Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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The following discussion and analysis of historical results of operations and financial condition should be read in conjunction with the audited financial statements and the notes thereto which appear elsewhere in this Form 10-K. This discussion includes forward-looking statements regarding our expectations with respect to our future performance, liquidity, and capital resources. Such statements, along with any other non-historical statements in the discussion, are forward-looking. See our discussion regarding forward-looking statements included under “Part I, Item 1A. Risk Factors” of this Form 10-K.

Overview

PCA is the third largest producer of containerboard products and the third largest producer of uncoated freesheet paper in North America. We operate six containerboard mills, two paper mills, and 95 corrugated products manufacturing plants. Our containerboard mills produce linerboard and corrugating medium, which are papers primarily used in the production of corrugated products. Our corrugated products manufacturing plants produce a wide variety of corrugated packaging products, including conventional shipping containers used to protect and transport manufactured goods, multi-color boxes and displays with strong visual appeal that help to merchandise the packaged product in retail locations, and honeycomb protective packaging. In addition, we are a large producer of packaging for meat, fresh fruit and vegetables, processed food, beverages, and other industrial and consumer products. We also manufacture and sell white papers, including both commodity and specialty papers, which may have custom or specialized features such as colors, coatings, high brightness, and recycled content. We are headquartered in Lake Forest, Illinois and operate primarily in the United States.

Executive Summary

Net sales were $7.01 billion for the year ended December 31, 2018 and $6.44 billion in 2017. We reported $738 million of net income, or $7.80 per diluted share, in 2018, compared to $669 million, or $7.07 per diluted share, in 2017. Net income included $22 million of expense for special items in 2018, compared to $100 million of income for special items in 2017, including $122 million of estimated income tax benefit related to the enactment in December 2017 of the Tax Cut and Jobs Act (H.R.1). Special items in both periods are described later in this section. Excluding special items, we recorded $760 million of net income, or $8.03 per diluted share, in 2018, compared to $569 million, or $6.02 per diluted share, in 2017. The increase was driven primarily by higher prices and mix and volumes in our Packaging segment, higher prices and mix in our Paper segment, lower taxes, and lower wood and recycled fiber costs, partially offset by lower volumes in our Paper segment, higher operating and converting costs, higher freight and logistic expenses, and higher annual outage expense, and other costs. For additional detail on special items included in reported GAAP results and other non-GAAP measures, see “Item 7. Reconciliations of Non-GAAP Financial Measures to Reported Amounts.”

Packaging segment income from operations was $1,045 million in 2018, compared to $950 million in 2017. Packaging segment EBITDA excluding special items was $1,401 million in 2018, compared to $1,264 million in 2017. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes driven by strong demand, and lower recycled fiber costs; partially offset by higher operating and converting costs; higher freight and logistic expense; and higher annual outage expense.

Paper segment income from operations was $98 million in 2018, compared to $54 million in 2017. Paper segment EBITDA excluding special items was $165 million in 2018, compared to $145 million in 2017. The increase was due primarily to higher paper prices and mix, lower operating costs, and lower annual outage expense, partially offset by higher freight and logistic expense and higher fiber costs.

During the second quarter of 2018, the Company discontinued production of uncoated freesheet and coated one-side grades at its Wallula, Washington mill and converted the No. 3 paper machine to a 400,000 ton-per-year virgin kraft linerboard machine. The Company incurred charges in the Packaging and Paper segments relating to these activities during 2017 and 2018 as described below under “Special Items and Earnings per Diluted Share, Excluding Special Items.”

In October 2017, the Company acquired substantially all of the assets of Sacramento Container Corporation, and 100% of the membership interests of Northern Sheets, LLC and Central California Sheets, LLC (collectively the “Sacramento Container acquisition”) for $274 million with cash on hand. The acquired companies operate two full-line corrugated product operations and sheet feeders in McClellan, California and Kingsburg, California. The operating results of the companies acquired in the Sacramento Container acquisition are included in our results and reported in the Packaging segment from and after October 2017. These operations have been substantially integrated into our business and have helped drive growth in our corrugated products volumes during 2018.

Special Items and Earnings per Diluted Share, Excluding Special Items

Earnings per diluted share, excluding special items, in 2018 and 2017 were as follows:

		Year Ended December 31,
		2018				2017
Earnings per diluted share		$	7.80			$	7.07
Special items:
Wallula mill restructuring (a)			0.24				0.21
Facilities closure and other costs (b)			0.01				(0.04	)
Tax reform (c)			(0.02	)			(1.29	)
Internal legal entity consolidation (d)			—				0.04
DeRidder mill incident (e)			—				0.03
Acquisition and integration related costs (f)			—				0.01
Deferred debt issuance costs (g)			—				0.01
Expiration of timberland repurchase option (h)			—				(0.01	)
Hexacomb working capital adjustment (i)			—				(0.01	)
Total special items (income) expense			0.23				(1.05	)
Earnings per diluted share, excluding special items		$	8.03			$	6.02

(a)	For 2018 and 2017, includes $30.0 million and $33.4 million, respectively, of charges related to the second quarter 2018 discontinuation of uncoated free sheet and coated one-side grades at the Wallula, Washington mill associated with the conversion of the No. 3 paper machine to a high-performance 100% virgin kraft linerboard machine.

(b)

For 2018, includes $1.8 million of charges consisting of closure costs related to corrugated products facilities and a corporate administration facility. For 2017, includes $5.8 million of income primarily related to the sale of land corresponding to the closure of a corrugated products facility, partially offset by closure costs related to corrugated products facilities, a paper administration facility, a corporate administration facility, and a lump sum settlement of a multiemployer pension plan withdrawal liability for one of our corrugated products facilities.

(c)

For 2018 and 2017, includes $2.0 million and $122.1 million, respectively, of income tax benefit for the re-measurement of our net deferred tax liability for the reduction in the U.S. corporate federal statutory income tax rate related to our 2017 measurement period adjustments in accordance with SEC Staff Accounting Bulletin No. 118 (SAB 118), Income Tax Accounting Implications of the Tax Cuts and Jobs Act.

(d)	Includes $3.3 million of tax expense for the change in value of deferred taxes as a result of an internal legal entity consolidation that will simplify future operating activities.

(e)	Includes $5.0 million of costs for the property damage and business interruption insurance deductible corresponding to the February 2017 explosion at our DeRidder, Louisiana mill.

(f)	Includes $1.7 million of charges for acquisition and integration costs related to recent acquisitions.

(g)	Includes $1.8 million of expense related to the write-off of deferred debt issuance costs in connection with the December 2017 debt refinancing.

(h)	Includes a $2.0 million gain related to the expiration of a repurchase option corresponding to timberland previously sold.

(i)	Includes $2.3 million of income related to a working capital adjustment from the April 2015 sale of our Hexacomb corrugated manufacturing operations in Europe and Mexico.

Management excludes special items, as it believes these items are not necessarily reflective of the ongoing results of operations of our business. We present these measures because they provide a means to evaluate the performance of our segments and our company on an ongoing basis using the same measures that are used by our management, because these measures assist in providing a meaningful comparison between periods presented and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. A reconciliation of diluted EPS to diluted EPS excluding special items is included above and the reconciliations of other non-GAAP measures used in this Management's Discussion and Analysis of Financial Condition and Results of Operations, to the most comparable measure reported in accordance with GAAP, are included later in Item 7 under “Reconciliations of Non-GAAP Financial Measures to Reported Amounts.” Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such.

