filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
180K characters. Original on sec.gov · Markdown
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGIST****ERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Packaging Corporation of America:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Packaging Corporation of America and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company acquired Advance Packaging Corporation during 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, Advance Packaging Corporation’s internal control over financial reporting associated with approximately 3% of the Company’s consolidated total assets and less than 1% of consolidated net sales included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Advance Packaging Corporation.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of the value of the pension benefit obligation
As discussed in Note 13 to the consolidated financial statements, the Company’s estimated pension benefit obligation totaled $1,504 million as of December 31, 2021. The pension benefit obligation is measured at the actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service rendered before that date. The determination of the Company’s pension benefit obligation is dependent, in part, on the selection of certain actuarial assumptions, including the discount rate.
We identified the evaluation of the value of the pension benefit obligation as a critical audit matter because of the specialized skills required to evaluate the measurement of the pension benefit obligation. In addition, the measurement of the pension benefit obligation is sensitive to minor changes in the discount rate assumption.
The following are primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s pension benefit obligation valuation process, including a control related to the development of the discount rate. We involved an actuarial professional with specialized skills and knowledge, who assisted in understanding and assessing the actuarial methods and assumptions used to measure the pension benefit obligation. In addition, the actuarial professional assisted with our evaluation of the discount rate by assessing:
changes in the discount rate from the prior year against changes in published indices;
the pattern of cash flows, including consideration of the plan type and plan provisions; and
the selected yield curve and its consistency with the prior year and spot rates.
| /s/ KPMG LLP | |
| We have served as the Company’s auditor since 2014*.* | |
| Chicago, Illinois | |
| February 24, 2022 |
Packaging Corporation of America
Consolidated Statements of In****come and Comprehensive Income
(dollars in millions, except per-share data)
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Statements of Income | ||||||||||||
| Net sales | $ | 7,730.3 | $ | 6,658.2 | $ | 6,964.3 | ||||||
| Cost of sales | (5,857.3 | ) | (5,288.8 | ) | (5,320.3 | ) | ||||||
| Gross profit | 1,873.0 | 1,369.4 | 1,644.0 | |||||||||
| Selling and administrative expenses | (576.8 | ) | (539.6 | ) | (557.6 | ) | ||||||
| Goodwill impairment | — | (55.2 | ) | — | ||||||||
| Other expense, net | (54.8 | ) | (50.7 | ) | (32.7 | ) | ||||||
| Income from operations | 1,241.4 | 723.9 | 1,053.7 | |||||||||
| Non-operating pension income (expense) | 19.7 | 2.3 | (7.9 | ) | ||||||||
| Interest expense, net | (152.4 | ) | (93.5 | ) | (128.8 | ) | ||||||
| Income before taxes | 1,108.7 | 632.7 | 917.0 | |||||||||
| Provision for income taxes | (267.6 | ) | (171.7 | ) | (220.6 | ) | ||||||
| Net income | $ | 841.1 | $ | 461.0 | $ | 696.4 | ||||||
| Net income per common share: | ||||||||||||
| Basic | $ | 8.87 | $ | 4.86 | $ | 7.36 | ||||||
| Diluted | $ | 8.83 | $ | 4.84 | $ | 7.34 | ||||||
| Dividends declared per common share | $ | 4.00 | $ | 3.37 | $ | 3.16 | ||||||
| Statements of Comprehensive Income: | ||||||||||||
| Net income | $ | 841.1 | $ | 461.0 | $ | 696.4 | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Foreign currency translation adjustment | $ | 0.4 | $ | — | $ | — | ||||||
| Reclassification adjustments to cash flow hedges included in net income, net of tax of $0.0 million, $0.0 million, and ($7.9) million for 2021, 2020, and 2019, respectively | — | — | 10.2 | |||||||||
| Changes in unrealized (losses) gains on marketable debt securities, net of tax of $0.2 million, ($0.1) million, and $0.0 million for 2021, 2020, and 2019, respectively | (0.5 | ) | 0.3 | — | ||||||||
| Amortization of pension and postretirement plans actuarial loss and prior service cost, net of tax of ($3.3) million, ($3.6) million, and ($3.2) million for 2021, 2020, and 2019, respectively | 10.0 | 10.7 | 9.6 | |||||||||
| Changes in unfunded employee benefit obligations, net of tax of ($19.9) million, ($1.3) million, and $13.6 million for 2021, 2020, and 2019, respectively | 59.4 | 4.0 | (40.5 | ) | ||||||||
| Other comprehensive income (loss) | 69.3 | 15.0 | (20.7 | ) | ||||||||
| Comprehensive income | $ | 910.4 | $ | 476.0 | $ | 675.7 |
See notes to consolidated financial statements.
Packaging Corporation of America
Consolidated B****alance Sheets
(dollars and shares in millions, except per-share data)
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 618.7 | $ | 974.6 | ||||
| Short-term marketable debt securities | 86.1 | 105.6 | ||||||
| Accounts receivable, net of allowance for credit losses and customer deductions of $14.3 million and $10.6 million as of December 31, 2021 and 2020, respectively | 1,071.0 | 832.4 | ||||||
| Inventories | 902.5 | 787.9 | ||||||
| Prepaid expenses and other current assets | 47.0 | 44.7 | ||||||
| Federal and state income taxes receivable | 7.4 | 5.1 | ||||||
| Total current assets | 2,732.7 | 2,750.3 | ||||||
| Property, plant and equipment, net | 3,529.0 | 3,193.4 | ||||||
| Goodwill | 923.5 | 863.5 | ||||||
| Other intangible assets, net | 308.4 | 295.9 | ||||||
| Operating lease right-of-use assets | 238.3 | 234.2 | ||||||
| Long-term marketable debt securities | 60.0 | 42.7 | ||||||
| Other long-term assets | 44.9 | 53.2 | ||||||
| Total assets | $ | 7,836.8 | $ | 7,433.2 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Operating lease obligations | $ | 67.1 | $ | 68.9 | ||||
| Finance lease obligations | 1.7 | 1.6 | ||||||
| Accounts payable | 452.4 | 387.0 | ||||||
| Dividends payable | 96.3 | 97.0 | ||||||
| Accrued liabilities | 255.0 | 216.2 | ||||||
| Accrued interest | 12.3 | 11.9 | ||||||
| Total current liabilities | 884.8 | 782.6 | ||||||
| Long-term liabilities: | ||||||||
| Long-term debt | 2,471.5 | 2,479.4 | ||||||
| Operating lease obligations | 179.3 | 173.6 | ||||||
| Finance lease obligations | 12.7 | 14.4 | ||||||
| Deferred income taxes | 465.9 | 379.4 | ||||||
| Compensation and benefits | 157.4 | 298.3 | ||||||
| Other long-term liabilities | 58.0 | 59.2 | ||||||
| Total long-term liabilities | 3,344.8 | 3,404.3 | ||||||
| Commitments and contingent liabilities (Note 21) | ||||||||
| Stockholders' equity: | ||||||||
| Common stock, par value $0.01 per share, 300.0 million shares authorized,93.5 million and 94.8 million shares issued as of December 31, 2021 and 2020, respectively | 0.9 | 0.9 | ||||||
| Additional paid in capital | 579.4 | 554.4 | ||||||
| Retained earnings | 3,102.1 | 2,835.5 | ||||||
| Accumulated other comprehensive loss | (75.2 | ) | (144.5 | ) | ||||
| Total stockholders' equity | 3,607.2 | 3,246.3 | ||||||
| Total liabilities and stockholders' equity | $ | 7,836.8 | $ | 7,433.2 |
See notes to consolidated financial statements.
Packaging Corporation of America
Consolidated Statem****ents of Cash Flows
(dollars in millions)
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Cash Flows from Operating Activities: | ||||||||||||
| Net income | $ | 841.1 | $ | 461.0 | $ | 696.4 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation, depletion, and amortization of intangibles | 417.5 | 409.9 | 387.5 | |||||||||
| Amortization of deferred financing costs | 4.4 | 2.6 | 23.4 | |||||||||
| Loss on early extinguishment of debt | 56.1 | — | 22.2 | |||||||||
| Share-based compensation expense | 35.5 | 30.0 | 30.4 | |||||||||
| Deferred income tax provision | 59.4 | 34.7 | 60.3 | |||||||||
| Goodwill impairment | — | 55.2 | — | |||||||||
| Net loss on asset disposals | 6.1 | 6.8 | 8.2 | |||||||||
| Pension and post-retirement benefits expense, net of contributions | (50.5 | ) | (63.4 | ) | (26.9 | ) | ||||||
| Other, net | 11.9 | 18.2 | (3.4 | ) | ||||||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||
| (Increase) decrease in assets — | ||||||||||||
| Accounts receivable | (227.2 | ) | 13.2 | 56.4 | ||||||||
| Inventories | (105.5 | ) | 6.3 | 1.4 | ||||||||
| Prepaid expenses and other current assets | (2.7 | ) | 0.4 | (6.9 | ) | |||||||
| Increase (decrease) in liabilities — | ||||||||||||
| Accounts payable | 12.2 | 39.7 | (32.4 | ) | ||||||||
| Accrued liabilities | 37.9 | (3.2 | ) | (0.1 | ) | |||||||
| Federal and state income tax payable / receivable | (2.1 | ) | 21.4 | (9.1 | ) | |||||||
| Net cash provided by operating activities | 1,094.1 | 1,032.8 | 1,207.4 | |||||||||
| Cash Flows from Investing Activities: | ||||||||||||
| Additions to property, plant, and equipment | (605.1 | ) | (421.2 | ) | (399.5 | ) | ||||||
| Acquisition of business, net of cash acquired | (194.9 | ) | — | — | ||||||||
| Additions to other long-term assets | (1.8 | ) | (6.4 | ) | (3.8 | ) | ||||||
| Proceeds from asset disposals | 7.9 | 4.6 | 4.1 | |||||||||
| Purchases of marketable debt securities | (127.4 | ) | (110.1 | ) | (157.0 | ) | ||||||
| Proceeds from sales of marketable debt securities | 26.7 | 24.2 | 10.9 | |||||||||
| Proceeds from maturities of marketable debt securities | 100.2 | 82.8 | — | |||||||||
| Other, net | — | — | (1.3 | ) | ||||||||
| Net cash used for investing activities | (794.4 | ) | (426.1 | ) | (546.6 | ) | ||||||
| Cash Flows from Financing Activities: | ||||||||||||
| Net proceeds received from issuance of debt | 690.2 | — | 889.0 | |||||||||
| Repayments of debt and finance lease obligations | (757.7 | ) | (1.5 | ) | (923.4 | ) | ||||||
| Financing costs paid | (2.4 | ) | — | (1.5 | ) | |||||||
| Common stock dividends paid | (379.8 | ) | (299.6 | ) | (298.7 | ) | ||||||
| Repurchases of common stock | (193.0 | ) | — | — | ||||||||
| Shares withheld to cover employee restricted stock taxes | (12.9 | ) | (10.5 | ) | (8.2 | ) | ||||||
| Net cash used for financing activities | (655.6 | ) | (311.6 | ) | (342.8 | ) | ||||||
| Net (decrease) increase in cash and cash equivalents | (355.9 | ) | 295.1 | 318.0 | ||||||||
| Cash and cash equivalents, beginning of year | 974.6 | 679.5 | 361.5 | |||||||||
| Cash and cash equivalents, end of year | $ | 618.7 | $ | 974.6 | $ | 679.5 |
See notes to consolidated financial statements.
Packaging Corporation of America
Consolidated Statements of Ch****anges in Stockholders' Equity
(dollars in millions and shares in thousands)
| Common Stock | Additional Paid in | Retained | Accumulated Other Comprehensive | Total Stockholders' | |||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Loss | Equity | ||||||||||||||||||||
| Balance at January 1, 2019 | 94,497 | $ | 0.9 | $ | 494.5 | $ | 2,315.8 | $ | (138.8 | ) | $ | 2,672.4 | |||||||||||||
| Common stock withheld and retired to cover taxes on vested stock awards | (87 | ) | — | (0.7 | ) | (7.5 | ) | — | (8.2 | ) | |||||||||||||||
| Common stock dividends declared | — | — | — | (299.7 | ) | — | (299.7 | ) | |||||||||||||||||
| Share-based compensation | 245 | — | 31.0 | — | — | 31.0 | |||||||||||||||||||
| Other | — | — | — | (0.2 | ) | — | (0.2 | ) | |||||||||||||||||
| Comprehensive income | — | — | — | 696.4 | (20.7 | ) | 675.7 | ||||||||||||||||||
| Balance at December 31, 2019 | 94,655 | 0.9 | 524.8 | 2,704.8 | (159.5 | ) | 3,071.0 | ||||||||||||||||||
| Common stock withheld and retired to cover taxes on vested stock awards | (108 | ) | — | (0.8 | ) | (9.7 | ) | — | (10.5 | ) | |||||||||||||||
| Common stock dividends declared | — | — | — | (320.9 | ) | — | (320.9 | ) | |||||||||||||||||
| Share-based compensation | 283 | — | 30.8 | — | — | 30.8 | |||||||||||||||||||
| Other | — | — | (0.4 | ) | 0.3 | — | (0.1 | ) | |||||||||||||||||
| Comprehensive income | — | — | — | 461.0 | 15.0 | 476.0 | |||||||||||||||||||
| Balance at December 31, 2020 | 94,830 | 0.9 | 554.4 | 2,835.5 | (144.5 | ) | 3,246.3 | ||||||||||||||||||
| Common stock repurchases and retirements | (1,443 | ) | — | (11.5 | ) | (181.5 | ) | — | (193.0 | ) | |||||||||||||||
| Common stock withheld and retired to cover taxes on vested stock awards | (95 | ) | — | (0.8 | ) | (12.1 | ) | — | (12.9 | ) | |||||||||||||||
| Common stock dividends declared | — | — | — | (379.9 | ) | — | (379.9 | ) | |||||||||||||||||
| Share-based compensation | 247 | — | 36.3 | — | — | 36.3 | |||||||||||||||||||
| Other | — | — | 1.0 | (1.0 | ) | — | — | ||||||||||||||||||
| Comprehensive income | — | — | — | 841.1 | 69.3 | 910.4 | |||||||||||||||||||
| Balance at December 31, 2021 | 93,539 | $ | 0.9 | $ | 579.4 | $ | 3,102.1 | $ | (75.2 | ) | $ | 3,607.2 |
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1.
Nature of Operations and Basis of Presentation
Packaging Corporation of America (“we,” “us,” “our,” “PCA,” or the “Company”) was incorporated on January 25, 1999. In April 1999, PCA acquired the containerboard and corrugated packaging products business of Pactiv Corporation (Pactiv), formerly known as Tenneco Packaging, Inc., a wholly owned subsidiary of Tenneco Inc. We are a large, diverse manufacturer of both packaging and paper products. We are headquartered in Lake Forest, Illinois and we operate primarily in the United States. We have approximately 15,200 employees.
We report our business in three reportable segments: Packaging, Paper, and Corporate and Other. Our Packaging segment produces a wide variety of containerboard and corrugated packaging products. The Paper segment manufactures and sells a range of communication-based papers.
Our Jackson, Alabama mill had historically operated as a UFS mill, with its results of operations reported in our Paper segment. During the fourth quarter of 2020, in order to meet strong packaging demand and maintain appropriate inventory levels, we temporarily began producing linerboard on the No. 3 machine at our Jackson, Alabama mill. In the first quarter of 2021, we announced the discontinuation of production of uncoated freesheet paper grades on the machine and the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities. Before October 2020, operating results for the Jackson mill were included in the Paper segment. Beginning in October 2020, operating results for the Jackson mill are included in both the Packaging and Paper segments.
