related to the Filer City mill process to change significantly within the next twelve months.

16.RELATED PARTY TRANSACTIONS

At December 31, 2012 and 2011, PCA owned approximately 29% of Southern Timber Venture, LLC (“STV”) and had not guaranteed the debt of STV and has no future funding requirements. There is no carrying value of the Company’s investment in STV under the equity method at December 31, 2012 and 2011. PCA did not receive any dividends from STV in 2012, 2011 or 2010.

PCA purchased pulpwood directly from STV for its Valdosta mill until November 2010, when STV sold its timberlands to another entity. PCA purchased $2.7 million of pulpwood for its Valdosta, Georgia mill from STV during the year ended December 31, 2010.

17.ACQUISITIONS

During 2011 and 2012, PCA acquired four corrugated products manufacturers located in Illinois, Alabama, Colorado and Pennsylvania. Information regarding the acquisitions is as follows:

Amount Allocated To
Date of AcquisitionPurchase PriceGoodwillCustomer RelationshipsOther Intangible Assets
(In thousands)AmountUseful LifeAmountUseful Life
Field Packaging Group
Chicago, Illinois4/14/2011$26,942$11,459$9,52010 years$2203 years
Packaging Materials Company
Huntsville, Alabama9/10/20118,6021,490————
Colorado Container
Denver, Colorado11/30/201121,7965,7825,80010 years2103 years
Packaging Specialists
Pittsburgh, Pennsylvania3/16/201235,3939,57615,50015 years5604 years

Purchase price in excess of amounts allocated to goodwill and intangible assets were allocated to assets acquired and liabilities assumed. Sales and total assets of the acquisitions were not material to the Company’s overall sales and total assets prior to the acquisitions. Operating results of the acquisitions subsequent to their purchase dates are included in the Company’s operating results. The Company has allocated the purchase price to the assets acquired and liabilities assumed. Amounts allocated to goodwill are deductible for tax purposes.

18.VALDOSTA MILL FIRE INSURANCE RECOVERY

On April 4, 2011, the Company’s Valdosta, Georgia mill had a fire in the turbine generator room. The fire resulted in production and sales volume losses of 11,000 tons and significant repair and demolition expenses to affected buildings and equipment. PCA was insured for the lost production, replacement value of destroyed assets, and related expenses, subject to a $3.0 million deductible. The Company filed an insurance claim for the total cost of the fire and received $9.4 million, net of the $3.0 million deductible, for losses incurred and capital

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expenditures during 2011. The $9.4 million in insurance proceeds is included in net cash provided by operating activities ($5.5 million) and in net cash used for investing activities ($3.9 million) based on the nature of the reimbursement.

During 2012, the Company received an additional $1.4 million in insurance proceeds for capital expenditures which is included in net cash used for investing activities based on the nature of the reimbursement.

19.U.S. TREASURY GRANT

On April 5, 2012, PCA’s application for a U.S. Treasury Section 1603 Grant for Specified Energy property was approved for the Valdosta energy project. The Company received the grant proceeds of $57.4 million on April 11, 2012 and recorded the proceeds as a reduction to the cost of the related property, plant and equipment. These proceeds will be amortized ratably over the estimated useful lives of the related equipment.

20.SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the filing date of this Form 10-K and determined there were no events to disclose.

21.QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal Quarter
FirstSecondThirdFourthTotal
(In thousands, except per share amounts)
2012:
Net sales$671,357$712,468$723,473$736,579$2,843,877
Gross profit145,019158,108162,552173,950639,629
Income from operations169,11083,85892,07298,419443,459
Net income17,84445,15439,79161,031163,820
Basic earnings per share0.180.470.410.631.70
Diluted earnings per share0.180.460.410.631.68
Stock price — high30.6229.8036.6838.6738.67
Stock price — low24.8225.7727.5933.8924.82
2011:
Net sales$629,500$665,481$670,824$654,306$2,620,111
Gross profit133,141136,901137,747134,157541,946
Income from operations65,90367,85971,18067,807272,749
Net income37,41739,36841,77739,465158,027
Basic earnings per share0.370.390.420.411.59
Diluted earnings per share0.370.390.420.401.57
Stock price — high30.6929.8829.1927.1630.69
Stock price — low25.9626.2621.0521.7521.05

Note: The sum of the quarters may not equal the total of the respective year’s earnings per share on either a basic or diluted basis due to changes in the weighted average shares outstanding throughout the year.

During the three months ended March 31, 2012, PCA amended its 2009 federal income tax return to reduce the gallons claimed as cellulosic biofuel producer credits previously recorded as a tax benefit and to increase those gallons claimed as alternative fuel mixture credits previously recorded as income. The increase in gallons

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claimed as alternative fuel mixture credits resulted in an increase in income from operations of $95.5 million. The decrease in gallons claimed as cellulosic biofuel producer credits resulted in a decrease in tax benefits of $118.5 million, for a total decrease in net income of $23.0 million, or $0.24 per share.

For the three months ended June 30, 2012 and September 30, 2012, net income decreased by $2.5 million or $0.025 per share, and $13.5 million or $0.14 per share, respectively, due to debt refinancing charges.

For the three months ended December 31, 2012, net income increased by $3.4 million, or $0.03 per share, from state income tax adjustments, partially offset by $1.4 million, or $0.01 per share, from plant closure charges.

For the three months ended March 31, June 30, September 30, and December 31, 2011 net income decreased by $2.1 million or $0.02 per share, $1.2 million or $0.01 per share, $1.0 million or $0.01 per share, and $0.5 million, or $0.005 per share, respectively, due to asset disposal charges related to major energy projects.

For the three months ended June 30, 2011, net income increased by $1.0 million or $0.01 per share due to an adjustment to reserves related to medical benefits.

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