Industry and Business Conditions

Trade publications reported North American industry-wide corrugated products total shipments increased 1.7% during 2018, compared to 2017. Reported industry containerboard production increased 1.7% compared to 2017, and reported industry containerboard inventories at the end of 2018 were approximately 2.7 million tons, up 11.7% compared to 2017. Reported containerboard export shipments were flat compared to 2017. In March 2018, trade publications reported a $50 price per ton increase on linerboard and corrugating medium. In January 2019, trade publications reported a $10 price per ton decrease on corrugating medium.

The market for communication papers competes heavily with electronic data transmission and document storage alternatives. Increasing shifts to these alternatives have reduced usage of traditional print media and communication papers. Trade publications reported North American uncoated freesheet paper shipments were down 4.0% in 2018, compared to 2017. Average prices reported by a trade publication for cut size office papers increased $83 per ton, or 8.7%, in 2018, compared to 2017.

Outlook

Looking ahead to the first quarter of 2019, we expect continued strong demand in our Packaging segment for both containerboard volume and corrugated products volume, and we expect strong market conditions in our Paper segment to continue. We anticipate higher labor and benefits costs with annual wage increases and other timing-related expenses. Although we expect costs for freight and recycled fiber to be fairly flat, we do anticipate some inflation with most of our chemical and repair and materials costs, while seasonally colder weather will increase energy usage and wood costs. We also expect our tax rate to be slightly higher. Finally, the recent decrease in the published price for domestic medium will have a minimal effect on earnings. Considering these items, we expect first quarter 2019 earnings, excluding special items, to be lower than fourth quarter 2018. We do not expect special items to be significant during the first quarter of 2019.

Results of Operations

Year Ended December 31, 2018, Compared with Year Ended December 31, 2017

The historical results of operations of PCA for the years ended December 31, 2018 and 2017 are set forth below (dollars in millions):

		Year Ended December 31,
		2018				2017 (c)				Change
Packaging		$	5,938.5			$	5,312.3			$	626.2
Paper			1,002.0				1,051.8				(49.8	)
Corporate and other and eliminations			74.1				80.8				(6.7	)
Net sales		$	7,014.6			$	6,444.9			$	569.7
Packaging		$	1,045.4			$	950.3			$	95.1
Paper			97.7				54.0				43.7
Corporate and other			(75.4	)			(71.8	)			(3.6	)
Income from operations			1,067.7				932.5				135.2
Interest expense, net and other			(97.2	)			(103.9	)			6.7
Income before taxes			970.5				828.6				141.9
Income tax expense (a)			(232.5	)			(160.0	)			(72.5	)
Net income		$	738.0			$	668.6			$	69.4
Net income excluding special items (b)		$	760.4			$	569.1			$	191.3
EBITDA (b)		$	1,478.6			$	1,323.9			$	154.7
EBITDA excluding special items (b)		$	1,497.2			$	1,343.4			$	153.8

	(a)	The U.S. corporate federal statutory income tax rate in 2018 was 21% and in 2017 was 35%. Income tax expense for 2018 and 2017 included a tax benefit of $2.0 million and $122.1 million, respectively, related to the enactment in December 2017 of the Tax Cuts and Jobs Act (H.R.1). See Note 7, Income Taxes, for more information.

	(b)	See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 7 for a reconciliation of non-GAAP measures to the most comparable GAAP measure.

	(c)	Effective January 1, 2018, the Company adopted ASU 2017-07, Compensation: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost and applied this standard retrospectively to the

		prior period reflected herein. See Note 2, Summary of Significant Accounting Policies and Note 18, Segment Information, for more information.

Net Sales

Net sales increased $570 million, or 8.8%, to $7,015 million in 2018, compared to $6,445 million in 2017.

Packaging. Net sales increased $626 million, or 11.8%, to $5,939 million, compared to $5,312 million in 2017, due to increased containerboard and corrugated products volume ($367 million) and higher domestic and export containerboard and corrugated products prices and mix ($259 million). In 2018, our domestic containerboard prices increased 6.3% and export prices increased 16.3% compared to 2017. Containerboard outside shipments increased 10.7%, and total corrugated products shipments were up 5.2% per day and 5.6% in total, compared to 2017. Prices reported by trade publications increased $50 per ton on linerboard and corrugating medium in March of 2018.

Paper. Net sales decreased $50 million, or 4.7%, to $1,002 million, compared to $1,052 million in 2017. The decrease was due to lower volume ($93 million), primarily as a result of discontinuing the production and sale of the products on the No. 3 machine at the Wallula mill in connection with its conversion to linerboard production, partially offset by higher prices and mix ($43 million).

Gross Profit

Gross profit increased $175 million in 2018, compared to 2017. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes, higher paper prices and mix, and lower wood and recycled fiber costs, partially offset by lower volumes in our Paper segment and higher operating and converting costs. In 2018, gross profit included special items of $15 million related to the conversion of the No. 3 machine at the Wallula mill, compared to $11 million related to the conversion of the No. 3 machine at the Wallula mill and acquisition-related costs in 2017.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (SG&A) increased $17 million in 2018, compared to 2017. The increase in 2018 was primarily due to higher employee salaries and fringes ($18 million), the Sacramento Container acquisition ($8 million), outside professional services ($6 million) and other administrative expenses individually insignificant ($10 million). These increases were partially offset by certain expenses that were previously recorded in SG&A for 2017 which are now recorded in cost of sales for 2018 ($25 million). Effective January 1, 2018, the Company adopted ASU 2014-09 (Topic 606): Revenue from Contracts with Customers using the modified retrospective method. The new standard provides additional clarity concerning contract fulfillment costs, which resulted in certain costs being classified as cost of sales rather than SG&A for 2018.

Other (Expense) Income, Net

Other (expense) income, net for the years ended December 31, 2018 and 2017 are set forth below (dollars in millions):

		Year Ended December 31,
		2018				2017
Asset disposals and write-offs		$	(17.3	)		$	(10.5	)
Wallula mill restructuring			(14.9	)			(23.1	)
Facilities closure and other costs			(1.6	)			5.9
Insurance deductible for property damage			(0.5	)			—
Acquisition and integration related costs			(0.2	)			(0.8	)
DeRidder mill incident			—				9.7
Hexacomb working capital adjustment			—				2.3
Expiration of timberland repurchase option			—				2.0
Other			(6.7	)			(3.9	)
Total		$	(41.2	)		$	(18.4	)

We discuss these items in more detail in Note 6, Other (Expense) Income, Net of the Condensed Notes to the Consolidated Financial Statements in “Part II, Item 8. Financial Statements” of this Form 10-K.

Income from Operations

Income from operations increased $135 million, or 14.5%, for the year ended December 31, 2018, compared to 2017. Income from operations in 2018 included $32 million of expense for special items compared to $30 million in 2017. Special items in 2018 consist of $30 million of charges related to the conversion of the Wallula No. 3 paper machine and $2 million related to facilities closures and other costs. 2017 special items included $33 million of charges related to the conversion of the Wallula No. 3 paper machine, $5 million for the property damage and business interruption insurance deductible related to the DeRidder mill incident, $2 million for integration-related costs, and $11 million in net gains related to facility closures and land sales, an adjustment to Hexacomb working capital, and the expiration of a repurchase option to timberland previously sold.