Corporate and other includes support staff services and related assets and liabilities, transportation assets, and activity related to other ancillary support operations. For more information about our segments, see Note 20, Segment Information.
In these consolidated financial statements, certain amounts in prior periods' consolidated financial statements have been reclassified to conform with the current period presentation.
The consolidated financial statements include the accounts of PCA and its majority-owned subsidiaries after elimination of intercompany balances and transactions.
2.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the consolidated financial statements in future periods.
Revenue Recognition
In accordance with ASU 2014-09 (Topic 606): Revenue from Contracts with Customers, we recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration expected to be received in exchange for those goods or services. The timing of revenue recognition for most goods and services occurs when performance obligations under the terms of a contract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time. For most packaging and paper products, revenue is recognized when the product is shipped from the mill or from our manufacturing facility to our customer. Shipping and handling fees billed to a customer are recorded on a gross basis in “Net sales”, with the corresponding shipping and handling costs included in “Cost of sales” in the concurrent period as the revenue is recorded. We present taxes collected from customers and remitted to governmental authorities on a net basis in our Consolidated Statements of Income. See Note 4, Revenue, for more information.
Planned Major Maintenance Costs
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.
Share-Based Compensation
We recognize compensation expense for awards granted under the PCA long-term equity incentive plans based on the fair value on the grant date. We recognize the cost of the equity awards expected to vest over the period the awards vest. See Note 15, Share-Based Compensation, for more information.
Research and Development
Research and development costs are expensed as incurred. The amount charged to expense was $14.5 million, $15.5 million, and $16.0 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less at the date of purchase. Cash equivalents are stated at cost, which approximates market. Cash and cash equivalents totaled $618.7 million and $974.6 million at December 31, 2021 and 2020, respectively, which included cash equivalents of $532.9 million and $662.2 million, respectively. At December 31, 2021 and 2020, we had $1.2 million and $2.2 million, respectively, of cash at our operations outside the United States.
Marketable Debt Securities
The Company’s marketable debt securities have been classified and accounted for as available-for-sale (AFS) marketable debt securities in accordance with ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The Company reports its marketable debt securities at fair value, and they are classified as short-term or long-term based on each security’s underlying contractual maturity date.
The Company’s marketable debt securities are analyzed at the individual debt security level. Changes in the fair value of the debt security have the potential to impact accumulated other comprehensive income (loss) (AOCI), the Company’s earnings, or both.
The Company regularly reviews its investment portfolio to determine if any debt security is impaired. A decline in the fair value of the debt security below its amortized cost results in an impairment of the debt security. If there is an intent to sell the debt security, or if it is more likely than not that the debt security will be sold prior to recovering the amortized cost basis, the Company recognizes the impairment as a realized loss in earnings by writing down the debt security’s amortized cost basis.
Additional analysis is required if there is not an intent to sell the debt security, or if a recovery of the amortized cost basis is expected to be made prior to the sale of the security. If any portion of the impairment is the result of a credit loss, the Company recognizes this portion in earnings through an allowance for credit losses, with the remainder recognized as unrealized loss in AOCI. Subsequent improvements in credit losses are recognized as a reduction in the allowance. Any impairment not attributed to credit loss is recognized as an unrealized loss in AOCI in its entirety.
The Company considers several factors when determining if a portion of an impairment is the result of a credit loss including, but not limited to, adverse conditions related to the financial health and future outlook of the issuer; the credit quality of the issuer, as reported by credit rating agencies; trends present in the issuer’s industry in which it operates; and general market conditions.
For the years ended December 31, 2021 and 2020, we do not consider any of the impairments related to our marketable debt securities to be the result of credit losses. See Note 12, Cash, Cash Equivalents, and Marketable Debt Securities, for more information.
Trade Accounts Receivable, Allowances, and Customer Deductions
Trade accounts receivable are recorded at amortized cost and represent a contractual right to receive payment from a customer. The Company’s trade accounts receivable are short-term receivables, with most requiring payment within 30 to 60 days, and represent the primary class of financing receivables utilized by the Company.
The Company has entered into a number of customer-based supply chain financing programs to accelerate the receipt of payments for outstanding accounts receivable from certain customers. Receivables transferred under these programs meet the requirements to be accounted for as sales in accordance with guidance under Financial Accounting Standards Board (“FASB”) ASC 860, Transfers and Servicing. The receivables are sold without recourse and are reflected as a reduction of accounts receivable on the Consolidated Balance Sheets at the time of sale. The corresponding proceeds are reflected in cash flows from operating activities within the Consolidated Statements of Cash Flows. Receivables involved with these programs constituted less than 5% of our 2021 net sales.
In accordance with ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), the Company established an allowance for credit losses, which is a valuation account that estimates the expected credit loss over the lifetime of the asset and is deducted from, or added to, the amortized cost basis of the trade accounts receivable. The allowance for credit losses is based upon a combination of factors such as historical collection experience, aged receivables, current economic conditions, and reasonable and supportable forecasts on future economic conditions. Expected recoveries of amounts previously written off, not to exceed the aggregate of the amount previously written off, are also considered when determining the necessary allowance at the balance sheet date. When determining the allowance for credit losses, management also considers specific customer accounts that may be considered higher risk or uncollectible due to customer industry trends, bankruptcy filings, or substantial downgrades of credit scores.
Current period estimates for the allowance for credit losses are compared against the allowance previously recorded, and all required adjustments are reported as credit loss expense (for expected losses or write offs) or a reversal of credit loss expense (for expected recoveries) in net income. Outstanding trade accounts receivable balances are written off when deemed uncollectible after undergoing reasonable collection efforts. At December 31, 2021 and 2020, the allowance for credit losses was $4.9 million and $3.0 million, respectively.
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 approximately 1% of gross selling price. Accordingly, PCA reserves 1% of its open customer accounts receivable balance for these items. The reserves for customer deductions of $9.4 million and $7.6 million at December 31, 2021 and 2020, respectively, are also included as a reduction of the accounts receivable balance.
Derivative Instruments and Hedging Activities
The Company records its derivatives, if any, in accordance with ASC 815, Derivatives and Hedging. The guidance requires the Company to recognize derivative instruments as either assets or liabilities on 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 at 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 AOCI and is subsequently recognized in earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized in earnings. We were not party to any derivative-based arrangements at December 31, 2021 and 2020.
Fair Value Measurements
PCA measures the fair value of its financial instruments and marketable debt securities 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.
Assets that are measured at fair value using the net asset value (NAV) per share as a practical expedient are not categorized within the fair value hierarchy.
Financial instruments and marketable debt securities measured at fair value on a recurring basis include the fair values of our marketable debt securities and our pension and postretirement benefit assets and liabilities. The valuation techniques used to measure the fair value of the Company’s marketable debt securities and pension and postretirement benefit assets and liabilities, which generally have counterparties with high credit ratings, are based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data. See Note 12, Cash, Cash Equivalents, and Marketable Debt Securities, and Note 13, Employee Benefit Plans and Other Postretirement Benefits, for more information.
Other assets and liabilities measured and recognized at fair value on a nonrecurring basis include assets acquired and liabilities assumed in acquisitions and our asset retirement obligations. Given the nature of these assets and liabilities, evaluating their fair value from the perspective of a market participant is inherently complex. Assumptions and estimates about future values can be affected by a variety of internal and external factors. Changes in these factors may require us to revise our estimates and could require us to retroactively adjust provisional amounts that we recorded for the fair values of assets acquired and liabilities assumed in connection with business combinations. These adjustments could have a material effect on our financial condition and results of operations. See Note 5, Acquisitions, and Note 14, Asset Retirement Obligations, for more information.
Inventory Valuation
We value our raw materials, work in process, and finished goods inventories using lower of cost, as determined by the average cost method, or net realizable value. Supplies and materials are valued at the first-in, first-out (FIFO) or average cost methods.
The components of inventories were as follows (dollars in millions):
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Raw materials | $ | 324.2 | $ | 263.5 | ||||
| Work in process | 16.2 | 11.6 | ||||||
| Finished goods | 201.0 | 183.6 | ||||||
| Supplies and materials | 361.1 | 329.2 | ||||||
| Inventories | $ | 902.5 | $ | 787.9 |
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Cost includes expenditures for major improvements and replacements and the amount of interest cost associated with significant capital additions. Repairs and maintenance costs are expensed as incurred*.* When property and equipment are retired, sold, or otherwise disposed of, the asset's carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in “Net income” in our Consolidated Statements of Income.
Property, plant, and equipment consisted of the following (dollars in millions):
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Land and land improvements | $ | 189.8 | $ | 179.6 | ||||
| Buildings | 938.7 | 858.5 | ||||||
| Machinery and equipment | 6,159.1 | 5,826.6 | ||||||
| Construction in progress | 481.0 | 360.0 | ||||||
| Other | 102.9 | 88.8 | ||||||
| Property, plant and equipment, at cost | 7,871.5 | 7,313.5 | ||||||
| Less accumulated depreciation | (4,342.5 | ) | (4,120.1 | ) | ||||
| Property, plant and equipment, net | $ | 3,529.0 | $ | 3,193.4 |
The amount of interest capitalized from construction in progress was $3.8 million, $3.7 million, and $3.4 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Depreciation is computed on the straight-line basis over the estimated useful lives of the related assets. Assets under finance 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 improvements | 5 to 40 years | |
| Machinery and equipment | 3 to 25 years | |
| Trucks and automobiles | 3 to 10 years | |
| Furniture and fixtures | 3 to 20 years | |
| Computers and hardware | 3 to 10 years | |
| Leasehold improvements | Period of the lease or useful life, if shorter |
The amount of depreciation expense was $376.0 million, $362.5 million, and $346.8 million for the years ended December 31, 2021, 2020, and 2019, respectively. In 2021, 2020, and 2019, we recognized incremental depreciation expense of $4.7 million, $4.5 million, and $0.3 million, respectively. The incremental depreciation expense for 2021 related to Jackson mill conversion-related activities and closures of corrugated products facilities. For 2020, the incremental depreciation expense related to closures of corrugated products facilities, while the incremental depreciation expense for 2019 primarily related to the second quarter 2018 discontinuation of paper grades at the Wallula, Washington mill associated with the conversion of the No. 3 paper machine to produce virgin kraft linerboard.
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 sheets under the caption “Property, plant, and equipment, net”, as all risks and rewards remain with the Company.
Leases
We determine if an arrangement is, or contains, a lease at the inception date based on the presence of identified assets and our right to obtain substantially all of the economic benefit from or to direct the use of such assets. When we determine a lease exists, we record a right-of-use asset and corresponding lease liability on our consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term. Lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets are recognized at commencement date at the value of the lease liability and are adjusted for any prepayments, lease incentives received, and initial direct costs incurred. Lease liabilities are recognized at lease commencement date based on the present value of remaining lease payments over the lease term. As the discount rate implicit in the lease is not readily determinable in most of our leases, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
Operating lease balances are included in Operating lease right-of-use assets with the related liabilities included in Current operating lease obligations and Long-term operating lease obligations. Assets under finance leases are included in Property, plant and equipment, net, with the related liabilities included in Current finance lease obligations and Long-term finance lease obligations.
We do not record lease contracts with a term of 12 months or less on our consolidated balance sheets.
We recognize fixed lease expense for operating leases on a straight-line basis over the lease term. For finance leases, we recognize amortization expense on the right-of-use asset and interest expense on the lease liability over the lease term.
We have lease agreements with non-lease components that relate to lease components (e.g., common area maintenance such as cleaning or landscaping, insurance, etc.). We account for each lease and any non-lease components associated with that lease as a single lease component for all underlying asset classes. Accordingly, all costs associated with a lease contract are accounted for as lease costs.
Long-Lived Asset Impairment
Long-lived assets other than goodwill and other intangibles 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 is performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset (or group of assets) is compared to the assets (or group of assets) carrying amount to determine if a write-down to fair value is required.
During the second quarter of 2020, with the exacerbated deterioration in uncoated freesheet market conditions arising from the COVID-19 pandemic and the estimated impact on our Paper segment and its projected future results of operations, we identified a triggering event indicating possible impairment of our long-lived assets within our Paper reporting unit, including property, plant, and equipment, and performed a recoverability test on the Paper reporting unit long-lived assets as of May 31, 2020. The recoverability test was based on forecasts of undiscounted cash flows. The results of the recoverability test indicated that the long-lived assets within our Paper segment, inclusive of property, plant, and equipment, were 100% recoverable.
Goodwill and Intangible Assets
The Company has capitalized certain intangible assets, primarily goodwill, customer relationships, and trademarks and trade names, 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 ten to 40 years, and trademarks and trade names over periods ranging from five to 20 years.
Goodwill, which amounted to $923.5 million and $863.5 million for the years ended December 31, 2021 and 2020, respectively, is not amortized but is subject to an annual impairment test in accordance with ASC 350, Intangibles – Goodwill and Other. 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. Additionally, we evaluate the remaining useful lives of our finite-lived purchased intangible assets to determine whether any adjustments to the useful lives are necessary.
During the second quarter of 2020, with the exacerbated deterioration in uncoated freesheet market conditions arising from the COVID-19 pandemic and the estimated impact on our Paper segment and its projected future results of operations, we identified a triggering event indicating possible impairment of goodwill within our Paper reporting unit and performed an interim quantitative impairment analysis as of May 31, 2020. Based on the evaluation performed, we determined that the carrying value of the Paper reporting unit exceeded its fair value, which resulted in a goodwill impairment charge totaling $55.2 million.
The Company concluded that none of the goodwill or intangible assets were impaired during the 2021, 2020, and 2019 annual impairment tests. See Note 9, Goodwill and Intangible Assets, for additional information.
Pension and Postretirement Benefits
Several estimates and assumptions are required to record pension costs and liabilities, including discount rate, return on assets, and longevity and service lives of employees. We review and update these assumptions annually unless a plan curtailment or other event occurs, requiring that we update the estimates on an interim basis. While we believe the assumptions used to measure our pension and postretirement benefit obligations are reasonable, differences in actual experience or changes in assumptions may materially affect our pension and postretirement benefit obligations and future expense. See Note 13, Employee Benefit Plans and Other Postretirement Benefits, for additional information.
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.
Environmental Matters
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. 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.
Asset Retirement Obligations
The Company accounts for its retirement obligations related predominantly to landfill closure, wastewater treatment pond dredging, closed-site monitoring costs, and certain leasehold improvements under ASC 410, Asset Retirement and Environmental Obligations, which requires recognition of legal obligations associated with the retirement of long-lived assets whether these assets are owned or leased. These legal obligations are recognized at fair value at the time that the obligations are incurred. When we record the liability, we capitalize the cost by increasing the carrying amount of the related long-lived asset, which is amortized to expense over the useful life of the asset. See Note 14, Asset Retirement Obligations, for additional information.
Deferred Debt Issuance Costs
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 related financing, which range from 10 to 30 years. At December 31, 2021 and 2020, deferred debt issuance costs were $19.5 million and $14.3 million, respectively, and were recorded in “Long-Term Debt” on our Consolidated Balance Sheets.