Packaging. Segment income from operations increased $95 million to $1,045 million, compared to $950 million in 2017. The increase in 2018 related primarily to higher containerboard and corrugated products prices and mix ($237 million), higher containerboard and corrugated products sales and production volumes ($141 million), and lower wood and recycled fiber costs ($25 million), partially offset by higher operating and converting costs ($177 million), higher annual outage expense ($36 million), higher freight expense ($26 million), higher depreciation expense ($24 million), Wallula No. 3 paper machine conversion-related costs ($5 million), and other expenses primarily related to the disposition of fixed assets ($8 million) and a 2017 insurance recovery related to the DeRidder incident ($13 million). Special items in 2018 included expense of $12 million of charges related to the conversion of the Wallula No. 3 paper machine and $2 million related to facilities closures and other costs. Special items in 2017 included expense of $5 million for property damage and business interruption insurance deductible related to the DeRidder mill incident, $2 million in integration-related costs, and $11 million in net gains related to facility closures, land sales, an adjustment to Hexacomb working capital and the expiration of a repurchase option corresponding to timberland previously sold.

Paper. Segment income from operations increased $44 million to $98 million, compared to $54 million in 2017. The increase primarily related to higher paper prices and mix ($43 million), lower operating costs ($19 million), lower annual outage expense ($19 million), and lower depreciation expense ($6 million), partially offset by lower sales and production volumes ($35 million), higher freight expense ($12 million), and higher wood and recycled fiber costs ($12 million). Special items during 2018 included expense of $18 million compared to $33 million in 2017 related to the conversion of the Wallula No. 3 paper machine to kraft linerboard.

Interest Expense, Net and Other, and Income Taxes

Interest expense, net and other, during 2018 decreased $7 million compared to 2017. The decrease is primarily related to our repayment of the 6.50% Senior Notes in March 2018 and our term loans in December 2017, partially offset by interest expense on the new notes related to the December 2017 refinancing.

During 2018, income tax expense increased $73 million compared to 2017, primarily due to the 2017 income tax benefit of $122.1 million recorded for the re-measurement of our net deferred tax liability to the lower federal income tax rate as a result of H.R. 1 (P.L. 115-97), originally known as the “Tax Cuts and Jobs Act”, which the President signed into law on December 22, 2017. For additional information regarding the 2017 impact of the Tax Act, see Note 7, Income Taxes, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K. Excluding the tax reform related income tax benefits of $2.0 million in 2018 and $122.1 million in 2017, the 2018 income tax expense would have decreased $48 million compared to 2017, primarily as a result of the reduction in the U.S. corporate federal statutory income tax rate. The effective tax rate for 2018 and 2017 was 24.0% and 19.3%, respectively. Excluding the tax reform related income tax benefits of $2.0 million in 2018 and $122.1 million in 2017, the effective tax rate for 2018 and 2017 would have been 24.2% and 34.1%, respectively.

Year Ended December 31, 2017, Compared with Year Ended December 31, 2016

		Year Ended December 31,
		2017 (c)				2016 (c)				Change
Packaging		$	5,312.3			$	4,584.8			$	727.5
Paper			1,051.8				1,093.9				(42.1	)
Corporate and other and eliminations			80.8				100.3				(19.5	)
Net sales		$	6,444.9			$	5,779.0			$	665.9
Packaging		$	950.3			$	718.5			$	231.8
Paper			54.0				131.7				(77.7	)
Corporate and other			(71.8	)			(66.9	)			(4.9	)
Income from operations			932.5				783.3				149.2
Interest expense, net and other			(103.9	)			(94.8	)			(9.1	)
Income before taxes			828.6				688.5				140.1
Income tax expense (a)			(160.0	)			(238.9	)			78.9
Net income		$	668.6			$	449.6			$	219.0
Net income excluding special items (b)		$	569.1			$	462.0			$	107.1
EBITDA (b)		$	1,323.9			$	1,141.3			$	182.6
EBITDA excluding special items (b)		$	1,343.4			$	1,157.5			$	185.9

	(a)	Income tax expense in 2017 included a tax benefit of $122.1 million related to the enactment in December 2017 of the Tax Cuts and Jobs Act (H.R.1). See Note 7, Income Taxes, for more information.

	(b)	See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 7 for a reconciliation of non-GAAP measures to the most comparable GAAP measure.

	(c)	Effective January 1, 2018, the Company adopted ASU 2017-07, Compensation: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost and applied this standard retrospectively to the prior periods reflected herein. See Note 2, Summary of Significant Accounting Policies and Note 18, Segment Information, for more information.

Net Sales

Net sales increased $666 million, or 11.5%, to $6,445 million in 2017, compared to $5,779 million in 2016.

Packaging. Net sales increased $728 million, or 15.9%, to $5,312 million, compared to $4,585 million in 2016, due to increased containerboard and corrugated products volume ($428 million) and higher domestic and export containerboard and corrugated products prices and mix ($299 million). In 2017, our domestic containerboard prices increased 11.1% and export prices increased 17.2% compared to 2016. Containerboard outside shipments increased 7.9%, and total corrugated products shipments were up 8.6%, compared to 2016. Prices reported by trade publications increased $50 per ton on linerboard in April; corrugating medium increased $50, $20, and $10 per ton in April, July, and August respectively.

Paper. Net sales decreased $42 million, or 3.8%, to $1,052 million, compared to $1,094 million in 2016. The decrease was due to lower pulp volume ($47 million) as a result of the December 2016 shutdown of our market pulp operations at our Wallula mill, and unfavorable changes in prices and mix ($7 million), partially offset by higher white paper volume ($12 million).

Gross Profit

Gross profit increased $195 million in 2017, compared to 2016. The increase was driven primarily by higher containerboard and corrugated products prices and mix and sales and production volumes, partially offset by lower Paper segment prices and mix and sales and production volumes, and higher input and operating costs. In 2017, gross profit included special items of $10 million related to the conversion of the No. 3 machine at the Wallula mill and $1 million of acquisition-related costs, compared to $5 million in 2016 for facility closure and acquisition-related costs.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased $51 million in 2017, compared to 2016. The increase in 2017 was due primarily to higher administrative costs corresponding to the acquisitions of TimBar and Columbus Container in the second half of 2016 and Sacramento Container in the fourth quarter of 2017.

Other (Expense) Income, Net

Other (expense) income, net for the years ended December 31, 2017 and 2016 are set forth below (dollars in millions):

		Year Ended December 31,
		2017				2016
Wallula mill restructuring		$	(23.1	)		$	—
Asset disposals and write-offs			(10.5	)			(11.9	)
Acquisition and integration related costs			(0.8	)			(3.3	)
Expiration of timberland repurchase option			2.0				—
Hexacomb working capital adjustment			2.3				—
Facilities closure and other costs			5.9				(10.3	)
DeRidder mill incident			9.7				—
Ceased production of market pulp at Wallula			—				(0.6	)
Other			(3.9	)			1.8
Total		$	(18.4	)		$	(24.3	)

We discuss these items in more detail in Note 6, Other (Expense) Income, Net of the Condensed Notes to the Consolidated Financial Statements in “Part II, Item 8. Financial Statements” of this Form 10-K.

Income from Operations

Income from operations increased $149 million, or 19.0%, for the year ended December 31, 2017, compared to 2016. 2017 income from operations included $30 million of expense for special items compared to $19 million of expense in 2016. Special items in 2017 consist of $33 million of charges related to the conversion of the Wallula No. 3 paper machine, $5 million for the property damage and business interruption insurance deductible related to the DeRidder mill incident, $2 million for integration-related costs, and $11 million in net gains related to facility closures and land sales, an adjustment to Hexacomb working capital, and the expiration of a repurchase option corresponding to timberland previously sold. 2016 special items included $11 million of facility closure costs related to corrugated manufacturing facilities and a paper distribution center, $4 million of TimBar and Columbus Container acquisition-related costs, $3 million related to shutdown of market pulp operations at our Wallula mill, and $1 million related to our withdrawal from a multiemployer pension plan for one of our corrugated products facilities.

Packaging. Segment income from operations increased $232 million to $950 million, compared to $718 million in 2016. The increase in 2017 related primarily to higher containerboard and corrugated products prices and mix ($223 million), and higher containerboard and corrugated products sales and production volumes ($81 million), partially offset by higher costs for input costs ($49 million), labor and fringes ($21 million), freight ($13 million), converting and other costs ($8 million), and higher depreciation expense ($12 million). Special items in 2017 included expense of $5 million for property damage and business interruption insurance deductible related to the DeRidder mill incident, $2 million in integration-related costs, and $11 million in net gains related to facility closures and land sales, an adjustment to Hexacomb working capital, and the expiration of a repurchase option corresponding to timberland previously sold. Special items in 2016 included $9 million of facility closure costs, $4 million of TimBar and Columbus Container acquisition-related costs, and $1 million related to our withdrawal from a multiemployer pension plan for one of our corrugated products facilities.

Paper. Segment income from operations decreased $78 million to $54 million, compared to $132 million in 2016. The decrease primarily related to lower sales and production volumes ($17 million), lower paper prices and mix ($8 million), and higher costs for energy ($12 million) and annual outage expenses ($10 million). Special items during 2017 included expense of $33 million related to the conversion of the Wallula No. 3 machine to kraft linerboard, compared to $4 million related to the shutdown of market pulp operations at our Wallula mill and facilities closures in 2016.

Interest Expense, Net and Other, and Income Taxes

Interest expense, net and other, during 2017 increased $9 million compared to 2016. The increase in interest expense was primarily due to interest on term loan borrowings for the TimBar acquisition made in August 2016, higher interest rates on variable rate debt due to higher LIBOR in 2017 compared to 2016, and interest on the new notes related to the December 2017 refinancing.

During 2017, income tax expense decreased $79 million compared to 2016 primarily due to a $122.1 million tax benefit as a result of H.R. 1 (P.L. 115-97), originally known as the “Tax Cuts and Jobs Act” (the “Tax Act”), which the President signed into law on December 22, 2017. The effective tax rate for 2017 and 2016 was 19.3% and 34.7%, respectively. For additional information regarding the impact of the Tax Act, see Note 7, Income Taxes, in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Liquidity and Capital Resources

Sources and Uses of Cash

Our primary sources of liquidity are net cash provided by operating activities and available borrowing capacity under our revolving credit facility. We ended the year with $362 million of cash and $327 million of unused borrowing capacity under the revolving credit facility, net of letters of credit. Currently, our primary uses of cash are for operations, capital expenditures, acquisitions, debt service, common stock dividends, and repurchases of common stock. We believe that net cash generated from operating activities, cash on hand, available borrowings under our revolving credit facility and available capital through access to capital markets will be adequate to meet our liquidity and capital requirements, including payments of any declared common stock dividends, for the foreseeable future. As our debt or credit facilities become due, we will need to repay, extend or replace such facilities. Our ability to do so will be subject to future economic conditions and financial, business, and other factors, many of which are beyond our control.

Below is a summary table of our cash flows, followed by a discussion of our sources and uses of cash through operating activities, investing activities, and financing activities (dollars in millions):

		Year Ended December 31,
		2018				2017				2016
Net cash provided by (used for):
Operating activities		$	1,180.1			$	856.1			$	806.9
Investing activities			(608.2	)			(609.1	)			(769.6	)
Financing activities			(427.3	)			(269.4	)			17.8
Net increase (decrease) in cash and cash equivalents		$	144.6			$	(22.4	)		$	55.1

Operating Activities

Our operating cash flow is primarily driven by our earnings and changes in operating assets and liabilities, such as accounts receivable, inventories, accounts payable and other accrued liabilities, as well as other factors described below. Cash requirements for operating activities are subject to PCA's operating needs and the timing of collection of receivables and payments of payables and expenses.

2018

During 2018, net cash provided by operating activities was $1,180 million, compared to $856 million for 2017, an increase of $324 million. Cash from operations excluding changes in cash used for operating assets and liabilities increased $231 million. The increase was primarily due to higher income from operations in 2018 as discussed above and lower qualified pension plan contributions of $20 million made in 2018 compared to the same period in 2017. Cash increased by $93 million due to changes in operating assets and liabilities. The increase was primarily due to the following: (a) a reduction in taxes paid in 2018 as a result of the lower U.S. corporate federal statutory income tax rate of 21% and the utilization in 2018 of a federal overpayment from 2017 as a result of Federal Tax Reform, (b) lower accounts receivables levels in 2018 compared to 2017 due to fewer shipping days in December 2018 compared to December 2017, as well as timing of collections, and (c) the receipt of the DeRidder insurance proceeds in the first quarter of 2018. These changes were partially offset by lower accounts payable levels in 2018 compared to 2017 primarily related to timing of payments.

2017

During 2017, net cash provided by operating activities was $856 million, compared to $807 million for 2016, an increase of $49 million. Cash from operations excluding changes in cash used for operating assets and liabilities increased $200 million. The increase was primarily due to higher income from operations in 2017 as discussed above. Cash decreased by $151 million due to changes in operating assets and liabilities. The decrease was primarily due to higher accounts receivable levels in 2017 compared to 2016 because of increased sales and timing of collections; and a higher federal and state income tax receivable in 2017 compared to 2016 primarily due to an overpayment of required taxes made in 2017 prior to the enactment of tax reform. These changes were partially offset by an increase in accounts payable levels in 2017 compared to 2016 primarily related to timing of payments.

Investing Activities

2018

We used $608 million for investing activities in 2018, compared to $609 million in 2017. In 2018, we spent $552 million for internal capital investments, compared to $343 million in 2017. During 2018, we spent $56 million for acquisitions (Englander dZignPak), compared to $274 million for acquisitions in 2017 (Sacramento Container).

The details of capital expenditures for property and equipment, excluding acquisitions, by segment for the years ended December 31, 2018, 2017, and 2016, are included in the table below (dollars in millions).

		Year Ended December 31,
		2018				2017				2016
Packaging		$	504.0			$	305.1			$	239.9
Paper			12.6				22.6				31.6
Corporate and Other			34.8				15.3				2.8
		$	551.4			$	343.0			$	274.3

We expect capital investments in 2019 to be between $390 million and $410 million. These expenditures could increase or decrease as a result of a number of factors, including our financial results, strategic opportunities, future economic conditions, and our regulatory compliance requirements. We currently estimate capital expenditures to comply with environmental regulations will be about $10 million in 2019. Our estimated environmental expenditures could vary significantly depending upon the enactment of new environmental laws and regulations. For additional information, see “Environmental Matters” in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

At December 31, 2018, the Company had commitments for capital expenditures of $113 million. The Company believes that cash-on-hand combined with cash flow from operations will be sufficient to fund these commitments.