Cutting Rights and Fiber Farms
We lease the cutting rights to approximately 65,000 acres of timberland. For our cutting rights, we capitalize the annual lease payments and reforestation costs associated with these leases. Costs are recorded as depletion when the timber or fiber is harvested and used in operations or sold to customers. Capitalized long-term lease costs for our cutting rights, primarily recorded in “Other long-term assets” on our Consolidated Balance Sheets, were $21.0 million and $20.3 million as of December 31, 2021 and 2020, respectively. The amount of depletion expense was $2.0 million, $3.1 million, and $2.7 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Deferred Software Costs
PCA capitalizes 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 recorded in “Other long-term assets” on our Consolidated Balance Sheets were $3.3 million and $4.8 million for the years ended December 31, 2021 and 2020, respectively. Software amortization expense was $1.6 million, $1.1 million, and $0.9 million for the years ended December 31, 2021, 2020, and 2019, respectively.
During 2019, the Company early adopted ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which includes amendments to align the accounting for costs incurred to implement a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. As of December 31, 2021 and 2020, capitalized costs associated with cloud computing arrangements were $2.8 million and $4.0 million, respectively.
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 the 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.
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 closer 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 certain grades of containerboard are commodity products 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 sale or income is recorded until such inventory is converted to a finished product and sold to an end-use customer.
Business Combinations
The Company accounts for acquisitions under ASC 805, Business Combinations and ASU 2017-01 (Topic 805): Clarifying the Definition of a Business. ASC 805 requires separate recognition of assets acquired and liabilities assumed from goodwill at the acquisition date fair values. ASU 2017-01 (Topic 805) provides additional guidance to assist entities with evaluating whether transfers of assets and activities should be accounted for as acquisitions of assets or businesses. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and liabilities assumed. During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated financial statements.
Recently Adopted Accounting Standards
The Company did not adopt any new accounting standards during 2021.
New Accounting Standards Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. Under current business combination guidance in ASC 805, Business Combinations, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date, whereas the new guidance requires the acquirer to recognize such assets and liabilities as if it had originated the contracts. The ASU is effective for annual periods beginning after December 15, 2022, and interim periods within those annual periods, with early adoption permitted. The amended guidance should be applied on a prospective basis to any business combinations that occur on or after the adoption date. The Company is currently evaluating the impact of this guidance but does not expect the guidance to have a significant impact on the Company's financial position, results of operations, or cash flow.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The amendments in this Update are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, which extends some of the optional expedients under Topic 848 to include derivative contracts impacted by discounting transition. Companies can apply the ASU immediately. The ASU can be adopted on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to any new modification from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The optional guidance will only be available until December 31, 2022. While the Company's fixed-rate outstanding debt will not be impacted by the reference rate reform, the Company is still evaluating the impact of this guidance on its revolving credit facility, as the interest rate associated with any future borrowings against the revolving credit facility is based on LIBOR. Overall, the Company does not expect the guidance to have a significant impact on its financial position or related disclosures.
There were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.
3.
Leases
We group our leases into two primary lease types, real estate and equipment, and into various asset classes within each type. Real estate leases primarily include manufacturing locations, office space, warehouses, and design centers, while equipment leases primarily include manufacturing equipment.
Leases with an initial term of 12 months or less and certain month-to-month leases are not recorded on the balance sheet. The lease expense for these types of leases is recognized on a straight-line basis over the lease term.
To determine the lease term, we include the non-cancellable period of the lease together with the following: all periods covered by an option to extend the lease if we are reasonably certain to exercise that option; any periods covered by an option to terminate the lease if we are reasonably certain not to exercise that option; and any periods covered by an option to extend or not to terminate the lease that are controlled by the lessor. The exercising of lease renewal options is based on whether future economic benefit is expected to be derived from the renewal. Most of our real estate leases contain at least one renewal option. Renewal options generally range from 1 to 5 years. Although equipment leases may also contain renewal options, we typically do not expect to extend and/or exercise these renewal options unless a compelling business reason is provided to management.
Our leases may contain fixed and variable costs. Fixed costs determine the right-of-use asset. Variable costs are those costs which will vary month to month and are excluded from the calculation of the right-of-use asset. Variable lease costs are recorded to lease expense in the period in which they are incurred.
Our leases do not provide an implicit borrowing rate of return. Therefore, we use our incremental borrowing rate to calculate the present value of lease payments at inception of the lease or when a lease is modified.
Supplemental balance sheet information related to our operating leases was as follows (dollars in millions):
| Year Ended December 31, | |||||||
| 2021 | 2020 | ||||||
| Operating lease right-of-use assets | $ | 238.3 | $ | 234.2 | |||
| Current portion of operating lease obligations | $ | 67.1 | $ | 68.9 | |||
| Long-term portion of operating lease obligations | 179.3 | 173.6 | |||||
| Total operating lease obligations | $ | 246.4 | $ | 242.5 |
Supplemental balance sheet information related to our finance leases was as follows (dollars in millions):
| Year Ended December 31, | |||||||
| 2021 | 2020 | ||||||
| Buildings | $ | 0.3 | $ | 0.3 | |||
| Machinery and equipment | 28.5 | 28.5 | |||||
| Total | 28.8 | 28.8 | |||||
| Less accumulated amortization | (21.1 | ) | (19.6 | ) | |||
| Total | $ | 7.7 | $ | 9.2 | |||
| Current portion of finance lease obligations | $ | 1.7 | $ | 1.6 | |||
| Long-term portion of finance lease obligations | 12.7 | 14.4 | |||||
| Total finance lease obligations | $ | 14.4 | $ | 16.0 |
The Company was obligated under finance leases covering buildings and machinery and equipment in the amount of $14.4 million and $16.0 million at December 31, 2021 and 2020, respectively. Amortization of assets under finance lease obligations is included in depreciation expense.
For both operating and finance leases, the weighted average remaining lease term in years and weighted average discount rates were as follows:
| Year Ended December 31, | |||||||
| 2021 | 2020 | ||||||
| Weighted-average remaining lease term (years): | |||||||
| Operating leases | 5.4 | 5.3 | |||||
| Finance leases | 6.8 | 7.8 | |||||
| Weighted-average discount rate: | |||||||
| Operating leases | 3.08 | % | 3.79 | % | |||
| Finance leases | 6.66 | % | 6.66 | % |
The components of lease expense were as follows (dollars in millions):
| Year Ended December 31, | |||||||||||
| 2021 | 2020 | 2019 | |||||||||
| Finance lease cost: | |||||||||||
| Amortization of finance lease assets | $ | 1.5 | $ | 1.5 | $ | 1.5 | |||||
| Interest on lease liabilities | 1.0 | 1.1 | 1.2 | ||||||||
| Total finance lease cost | 2.5 | 2.6 | 2.7 | ||||||||
| Operating lease cost | 77.0 | 74.4 | 70.2 | ||||||||
| Short-term lease cost | 22.7 | 18.0 | 19.2 | ||||||||
| Variable lease cost | 19.4 | 12.9 | 13.7 | ||||||||
| Total lease cost | $ | 121.6 | $ | 107.9 | $ | 105.8 |
We had an insignificant amount of sublease rental income for the years ended December 31, 2021, 2020, and 2019.
Supplemental cash flow information related to leases was as follows (dollars in millions):
| Year Ended December 31, | |||||||||||
| 2021 | 2020 | 2019 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows for operating leases | $ | (71.7 | ) | $ | (68.2 | ) | $ | (60.0 | ) | ||
| Operating cash flows for finance leases | (1.5 | ) | (1.5 | ) | (1.5 | ) | |||||
| Financing cash flows for finance leases | (1.0 | ) | (1.1 | ) | (1.2 | ) | |||||
| Right-of-use assets obtained in exchange for new lease obligations: | |||||||||||
| Operating leases | $ | (44.4 | ) | $ | (35.7 | ) | $ | (27.7 | ) | ||
| Finance leases | — | — | — | ||||||||
| Supplemental non-cash information on changes in lease liabilities | $ | 31.3 | $ | 34.8 | $ | 44.5 | |||||
| Supplemental non-cash information on changes in right-of-use assets | $ | 40.3 | $ | 35.8 | $ | 21.4 |
The future minimum payments under operating and finance lease liabilities at December 31, 2021 were as follows (dollars in millions):
| Operating Leases | Finance Leases | |||||||
| 2022 | $ | 73.6 | $ | 2.7 | ||||
| 2023 | 59.4 | 2.7 | ||||||
| 2024 | 44.9 | 2.7 | ||||||
| 2025 | 33.2 | 2.7 | ||||||
| 2026 | 20.1 | 2.7 | ||||||
| Thereafter | 38.4 | 4.4 | ||||||
| Total lease payments | 269.6 | 17.9 | ||||||
| Less imputed interest (a) | (23.2 | ) | (3.5 | ) | ||||
| Present value of lease liabilities | $ | 246.4 | $ | 14.4 |
(a)
Calculated using the incremental borrowing rate for each lease applied to the future payments.
4.
Revenue
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration expected to be received in exchange for those goods or services. Sales, value added, and other taxes collected concurrently with revenue-producing activities are excluded from revenue.
The following table presents our revenues disaggregated by product line (dollars in millions):
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Packaging | $ | 7,052.6 | $ | 5,919.5 | $ | 5,932.2 | ||||||
| Paper | 599.7 | 674.8 | 964.3 | |||||||||
| Corporate and Other | 78.0 | 63.9 | 67.8 | |||||||||
| Total revenue | $ | 7,730.3 | $ | 6,658.2 | $ | 6,964.3 |
Packaging Revenue
Our containerboard mills produce linerboard and corrugating medium which are papers primarily used in the production of corrugated products. The majority of our containerboard production is used internally by our corrugated products manufacturing facilities. The remaining containerboard is sold to outside domestic and export customers. Our corrugated products manufacturing plants produce a wide variety of corrugated packaging products and retail merchandise displays. We sell corrugated products to national, regional and local accounts, which are broadly diversified across industries and geographic locations.
The Company recognizes revenue for its packaging products when performance obligations under the terms of a contract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time. Based on our express terms and conditions of the sale of products to our customers, as well as terms included in contractual arrangements with our customers, we do not have an enforceable right of payment that includes a reasonable profit throughout the duration of the contract for products that do not have an alternative use. Revenue is recognized when the product is shipped from the mill or from our manufacturing facility to our customer. Certain customers may receive volume-based incentives, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue recognized.
Certain customers receive a portion of their packaging products as consigned inventory with billing triggered once the customer uses or consumes the designated product. Prior to invoicing, these amounts are handled as unbilled receivables. Total unbilled receivables, which are immaterial in amount, are included in the accounts receivable financial statement caption.
Paper Revenue
We manufacture and sell a range of communication-based papers. Communication papers consist of cut-size office papers, and printing and converting papers.
The Company recognizes revenue for its paper products when performance obligations under the terms of a contract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time. Revenue is recognized when the product is shipped from the mill or from our manufacturing facility or distribution center to our customer. Certain customers may receive volume-based incentives, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue recognized.
Corporate and Other Revenue
Revenue in this segment primarily relates to Louisiana Timber Procurement Company, L.L.C. (LTP), a variable-interest entity that is 50% owned by PCA and 50% owned by Boise Cascade Company (Boise Cascade). PCA is the primary beneficiary of LTP and has the power to direct the activities that most significantly affect the economic performance of LTP. Therefore, we consolidate 100% of LTP in our financial statements. See Note 19, Transactions With Related Parties, for more information related to LTP.
The Company recognizes revenue within this segment when performance obligations under the terms of a contract with a customer are satisfied. This occurs with the transfer of control of our products at a specific point in time.
Practical Expedients and Exemption
Shipping and handling fees billed to a customer are recorded on a gross basis in "Net sales" with the corresponding shipping and handling costs included in "Cost of sales" in the concurrent period as the revenue is recorded. We expense sales commissions when incurred because the amortization period is one year or less. Sales commissions are recorded in "Selling, general, and administrative expenses".
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
5.
Acquisitions
Advance Packaging Acquisition
On December 11, 2021, PCA acquired the assets of Advance Packaging Corporation ("Advance Packaging"), an independent corrugated products producer, for $194.9 million, including working capital adjustments. Assets acquired include full-line corrugated products operations in Grand Rapids, Michigan. Advance Packaging is a full-service producer of corrugated packaging products, including graphics, retail displays, sustainable shipping containers, and protective packaging. Advance Packaging's financial results are included in the Packaging segment from the date of acquisition. We have estimated the allocation of the purchase price to the assets acquired and liabilities assumed based on estimates of the fair value at the date of acquisition, of which $66.7 million was allocated to property, plant, and equipment, $60.0 million was allocated to goodwill (which is deductible for tax purposes) and $50.2 million to intangible assets (to be amortized over a weighted average life of approximately 9.7 years), primarily customer relationships, in the Packaging segment. The purchase price continues to be preliminary, as estimates and assumptions are subject to change as more information becomes available. Had the acquisition occurred at the beginning of 2020, the Company's net sales would have been $7.8 billion and $6.8 billion for 2021 and 2020, respectively.
6.
Earnings Per Share
The following table sets forth the computation of basic and diluted income per common share for the periods presented (dollars and shares in millions, except per share data).
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Numerator: | ||||||||||||
| Net income | $ | 841.1 | $ | 461.0 | $ | 696.4 | ||||||
| Less: distributed and undistributed earnings allocated to participating securities | (6.4 | ) | (3.6 | ) | (5.2 | ) | ||||||
| Net income attributable to common stockholders | $ | 834.7 | $ | 457.4 | $ | 691.2 | ||||||
| Denominator: | ||||||||||||
| Weighted average common shares outstanding | 94.1 | 94.1 | 93.8 | |||||||||
| Effect of dilutive securities | 0.4 | 0.3 | 0.3 | |||||||||
| Diluted common shares outstanding | 94.5 | 94.4 | 94.1 | |||||||||
| Basic income per common share | $ | 8.87 | $ | 4.86 | $ | 7.36 | ||||||
| Diluted income per common share | $ | 8.83 | $ | 4.84 | $ | 7.34 |
7.
Other Expense, Net
The components of other expense, net, were as follows (dollars in millions):
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Asset disposals and write-offs | $ | (38.9 | ) | $ | (26.5 | ) | $ | (25.0 | ) | |||
| Facilities closure and other income (costs) (a) | 6.5 | (19.1 | ) | (0.3 | ) | |||||||
| Jackson mill conversion-related activities (b) | (8.9 | ) | — | — | ||||||||
| Acquisition and integration related costs (c) | (0.6 | ) | — | — | ||||||||
| Wallula mill restructuring (d) | — | — | (0.7 | ) | ||||||||
| Other | (12.9 | ) | (5.1 | ) | (6.7 | ) | ||||||
| Total | $ | (54.8 | ) | $ | (50.7 | ) | $ | (32.7 | ) |
(a)
For 2021, includes income primarily consisting of an adjustment of the required asset retirement obligation related to the 2020 closure of the San Lorenzo, California facility, a gain on sale of transportation assets and corrugated products facilities, and insurance proceeds received for a natural disaster at one of the corrugated products facilities, partially offset by closure costs related to corrugated products facilities. For 2020, includes charges consisting of restructuring costs for paper administrative functions and closure costs related to corrugated products facilities, substantially all of which relates to the previously announced closure of the San Lorenzo, California facility during the second quarter of 2020, partially offset by income related
to the sale of a closed corrugated products facility during the second quarter of 2020. For 2019, includes charges consisting of closure costs related to corrugated products facilities, partially offset by income from the sale of a building related to a closed corrugated products facility.
(b)
Includes charges related to the announced discontinuation of production of uncoated freesheet paper grades on the No. 3 machine at the Jackson, Alabama mill in the first quarter of 2021 associated with the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities.