2017

We used $609 million for investing activities in 2017, compared to $770 million in 2016. In 2017, we spent $343 million for internal capital investments, compared to $274 million in 2016. During 2017, we spent $274 million for acquisitions (Sacramento Container), compared to $485 million for acquisitions in 2016 (TimBar and Columbus Container).

Financing Activities

2018

In 2018, net cash used for financing activities was $427 million, compared to $269 million of cash used for financing activities in 2017, an increase of $158 million. The increase primarily relates to higher debt repayments and dividends in 2018. In March 2018, we repaid from cash $150 million of our maturing 6.5% senior notes. We paid $268 million of dividends in 2018 compared to $238 million in 2017.

2017

In 2017, net cash used for financing activities was $269 million, compared to $18 million of cash provided by financing activities in 2016, a change of $287 million. In 2017, we paid down approximately $14 million of debt, including scheduled principal payments on our term loan borrowings and the refinancing of those borrowings as described below. In 2016, we increased our debt, as we borrowed $385 million to finance the TimBar acquisition. In addition, in 2016, we repurchased $100

million of shares, with no such repurchase activity in 2017. We paid $238 million of dividends in 2017 compared to $216 million in 2016.

To reduce exposure to variable interest rates, in December 2017, we issued a total of $1 billion in three-year and ten-year notes with fixed interest rates of 2.45% and 3.40%, respectively, and used the proceeds to fully pay down our five-year and seven-year term loans.

For more information about our debt, treasury lock derivative instruments, and commitments, see Note 10, Debt, Note 14, Derivative Instruments and Hedging Activities, and Note 19, Commitments, Guarantees, Indemnifications, and Legal Proceedings, respectively, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Commitments

Contractual Obligations

The table below sets forth our enforceable and legally binding obligations as of December 31, 2018 for the categories described below. Some of the amounts included in the table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in the table. Purchase orders made in the ordinary course of business are excluded from the table below. Any amounts for which we are liable under purchase orders are reflected on the Consolidated Balance Sheets as accounts payable and accrued liabilities (dollars in millions):

		Payments Due by Period
						Less Than 1 Year				1-3 Years				3-5 Years				More Than 5 Years
		Total				2019				2020-2021				2022-2023				2024 & After
2.45% Senior Notes, due December 2020		$	500.0			$	—			$	500.0			$	—			$	—
3.90% Senior Notes, due June 2022			400.0				—				—				400.0				—
4.50% Senior Notes, due November 2023			700.0				—				—				700.0				—
3.65% Senior Notes, due September 2024			400.0				—				—				—				400.0
3.40% Senior Notes, due December 2027			500.0				—				—				—				500.0
Total short-term and long-term debt (a)			2,500.0				—				500.0				1,100.0				900.0
Interest on long-term debt (b)			477.2				90.9				169.7				134.0				82.6
Capital lease obligations, including interest			25.9				2.7				5.4				5.4				12.4
Operating leases (c)			270.3				70.1				106.1				47.7				46.4
Capital commitments			112.8				112.8				—				—				—
Purchase commitments:
Raw materials (d)			335.1				48.6				87.3				85.1				114.1
Energy related (e)			35.7				26.7				4.5				1.1				3.4
Other liabilities reflected on our Consolidated Balance Sheet (f):
Compensation and benefits (g)			359.9				50.9				111.8				126.9				70.3
Other (h)			71.1				13.2				7.1				2.7				48.1
		$	4,188.0			$	415.9			$	991.9			$	1,502.9			$	1,277.3

(a)	The table assumes our long-term debt is held to maturity and includes the current portion of long-term debt. See Note 10, Debt, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K. Amounts reported are gross amounts and do not include unamortized debt discounts of $3.7 million at December 31, 2018.

(b)	Amounts represent estimated future interest payments as of December 31, 2018, assuming our long-term debt is held to maturity. All interest rates are fixed.

(c)

We enter into operating leases in the normal course of business. We lease some of our operating facilities, as well as other property and equipment, under operating leases. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our operating lease obligations would change if we exercised these renewal options and/or if we entered into additional operating lease agreements.

(d)	Included among our raw materials purchase obligations are contracts to purchase approximately $321.0 million of wood fiber. Purchase prices under most of these agreements are set quarterly, semiannually, or annually based on regional

market prices, and the estimate is based on contract terms or first quarter 2019 pricing. Except for deposits required pursuant to wood supply contracts, these obligations are not recorded in our consolidated financial statements until contract payment terms take effect. Our log, fiber, and wood chip obligations are subject to change based on, among other things, the effect of governmental laws and regulations, disruptions to our manufacturing operations, and log and fiber availability.

(e)	We enter into utility contracts for the purchase of electricity and natural gas. We also purchase these services under utility tariffs. The contractual and tariff arrangements include multiple-year commitments and minimum annual purchase requirements. Our payment obligations were based upon prices in effect on December 31, 2018, or contract language, if available.

(f)	Long-term deferred income taxes of $285.2 million and unrecognized tax benefits of $5.2 million, including interest and penalties, are excluded from this table, because the timing of their future cash outflows are uncertain.

(g)	Amounts primarily consist of pension and postretirement obligations. We have minimum qualified pension contributions of approximately $15.8 million in 2019. See Note 11, Employee Benefit Plans and Other Postretirement Benefits, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K, for additional information.

(h)	Amounts primarily consist of workers compensation, environmental, and asset retirement obligations.

Off-Balance-Sheet Arrangements

The Company does not have any off-balance sheet arrangements as of December 31, 2018.

Inflation and Other General Cost Increases

We are subject to both contractual, inflation, and other general cost increases. If we are unable to offset these cost increases by price increases, growth, and/or cost reductions in our operations, these inflation and other general cost increases could have a material adverse effect on our operating cash flows, profitability, and liquidity.

In 2018, our total company costs including cost of sales (COS) and selling, general, and administrative expenses (SG&A) was $5.9 billion, and excluding non-cash costs (depreciation, pension and postretirement expense, and share-based compensation expense) was $5.4 billion. A 1% increase in COS and SG&A costs would increase costs by $59 million and cash costs by $54 million.

Certain items of product input costs have historically been subject to more cost volatility including fiber, purchased energy, and chemicals.

Energy

In 2018, our mills, including both packaging and paper mills, consumed about 95 million MMBTU’s of fuel, including internally generated and externally purchased, to produce both steam and electricity. The following table for 2018 provides the total MMBTU's purchased externally by fuel type each quarter and the average cost per MMBTU by fuel type for the year. Our mills represent about 90% of our total purchased fuel costs. The cost per MMBTU includes the cost of the fuel plus our transportation and delivery costs.

		2018 Fuel Purchased (millions of MMBTU's)																				2018 Avg.
Fuel Type		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Full Year				Cost / MMBTU
Natural gas			6.97				5.83				5.47				6.23				24.50			$	3.48
Purchased bark			2.53				2.20				2.17				2.37				9.27				2.42
Other purchased fuels			0.31				0.23				0.23				0.33				1.10				4.11
Total mills			9.81				8.26				7.87				8.93				34.87			$	3.22

In addition, the mills purchased 22.41 million CkWh (hundred kilowatt-hours) of electricity in 2018. The purchases by quarter and the average cost per CkWh were as follows:

		2018 Purchased Electricity (millions of CkWh)																				2018 Avg.
		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Full Year				Cost / CkWh
Purchased electricity			5.38				5.66				6.04				5.33				22.41			$	5.57

Environmental Matters

Environmental compliance requirements are a significant factor affecting our business. We employ processes in the manufacture of containerboard, paper, and pulp, which result in various discharges, emissions and waste disposal. These processes are subject to numerous federal, state, local and foreign environmental laws and regulations. We operate and expect to continue to operate, under environmental permits and similar authorizations from various governmental authorities that regulate such discharges, emissions, and waste disposal. The most significant of these laws affecting the Company are:

	•	Resource Conservation and Recovery Act (RCRA);

	•	Clean Water Act (CWA);

	•	Clean Air Act (CAA);

	•	The Emergency Planning and Community Right-to-Know-Act (EPCRA);

	•	Toxic Substance Control Act (TSCA); and

	•	Safe Drinking Water Act (SDWA).

We believe that we are currently in material compliance with these and all applicable environmental rules and regulations. Because environmental regulations are constantly evolving, the Company has incurred, and will continue to incur, costs to maintain compliance with these and other environmental laws. The Company works diligently to anticipate and budget for the impact of applicable environmental regulations, and does not currently expect that future environmental compliance obligations will materially affect its business or financial condition. For the years ended December 31, 2018, 2017, and 2016, we spent $40 million, $39 million, and $44 million, respectively, to comply with the requirements of these and other environmental laws. Additionally, we had $7 million of environmental capital expenditures in 2018, $9 million in 2017, and $8 million in 2016.

In January 2013, the U.S. Environmental Protection Agency (the “EPA”) established a three-year deadline for compliance with the Boiler MACT regulations, establishing air emissions standards and certain other requirements for industrial boilers. PCA's compliance actions involved modifying or replacing certain boilers, and all PCA mills are in full compliance with Boiler MACT requirements. On July 29, 2016, the U.S. Court of Appeals for the District of Columbia Circuit issued a ruling on the consolidated cases challenging Boiler MACT. The court vacated key portions of the rule, including emission limits for certain subcategories of solid fuel boilers, and remanded issues to the EPA for further rulemaking. At this time, we cannot predict with certainty how the recent decision will impact our existing Boiler MACT compliance efforts or whether we will incur additional costs to comply with any revised standards.

As is the case with any industrial operation, PCA has, in the past, incurred costs associated with the remediation of soil or groundwater contamination, as required by the federal Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the federal “Superfund” law, and analogous state laws. Cleanup requirements arise with respect to properties the Company currently owns or operates, former facilities and off-site facilities where the Company has disposed of hazardous substances. As part of the sale to PCA of the containerboard and corrugated products business of Pactiv Corporation in April 1999, Pactiv agreed to retain all liability for all former facilities and all sites associated with pre-closing off-site waste disposal. Pactiv also retained environmentally impaired real property in Filer City, Michigan unrelated to current mill operations. In addition, OfficeMax (now an indirect, wholly owned subsidiary of Office Depot) retains responsibility for certain environmental liabilities related to some of the businesses, facilities, and assets we acquired from Boise. Generally, this responsibility relates to hazardous substance releases and other environmental incidents that arose before 2004. Some of these liabilities could be significant; however, Office Depot may not have sufficient funds to satisfy its indemnification obligations, and in some cases, we may not be entitled to such indemnification.

Because liability for remediation costs under environmental laws is strict, meaning that liability is imposed without fault, joint and several, meaning that liability is imposed on each party without regard to contribution, and retroactive, PCA could receive notifications of cleanup liability in the future and this liability could be material. From 2006 through 2018, there were no significant environmental remediation costs at PCA's mills and corrugated plants. As of December 31, 2018, we maintained an environmental reserve of $27.3 million relating to on-site landfills and surface impoundments as well as ongoing and anticipated remedial projects. The Company believes that it is not reasonably possible that future environmental expenses above the $27.3 million accrued at December 31, 2018, will have a material impact on its financial condition, results of operations, and cash flows.

While legislation regarding the regulation of greenhouse gas emissions has been proposed at the federal level, it is uncertain whether such legislation will be passed and, if so, what the breadth and scope of such legislation will be. The result of the regulation of greenhouse gas emissions could be an increase in our future environmental compliance costs, through caps, taxes or additional capital expenditures to modify facilities, which may be material. However, climate change legislation and the resulting future energy policy could also provide us with opportunities if the use of renewable energy is encouraged. We currently self-generate a significant portion of our power requirements at our mills using bark, black liquor and biomass as fuel, which are derived from renewable resources. While we believe we are well-positioned to take advantage of any renewable energy incentives, it is uncertain what the ultimate costs and opportunities of any climate change legislation will be and how our business and industry will be affected.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, PCA evaluates its estimates, including those related to business combinations, goodwill and intangible assets, pensions and other postretirement benefits, environmental liabilities, income taxes, and long-lived asset impairment, among others. PCA bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting estimates are those that are most important to the portrayal of our financial condition and results. These estimates require management's most difficult, subjective, or complex judgments. We review the development, selection, and disclosure of our critical accounting estimates with the Audit Committee of our board of directors. The Company believes that of its significant accounting policies, the following involve a higher degree of judgment and/or complexity:

Pensions

The Company accounts for defined benefit pension plans in accordance with Accounting Standards Codification (ASC) 715, Compensation - Retirement Benefits. The calculation of pension expense and pension liabilities requires decisions about a number of key assumptions that can significantly affect expense and liability amounts, including discount rates, expected return on plan assets, expected rate of compensation increases, longevity and service lives of participants, expected contributions, and other factors. The pension assumptions used to measure pension expense and liabilities are discussed in Note 11, Employee Benefit Plans and Other Postretirement Benefits.

We recognize the funded status of our pension plans on our Consolidated Balance Sheet and recognize the actuarial and experience gains and losses and the prior service costs and credits as a component of “Accumulated Other Comprehensive Loss” in our Consolidated Statement of Changes in Stockholders' Equity. Actual results that differ from assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense in future periods. At December 31, 2018, we had approximately $127.9 million of actuarial losses and prior service costs, net of tax, recorded in “Accumulated other comprehensive loss” on our Consolidated Balance Sheet. Accumulated losses in excess of 10% of the greater of the projected benefit obligation or the market-related value of assets will be recognized on a straight-line basis over the average remaining service period of active employees in PCA plans (which is between seven and ten years) and over the average remaining lifetime of inactive participants of Boise plans (which is between 24 and 27 years), to the extent that losses are not offset by gains in subsequent years. While we believe that the assumptions used to measure our pension obligations are reasonable, differences in actual experience or changes in assumptions may materially affect our pension obligations and future expense.

We believe that the accounting estimate related to pensions is a critical accounting estimate because it is highly susceptible to change from period to period. As discussed above, the future effects of pension plans on our financial position and results of operations will depend on economic conditions, employee demographics, mortality rates, retirement rates, investment performance, and funding decisions, among other factors. The following table presents selected assumptions used and expected to be used in the measurement of pension expense in the following periods (dollars in millions):

		Year Ending December 31,				Year Ended December 31
		2019				2018				2017
Pension expense		$	32.8			$	27.1			$	24.8
Assumptions
Discount rate			4.31	%			3.66	%			4.24	%
Expected rate of return on plan assets			6.06	%			6.06	%			6.55	%

A change of 0.25% in either direction to the discount rate or the expected rate of return on plan assets would have had the following effect on 2018 and 2019 pension expense (dollars in millions):

						Increase (Decrease) in Pension Expense(a)
		Base Expense				0.25% Increase				0.25% Decrease
2018
Discount rate		$	27.1			$	(2.2	)		$	2.6
Expected rate of return on plan assets			27.1				(2.3	)			2.3
2019
Discount rate		$	32.8			$	(2.3	)		$	2.5
Expected rate of return on plan assets			32.8				(2.2	)			2.2

(a)	The sensitivities shown above are specific to 2018 and 2019. The sensitivities may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown.

For more information related to our pension benefit plans, see Note 11, Employee Benefit Plans and Other Postretirement Benefits, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Goodwill Impairment

Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. At December 31, 2018, we had $917.3 million of goodwill, of which, during 2018, we recorded $28.6 million in connection with the acquisition of Englander. At December 31, 2018, we had $862.1 million and $55.2 million of goodwill recorded in our Packaging and Paper segments, respectively.

We maintain two reporting units for purposes of our goodwill impairment testing, Packaging and Paper, which are the same as our operating segments discussed in Note 18, Segment Information, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K. We test goodwill for impairment annually in the fourth quarter or sooner if events or changes in circumstances indicate that the carrying value of the asset may exceed fair value.

Under ASU 2017-04 (Topic 350), Intangibles - Goodwill and Other – Simplifying the Test for Goodwill Impairment, companies are no longer required to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment, thus eliminating Step Two of the analysis that was required under the prior guidance. Under ASU 2017-04, goodwill impairment testing is performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company adopted this ASU prospectively beginning with its annual goodwill impairment test in the fourth quarter of 2017.

The update to the standard does not eliminate the optional qualitative assessment of goodwill impairment that is often used to determine if the quantitative assessment is necessary. The qualitative assessment requires the evaluation of certain events and circumstances such as macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, as well as company and reporting unit specific items. If, after assessing these qualitative factors, the Company determines that it is more likely than not that the carrying value of the reporting unit is less than its fair value, then no further testing is required. Otherwise, the Company would perform a quantitative analysis.

The quantitative analysis requires companies to compare the fair value of the reporting units to which goodwill was assigned to their respective carrying values. In calculating fair value, we use the income approach as our primary indicator of fair value. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. These estimates are based on a number of factors including industry experience, business expectations and the economic environment. If the fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is potentially impaired, and the carrying value of goodwill is then reduced to the implied value, or to zero if the fair value of the assets exceeds the fair value of the reporting unit, through an impairment charge.

During the annual goodwill impairment test performed in the fourth quarter of 2018, we assessed qualitative factors to determine whether it was more likely than not that the fair value of each reporting unit was less than its carrying value. Based on the results of the qualitative impairment test, we determined that it was more likely than not that the carrying value was less than the fair value of the Packaging and Paper reporting units.

If management's estimates of future operating results materially change or if there are changes to other assumptions, the estimated fair value of our goodwill could change significantly. Such change could result in impairment charges in future periods, which could have a significant noncash impact on our operating results and financial condition. We cannot predict the occurrence of future events that might adversely affect the reported value of our goodwill. As additional information becomes known, we may change our estimates.

Long-Lived Asset Impairment

An impairment of a long-lived asset exists when the carrying value of an asset is not recoverable through future undiscounted cash flows from operations and when the carrying value of the asset exceeds its fair value. Long-lived asset impairment is a critical accounting estimate, as it is susceptible to change from period to period.

We review the carrying value of long-lived assets, including intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. For purposes of testing for impairment, we group our long-lived assets at the lowest level for which identifiable cash flows are largely independent of the cash flows from other assets and liabilities. Our asset groupings vary based on the related business in which the long-lived asset is employed and the interrelationship between those long-lived assets in producing net cash flows. Asset groupings could change in the future if changes in the operations of the business or business environment affect the way particular long-lived assets are employed or the interrelationships between assets. To estimate whether the carrying value of an asset or asset group is impaired, we estimate the undiscounted cash flows that could be generated under a range of possible outcomes. To measure future cash flows, we are required to make assumptions about future production volumes, future product pricing, and future expenses to be incurred. In addition, estimates of future cash flows may change based on the availability of fiber, environmental requirements, capital spending, and other strategic management decisions. We estimate the fair value of an asset or asset group based on quoted market prices for similar assets and liabilities or inputs that are observable either directly (Level 1 measurement) or indirectly (the amount for which the asset(s) could be bought or sold in a current transaction with a third party) when available (Level 2 measurement). When quoted market prices are not available, we use a discounted cash flow model to estimate fair value (Level 3 measurement).

We periodically assess the estimated useful lives of our assets. Changes in circumstances, such as changes to our operational or capital strategy, changes in regulation, or technological advances, may result in the actual useful lives differing from our estimates. Revisions to the estimated useful lives of assets requires judgment and constitutes a change in accounting estimate, which is accounted for prospectively by adjusting or accelerating depreciation and amortization rates. In 2018 and 2017, we recognized incremental depreciation expense of $14.5 million and $10.5 million, respectively, primarily related to the second quarter 2018 discontinuation of uncoated free sheet and coated one-side grades at the Wallula, Washington mill associated with the conversion of the No. 3 paper machine to a high-performance 100% virgin kraft linerboard machine. Additionally, in conjunction with the conversion of the No. 3 paper machine, we recognized an impairment loss of $3.1 million and $13.5 million associated with the fiber farm asset group during 2018 and 2017, respectively.

New and Recently Adopted Accounting Standards

For a listing of our new and recently adopted accounting standards, see Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Reconciliations of Non-GAAP Financial Measures to Reported Amounts

Net income excluding special items, EBITDA, and EBITDA excluding special items are non-GAAP financial measures. Management excludes special items, as it believes that these items are not necessarily reflective of the ongoing operations of our business. These measures are presented because they provide a means to evaluate the performance of our segments and our Company on an ongoing basis using the same measures that are used by our management, because these measures assist in providing a meaningful comparison between periods and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such. Reconciliations of the non-GAAP measures to the most comparable measure reported in accordance with GAAP for the years ended December 31, 2018, 2017, and 2016, follow (dollars in millions):

		Year Ended December 31,
		2018												2017
		Income before Taxes				Income Taxes				Net Income				Income before Taxes				Income Taxes				Net Income
As reported in accordance with GAAP		$	970.5			$	(232.5	)		$	738.0			$	828.6			$	(160.0	)		$	668.6
Special items:
Wallula mill restructuring (a)			30.0				(7.5	)			22.5				33.4				(13.1	)			20.3
Facilities closure and other costs (b)			1.8				(0.5	)			1.3				(5.8	)			2.3				(3.5	)
Insurance deductible for property damage (c)			0.5				(0.1	)			0.4				—				—				—
Acquisition and integration related costs (d)			0.2				—				0.2				1.7				(0.7	)			1.0
Tax reform (e)			—				(2.0	)			(2.0	)			—				(122.1	)			(122.1	)
DeRidder mill incident (f)			—				—				—				5.0				(2.0	)			3.0
Deferred debt issuance costs (g)			—				—				—				1.8				(0.7	)			1.1
Hexacomb working capital adjustment (h)			—				—				—				(2.3	)			0.9				(1.4	)
Expiration of timberland repurchase option (i)			—				—				—				(2.0	)			0.8				(1.2	)
Internal legal entity consolidation (j)			—				—				—				—				3.3				3.3
Total special items			32.5				(10.1	)			22.4				31.8				(131.3	)			(99.5	)
Excluding special items		$	1,003.0			$	(242.6	)		$	760.4			$	860.4			$	(291.3	)		$	569.1

		Year Ended December 31,
		2016
		Income before Taxes				Income Taxes				Net Income
As reported in accordance with GAAP		$	688.5			$	(238.9	)		$	449.6
Special items:
Facilities closure and other costs (b)			11.9				(4.2	)			7.7
Acquisition and integration related costs (d)			4.5				(1.6	)			2.9
Ceased production of market pulp at Wallula (k)			2.7				(0.9	)			1.8
Total special items			19.1				(6.7	)			12.4
Excluding special items		$	707.6			$	(245.6	)		$	462.0

(a)	Includes charges related to the second quarter 2018 discontinuation of uncoated free sheet and coated one-side grades at the Wallula, Washington mill associated with the conversion of the No. 3 paper machine to a high-performance 100% virgin kraft linerboard machine.

(b)

For 2018, includes charges consisting of closure costs related to corrugated products facilities and a corporate administration facility. For 2017, includes income primarily related to the sale of land corresponding to the closure of a corrugated products facility, partially offset by closure costs related to corrugated products facilities, a paper administration facility, a corporate administration facility, and a lump sum settlement of a multiemployer pension plan withdrawal liability for one of our corrugated products facilities. For 2016, includes closure costs related to corrugated

	product facilities and a paper products facility, and a lump sum settlement of a multiemployer pension plan withdrawal liability for one of our corrugated products facilities.

(c)	Includes costs for the property damage insurance deductible for a weather-related incident at one of the corrugated products facilities.

(d)	Includes charges for acquisition and integration costs related to recent acquisitions.

(e)

For 2018 and 2017, includes $2.0 million and $122.1 million, respectively, of income tax benefit for the re-measurement of our net deferred tax liability for the reduction in the U.S. corporate federal statutory income tax rate related to our 2017 measurement period adjustments in accordance with SEC Staff Accounting Bulletin No. 118 (SAB 118), Income Tax Accounting Implications of the Tax Cuts and Jobs Act.

(f)	Includes costs for the property damage and business interruption insurance deductible corresponding to the February 2017 explosion at our DeRidder, Louisiana mill.

(g)	Includes expense related to the write-off of deferred debt issuance costs in connection with the December 2017 debt refinancing.

(h)	Includes income related to a working capital adjustment from the April 2015 sale of our Hexacomb corrugated manufacturing operations in Europe and Mexico.

(i)	Includes a gain related to the expiration of a repurchase option corresponding to timberland previously sold.

(j)	Includes tax expense for the change in value of deferred taxes as a result of an internal legal entity consolidation that will simplify future operating activities.

(k)	Includes costs related to ceased production of softwood market pulp operations at our Wallula, Washington mill and the permanent shutdown of the No. 1 machine.

The following table reconciles net income (loss) to EBITDA and EBITDA excluding special items for the periods indicated (dollars in millions):

		Year Ended December 31,
		2018				2017				2016
Net income		$	738.0			$	668.6			$	449.6
Interest expense, net and other			97.2				103.9		(a)		94.8		(a)
Provision for income taxes (b)			232.5				160.0				238.9
Depreciation, amortization, and depletion			410.9				391.4				358.0
EBITDA		$	1,478.6			$	1,323.9		(a)	$	1,141.3		(a)
Special items:
Acquisition and integration related costs		$	0.2			$	1.7			$	4.5
Facilities closure and other costs			1.6				(6.0	)			11.1
Wallula mill restructuring			16.3				23.1				—
Insurance deductible for property damage			0.5				—				—
DeRidder mill incident			—				5.0				—
Hexacomb working capital adjustment			—				(2.3	)			—
Expiration of timberland repurchase option			—				(2.0	)			—
Ceased production of market pulp at Wallula			—				—				0.6
EBITDA excluding special items		$	1,497.2			$	1,343.4		(a)	$	1,157.5		(a)

(a)	Effective January 1, 2018, the Company adopted ASU 2017-07, Compensation: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost and applied this standard retrospectively to the prior periods reflected herein. See Note 2, Summary of Significant Accounting Policies and Note 18, Segment Information, for more information.

(b)	The U.S. corporate federal statutory income tax rate in 2018 was 21% and 35% in all prior years presented in the table. Income tax expense for 2018 and 2017 included a tax benefit of $2.0 million and $122.1 million, respectively, related to the enactment in December 2017 of the Tax Cuts and Jobs Act (H.R.1). See Note 7, Income Taxes, for more information.

The following table reconciles segment income (loss) to EBITDA and EBITDA excluding special items (dollars in millions):

		Year Ended December 31,
		2018				2017 (a)				2016 (a)
Packaging
Segment income		$	1,045.4			$	950.3			$	718.5
Depreciation, amortization, and depletion			342.0				317.5				293.3
EBITDA			1,387.4				1,267.8				1,011.8
Facilities closure and other costs			1.6				(7.2	)			10.2
Acquisition and integration related costs			0.2				1.7				4.2
Wallula mill restructuring			11.3				—				—
Insurance deductible for property damage			0.5				—				—
DeRidder mill incident			—				5.0				—
Expiration of timberland repurchase option			—				(2.0	)			—
Hexacomb working capital adjustment			—				(1.6	)			—
EBITDA excluding special items		$	1,401.0			$	1,263.7			$	1,026.2
Paper
Segment income		$	97.7			$	54.0			$	131.7
Depreciation, amortization, and depletion			62.0				67.6				59.6
EBITDA			159.7				121.6				191.3
Wallula mill restructuring			5.0				23.1				—
Facilities closure and other costs			—				0.4				0.9
Ceased production of market pulp at Wallula			—				—				0.6
EBITDA excluding special items		$	164.7			$	145.1			$	192.8
Corporate and Other
Segment loss		$	(75.4	)		$	(71.8	)		$	(66.9	)
Depreciation, amortization, and depletion			6.9				6.3				5.1
EBITDA			(68.5	)			(65.5	)			(61.8	)
Facilities closure and other costs			—				0.8				—
Hexacomb working capital adjustment			—				(0.7	)			—
Acquisition and integration related costs			—				—				0.3
EBITDA excluding special items		$	(68.5	)		$	(65.4	)		$	(61.5	)
EBITDA		$	1,478.6			$	1,323.9			$	1,141.3
EBITDA excluding special items		$	1,497.2			$	1,343.4			$	1,157.5

(a)	Effective January 1, 2018, the Company adopted ASU 2017-07, Compensation: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost and applied this standard retrospectively to the prior periods reflected herein. See Note 2, Summary of Significant Accounting Policies and Note 18, Segment Information, for more information.