(c)
Includes charges related to the December 2021 Advance Packaging Corporation acquisition.
(d)
Includes charges related to the discontinuation of production of uncoated free sheet and coated one-side white paper grades at the Wallula, Washington mill in the second quarter of 2018 and the conversion of the No. 3 paper machine to produce virgin kraft linerboard.
8.
Income Taxes
The following is an analysis of the components of the consolidated income tax provision (dollars in millions):
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Current income tax provision - | ||||||||||||
| U.S. federal | $ | 158.0 | $ | 109.4 | $ | 123.2 | ||||||
| State and local | 50.1 | 27.5 | 37.0 | |||||||||
| Foreign | 0.1 | 0.1 | 0.1 | |||||||||
| Total current provision for taxes | 208.2 | 137.0 | 160.3 | |||||||||
| Deferred income tax provision (benefit) - | ||||||||||||
| U.S. federal | 62.1 | 26.8 | 55.3 | |||||||||
| State and local | (2.6 | ) | 8.0 | 5.0 | ||||||||
| Foreign | (0.1 | ) | (0.1 | ) | — | |||||||
| Total deferred provision (benefit) for taxes | 59.4 | 34.7 | 60.3 | |||||||||
| Total provision for taxes | $ | 267.6 | $ | 171.7 | $ | 220.6 |
The effective tax rate varies from the U.S. federal statutory tax rate principally due to the following (dollars in millions):
| 2021 | 2020 | 2019 | ||||||||||
| Provision computed at U.S. federal statutory rate of 21% | $ | 232.8 | $ | 132.9 | $ | 192.6 | ||||||
| State and local taxes, net of federal benefit | 42.6 | 28.4 | 35.7 | |||||||||
| Goodwill impairment (a) | — | 11.6 | — | |||||||||
| Other | (7.8 | ) | (1.2 | ) | (7.7 | ) | ||||||
| Total | $ | 267.6 | $ | 171.7 | $ | 220.6 |
(a)
For additional information regarding the impairment of goodwill within our Paper reporting unit, see Note 9, Goodwill and Intangible Assets.
The following details the scheduled expiration dates of our tax effected net operating loss (NOL) and other tax carryforwards at December 31, 2021 (dollars in millions):
| 2022 Through 2031 | 2032 Through 2041 | Indefinite | Total | |||||||||||||
| U.S. federal NOLs | $ | 22.2 | $ | — | $ | — | $ | 22.2 | ||||||||
| State taxing jurisdiction NOLs | 1.1 | 0.1 | — | 1.2 | ||||||||||||
| U.S. federal tax credit carryforwards | 0.1 | — | — | 0.1 | ||||||||||||
| U.S. federal and non-U.S. capital loss carryforwards | 0.6 | — | 0.1 | 0.7 | ||||||||||||
| Total | $ | 24.0 | $ | 0.1 | $ | 0.1 | $ | 24.2 |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Deferred income tax assets and liabilities at December 31 are summarized as follows (dollars in millions):
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Deferred tax assets: | ||||||||
| Lease obligations | $ | 61.4 | $ | 60.6 | ||||
| Employee benefits and compensation | 44.7 | 39.3 | ||||||
| Pension and postretirement benefits | 33.8 | 70.1 | ||||||
| Net operating loss carryforwards | 23.4 | 27.2 | ||||||
| Restricted stock and performance units | 8.5 | 9.6 | ||||||
| Inventories | 6.8 | 5.9 | ||||||
| Accrued liabilities | 6.3 | 5.3 | ||||||
| Capital loss and general business credit carryforwards | 0.7 | 0.6 | ||||||
| Derivatives | 0.1 | 0.1 | ||||||
| Gross deferred tax assets | 185.7 | 218.7 | ||||||
| Valuation allowance (b) | (0.6 | ) | (0.5 | ) | ||||
| Net deferred tax assets | $ | 185.1 | $ | 218.2 | ||||
| Deferred tax liabilities: | ||||||||
| Property, plant and equipment | $ | (518.0 | ) | $ | (465.6 | ) | ||
| Goodwill and intangible assets | (73.3 | ) | (72.7 | ) | ||||
| Right-of-use assets | (59.7 | ) | (59.3 | ) | ||||
| Total deferred tax liabilities | $ | (651.0 | ) | $ | (597.6 | ) | ||
| Net deferred tax liabilities (c) | $ | (465.9 | ) | $ | (379.4 | ) |
(b)
Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax assets will not be realized. Both the 2021 and 2020 valuation allowance relate to capital losses. We do not expect to generate capital gains before the capital losses expire. If or when recognized, the tax benefits relating to the reversal of any or all of the valuation allowance would be recognized as a benefit to income tax expense.
(c)
As of December 31, 2021, we did not recognize U.S. deferred income taxes on our cumulative total of undistributed foreign earnings for our foreign subsidiaries. We indefinitely reinvest our earnings in operations outside the United States. It is not practicable to determine the amount of unrecognized deferred tax liability on these undistributed earnings because the actual tax liability, if any, is dependent on circumstances existing when the repatriation occurs.
Cash payments for federal, state, and foreign income taxes were $210.5 million, $115.6 million, and $172.7 million for the years ended December 31, 2021, 2020, and 2019, respectively.
The following table summarizes the changes related to PCA’s gross unrecognized tax benefits excluding interest and penalties (dollars in millions):
| 2021 | 2020 | 2019 | ||||||||||
| Balance as of January 1 | $ | (5.2 | ) | $ | (4.8 | ) | $ | (4.6 | ) | |||
| Increases related to prior years’ tax positions | — | — | (0.1 | ) | ||||||||
| Increases related to current year tax positions | (0.3 | ) | (0.4 | ) | (0.4 | ) | ||||||
| Decreases related to prior years' tax positions | 0.2 | — | — | |||||||||
| Settlements with taxing authorities | 3.0 | — | — | |||||||||
| Expiration of the statute of limitations | 0.4 | — | 0.3 | |||||||||
| Balance at December 31 | $ | (1.9 | ) | $ | (5.2 | ) | $ | (4.8 | ) |
At December 31, 2021, PCA had recorded a $1.9 million gross reserve for unrecognized tax benefits, excluding interest and penalties. Of the total, $1.9 million (net of the federal benefit for state taxes) would impact the effective tax rate if recognized.
PCA recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. For the years ended December 31, 2021 and 2020, we had $0.2 million and $1.2 million, respectively, of interest and penalties recorded for unrecognized tax benefits. PCA does not expect the unrecognized tax benefits to change significantly over the next 12 months.
PCA is subject to income taxation in the United States, various state and local jurisdictions, Canada and Hong Kong. A federal examination of the 2016 tax year concluded in March 2021. The tax years 2018 - 2021 remain open to federal examination. The tax years 2017 - 2021 remain open to state examinations. Some foreign tax jurisdictions are open to examination for the 2009 tax year forward. Through the Boise acquisition, PCA recorded net operating losses and credit carryforwards from 2008 through 2011 and 2013 that are subject to examinations and adjustments for at least three years following the year in which utilized.
9.
Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. At December 31, 2021 and 2020, we had $923.5 million and $863.5 million of goodwill recorded in our Packaging segment on our Consolidated Balance Sheets. At December 31, 2021 and 2020, we had no goodwill recorded in our Paper segment on our Consolidated Balance Sheets.
Changes in the carrying amount of our goodwill were as follows (dollars in millions):
| Total | ||||||||||||
| Packaging | Paper | Goodwill | ||||||||||
| Balance at January 1, 2020 | $ | 863.5 | $ | 55.2 | $ | 918.7 | ||||||
| Impairment of Paper segment | — | (55.2 | ) | (55.2 | ) | |||||||
| Balance at December 31, 2020 | 863.5 | — | 863.5 | |||||||||
| Acquisition (a) | 60.0 | — | 60.0 | |||||||||
| Balance at December 31, 2021 | $ | 923.5 | $ | — | $ | 923.5 |
(a)
In connection with the December 2021 acquisition of Advance Packaging, the Company recorded $60.0 million of goodwill in the Packaging segment.
See Note 5, Acquisitions, for more information.
Goodwill Impairment
During the second quarter of 2020, with the exacerbated deterioration in uncoated freesheet market conditions arising from the COVID-19 pandemic and the estimated impact on our Paper segment and its projected future results of operations, we identified a triggering event indicating possible impairment of goodwill and our long-lived assets within our Paper reporting unit. An interim quantitative impairment analysis was performed as of May 31, 2020 for the Paper reporting unit, which is the same as our Paper reportable segment. We estimated the fair value of the Paper reporting unit using a combination of the income approach and the market approach, as further described below. Based on the evaluation performed, we determined that the carrying value of the Paper reporting unit exceeded its fair value, which resulted in a goodwill impairment charge totaling $55.2 million. The impairment charge is included in “Goodwill impairment” on our Consolidated Statements of Income and Comprehensive Income and is not tax deductible.
For purposes of our goodwill impairment analysis, we estimated the fair value of the Paper reporting unit using a combination of the income approach and the market approach applying an equal weighting. The income approach incorporated the estimated future cash flows and a terminal value discounted to their present value using an appropriate risk-adjusted discount rate. The estimated future cash flows and terminal value were based on internal forecasts and industry trends, including the long-term outlook for the paper industry. Our expected cash flows include assumptions about industry pricing, expected paper demand, and anticipated input and conversion costs. The discount rate utilized in the income approach was 9%, which was derived using a capital asset pricing model based on relevant industry data to estimate the cost of equity financing. The discount rate is commensurate with the risks and uncertainties inherent in the business and the cash flow forecasts, updated for recent events. The market approach estimated the fair value of the Paper reporting unit by using valuation metrics of publicly traded companies or historically completed transactions of comparable businesses.
The valuation of our Paper reporting unit requires significant judgment in evaluating recent indicators of market activity and estimated future cash flows, discount rates, and other factors. Our impairment analysis contains inherent uncertainties due to uncontrollable events that could positively or negatively impact anticipated future economic and operating conditions. In making these estimates, the weighted-average cost of capital is utilized to calculate the present value of future cash flows and terminal value. Many variables go into estimating future cash flows, including estimates of our future revenue growth and operating results. When estimating our projected revenue growth and future operating results, we considered industry trends, economic data, and our competitive situation.
Intangible Assets
Intangible assets are comprised of customer relationships and trademarks and trade names. As a result of the triggering event described above, we also performed a recoverability test on our long-lived assets within the Paper segment, including long lived intangible assets, as of May 31, 2020. The recoverability test was based on forecasts of undiscounted cash flows. The results of the recoverability test indicated that the long-lived assets within our Paper segment, inclusive of the long lived intangible assets, were 100% recoverable.
The weighted average useful life, gross carrying amount, and accumulated amortization of our intangible assets were as follows (dollars in millions):
| As of December 31, 2021 | As of December 31, 2020 | |||||||||||||||||||||||
| Weighted Average Remaining Useful Life (in Years) | Gross Carrying Amount | Accumulated Amortization | Weighted Average Remaining Useful Life (in Years) | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||
| Customer relationships (b)(c) | 8.5 | $ | 551.1 | $ | 254.9 | 9.1 | $ | 503.8 | $ | 220.2 | ||||||||||||||
| Trademarks and trade names (b) | 8.4 | 37.6 | 25.5 | 9.3 | 34.8 | 23.0 | ||||||||||||||||||
| Other (b) | 2.2 | 4.4 | 4.3 | 1.2 | 4.3 | 3.8 | ||||||||||||||||||
| Total intangible assets (excluding goodwill) | 8.5 | $ | 593.1 | $ | 284.7 | 9.1 | $ | 542.9 | $ | 247.0 |
(b)
In connection with the December 2021 acquisition of Advance Packaging, the Company recorded intangible assets of $47.3 million for customer relationships, $2.8 million for trade names, and $0.1 million for other intangibles.
(c)
During the second quarter of 2020, the Company recorded a $4.5 million adjustment to decrease the remaining book value of the customer relationships intangible asset as a result of the closure of the San Lorenzo, California corrugated products facility.
Amortization expense was $37.7 million, $42.9 million (including the $4.5 million adjustment to the customer relationships intangible asset related to the San Lorenzo, California facility closure, which was written off to amortization expense), and $38.6 million for the years ended December 31, 2021, 2020, and 2019, respectively. Estimated amortization expense of intangible assets over the next five years is expected to approximate $40.2 million (2022), $39.2 million (2023), $38.7 million (2024), and $38.5 million (2025 and 2026).
Impairment Testing
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. Additionally, when we experience changes to our business or operating environment, we evaluate the remaining useful lives and recoverability of our finite-lived purchased intangible assets to determine whether any adjustments to the useful lives or impairment are necessary. We completed our annual qualitative assessment in the fourth quarter, and there was no indication of goodwill or intangible asset impairment.
10.
Accrued Liabilities
The components of accrued liabilities were as follows (dollars in millions):
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Compensation and benefits | $ | 157.1 | $ | 126.5 | ||||
| Customer rebates and other credits | 36.9 | 27.1 | ||||||
| Medical insurance and workers’ compensation | 26.9 | 25.5 | ||||||
| Franchise, property, sales and use taxes | 17.6 | 16.5 | ||||||
| Environmental liabilities and asset retirement obligations | 4.0 | 4.6 | ||||||
| Severance, retention, and relocation | 2.7 | 4.1 | ||||||
| Other | 9.8 | 11.9 | ||||||
| Total | $ | 255.0 | $ | 216.2 |
11.
Debt
At December 31, 2021 and 2020, our long-term debt and interest rates on that debt were as follows (dollars in millions):
| December 31, 2021 | December 31, 2020 | ||||||||
| Amount | Amount | ||||||||
| Revolving Credit Facility | $ | — | $ | — | |||||
| 4.50% Senior Notes, net of discount of $0.6 million as of December 31, 2020, due November 2023 | — | 699.4 | |||||||
| 3.65% Senior Notes, net of discount of $0.4 million and $0.5 million as of December 31, 2021 and 2020, respectively, due September 2024 | 399.6 | 399.5 | |||||||
| 3.40% Senior Notes, net of discount of $1.0 million and $1.2 million as of December 31, 2021 and 2020, respectively, due December 2027 | 499.0 | 498.8 | |||||||
| 3.00% Senior Notes, net of discount of $0.5 million and $0.6 million as of December 31, 2021 and 2020, respectively, due December 2029 | 499.5 | 499.4 | |||||||
| 4.05% Senior Notes, net of discount of $3.4 million as of both December 31, 2021 and 2020, due December 2049 | 396.6 | 396.6 | |||||||
| 3.05% Senior Notes, net of discount of $3.7 million as of December 31, 2021, due October 2051 | 696.3 | — | |||||||
| Total | 2,491.0 | 2,493.7 | |||||||
| Less unamortized debt issuance costs | 19.5 | 14.3 | |||||||
| Total long-term debt | $ | 2,471.5 | $ | 2,479.4 |
On September 21, 2021, the Company issued $700.0 million of 3.05% senior notes due 2051 through a registered public offering, for the purpose of refinancing its $700.0 million of 4.50% notes due November 1, 2023. On October 8, 2021, the Company completed the redemption of the old 4.50% notes for $769.8 million, which included a redemption premium of $56.1 million and $13.7 million of accrued and unpaid interest. The redemption of the old 4.50% notes also included a $1.4 million write-off of the remaining balance of unamortized debt issuance costs and a $0.5 million write-off of the remaining balance of unamortized debt discount. PCA used the proceeds of the offering of the new 3.05% notes and cash on hand to fund the redemption and the $7.7 million of debt issuance costs associated with the new notes. The debt issuance costs are amortized to interest expense using the effective interest method over the term of the notes.
As of December 31, 2021, the details of our borrowings were as follows:
Senior Unsecured Credit Agreement. On June 8, 2021, we entered into a revolving credit agreement with various financial institutions (the "New Revolving Credit Agreement"), which replaced the old Credit Agreement, dated August 29, 2016 (the "Old Credit Agreement"). The Old Credit Agreement was scheduled to terminate on August 29, 2021. Loans under the New Revolving Credit Agreement bear interest at LIBOR plus an applicable margin based upon the public ratings of PCA's senior long-term unsecured debt or PCA's gross leverage ratio. The New Revolving Credit Agreement is a $350 million unsecured revolving credit facility, which has a five-year term and is available for borrowings on a revolving basis for general corporate purposes. At December 31, 2021, unused borrowing capacity was $323.2 million, which includes various outstanding letters of credit. The outstanding letters of credit were primarily for workers compensation. We are required to pay commitment fees on the unused portions of the credit facility.
4.50% Senior Notes. On October 22, 2013, we issued $700.0 million of 4.50% senior notes due November 1, 2023, through a registered public offering. The senior notes were paid off on October 8, 2021 with the proceeds received from the September 2021 offering discussed above and cash on hand.
3.65% Senior Notes. On September 5, 2014, we issued $400.0 million of 3.65% senior notes due September 15, 2024, through a registered public offering.
3.40% Senior Notes. On December 13, 2017, we issued $500.0 million of 3.40% senior notes due December 15, 2027, through a registered public offering.
3.00% Senior Notes. On November 21, 2019, we issued $500.0 million of 3.00% senior notes due December 15, 2029, through a registered public offering.
4.05% Senior Notes. On November 21, 2019, we issued $400.0 million of 4.05% senior notes due December 15, 2049, through a registered public offering.
3.05% Senior Notes. On September 21, 2021, we issued $700.0 million of 3.05% senior notes due October 1, 2051, through a registered public offering.
The instruments governing our 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 our assets. Our credit facility also requires us 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 us from drawing on the revolving credit facility. An acceleration under the revolving credit facility may also constitute an event of default under the senior notes indenture. At December 31, 2021, we were in compliance with these covenants.
At December 31, 2021, we have $2,491.0 million of fixed-rate senior notes outstanding. At December 31, 2021, the fair value of our fixed-rate debt was estimated to be $2,650.1 million. The difference between the book value and fair value is due to the difference between the period-end market interest rate and the stated rate of our fixed-rate debt. We estimated the fair value of our fixed-rate debt using quoted market prices (Level 2 inputs), discussed further in Note 2, Summary of Significant Accounting Policies.
Repayments, Interest, and Other
In October 2021, we used the net proceeds from the September 2021 offering of the new 3.05% notes and cash on hand to redeem the 4.50% notes. We completed the redemption of the old 4.50% notes for $769.8 million, which included a redemption premium and accrued and unpaid interest.
In 2020, we did not repay any outstanding debt, as we did not have any maturities of our Senior Notes during 2020.
In December 2019, we used the net proceeds from the November 2019 offering of the new 3.00% and 4.05% notes and cash on hand to redeem the two series of old notes (aggregate principal amount of $900 million) outstanding at the time. We completed the redemption of those old notes for $928.4 million, which included redemption premiums and accrued and unpaid interest.
As of December 31, 2021, annual principal maturities for debt, excluding unamortized debt discount, are: none for 2022 through 2023, $400.0 million for 2024; none for 2025; and $2.1 billion for 2026 and thereafter.
Interest payments paid in connection with the Company’s debt obligations for the years ended December 31, 2021, 2020, and 2019 were $149.6 million (including redemption premiums of $56.1 million), $97.0 million, and $114.0 million (including redemption premiums of $22.2 million), respectively. As of December 31, 2021, the estimated future interest payments for the Company's debt obligations are: $84.7 million for 2022; $84.2 million for 2023 and 2024; $69.6 million for 2025; and $1.0 billion for 2026 and thereafter.
Included in interest expense, net, are amortization of financing costs and, for 2019, amortization of treasury lock settlements. Amortization of financing costs in 2021, 2020, and 2019 was $3.4 million (including a $1.4 million write-off of deferred debt issuance costs related to the October 2021 debt refinancing), $2.0 million, and $4.5 million (including a $1.8 million write-off of deferred debt issuance costs related to the November 2019 debt refinancing), respectively. Amortization of treasury lock settlements was an $18.2 million net loss in 2019 (including a $13.1 million write-off of the remaining balance for treasury locks related to the November 2019 debt refinancing).
12.
Cash, Cash Equivalents, and Marketable Debt Securities
The following table shows the Company’s cash and available-for-sale (AFS) debt securities by major asset category at December 31, 2021 and 2020 (in millions):
| December 31, 2021 | ||||||||||||||||||||||||||||
| Adjusted Cost Basis | Unrealized Gain | Unrealized Loss | Fair Value | Cash and Cash Equivalents | Short-Term Marketable Debt Securities | Long-Term Marketable Debt Securities | ||||||||||||||||||||||
| Cash and cash equivalents | $ | 612.3 | $ | — | $ | — | $ | 612.3 | $ | 612.3 | $ | — | $ | — | ||||||||||||||
| Level 1 (a): | ||||||||||||||||||||||||||||
| U.S. Treasury securities | 26.4 | — | (0.1 | ) | 26.3 | 2.0 | 14.7 | 9.6 | ||||||||||||||||||||
| Money market funds | 0.9 | — | — | 0.9 | 0.9 | — | — | |||||||||||||||||||||
| Subtotal | 27.3 | — | (0.1 | ) | 27.2 | 2.9 | 14.7 | 9.6 | ||||||||||||||||||||
| Level 2 (b): | ||||||||||||||||||||||||||||
| Corporate debt securities | 118.9 | — | (0.3 | ) | 118.6 | 3.5 | 66.0 | 49.1 | ||||||||||||||||||||
| U.S. government agency securities | 4.8 | — | — | 4.8 | — | 3.5 | 1.3 | |||||||||||||||||||||
| Certificates of deposit | 1.9 | — | — | 1.9 | — | 1.9 | — | |||||||||||||||||||||
| Subtotal | 125.6 | — | (0.3 | ) | 125.3 | 3.5 | 71.4 | 50.4 | ||||||||||||||||||||
| Total | $ | 765.2 | $ | — | $ | (0.4 | ) | $ | 764.8 | $ | 618.7 | $ | 86.1 | $ | 60.0 |
| December 31, 2020 | ||||||||||||||||||||||||||||
| Adjusted Cost Basis | Unrealized Gain | Unrealized Loss | Fair Value | Cash and Cash Equivalents | Short-Term Marketable Debt Securities | Long-Term Marketable Debt Securities | ||||||||||||||||||||||
| Cash and cash equivalents | $ | 970.5 | — | — | $ | 970.5 | $ | 970.5 | $ | — | $ | — | ||||||||||||||||
| Level 1 (a): | ||||||||||||||||||||||||||||
| U.S. Treasury securities | 28.1 | 0.2 | — | 28.3 | — | 18.9 | 9.4 | |||||||||||||||||||||
| Money market funds | 0.6 | — | — | 0.6 | 0.6 | — | — | |||||||||||||||||||||
| Subtotal | 28.7 | 0.2 | — | 28.9 | 0.6 | 18.9 | 9.4 | |||||||||||||||||||||
| Level 2 (b): | ||||||||||||||||||||||||||||
| Corporate debt securities | 107.5 | 0.3 | — | 107.8 | 1.4 | 77.1 | 29.3 | |||||||||||||||||||||
| U.S. government agency securities | 6.6 | — | — | 6.6 | — | 2.6 | 4.0 | |||||||||||||||||||||
| Certificates of deposit | 5.9 | — | — | 5.9 | 1.1 | 4.8 | — | |||||||||||||||||||||
| Commercial paper | 3.2 | — | — | 3.2 | 1.0 | 2.2 | — | |||||||||||||||||||||
| Subtotal | 123.2 | 0.3 | — | 123.5 | 3.5 | 86.7 | 33.3 | |||||||||||||||||||||
| Total | $ | 1,122.4 | $ | 0.5 | $ | — | $ | 1,122.9 | $ | 974.6 | $ | 105.6 | $ | 42.7 |
(a)
Valuations based on quoted prices for identical assets and liabilities in active markets.
(b)
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.
For the years ended December 31, 2021, 2020 and 2019, net realized gains and losses on the sales and maturities of certain marketable debt securities were insignificant.
The Company invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy requires securities to be investment grade and limits the amount of credit exposure to any one issuer. The maturities of the Company’s long-term marketable debt securities generally range from one to two years.
Fair values were determined for each individual marketable debt security in the investment portfolio. When evaluating a marketable debt security for other-than-temporary impairment, PCA reviews factors such as the duration and extent to which the fair value of the marketable debt security is less than its cost, the financial condition of the issuer and any changes thereto, the general market condition in which the issuer operates, and PCA's intent to sell or whether it will be more likely than not be required to sell, the marketable debt security before recovery of its amortized cost basis.
As of December 31, 2021 and 2020, we do not consider any of the impairments related to our marketable debt securities to be the result of credit losses. Therefore, we have not recorded an allowance for credit losses related to our marketable debt securities. All unrealized gains and losses were recorded in other comprehensive income (OCI).
The following table provides information about the Company’s marketable debt securities that have been in a continuous loss position as of December 31, 2021 and 2020 (in millions, except number of marketable debt securities in a loss position):
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||
| Fair Value of Marketable Debt Securities | Number of Marketable Debt Securities in a Loss Position | Unrealized Losses | Fair Value of Marketable Debt Securities | Number of Marketable Debt Securities in a Loss Position | Unrealized Losses (c) | |||||||||||||||||||
| Corporate debt securities | $ | 106.9 | 153 | $ | 0.3 | $ | 42.9 | 56 | $ | — | ||||||||||||||
| U.S. Treasury securities | 22.4 | 27 | 0.1 | 1.7 | 3 | — | ||||||||||||||||||
| Certificates of deposit | 0.5 | 1 | — | 1.3 | 2 | — | ||||||||||||||||||
| U.S. government agency securities | 4.8 | 6 | — | — | — | — | ||||||||||||||||||
| Commercial paper | — | — | — | 2.2 | 1 | — | ||||||||||||||||||
| $ | 134.6 | 187 | $ | 0.4 | $ | 48.1 | 62 | $ | — |
(c)
Unrealized losses were insignificant for the period ended December 31, 2020.
13.
Employee Benefit Plans and Other Postretirement Benefits
PCA has defined pension benefit plans for both salaried and hourly employees. The plans covering salaried employees are closed to new entrants with only certain current active participants still accruing benefits. The plans covering certain hourly employees are closed to new participants. We also have a Supplemental Executive Retirement Plan (SERP) and other nonqualified defined benefit pension plans that provide unfunded supplemental retirement benefits to certain of our current and former management employees. The SERP provides for incremental pension benefits in excess of those offered in our principal pension plans.
Other Postretirement Benefits
PCA provides postretirement medical benefits for certain retired salaried employees and postretirement medical and life insurance benefits for certain hourly employees. The plan covering salaried employees is closed to new participants.
Obligations and Funded Status of Defined Benefit Pension and Other Postretirement Benefits Plans
The funded status of PCA's plans change from year to year based on the plan asset investment return, contributions, benefit payments, the discount rate used to measure the liability, and expected participant longevity. The following table, which includes only company-sponsored defined benefit and other postretirement benefit plans, reconciles the beginning and ending balances of the projected benefit obligation and the fair value of plan assets. We recognize the unfunded status of these plans on the Consolidated Balance Sheets, and we recognize changes in funded status in the year changes occur through the Consolidated Statements of Comprehensive Income (dollars in millions):
| Pension Plans | Postretirement Plans | |||||||||||||||
| Year Ended December 31 | Year Ended December 31 | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Change in Benefit Obligation: | ||||||||||||||||
| Benefit obligation at beginning of period | $ | 1,565.6 | $ | 1,420.1 | $ | 13.1 | $ | 14.5 | ||||||||
| Service cost | 21.4 | 23.0 | 0.2 | 0.3 | ||||||||||||
| Interest cost | 29.6 | 39.8 | 0.3 | 0.4 | ||||||||||||
| Plan amendments | 2.1 | 1.3 | (0.1 | ) | — | |||||||||||
| Actuarial (gain) loss (a) | (61.1 | ) | 132.0 | 1.3 | (1.5 | ) | ||||||||||
| Participant contributions | — | — | 0.6 | 0.9 | ||||||||||||
| Benefits paid | (53.8 | ) | (50.6 | ) | (1.8 | ) | (1.5 | ) | ||||||||
| Benefit obligation at plan year end | $ | 1,503.8 | $ | 1,565.6 | $ | 13.6 | $ | 13.1 | ||||||||
| Accumulated benefit obligation portion of above | $ | 1,464.8 | $ | 1,520.4 | ||||||||||||
| Change in Fair Value of Plan Assets: | ||||||||||||||||
| Plan assets at fair value at beginning of period | $ | 1,300.7 | $ | 1,073.8 | $ | — | $ | — | ||||||||
| Actual return on plan assets | 84.7 | 193.8 | — | — | ||||||||||||
| Company contributions | 51.1 | 83.7 | 1.2 | 0.6 | ||||||||||||
| Participant contributions | — | — | 0.6 | 0.9 | ||||||||||||
| Benefits paid | (53.8 | ) | (50.6 | ) | (1.8 | ) | (1.5 | ) | ||||||||
| Fair value of plan assets at plan year end | $ | 1,382.7 | $ | 1,300.7 | $ | — | $ | — | ||||||||
| Underfunded status | $ | **(**121.1 | ) | $ | **(**264.9 | ) | $ | **(**13.6 | ) | $ | **(**13.1 | ) | ||||
| Amounts Recognized on Consolidated Balance Sheets: | ||||||||||||||||
| Current liabilities | $ | (1.9 | ) | $ | (1.2 | ) | $ | (0.6 | ) | $ | (0.6 | ) | ||||
| Noncurrent liabilities | (119.2 | ) | (263.7 | ) | (13.0 | ) | (12.5 | ) | ||||||||
| Accrued obligation recognized at December 31 | $ | **(**121.1 | ) | $ | **(**264.9 | ) | $ | **(**13.6 | ) | $ | **(**13.1 | ) | ||||
| Amounts Recognized in Accumulated Other Comprehensive Loss (Income) (Pre-Tax): | ||||||||||||||||
| Prior service cost (credit) | $ | 20.0 | $ | 21.7 | $ | (4.7 | ) | $ | (4.9 | ) | ||||||
| Actuarial loss (gain) | 130.4 | 223.5 | (3.6 | ) | (5.5 | ) | ||||||||||
| Total | $ | 150.4 | $ | 245.2 | $ | **(**8.3 | ) | $ | **(**10.4 | ) |
(a)
For the year ended December 31, 2021, the most significant driver of the decrease in benefit obligations for the pension plans was the actuarial gains due to an increase in the discount rate assumption. The OPEB plans experienced an actuarial loss primarily due to adverse medical claims experience that was partially offset by the effect of the change in the discount rate assumption. For the year ended December 31, 2020, the most significant driver of the increase in benefit obligations for the plans was the actuarial losses due to the decrease in the discount rate assumption. The OPEB plans experienced a net actuarial gain primarily due to changes in demographic assumptions that were partially offset by the effect of the change in the discount rate assumption.
Components of Net Periodic Benefit Cost and Other Comprehensive (Income) Loss
The components of net periodic benefit cost and other comprehensive (income) loss (pretax) were as follows (dollars in millions):
| Pension Plans | Postretirement Plans | |||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | |||||||||||||||||||
| Service cost | $ | 21.4 | $ | 23.0 | $ | 24.5 | $ | 0.2 | $ | 0.3 | $ | 0.3 | ||||||||||||
| Interest cost | 29.6 | 39.8 | 47.0 | 0.3 | 0.4 | 0.5 | ||||||||||||||||||
| Expected return on plan assets | (63.1 | ) | (56.8 | ) | (52.1 | ) | — | — | — | |||||||||||||||
| Net amortization of unrecognized amounts: | ||||||||||||||||||||||||
| Prior service cost (credit) | 3.8 | 4.3 | 6.3 | (0.4 | ) | (0.4 | ) | (0.3 | ) | |||||||||||||||
| Actuarial loss (gain) | 10.4 | 10.8 | 7.0 | (0.5 | ) | (0.4 | ) | (0.4 | ) | |||||||||||||||
| Net periodic benefit cost | $ | 2.1 | $ | 21.1 | $ | 32.7 | $ | (0.4 | ) | $ | (0.1 | ) | $ | 0.1 | ||||||||||
| Changes in plan assets and benefit obligations recognized in other comprehensive (income) loss: | ||||||||||||||||||||||||
| Actuarial net loss (gain) | $ | (82.7 | ) | $ | (5.0 | ) | $ | 51.8 | $ | 1.3 | $ | (1.5 | ) | $ | 0.2 | |||||||||
| Prior service cost (credit) | 2.1 | 1.3 | 2.3 | (0.1 | ) | — | (0.3 | ) | ||||||||||||||||
| Amortization of prior service cost (credit) | (3.8 | ) | (4.3 | ) | (6.3 | ) | 0.4 | 0.4 | 0.3 | |||||||||||||||
| Amortization of actuarial loss (gain) | (10.4 | ) | (10.8 | ) | (7.0 | ) | 0.5 | 0.4 | 0.4 | |||||||||||||||
| Total recognized in other comprehensive loss (income) (b) | $ | (94.8 | ) | $ | (18.8 | ) | $ | 40.8 | $ | 2.1 | $ | (0.7 | ) | $ | 0.6 | |||||||||
| Total recognized in net periodic benefit cost and other comprehensive loss (income) (pre-tax) | $ | (92.7 | ) | $ | 2.3 | $ | 73.5 | $ | 1.7 | $ | (0.8 | ) | $ | 0.7 |
(b)
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 six and nine years) and over the average remaining lifetime of inactive participants of Boise plans (which is between 22 and 26 years), to the extent that losses are not offset by gains in subsequent years.
As of both December 31, 2021 and 2020, the accumulated benefit obligations for the plans with obligations in excess of plan assets is $1.4 billion, and the pension benefit obligations for the plans with obligations in excess of plan assets is $1.4 billion and $1.5 billion for those same periods, respectively. Additionally, the fair value of the plan assets for the plans with obligations in excess of plan assets is $1.3 billion and $1.2 billion as of December 31, 2021 and 2020, respectively.
Assumptions
The following table presents the assumptions used in the measurement of our benefits obligations:
| Pension Plans | Postretirement Plans | |||||||||||
| December 31, | December 31, | |||||||||||
| 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | |||||||
| Weighted-Average Assumptions Used to Determine Benefit Obligations at December 31: | ||||||||||||
| Discount rate | 2.89 % | 2.57 % | 3.25 % | 2.91 % | 2.60 % | 3.18 % | ||||||
| Rate of compensation increase | 4.00 % | 4.00 % | 4.00 % | N/A | N/A | N/A | ||||||
| Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost for the Years Ended December 31: | ||||||||||||
| Discount rate | 2.57 % | 3.25 % | 4.31 % | 2.60 % | 3.18 % | 4.21 % | ||||||
| Expected return on plan assets | 4.91 % | 5.29 % | 6.06 % | N/A | N/A | N/A | ||||||
| Rate of compensation increase | 4.00 % | 4.00 % | 4.00 % | N/A | N/A | N/A |
Discount Rate Assumption. The discount rate reflects the current rate at which the pension obligations could be settled on the measurement date: December 31. The discount rate assumption used to calculate the present value of pension and postretirement benefit obligations reflects the rates available on high-quality, fixed-income debt instruments at December 31. In all periods, the bonds included in the models reflect anticipated investments that would be made to match the expected monthly benefit payments over time. The plans' projected cash flows were duration-matched to these models to develop an appropriate discount rate.
Asset Return Assumption. The expected return on plan assets reflects the expected long-term rates of return for the categories of investments currently held in the plans 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 weighted-average expected return on plan assets we will use in our calculation of 2022 net periodic pension benefit cost is 4.08%.
Rate of Compensation Increase. The rate of compensation increase is determined by PCA based upon annual reviews. The compensation increase assumption is not applicable for all plans as many of our pension plans are frozen and not accruing benefits.
Health Care Cost Trend Rate Assumptions. PCA assumed health care cost trend rates for its postretirement benefits plans were as follows:
| 2021 | 2020 | 2019 | ||||
| Health care cost trend rate assumed for next year | 6.55 % | 6.82 % | 7.09 % | |||
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 4.50 % | 4.50 % | 4.50 % | |||
| Year that the rate reaches the ultimate trend rate | 2030 | 2029 | 2029 |
Postretirement Health Care Plan Assumptions. For postretirement health care plan accounting, PCA reviews external data and its own historical trends for health care costs to determine the health care cost trend rate assumption.
Investment Policies and Strategies
PCA has retained the services of professional advisors 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 funded status of the plans. The general investment objective for all of our plan assets is to optimize growth of the pension plan trust assets, while minimizing the risk of significant losses to enable the plans to satisfy their benefit payment obligations over time. The objectives take into account the long-term nature of the benefit obligations, the liquidity needs of the plans, and the expected risk/return trade-offs of the asset classes in which the plans may choose to invest. Assets of our pension plans were invested in the following classes of securities at December 31, 2021 and 2020:
| Percentage of Fair Value at December 31, | ||||||||
| 2021 | 2020 | |||||||
| Fixed income securities | 67 | % | 48 | % | ||||
| International equity securities | 18 | % | 29 | % | ||||
| Domestic equity securities | 13 | % | 21 | % | ||||
| Other | 2 | % | 2 | % |
At December 31, 2021, the targeted investment allocations differed between the plans based on funded status. For our pension plans, the weighted average target allocation of plan assets was 70% in fixed income, 29% in equities, and 1% in other. Our retirement committee reviews the investment allocations for reasonableness at a minimum, semi-annually.
Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility risk, all of which are subject to change. Due to the level of risk associated with some investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term, and such changes could materially affect the reported amounts.
Fair Value Measurements of Plan Assets
The following tables set forth, by level within the fair value hierarchy, discussed in Note 2, Summary of Significant Accounting Policies, the pension plan assets, by major asset category, at fair value at December 31, 2021 and 2020 (dollars in millions):
| Fair Value Measurements at December 31, 2021 | ||||||||||||||||||||
| Asset Category | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Net Asset Value (NAV) (a) | Total | |||||||||||||||
| Short-term investments | $ | — | $ | 19.3 | $ | — | $ | — | $ | 19.3 | ||||||||||
| Common/collective trust funds: | ||||||||||||||||||||
| International equities | 134.4 | 20.1 | — | 90.1 | 244.6 | |||||||||||||||
| Domestic equities | — | 185.7 | — | — | 185.7 | |||||||||||||||
| Corporate and government bonds: | ||||||||||||||||||||
| Corporate bonds | — | 436.2 | — | — | 436.2 | |||||||||||||||
| Government bonds and agencies | — | 320.2 | — | — | 320.2 | |||||||||||||||
| Fixed income | — | 147.7 | — | — | 147.7 | |||||||||||||||
| Municipal bonds | — | 24.0 | — | — | 24.0 | |||||||||||||||
| Private equity securities (b) | — | — | 1.5 | — | 1.5 | |||||||||||||||
| Total securities at fair value | $ | 134.4 | $ | 1,153.2 | $ | 1.5 | $ | 90.1 | $ | 1,379.2 | ||||||||||
| Accrued income | 3.5 | |||||||||||||||||||
| Total fair value of plan assets | $ | 1,382.7 |
| Fair Value Measurements at December 31, 2020 | ||||||||||||||||||||
| Asset Category | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Net Asset Value (NAV) (a) | Total | |||||||||||||||
| Short-term investments | $ | — | $ | 25.1 | $ | — | $ | — | $ | 25.1 | ||||||||||
| Common/collective trust funds: | ||||||||||||||||||||
| International equities | 198.4 | 32.8 | — | 136.9 | 368.1 | |||||||||||||||
| Domestic equities | — | 276.9 | — | — | 276.9 | |||||||||||||||
| Corporate and government bonds: | ||||||||||||||||||||
| Corporate bonds | — | 318.3 | — | — | 318.3 | |||||||||||||||
| Government bonds and agencies | — | 243.4 | — | — | 243.4 | |||||||||||||||
| Fixed income | — | 49.4 | — | — | 49.4 | |||||||||||||||
| Municipal bonds | — | 15.9 | — | 15.9 | ||||||||||||||||
| Private equity securities (b) | — | — | 2.0 | — | 2.0 | |||||||||||||||
| Total securities at fair value | $ | 198.4 | $ | 961.8 | $ | 2.0 | $ | 136.9 | $ | 1,299.1 | ||||||||||
| Accrued income | 1.6 | |||||||||||||||||||
| Total fair value of plan assets | $ | 1,300.7 |
(a)
In accordance with ASC 820, Fair Value Measurement, certain investments that do not have readily determinable fair values are measured at fair value using the net asset value (NAV) per share practical expedient and are not classified within the fair value hierarchy.
(b)
Investments in this category are invested in the Pantheon Global Secondary Fund IV, LP. The fund specializes in investments in the private equity secondary market and occasionally directly in private companies to maximize capital growth. Fund investments are carried at fair value as determined quarterly using the market approach to estimate the fair value of private investments. The market approach utilizes prices and other relevant information generated by market transactions, type of security, size of the position, degree of liquidity, restrictions on the disposition, latest round of financing data, current financial position, and operating results, among other factors. In circumstances where fair values are not provided with respect to any of the company's fund investments, the investment advisor will seek to determine the fair value of such investments based on information provided by the general partners or managers of such funds or from other sources. Audited financial statements are provided by fund management annually. Notwithstanding the above, the variety of valuation bases adopted and quality of management data of the ultimate underlying investee companies means that there are inherent difficulties in determining the value of the investments. Amounts realized on the sale of these investments may differ from the calculated values. Boise had originally committed to a $15.0 million investment, with $2.0 million of the commitment unfunded at December 31, 2021.
The following table sets forth a summary of changes in the fair value of the pension plans' Level 3 assets for the year ended December 31, 2021 (dollars in millions):
| 2021 | ||||
| Balance, beginning of year | $ | 2.0 | ||
| Acquisitions | — | |||
| Purchases | 0.4 | |||
| Sales | (0.9 | ) | ||
| Unrealized gain | — | |||
| Balance, end of year | $ | 1.5 |
Funding and Cash Flows
PCA makes pension plan contributions that are sufficient to fund its actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA). From time to time, PCA may make discretionary contributions based on the funded status of the plans, tax deductibility, income from operations, and other factors. In 2021, 2020, and 2019, we made contributions of $50.0 million, $82.5 million, and $57.9 million, respectively, to our qualified pension plans. We do not have a required minimum contribution amount established for 2022, but we expect to make discretionary contributions to our plans.
The following are estimated benefit payments to be paid to current plan participants by year (dollars in millions). Qualified pension benefit payments are paid from plan assets, while nonqualified pension benefit payments are paid by the Company.
| Pension Plans | Postretirement Plans | |||||||
| 2022 | $ | 60.1 | $ | 0.5 | ||||
| 2023 | 63.9 | 0.5 | ||||||
| 2024 | 66.8 | 0.5 | ||||||
| 2025 | 70.0 | 0.6 | ||||||
| 2026 - 2031 | 469.3 | 3.9 |
Defined Contribution Plans
Some of our employees participate in contributory defined contribution savings plans, available to most of our salaried and hourly employees. The defined contribution plans permit participants to make contributions by salary reduction pursuant to Section 401(k) of the Code. PCA made employer-matching contributions of $38.2 million, $40.8 million, and $39.0 million in 2021, 2020, and 2019, respectively. All company-matching contributions to all employees were made in cash. We expense employer matching contributions and charge dividends on shares held by the ESOP to retained earnings. Shares of company stock held by the ESOP are included in basic shares for earnings-per-share computations. At both December 31, 2021 and 2020, the ESOP held 1.2 million shares of Company stock.
Certain salaried and hourly employees that are not participating in a PCA sponsored defined benefit pension plan 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. We contributed $46.4 million, $39.4 million, and $36.7 million for this retirement contribution during the years ended December 31, 2021, 2020, and 2019, respectively.
Deferred Compensation Plans
Key managers can elect to participate in a deferred compensation plan. The deferred compensation plan is unfunded; therefore, benefits are paid from our general assets. At December 31, 2021 and 2020, we had $25.2 million and $22.6 million, respectively, of liabilities attributable to participation in our deferred compensation plan on our Consolidated Balance Sheets.
14.
Asset Retirement Obligations
Our asset retirement obligations relate predominantly to landfill closure, wastewater treatment pond dredging, closed-site monitoring costs, and certain leasehold improvements. In accordance with ASC 410, Asset Retirement and Environmental Obligations, we recognize the fair value of these liabilities as an asset retirement obligation and capitalize that cost as part of the cost basis of the related asset in the period in which the costs are incurred if sufficient information is available to reasonably estimate the fair value of the obligation. Fair value estimates are determined using Level 3 inputs in the fair value hierarchy. The fair value of our asset retirement obligations is measured using expected future cash outflows discounted using the Company's credit-adjusted risk-free interest rate. Over time, the liability is accreted to its settlement value, and the capitalized cost is depreciated over the useful life of the related asset. These liabilities are based on the best estimate of costs and are updated periodically to reflect current technology, laws and regulations, inflation, and other economic factors. Occasionally, we become aware of events or circumstances that require us to revise our future estimated cash flows. When revisions become necessary, we recalculate our obligation and adjust our asset and liability accounts utilizing appropriate discount rates. No assets are legally restricted for purposes of settling asset retirement obligations. Upon settlement of the liability, we will recognize a gain or loss for any difference between the settlement amount and the liability recorded.
The following table describes changes to the asset retirement obligation liability (dollars in millions):
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Asset retirement obligation at beginning of period | $ | 31.8 | $ | 27.8 | ||||
| Accretion expense | 1.2 | 1.3 | ||||||
| Liabilities incurred | 1.0 | — | ||||||
| Revisions in estimated cash flows (a) | (4.5 | ) | 3.5 | |||||
| Payments | (0.1 | ) | (0.8 | ) | ||||
| Asset retirement obligation at end of period | $ | 29.4 | $ | 31.8 |
(a)
For 2021 and 2020, primarily consists of an asset retirement adjustment of $4.2 million and $4.5 million, respectively, related to the San Lorenzo, California facility closure.
We have additional asset retirement obligations with indeterminate settlement dates. The fair value of these asset retirement obligations cannot be estimated due to the lack of sufficient information to estimate the settlement dates of the obligations. These asset retirement obligations include, for example, (i) removal and disposal of potentially hazardous materials related to equipment and/or an operating facility if the equipment and/or facilities were to undergo major maintenance, renovation, or demolition and (ii) storage sites or owned facilities for which removal and/or disposal of chemicals and other related materials are required if the operating facility is closed. We will recognize a liability in the period in which sufficient information becomes available to reasonably estimate the fair value of these obligations.
15.
Share-Based Compensation
The Company has a long-term equity incentive plan, which allows for grants of restricted stock, performance awards, stock appreciation rights, and stock options to directors, officers, and employees, as well as others who engage in services for PCA. On February 25, 2020, our board of directors approved, and, on May 5, 2020, our stockholders approved, the amendment and restatement of the plan. The amendment extended the plan’s term to May 5, 2030 and increased the number of shares of common stock available for issuance under the plan by 1.4 million shares. The total number of shares authorized for past and future awards is 12.0 million shares.
As of December 31, 2021, assuming performance units are paid out at the target level of performance, 1.3 million shares were available for future grants under the current plan. Forfeitures are added back to the pool of shares of common stock available to be granted at a future date.
Restricted Stock
Restricted stock awards granted to officers and employees generally vest at the end of a four-year period, and restricted stock awards granted to directors vest immediately. A summary of the Company’s restricted stock activity follows:
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| Shares | Weighted Average Grant- Date Fair Value | Shares | Weighted Average Grant- Date Fair Value | Shares | Weighted Average Grant- Date Fair Value | |||||||||||||||||||
| Restricted stock at January 1 | 669,102 | $ | 102.55 | 716,952 | $ | 94.50 | 743,591 | $ | 86.90 | |||||||||||||||
| Granted | 173,970 | 134.10 | 204,960 | 94.25 | 199,499 | 95.48 | ||||||||||||||||||
| Vested (a) | (182,779 | ) | 108.59 | (244,823 | ) | 72.11 | (212,809 | ) | 68.59 | |||||||||||||||
| Forfeitures | (8,845 | ) | 111.73 | (7,987 | ) | 99.94 | (13,329 | ) | 98.86 | |||||||||||||||
| Restricted stock at December 31 | 651,448 | $ | 109.16 | 669,102 | $ | 102.55 | 716,952 | $ | 94.50 |
(a)
The total fair value of awards upon vesting for the years ended December 31, 2021, 2020, and 2019 was $24.8 million, $23.6 million, and $19.9 million, respectively**.**
Performance Units
Performance unit awards granted to certain key employees are earned based on the achievement of defined performance rankings of Return on Invested Capital (ROIC) or Total Shareholder Return (TSR) compared to ROIC and TSR for peer companies. ROIC performance unit awards vest four years after the grant date, while TSR performance unit awards vest approximately three years after the grant date. Both ROIC and TSR performance units are paid out entirely in shares of the Company’s common stock. A summary of the Company’s performance unit activity follows:
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| Units | Weighted Average Grant- Date Fair Value | Units | Weighted Average Grant- Date Fair Value | Units | Weighted Average Grant- Date Fair Value | |||||||||||||||||||
| Performance units at January 1 | 357,417 | $ | 103.63 | 323,147 | $ | 96.56 | 266,704 | $ | 90.01 | |||||||||||||||
| Granted | 95,236 | 140.47 | 111,287 | 99.20 | 109,545 | 97.24 | ||||||||||||||||||
| Vested (b) | (74,894 | ) | 134.53 | (77,017 | ) | 67.57 | (53,102 | ) | 65.03 | |||||||||||||||
| Forfeitures | (19,667 | ) | 132.58 | — | — | — | — | |||||||||||||||||
| Performance units at December 31 | 358,092 | $ | 105.38 | 357,417 | $ | 103.63 | 323,147 | $ | 96.56 |
(b)
The total fair value of awards upon vesting, including dividends, for the years ended December 31, 2021, 2020, and 2019 was $11.0 million, $8.5 million, and $5.5 million, respectively. Upon vesting of the awards in 2021, 2020, and 2019, PCA issued 81,577 shares, 86,015 shares, and 59,165 shares, respectively. For 2021, 2020, and 2019, these amounts included 6,683 shares, 8,998 shares, and 6,063 shares, respectively, for dividends accrued during the vesting period.
Compensation Expense
Our share-based compensation expense is recorded in “Cost of sales” and “Selling, general, and administrative expenses” Compensation expense for share-based awards recognized in the Consolidated Statements of Income, net of forfeitures was as follows (dollars in millions):
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Restricted stock | $ | 23.0 | $ | 20.1 | $ | 22.6 | ||||||
| Performance units | 12.5 | 9.9 | 7.8 | |||||||||
| Impact on income before income taxes | 35.5 | 30.0 | 30.4 | |||||||||
| Income tax benefit | (8.9 | ) | (7.6 | ) | (7.6 | ) | ||||||
| Impact on net income | $ | 26.6 | $ | 22.4 | $ | 22.8 |
The fair value of restricted stock is determined based on the closing price of the Company’s stock on the grant date. Compensation expense, net of estimated forfeitures, is recorded over the requisite service period. As PCA’s Board of Directors has the ability to accelerate the vesting of these awards upon an employee’s retirement, the Company accelerates the recognition of compensation expense for certain employees approaching normal retirement age.
For performance unit awards made in 2021, 2020, and 2019, in terms of grant date value, 50% used total shareholder return (TSR) as the performance measure and 50% used return on invested capital (ROIC) as the performance measure. All units awarded before 2018 used ROIC as the performance measure. The ROIC component of performance unit awards is valued based on the closing price of the stock on the grant date. As the ROIC component contains a performance condition, compensation expense, net of estimated forfeitures, is recorded over the requisite service period based on the most probable number of awards expected to vest. The TSR component of performance unit awards is valued using a Monte Carlo simulation as the TSR component contains a market condition. The Monte Carlo simulation estimates the fair value of the TSR component based on the expected term of the award, a risk-free interest rate, expected dividends, and expected volatility of the Company’s common stock and the common stock of the peer companies. Compensation expense is recorded ratably over the expected term of the award.
The unrecognized compensation expense for all share-based awards was as follows (dollars in millions):
| December 31, 2021 | ||||||||
| Unrecognized Compensation Expense | Remaining Weighted Average Recognition Period (in years) | |||||||
| Restricted stock | $ | 26.1 | 2.4 | |||||
| Performance units | 17.9 | 2.1 | ||||||
| Total unrecognized share-based compensation expense | $ | 44.0 | 2.3 |
We evaluate share-based compensation expense on a quarterly basis based on our estimate of expected forfeitures, review of recent forfeiture activity, and expected future turnover. We recognize the effect of adjusting the forfeiture rate for all expense amortization in the period that we change the forfeiture estimate. The effect of forfeiture adjustments was insignificant in all periods presented.
16.
Derivative Instruments and Hedging Activities
Hedging Strategy
When appropriate, we use 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 risks. We do not enter into derivative financial instruments for trading or speculative purposes.
Interest Rate Risk
The Company previously used treasury lock derivative instruments to manage interest costs and the risk associated with changes in the ten-year U.S. Treasury Note rate, which served as a reference in determining the interest rates applicable to the Company's debt securities issued in March 2008 and June 2012. Upon settlement of the interest rate protection agreements, the Company recorded the effective portion of the settlements in accumulated OCI. These amounts were then amortized over the terms of the respective notes.
During the fourth quarter of 2019, the Company recorded a charge of $13.1 million in interest expense from the write-off of the remaining treasury lock balance due to the redemption of the 3.90% notes on December 23, 2019. The Company has not entered into any new interest rate protection agreements subsequent to the fourth quarter 2019 write-off of the remaining treasury lock balance.
Derivative Instruments
The impact of derivative instruments on the consolidated statements of income and accumulated OCI was as follows (dollars in millions):
| Loss Reclassified from Accumulated OCI into Income (Effective Portion) Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Amortization of treasury locks (included in interest expense, net) | $ | — | $ | — | $ | (18.2 | ) |
As a result of our November 2019 debt refinancing and redemption of the 3.90% notes due June 15, 2022, the Company accelerated the amortization of the remaining treasury lock balance of $13.1 million ($6.5 million after tax) during the fourth quarter of 2019. The after tax amount includes $3.2 million of income tax benefit from the stranded tax effects in accumulated OCI related to the write-off of the remaining treasury lock balance.
17.
Stockholders' Equity
Dividends
During the year ended December 31, 2021, we paid $379.8 million of dividends to shareholders. On December 9, 2021, PCA's Board of Directors declared a regular quarterly cash dividend of $1.00 per share of common stock, which was paid on January 14, 2022 to shareholders of record as of December 20, 2021. The dividend payment was $93.5 million.
Share Repurchase Program
On January 26, 2022, PCA announced that its Board of Directors authorized the repurchase of an additional $1 billion of the Company's outstanding common stock. At the time of the announcement, there was no remaining authority under previously announced programs. Repurchases may be made from time to time in open market or privately negotiated transactions in accordance with applicable securities regulations. The timing and amount of repurchases will be determined by the Company in its discretion based on factors such as PCA’s stock price and market and business conditions.
During the fourth quarter of 2021, we paid $193.0 million to repurchase 1.4 million shares of common stock, which fully depleted the remaining February 2016 authorization of $200.0 million. All shares repurchased have been retired. The Company did not repurchase any shares of its common stock under this authority during the years ended December 31, 2020 and 2019.
Accumulated Other Comprehensive Income (Loss)
Changes in AOCI, net of taxes, by component follows (dollars in millions). Amounts in parentheses indicate losses.
| Foreign Currency Translation Adjustments | Unrealized Loss on Foreign Exchange Contracts | Unrealized (Loss) Gain on Marketable Debt Securities | Unfunded Employee Benefit Obligations | Total | ||||||||||||||||
| Balance at January 1, 2020 | $ | (0.4 | ) | $ | (0.2 | ) | $ | — | $ | (158.9 | ) | $ | (159.5 | ) | ||||||
| Other comprehensive income before reclassifications | — | — | 0.3 | 4.0 | 4.3 | |||||||||||||||
| Amounts reclassified from AOCI | — | — | — | 10.7 | 10.7 | |||||||||||||||
| Net current-period other comprehensive income (loss) | — | — | 0.3 | 14.7 | 15.0 | |||||||||||||||
| Balance at December 31, 2020 | $ | (0.4 | ) | $ | (0.2 | ) | $ | 0.3 | $ | (144.2 | ) | $ | (144.5 | ) | ||||||
| Other comprehensive income before reclassifications | — | — | (0.5 | ) | 59.4 | 58.9 | ||||||||||||||
| Amounts reclassified from AOCI | 0.4 | — | — | 10.0 | 10.4 | |||||||||||||||
| Net current-period other comprehensive income (loss) | 0.4 | — | (0.5 | ) | 69.4 | 69.3 | ||||||||||||||
| Balance at December 31, 2021 | $ | — | $ | (0.2 | ) | $ | (0.2 | ) | $ | (74.8 | ) | $ | (75.2 | ) |
The following table presents information about reclassifications out of AOCI (dollars in millions). Amounts in parentheses indicate expenses in the Consolidated Statements of Income.
| Amounts Reclassified from AOCI Year Ended December 31, | ||||||||||
| Details about AOCI Components | 2021 | 2020 | ||||||||
| Unfunded employee benefit obligations (a) | ||||||||||
| Amortization of prior service costs | $ | (3.4 | ) | $ | (3.9 | ) | ||||
| Amortization of actuarial gains / (losses) | (9.9 | ) | (10.4 | ) | ||||||
| (13.3 | ) | (14.3 | ) | Total before tax | ||||||
| 3.3 | 3.6 | Tax benefit | ||||||||
| $ | (10.0 | ) | $ | (10.7 | ) | Net of tax |
(a)
These AOCI components are included in the computation of net pension and postretirement benefit costs. See Note 13, Employee Benefit Plans and Other Postretirement Benefits, for additional information.
18.
Concentrations of Risk
Our Paper segment has had a long-standing commercial and contractual relationship with Office Depot, our largest customer in the paper business. This relationship exposes us to a significant concentration of business and financial risk. Our sales to Office Depot represented approximately 4% and 5% of our total Company sales for 2021 and 2020, respectively, and about 51% and 45% of our Paper segment sales revenue for those periods, respectively. At December 31, 2021 and 2020, we had $49.8 million and $39.6 million of accounts receivable due from Office Depot, respectively, which represents approximately 4% and 5% of our total Company receivables, respectively.
In 2021, sales to Office Depot represented about 51% of our Paper segment sales. If these sales are reduced, we would need to find new customers. We may not be able to fully replace any lost sales, and any new sales may be at lower prices or higher costs. Any significant deterioration in the financial condition of Office Depot affecting its ability to pay or any other change that affects its willingness to purchase our products will harm our business and results of operations.
Labor
At December 31, 2021, we had approximately 15,200 employees and approximately 45% of these employees worked pursuant to collective bargaining agreements. Approximately 63% of our hourly employees are represented by unions. The majority of our unionized employees are represented by the United Steel Workers (USW), the International Brotherhood of Teamsters (IBT), the International Association of Machinists (IAM), and the Association of Western Pulp and Paper Workers (AWPPW). Of the employees who work pursuant to collective bargaining agreements, approximately 2% work pursuant to collective bargaining agreements that will expire within the next twelve months.
19.
Transactions With Related Parties
Louisiana Timber Procurement Company, L.L.C. (LTP) is a variable-interest entity that is 50% owned by PCA and 50% owned by Boise Cascade Company (Boise Cascade). LTP procures sawtimber, pulpwood, residual chips, and other residual wood fiber to meet the wood and fiber requirements of PCA and Boise Cascade in Louisiana. PCA is the primary beneficiary of LTP and has the power to direct the activities that most significantly affect the economic performance of LTP. Therefore, we consolidate 100% of LTP in our financial statements in our Corporate and Other segment. The carrying amounts of LTP's assets and liabilities (which relate primarily to non-inventory working capital items) on our Consolidated Balance Sheets were $3.5 million at December 31, 2021 and $2.5 million at December 31, 2020. For 2021, 2020, and 2019, we recorded $84.4 million, $70.6 million, and $81.7 million, respectively, of LTP sales to Boise Cascade in “Net Sales” in the Consolidated Statements of Income and approximately the same amount of expenses in “Cost of Sales”.
Fiber purchases from related parties were $13.5 million for 2021, $12.6 million for 2020, and $16.8 million for 2019. Most of these purchases related to chip and log purchases by LTP from Boise Cascade's wood products business. These purchases are recorded in “Cost of Sales” in the Consolidated Statements of Income.
20.
Segment Information
We report our business in three reportable segments: Packaging, Paper, and Corporate and Other. These segments represent distinct businesses that are managed separately because of differing products and services. Each of these businesses requires distinct operating and marketing strategies.
Our Jackson, Alabama mill had historically operated as a UFS mill, with its results of operations reported in our Paper segment. During the fourth quarter of 2020, in order to meet strong packaging demand and maintain appropriate inventory levels, we temporarily began producing linerboard on the No. 3 machine at our Jackson, Alabama mill. In the first quarter of 2021, we announced the discontinuation of production of uncoated freesheet paper grades on the machine and the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities. Before October 2020, operating results for the Jackson mill were included in the Paper segment. Beginning in October 2020, operating results for the Jackson mill are included in both the Packaging and Paper segments.
Packaging. We manufacture and sell a wide variety of containerboard and 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. In addition, we are a large producer of packaging for meat, fresh fruit and vegetables, processed food, beverages, and other industrial and consumer products.
Paper. We manufacture and sell a range of communication-based papers. Our papers can be manufactured as either commodity papers or specialty papers with specialized or custom features, such as colors, coatings, high brightness, or recycled content.
Corporate and Other. Our Corporate and Other segment includes corporate support staff services and related assets and liabilities, and foreign exchange gains and losses. This segment also includes transportation assets, such as rail cars and trucks, which we use to transport our products from some of our manufacturing sites and assets related to LTP. See Note 19, Transactions with Related Parties, for more information related to LTP. Sales in this segment relate primarily to LTP and our rail and truck business. We provide transportation services not only to our own facilities but also, on a limited basis, to third parties when geographic proximity and logistics are favorable. Rail cars and trucks are generally leased.
Each segments' profits and losses are measured on operating profits before interest expense, net and other and income taxes. For many of these allocated expenses, the related assets and liabilities remain in the Corporate and Other segment.
Segment sales to external customers by product line were as follows (dollars in millions):
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Packaging | $ | 7,052.6 | $ | 5,919.5 | $ | 5,932.2 | ||||||
| Paper | 599.7 | 674.8 | 964.3 | |||||||||
| Corporate and Other | 78.0 | 63.9 | 67.8 | |||||||||
| $ | 7,730.3 | $ | 6,658.2 | $ | 6,964.3 |
Sales to foreign unaffiliated customers during the years ended December 31, 2021, 2020, and 2019 were $497.8 million, $318.7 million, and $394.9 million, respectively. At December 31, 2021 and 2020, we did not have any significant long-lived assets held by foreign operations.
An analysis of operations by reportable segment is as follows (dollars in millions):
| Sales, net | Operating | Depreciation, | ||||||||||||||||||||||||||
| Year Ended December 31, 2021 | Trade | Inter- segment | Total | Income (Loss) | Amortization, and Depletion | Capital Expenditures (k) | Assets | |||||||||||||||||||||
| Packaging | $ | 7,036.2 | $ | 16.4 | $ | 7,052.6 | $ | 1,306.0 | (a) | $ | 381.0 | $ | 562.5 | $ | 6,603.3 | |||||||||||||
| Paper | 599.6 | 0.1 | 599.7 | 39.1 | (b) | 27.4 | 30.1 | 398.9 | ||||||||||||||||||||
| Corporate and Other | 94.5 | 135.9 | 230.4 | (103.7 | ) | (c) | 9.1 | 12.5 | 834.6 | |||||||||||||||||||
| Intersegment eliminations | — | (152.4 | ) | (152.4 | ) | — | — | — | — | |||||||||||||||||||
| $ | 7,730.3 | $ | — | $ | 7,730.3 | 1,241.4 | $ | 417.5 | $ | 605.1 | $ | 7,836.8 | ||||||||||||||||
| Non-operating pension income | 19.7 | |||||||||||||||||||||||||||
| Interest expense, net | (152.4 | ) | (d) | |||||||||||||||||||||||||
| Income before taxes | $ | 1,108.7 |
| Sales, net | Operating | Depreciation, | ||||||||||||||||||||||||||
| Year Ended December 31, 2020 | Trade | Inter- segment | Total | Income (Loss) | Amortization, and Depletion | Capital Expenditures (k) | Assets | |||||||||||||||||||||
| Packaging | $ | 5,901.7 | $ | 17.8 | $ | 5,919.5 | $ | 829.5 | (e) | $ | 365.2 | $ | 394.8 | $ | 5,744.0 | |||||||||||||
| Paper | 674.7 | 0.1 | 674.8 | (20.0 | ) | (f)(g) | 36.5 | 20.1 | 497.2 | |||||||||||||||||||
| Corporate and Other | 81.8 | 131.3 | 213.1 | (85.6 | ) | 8.3 | 6.3 | 1,192.0 | ||||||||||||||||||||
| Intersegment eliminations | — | (149.2 | ) | (149.2 | ) | — | — | — | — | |||||||||||||||||||
| $ | 6,658.2 | $ | — | $ | 6,658.2 | 723.9 | $ | 410.0 | $ | 421.2 | $ | 7,433.2 | ||||||||||||||||
| Non-operating pension income | 2.3 | |||||||||||||||||||||||||||
| Interest expense, net | (93.5 | ) | ||||||||||||||||||||||||||
| Income before taxes | $ | 632.7 |
| Sales, net | Operating | Depreciation, | ||||||||||||||||||||||||||
| Year Ended December 31, 2019 | Trade | Inter- segment | Total | Income (Loss) | Amortization, and Depletion | Capital Expenditures (k) | Assets | |||||||||||||||||||||
| Packaging | $ | 5,905.1 | $ | 27.1 | $ | 5,932.2 | $ | 963.4 | (h) | $ | 342.8 | $ | 367.4 | $ | 5,491.5 | |||||||||||||
| Paper | 964.3 | — | 964.3 | 175.4 | (i) | 37.7 | 23.8 | 791.4 | ||||||||||||||||||||
| Corporate and Other | 94.9 | 133.1 | 228.0 | (85.1 | ) | 7.0 | 8.3 | 952.9 | ||||||||||||||||||||
| Intersegment eliminations | — | (160.2 | ) | (160.2 | ) | — | — | — | — | |||||||||||||||||||
| $ | 6,964.3 | $ | — | $ | 6,964.3 | 1,053.7 | $ | 387.5 | $ | 399.5 | $ | 7,235.8 | ||||||||||||||||
| Non-operating pension expense | (7.9 | ) | ||||||||||||||||||||||||||
| Interest expense, net | (128.8 | ) | (j) | |||||||||||||||||||||||||
| Income before taxes | $ | 917.0 |
| (a) | Includes the following: | |
| • | $4.3 million of charges related to the announced discontinuation of uncoated freesheet paper grades on the No. 3 machine at the Jackson, Alabama mill in the first quarter of 2021 associated with the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities. | |
| • | $2.8 million of income primarily consisting of an adjustment of the required asset retirement obligation related to the 2020 closure of the San Lorenzo, California facility, a gain on sale of corrugated products facilities, and insurance proceeds received for a natural disaster at one of the corrugated products facilities, partially offset by closure costs related to corrugated products facilities. | |
| • | $0.4 million of charges for acquisition and integration costs related to the December 2021 Advance Packaging Corporation acquisition. | |
| (b) | Includes $9.3 million of charges related to the announced discontinuation of uncoated freesheet paper grades on the No. 3 machine at the Jackson, Alabama mill in the first quarter of 2021 associated with the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities. | |
| (c) | Includes the following: | |
| • | $0.8 million of income related to a gain on sale of transportation assets. | |
| • | $0.5 million of charges for acquisition and integration costs related to the December 2021 Advance Packaging Corporation acquisition. | |
| • | $0.4 million of charges related to the announced discontinuation of uncoated freesheet paper grades on the No. 3 machine at the Jackson, Alabama mill in the first quarter of 2021 associated with the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities. | |
| (d) | Includes $58.9 million of costs related to the Company's debt refinancing completed in October 2021, which included a redemption premium and the write-off of the remaining balance of unamortized debt issuance costs. | |
| (e) | Includes the following: | |
| • | $27.3 million of closure costs related to corrugated products facilities, substantially all of which relates to the previously announced closure of the San Lorenzo, California facility during the second quarter of 2020, partially offset by income related to the sale of a corrugated products facility during the second quarter of 2020. | |
| • | $10.0 million of charges related to the impact of Hurricane Laura at our DeRidder, Louisiana mill, including unabsorbed costs related to lost production, excess purchased containerboard and freight costs, repair expenses, rental and supplies costs, and other recovery expenses. | |
| • | $6.3 million of incremental, out-of-pocket costs related to COVID-19, including supplies, cleaning and sick pay. Beginning in July 2020, all corresponding COVID-19 related expenses were included in normalized costs. | |
| (f) | Includes the following: | |
| • | $0.8 million of restructuring costs for paper administrative functions. | |
| • | $0.6 million incremental, out-of-pocket costs related to COVID-19, including supplies, cleaning and sick pay. Beginning in July 2020, all corresponding COVID-19 related expenses were included in normalized costs. | |
| (g) | During the second quarter of 2020, with the exacerbated deterioration in uncoated freesheet market conditions and the estimated impact on our Paper reporting unit arising from the COVID-19 pandemic, as well as projected future results of operations, we identified a triggering event indicating possible impairment of goodwill within our Paper reporting unit. The Company performed an interim quantitative impairment analysis as of May 31, 2020, and, based on the evaluation performed, we determined that goodwill was fully impaired for the Paper reporting unit and recognized a non-cash impairment charge of $55.2 million. | |
| (h) | Includes the following: | |
| • | $3.0 million of charges for the disposal of fixed assets related to the containerboard mill conversion at our DeRidder, Louisiana mill. | |
| • | $0.8 million of charges related to the second quarter discontinuation of uncoated free sheet and coated one-side white paper grades at the Wallula, Washington mill associated with the conversion of the No. 3 paper machine to produce virgin kraft linerboard. | |
| • | $0.3 million of charges consisting of closure costs related to corrugated products facilities, partially offset by income from the sale of a building related to a closed corrugated products facility | |
| (i) | Includes $0.2 million of charges related to the second quarter discontinuation of uncoated free sheet and coated one-side white paper grades at the Wallula, Washington mill associated with the conversion of the No. 3 paper machine to produce virgin kraft linerboard. | |
| (j) | Includes $38.7 million of charges related to the Company’s November 2019 debt refinancing, which included redemption premiums and the write-offs of remaining balances of treasury locks and unamortized debt issuance costs. | |
| (k) | Includes “Additions to property, plant, and equipment” and excludes cash used for “Acquisition of business, net of cash acquired” as reported on our Consolidated Statements of Cash Flows. |
21.
Commitments, Guarantees, Indemnifications, and Legal Proceedings
We have financial commitments and obligations that arise in the ordinary course of our business. These include long-term debt (discussed in Note 11, Debt), lease obligations (discussed in Note 3, Leases), capital commitments, purchase commitments for goods and services, and legal proceedings (discussed below).
Capital Commitments
The Company had capital commitments of approximately $784.9 million and $304.2 million as of December 31, 2021 and 2020, respectively, in connection with the expansion and replacement of existing facilities and equipment.
Purchase Commitments
In the table below, we set forth our enforceable and legally binding purchase obligations as of December 31, 2021. Some of the amounts 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 below. Any amounts for which we are liable under purchase orders are reflected on the Consolidated Balance Sheets as accounts payable and accrued liabilities. These obligations relate to various purchase agreements for items such as minimum amounts of energy and fiber purchases over periods ranging from one year to 31 years. Total purchase commitments were as follows (dollars in millions):
| 2022 | $ | 75.0 | ||
| 2023 | 72.3 | |||
| 2024 | 40.7 | |||
| 2025 | 32.7 | |||
| 2026 | 27.0 | |||
| Thereafter | 72.5 | |||
| Total | $ | 320.2 |
The Company purchased a total of $360.8 million, $317.6 million, and $315.0 million during the years ended December 31, 2021, 2020, and 2019, respectively, under these purchase agreements.
Environmental Matters
On August 8, 2019, the EPA issued a notice of violation (NOV) alleging violations of the Clean Air Act, resulting from an inspection of our Wallula, Washington mill in September 2018. PCA denies the violations set forth in the NOV and has requested that the EPA’s Office of Air Quality Planning and Standards provide an applicability determination to clarify that the relevant operations of PCA have not violated the regulations at issue in the NOV. The EPA denied our request in 2020. On July 27, 2020, we filed a petition with the EPA to reconsider its denial of our applicability determination and filed petitions in U.S. federal court to review the agency’s denial of our applicability determination as well as the rule at issue. After the filing of the petitions, we conducted further discussions with the agency, and, in the course of those discussions, the agency advised us that it would no longer pursue the enforcement action. The parties have jointly agreed to voluntarily dismiss the litigation.
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 2006 through 2021, there were no significant environmental remediation costs at PCA's mills and corrugated plants. At December 31, 2021, the Company had $24.3 million of environmental-related reserves recorded on its Consolidated Balance Sheet. Of the $24.3 million, approximately $17.0 million related to environmental-related asset retirement obligations discussed in Note 14, Asset Retirement Obligations, and $7.3 million related to our estimate of other environmental contingencies. The Company recorded $4.0 million in “Accrued liabilities” and $20.3 million in “Other long-term liabilities” on the Consolidated Balance Sheet. 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. The Company believes that it is not reasonably possible that future environmental expenditures for remediation costs and asset retirement obligations above the $24.3 million accrued as of December 31, 2021 will have a material impact on its financial condition, results of operations, or cash flows.
Guarantees and Indemnifications
We provide guarantees, indemnifications, and other assurances to third parties in the normal course of our business. These include tort indemnifications, environmental assurances, and representations and warranties in commercial agreements. At December 31, 2021, we are not aware of any material liabilities arising from any guarantee, indemnification, or financial assurance we have provided. If we determined such a liability was probable and subject to reasonable determination, we would accrue for it at that time.
DeRidder Mill Incident
On February 8, 2017, a tank located in the pulp mill at the Company's DeRidder, Louisiana facility exploded, resulting in three contractor fatalities and other injuries. The Company has been served with multiple lawsuits involving the decedents and other allegedly injured parties, alleging negligence on the part of the Company and claiming compensatory and punitive damages. The Company is vigorously defending these lawsuits. The Company believes that these suits are covered by its liability insurance policies, subject to an aggregate $1.0 million deductible, which has been satisfied in full as a result of settlement of various lawsuits and fees and expenses incurred by the Company. Cases involving nine plaintiffs are pending in the U.S. District Court for the Middle District of Louisiana and one case remains pending in state court in Alabama. One case previously dismissed by the federal district court for the Western District of Louisiana has been appealed by the plaintiff to the United States Court of Appeals for the Fifth Circuit. The remaining lawsuits pending in federal district court and state court are in the early stages. Accordingly, the Company is unable to estimate a range of reasonable possible losses at this time.
The Company has cooperated with investigations from the U.S. Occupational Health and Safety Administration (OSHA), the U.S. Chemical Safety Board (CSB) and the U.S. Environmental Protection Agency (EPA). The U.S. Chemical Safety Board completed its investigation and issued its report during the second quarter of 2018. The Company settled with OSHA during the second quarter of 2018 and paid approximately $40,000 in penalties for citations.
The EPA investigation is ongoing. In May 2017, the EPA conducted an on-site inspection of the facility to assess compliance with the Clean Air Act, Risk Management Program (RMP). The Company provided additional information to the EPA promptly after the inspection to address certain areas of concern (AOCs) observed during the inspection. In January 2021, the EPA and U.S. Department of Justice (DOJ) initiated civil judicial enforcement discussions with PCA. These discussions are ongoing. As of the date of filing of this report, no complaint has been filed. PCA continues to cooperate with the agencies. Since the inspection in 2017, PCA performed several voluntary activities to address the AOCs presented in the EPA’s inspection report and has removed the RMP covered process from the facility.
Legal Proceedings
We are also a party to various legal actions arising in the ordinary course of our business. These legal actions include commercial liability claims, premises liability claims, and employment-related claims, among others. As of the date of this filing, we believe it is not reasonably possible that any of the legal actions against us will, either individually or in the aggregate, have a material adverse effect on our financial condition, results of operations, or cash flows.
Previous: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK · Next: Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE