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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-08 · 184 added, 163 removed, 180 unchanged (66% of the section changed)

13 unchanged sentences

We are headquartered in Lake Forest, Illinois and operate primarily in the United States.

Included in this Item 2 are various non-GAAP financial measures, including earnings per diluted share excluding special items, net income excluding special items, earnings before non-operating pension income (expense), interest, income taxes, and depreciation, amortization, and depletion (“EBITDA”), segment EBITDA, EBITDA excluding special items, and segment EBITDA excluding special items.

We provide important disclosures regarding our presentation of non-GAAP financial measures and reconciliations of presented non-GAAP financial measures to the most comparable measures presented in accordance with GAAP later in this section under the caption “Non-GAAP Financial Measures.”

This Item 2 is intended to supplement, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2023 Annual Report on Form 10-K.

Executive Summary

Second quarter net sales were $2.08 billion in 2024 and $1.95 billion in 2023.

We reported $199 million of net income, or $2.21 per diluted share, during the second quarter of 2024, compared to $203 million, or $2.24 per diluted share, during the same period in 2023.

Net income included an insignificant amount for special items in the second quarter of 2024, compared to $6 million of expense for special items in 2023 (discussed below).

Excluding special items, net income was $199 million, or $2.20 per diluted share, during the second quarter of 2024, compared to $209 million, or $2.31 per diluted share, in the second quarter of 2023.

The decrease in net income was driven primarily by lower prices and mix in the Packaging segment and Paper segment, higher operating costs, higher depreciation expense, and a higher tax rate.

These items were partially offset by higher volume in the Packaging segment and Paper segment, lower other converting costs, lower freight and logistics expenses, and lower interest expense.

For additional detail on special items included in reported GAAP results, as well as segment income (loss) excluding special items, earnings before non-operating pension income (expense), interest, income taxes, and depreciation, amortization, and depletion (“EBITDA”), and EBITDA excluding special items, see “Item 2.

Reconciliations of Non-GAAP Financial Measures to Reported Amounts.”

Packaging segment income from operations was $280 million in the second quarter of 2024, compared to $286 million in the second quarter of 2023.

Packaging segment EBITDA excluding special items was $400 million in the second quarter of 2024 compared to $405 million in the second quarter of 2023.

The decrease was due to lower prices and mix, higher operating and other costs, partially offset by higher sales and production volumes, lower scheduled mill outage expenses, lower other converting costs, and lower freight and logistics expense.

Strong market conditions continued in the second quarter.

This drove a new all-time containerboard production record of 1.3 million tons in order to service corrugated products and containerboard demand which grew stronger each month.

Corrugated products shipments per day were up 9.2% compared to the second quarter of 2023.

Prices and mix moved higher from first quarter levels as we continued to implement price increases that were communicated to customers in the first and second quarters of 2024.

Paper segment income from operations was $27 million in the second quarter of 2024, compared to $29 million in the second quarter of 2023.

Paper segment EBITDA excluding special items was $31 million in the second quarter of 2024, compared to $39 million in the second quarter of 2023.

The decrease was due to lower prices and mix and higher scheduled mill outage expenses, partially offset by higher sales and production volumes and lower operating costs.

Packaging segment income from operations was $484 million in the first six months of 2024, compared to $554 million in the same period in 2023.

Packaging segment EBITDA excluding special items was $726 million in the first six months of 2024 compared to $797 million in the first six months of 2023.

The decrease in EBITDA excluding special items was due primarily to lower prices and mix, higher operating costs, higher expenses related to corrugated plant capital projects and other costs, and higher scheduled outage expenses, partially offset by higher sales and production volumes, lower other converting costs, and lower freight and logistics expenses.

Paper segment income from operations was $56 million in the first six months of 2024, compared to $63 million in the first six months of 2023.

Paper segment EBITDA excluding special items was $71 million in the first six months of 2024, compared to $80 million in the same period in 2023.

The decrease in EBITDA excluding special items was due to lower prices and mix and higher scheduled mill outage expenses, partially offset by higher sales and production volumes, lower operating costs, and lower freight and logistic expenses.

Special Items and Earnings per Diluted Share, Excluding Special Items

A reconciliation of reported earnings per diluted share to earnings per diluted share, excluding special items, for the three and six months ended June 30, 2024 and 2023 is as follows:

Three Months Ended

Six Months Ended

Earnings per diluted share, as reported

Special items:

Jackson mill conversion-related activities (a)

Facilities closure and other costs (b)

Total special items

Earnings per diluted share, excluding special items

(a) For the three and six months ended June 30, 2024, includes $0.6 million of income and $9.7 million of charges, respectively, related to the announced discontinuation of production of UFS paper grades on the No.

3 machine at the Jackson, Alabama mill associated with the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities.

For the three and six months ended June 30, 2023, these amounts were $4.4 million and $5.7 million, respectively.

(b) For the three months ended June 30, 2024, includes $0.1 million of charges consisting of closure costs related to corrugated products facilities.

For the six months ended June 30, 2024, these charges were completely offset by $0.1 million of income primarily related to a favorable lease buyout for a closed corrugated products facility during the first quarter of 2024.

For the three and six months ended June 30, 2023, includes $3.9 million and $13.6 million, respectively, of closure costs related to corrugated products facilities and design centers.

Included in this Item 2 are various non-GAAP financial measures, including diluted EPS excluding special items, segment income excluding special items and EBITDA excluding special items.

Management excludes special items as it believes these items are not necessarily reflective of the ongoing results of operations of our business.

We present these measures because they provide a means to evaluate the performance of our segments and our Company on an ongoing basis using the same measures that are used by our management, because these measures assist in providing a meaningful comparison between periods presented and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments.

A reconciliation of diluted EPS to diluted EPS excluding special items is included above and the reconciliations of other non-GAAP measures used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, to the most comparable measure reported in accordance with GAAP, are included in Item 2 under “Reconciliations of Non-GAAP Financial Measures to Reported Amounts.” Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP.

The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such.

Third quarter net sales were $2.18 billion in 2024 and $1.94 billion in 2023.

We reported $238 million of net income, or $2.64 per diluted share, during the third quarter of 2024, compared to $183 million, or $2.03 per diluted share, during the same period in 2023.

Net income included $1 million of expense for special items in the third quarter of 2024, compared to $2 million of expense for special items in 2023 (discussed below).

Excluding special items, net income was $239 million, or $2.65 per diluted share, during the third quarter of 2024, compared to $185 million, or $2.05 per diluted share, in the third quarter of 2023.

1 The increase in net income was driven primarily by higher volume and prices and mix in the Packaging segment, higher volume in the Paper segment, lower freight and logistics expenses, lower scheduled outage expenses, and lower interest expense.

These items were partially offset by lower prices and mix in the Paper segment, higher operating and converting costs, higher depreciation expense, and other expenses.

For additional detail on special items included in reported GAAP results and other non-GAAP measures, see “Item 2.

Non-GAAP Financial Measures.”

Packaging segment operating income was $321 million in the third quarter of 2024, compared to $257 million in the third quarter of 2023.

Packaging segment EBITDA excluding special items was $446 million in the third quarter of 2024 compared to $374 million in the third quarter of 2023.

1 The increase was due to higher sales and production volumes and prices and mix, lower freight and logistics expense, and lower scheduled mill outage expenses, partially offset by higher operating and converting costs.

Strong demand drove a new all-time containerboard production record of 1.3 million tons.

Corrugated plants also had record breaking performance with shipments per day up 11.1% compared to the third quarter of 2023.

Prices and mix moved higher as we implemented previously announced price increases for containerboard and corrugated products.

Paper segment operating income was $39 million in the third quarter of 2024, compared to $28 million in the third quarter of 2023.

Paper segment EBITDA excluding special items was $43 million in the third quarter of 2024, compared to $35 million in the third quarter of 2023.

1 The increase was due to higher sales and production volumes, lower scheduled mill outage expenses, and lower operating costs, partially offset by lower prices and mix and higher freight and logistic expense.

Packaging segment operating income was $804 million in the first nine months of 2024, compared to $811 million in the same period in 2023.

Packaging segment EBITDA excluding special items was $1,172 million in the first nine months of 2024 compared to $1,171 million in the first nine months of 2023.

1 The slight increase in EBITDA excluding special items was due primarily to higher sales and production volumes, and lower freight and logistics expense, partially offset by lower prices and mix, higher operating and converting costs, higher expenses related to corrugated plant capital projects and other costs, and higher scheduled mill outage expenses.

1 Net income excluding special items, earnings per diluted share excluding special items, and segment EBITDA excluding special items are non-GAAP financial measures.

See “Non-GAAP Financial Measures” later in this Item 2.

Paper segment operating income was $95 million in the first nine months of 2024, compared to $91 million in the first nine months of 2023.

Paper segment EBITDA excluding special items was $114 million in the first nine months of 2024, compared to $115 million in the same period in 2023.

1 The slight decrease in EBITDA excluding special items was due to lower prices and mix and higher scheduled mill outage expenses, partially offset by higher sales and production volumes, and lower operating costs.

Industry and Business Conditions

Trade publications reported North American industry-wide corrugated products shipments were up 1.1% in total and down (0.5%) per workday with one additional shipping day during the second quarter of 2024 compared to the same quarter of 2023.

Reported industry containerboard production increased 7.5% compared to the second quarter of 2023.

Reported industry containerboard inventories at the end of the second quarter of 2024 were approximately 2.7 million tons, up 1.6% compared to the same period in 2023.

Reported containerboard export shipments were up 39.5% compared to the second quarter of 2023.

In February 2024, index prices increased $40 per ton for linerboard and $60 per ton for corrugating medium, followed by an additional increase in June 2024 of $40 per ton for linerboard and corrugating medium.

Trade publications reported North American industry-wide corrugated products shipments were up 0.6% in total and down (1.0%) per workday with one additional shipping day during the third quarter of 2024 compared to the same quarter of 2023.

Reported industry containerboard production increased 3.1% compared to the third quarter of 2023.

Reported industry containerboard inventories at the end of the third quarter of 2024 were approximately 2.6 million tons, up 1.9% compared to the same period in 2023.

Reported containerboard export shipments were up 2.2% compared to the third quarter of 2023.

In February 2024, reported index prices increased $40 per ton for linerboard and $60 per ton for corrugating medium, followed by an additional increase in June 2024 of $40 per ton for linerboard and corrugating medium.

The market for communication papers competes heavily with electronic data transmission and document storage alternatives.

Increasing shifts to these alternatives have reduced usage of traditional print media and communication papers.

Trade publications reported North American UFS paper shipments were down (2.7%) in the second quarter of 2024 compared to the same quarter of 2023.

Average prices reported by a trade publication for cut size office papers were higher by $33 per ton, or 2.4% in the second quarter of 2024, compared to the first quarter of 2024, and lower by $40 per ton, or (2.7%), compared to the second quarter of 2023.

In January 2024, index prices declined $40 per ton for cut size office papers and $20 per ton for offset printing papers, followed by $20 per ton price increases in April and May 2024 for both cut size office papers and offset printing papers.

Looking ahead into the third quarter, we expect prices and mix in both our Packaging and Paper segments to improve as we continue to implement price increases previously communicated to customers along with higher containerboard export prices.

Although there is one less shipping day for the corrugated business, we expect shipments-per-day to continue to strengthen, potentially setting a new third quarter record, and higher containerboard volume.

With containerboard inventory below our target levels, we will attempt to build some inventory ahead of the scheduled maintenance outage at our Deridder mill in October.

Paper volume is expected to be slightly lower primarily due to the timing of the back-to-school business received in the second quarter.

Operating and converting costs should be higher primarily due to seasonal electricity usage and prices and slightly higher recycled fiber costs, with scheduled outage expenses expected to be slightly lower.

Considering these items, we expect third quarter earnings to be higher than second quarter earnings.

Trade publications reported North American UFS paper shipments were up 2.7% in the third quarter of 2024 compared to the same quarter of 2023.

Average prices reported by a trade publication for cut size office papers were higher by $7 per ton, or 0.5% in the third quarter of 2024, compared to the second quarter of 2024, and lower by $20 per ton, or (1.4%), compared to the third quarter of 2023.

In January 2024, reported index prices declined $40 per ton for cut size office papers and $20 per ton for offset printing papers, followed by $20 per ton price increases in April and May 2024 for both cut size office papers and offset printing papers.

We expect demand in our Packaging segment to remain strong with corrugated shipments-per-day continuing to strengthen and slightly higher containerboard volume.

However, total corrugated products shipments will be impacted by two less shipping days than the third quarter and recent hurricane damage to the strawberry crops in Florida affecting our customers.

With current containerboard inventory below target levels, we will also attempt to build inventory prior to year-end.

We expect continued realization from our previously announced price increases and higher export prices, although with a seasonally less rich mix compared to the third quarter.

In our Paper segment, shipments are expected to be lower versus the seasonally stronger third quarter while prices and mix should be fairly flat.

Operating and converting costs are expected to increase, driven by higher seasonal energy costs and chemical costs.

Scheduled mill maintenance outage costs are estimated to be higher than the third quarter, and depreciation expense should be slightly higher.

Considering these items, we expect fourth quarter earnings to be lower than third quarter earnings.

Results of Operations

Three Months Ended June 30, 2024, compared to Three Months Ended June 30, 2023

The historical results of operations of PCA for the three months ended June 30, 2024 and 2023 are set forth below (dollars in millions):

Three Months Ended September 30, 2024, compared to Three Months Ended September 30, 2023

The historical results of operations of PCA for the three months ended September 30, 2024 and 2023 are set forth below (dollars in millions):

Three Months Ended

September 30,

Corporate and Other

13 unchanged sentences

Paper EBITDA excluding special items

(a) See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 2 for a reconciliation of non-GAAP measures to the most comparable GAAP measure.

Net sales increased $123 million, or 6.3%, to $2,075 million during the three months ended June 30, 2024, compared to $1,952 million during the same period in 2023.

Net sales increased $118 million, or 6.6%, to $1,908 million, compared to $1,790 million in the second quarter of 2023 due to higher volume ($199 million), partially offset by lower containerboard and corrugated products prices and mix ($81 million).

In the second quarter of 2024, export and domestic containerboard outside shipments increased 19.9% compared to the second quarter of 2023.

(a) See “Non-GAAP Financial Measures” included in this Item 2 for a reconciliation of non-GAAP measures to the most comparable GAAP measure.

Net sales increased $246 million, or 12.7%, to $2,182 million during the three months ended September 30, 2024, compared to $1,936 million during the same period in 2023.

Net sales increased $249 million, or 14.1%, to $2,009 million, compared to $1,760 million in the third quarter of 2023 due to higher volume ($241 million) and higher containerboard and corrugated products prices and mix ($8 million).

In the third quarter of 2024, export and domestic containerboard outside shipments increased 25.8% compared to the third quarter of 2023.

Our total corrugated products shipments were up 12.9% in total and up 11.1% per workday, with one additional shipping day compared to the same period in 2023.

In the second quarter of 2024, our domestic containerboard prices were (0.1%) lower, while export prices were (6.0%) lower, than the same period in 2023.

Net sales increased $7 million, or 5.1%, to $150 million, compared to $143 million in the second quarter of 2023, due to higher volume ($16 million), partially offset by lower prices and mix ($9 million).

Gross profit decreased $7 million during the three months ended June 30, 2024, compared to the same period in 2023.

The decrease was driven primarily by lower prices and mix in the Packaging segment and Paper segment, higher operating costs, and higher depreciation expense, partially offset by higher volume in the Packaging segment and Paper segment, lower other converting costs, and lower freight and logistics expenses .

In the three months ended June 30, 2024, gross profit included no special items.

In the three months ended June 30, 2023, gross profit included $3 million of special items for charges primarily related to Jackson mill conversion-related activities and closure costs related to corrugated products facilities.

In the third quarter of 2024, our domestic containerboard prices were 8.5% higher, while export prices were 9.4% higher, than the same period in 2023.

Net sales increased $1 million, or 0.9%, to $159 million, compared to $158 million in the third quarter of 2023, due to higher volume ($4 million), partially offset by lower prices and mix ($3 million).

Gross profit increased $93 million during the three months ended September 30, 2024, compared to the same period in 2023.

The increase was driven primarily by higher volume and prices and mix in the Packaging segment, higher volume in the Paper segment, lower freight and logistics expenses, and lower scheduled outage expenses.

These items were partially offset by lower prices and mix in the Paper segment, higher operating and converting costs, and other expenses.

In the three months ended September 30, 2024, gross profit included no significant special items.

In the three months ended September 30, 2023, gross profit included $3 million of special items expense related to Jackson mill conversion-related activities.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (“SG&A”) increased $4 million during the three months ended June 30, 2024, compared to the same period in 2023.

The increase was primarily due to higher employee-related expenses.

Selling, general, and administrative expenses (“SG&A”) increased $18 million during the three months ended September 30, 2024, compared to the same period in 2023.

The increase was primarily due to higher employee-related expenses and bad debt expense.

Other Income (Expense), Net

Other income (expense), net, for the three months ended June 30, 2024 and 2023 are set forth below (dollars in millions):

Other income (expense), net, for the three months ended September 30, 2024 and 2023 are set forth below (dollars in millions):

Three Months Ended

September 30,

Asset disposals and write-offs

Jackson mill conversion-related activities

Facilities closure and other costs

Facilities closure and other (costs) income

DeRidder litigation

DeRidder litigation insurance recovery

Jackson mill conversion-related activities

We discuss these items in more detail in Note 5, Other Income (Expense), Net, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in “Part I, Item 1.

1 unchanged sentence

Income from Operations

Income from operations decreased $8 million, or (3.0%), during the three months ended June 30, 2024, compared to the same period in 2023.

The second quarter of 2024 included an insignificant amount of special items, compared to $8 million of special items expense primarily related to closure costs related to corrugated products facilities and Jackson mill conversion-related activities in the second quarter of 2023.

Packaging segment income from operations decreased $6 million to $280 million, compared to $286 million during the three months ended June 30, 2023.

The decrease related primarily to lower containerboard and corrugated products prices and mix ($103 million), higher operating costs ($41 million), higher depreciation expense ($5 million) and other costs ($2 million), partially offset by higher sales and production volumes ($114 million), lower annual outage expenses ($10 million), lower other converting costs ($9 million), and lower freight expenses ($8 million).

There was an insignificant amount of special items in the Packaging segment during the second quarter of 2024, compared to $4 million of expense primarily related to closure costs related to corrugated products facilities in the second quarter of 2023.

Paper segment income from operations decreased $2 million to $27 million, compared to $29 million during the three months ended June 30, 2023.

The decrease primarily related to lower prices and mix ($9 million) and higher annual outage expenses ($9 million), partially offset by higher sales and production volumes ($8 million), lower operating costs ($2 million), and lower depreciation expense ($1 million).

There was an insignificant amount of special items in the Paper segment during the second quarter of 2024, compared to $4 million of expense for Jackson mill conversion-related activities in the second quarter of 2023.

Income from operations increased $69 million, or 26.5%, during the three months ended September 30, 2024, compared to the same period in 2023.

The third quarter of 2024 included $1 million of special items related to corrugated products facility closure costs, compared to $2 million of special items expense primarily related to Jackson mill conversion-related activities and corrugated products facilities closure costs in the third quarter of 2023.

Packaging segment operating income increased $64 million to $321 million, compared to $257 million during the three months ended September 30, 2023.

The increase related primarily to higher sales and production volumes ($113 million), lower freight expenses ($11 million), higher containerboard and corrugated products prices and mix ($4 million), and lower annual outage expenses ($1 million), partially offset by higher operating and converting costs ($58 million), and higher depreciation expense ($6 million).

Operating costs were higher primarily because we operated the Wallula, Washington containerboard mill for the entire third quarter of 2024 while the mill was temporarily idled during the third quarter of 2023.

The third quarter of 2024 included $1 million of special items related to corrugated products facility closure costs, compared to no special items in the third quarter of 2023.

Paper segment operating income increased $11 million to $39 million, compared to $28 million during the three months ended September 30, 2023.

The increase primarily related to lower annual outage expenses ($6 million), higher sales and production volumes ($4 million), lower depreciation expense ($1 million), and lower operating costs ($1 million), partially offset by lower prices and mix ($3 million), and higher freight expenses ($1 million).

There were no special items in the Paper segment during the third quarter of 2024, compared to $3 million of expense for Jackson mill conversion-related activities in the third quarter of 2023.

Non-Operating Pension Income, Interest Expense, Net and Income Taxes

Non-operating pension income increased $3 million during the three months ended June 30, 2024, compared to the same period in 2023.

Non-operating pension income increased $3 million during the three months ended September 30, 2024, compared to the same period in 2023.

The increase in non-operating pension income was related to favorable 2023 asset performance and favorable assumption changes.

Interest expense, net for the three months ended June 30, 2024 decreased $4 million when compared to the same period in 2023.

Interest expense, net for the three months ended September 30, 2024 decreased $3 million when compared to the same period in 2023.

The decrease in interest expense, net was primarily due to higher interest income on invested cash in 2024 due to higher rates and higher cash balances.

During the three months ended June 30, 2024, we recorded $68 million of income tax expense, compared to $65 million of expense during the three months ended June 30, 2023.

The effective tax rate for the three months ended June 30, 2024 and 2023 was 25.4% and 24.3%, respectively.

The increase in our effective tax rate for the three months ended June 30, 2024 compared to the same period in 2023 was primarily due to lower excess tax benefits associated with employee restricted stock and performance unit vests as well as lower favorable state tax law changes .

Six Months Ended June 30, 2024, compared to Six Months Ended June 30, 2023

The historical results of operations of PCA for the six months ended June 30, 2024 and 2023 are set forth below (dollars in millions):

Six Months Ended

During the three months ended September 30, 2024, we recorded $81 million of income tax expense, compared to $61 million of expense during the three months ended September 30, 2023.

The effective tax rate for the three months ended September 30, 2024 and 2023 was 25.3% and 25.1%, respectively.

The increase in our effective tax rate for the three months ended September 30, 2024 compared to the same period in 2023 was primarily due to higher nondeductible employee remuneration paid to covered employees.

Nine Months Ended September 30, 2024, compared to Nine Months Ended September 30, 2023

The historical results of operations of PCA for the nine months ended September 30, 2024 and 2023 are set forth below (dollars in millions):

Nine Months Ended

September 30,

Corporate and Other

13 unchanged sentences

Paper EBITDA excluding special items

(a) See “Reconciliations of Non-GAAP Financial Measures to Reported Amounts” included in this Item 2 for a reconciliation of non-GAAP measures to the most comparable GAAP measure.

Net sales increased $126 million, or 3.2%, to $4,055 million during the six months ended June 30, 2024, compared to $3,928 million during the same period in 2023.

Net sales increased $108 million, or 3.0%, to $3,707 million, compared to $3,599 million in the six months ended June 30, 2023, due to higher containerboard and corrugated products volume ($357 million), partially offset by lower containerboard and corrugated products prices and mix ($249 million).

In the first six months of 2024, export and domestic containerboard outside shipments increased 20.9% compared to the first six months of 2023.

Total corrugated products shipments were up 10.1% in total and per workday compared to the same period in 2023.

In the first six months of 2024, our domestic containerboard prices were (0.9%) lower, while export prices were (15.9%) lower, than the same period in 2023.

Net sales during the six months ended June 30, 2024 increased $20 million, or 6.9%, to $314 million, compared to $294 million in the six months ended June 30, 2023, due to higher volume ($39 million), partially offset by lower prices and mix ($19 million).

Gross profit decreased $68 million during the six months ended June 30, 2024, compared to the same period in 2023.

The decrease was driven primarily by lower prices and mix in the Packaging and Paper segments, higher operating costs, higher scheduled outage expenses, higher depreciation expense, and other costs, partially offset by higher volumes in the Packaging and Paper segments, lower other converting costs, and lower fright and logistic expenses.

In the six months ended June 30, 2024, gross profit included $2 million of special items expense related to Jackson mill conversion-related activities.

In the six months ended June 30, 2023, gross profit included $10 million of special items expense primarily related to closure costs related to corrugated products facilities and Jackson mill conversion-related activities.

(a) See “Non-GAAP Financial Measures” included in this Item 2 for a reconciliation of non-GAAP measures to the most comparable GAAP measure.

Net sales increased $373 million, or 6.4%, to $6,237 million during the nine months ended September 30, 2024, compared to $5,865 million during the same period in 2023.

Net sales increased $357 million, or 6.7%, to $5,715 million, compared to $5,359 million in the nine months ended September 30, 2023, due to higher containerboard and corrugated products volume ($598 million), partially offset by lower containerboard and corrugated products prices and mix ($241 million).

In the first nine months of 2024, export and domestic containerboard outside shipments increased 22.7% compared to the first nine months of 2023.

Total corrugated products shipments were up 11.0% in total and up 10.4% per workday compared to the same period in

In the first nine months of 2024, our domestic containerboard prices were 2.3% higher, while export prices were (7.7%) lower, than the same period in 2023.

Net sales during the nine months ended September 30, 2024 increased $22 million, or 4.8%, to $473 million, compared to $452 million in the nine months ended September 30, 2023, due to higher volume ($43 million), partially offset by lower prices and mix ($21 million).

Gross profit increased $25 million during the nine months ended September 30, 2024, compared to the same period in 2023.

The increase was driven primarily by higher volumes in the Packaging and Paper segments, and lower freight and logistic expenses, partially offset by lower prices and mix in the Packaging and Paper segments, higher operating and converting costs, and higher annual outage expense.

In the nine months ended September 30, 2024, gross profit included $2 million of special items expense primarily related to Jackson mill conversion-related activities.

In the nine months ended September 30, 2023, gross profit included $12 million of special items expense primarily related to closure costs related to corrugated products facilities and Jackson mill conversion-related activities.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (“SG&A”) increased $7 million during the six months ended June 30, 2024, compared to the same period in 2023.

The increase was primarily due to higher bad debt expense and employee-related expenses.

Selling, general, and administrative expenses (“SG&A”) increased $25 million during the nine months ended September 30, 2024, compared to the same period in 2023.

The increase was primarily due to employee-related expenses and higher bad debt expense.

Other Income (Expense), Net

Other income (expense), net, for the six months ended June 30, 2024 and 2023 are set forth below (dollars in millions):

Six Months Ended

Other income (expense), net, for the nine months ended September 30, 2024 and 2023 are set forth below (dollars in millions):

Nine Months Ended

September 30,

Asset disposals and write-offs

Jackson mill conversion-related activities

Facilities closure and other costs

DeRidder litigation

DeRidder litigation insurance recovery

Facilities closure and other costs

We discuss these items in more detail in Note 5, Other Income (Expense), Net, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in “Part I, Item 1.

1 unchanged sentence

Income from Operations

Income from operations decreased $83 million, or (15.0%), during the six months ended June 30, 2024, compared to the same period in 2023.

The first six months of 2024 included $10 million of special items expense primarily related to Jackson mill conversion-related costs, compared to $19 million of special items expense primarily related to corrugated facility closure costs and Jackson mill conversion-related costs in the same period in 2023.

Packaging segment income from operations decreased $70 million to $484 million during the first six months of 2024, compared to the same period last year.

The decrease related primarily to lower containerboard and corrugated products prices and mix ($261 million), higher operating costs ($30 million), higher depreciation expense ($9 million), higher expenses related to corrugated plant capital projects and other costs ($8 million), and higher annual outage expenses ($2 million), partially offset by higher sales and production volumes ($201 million), lower other converting costs ($18 million), and lower freight expenses ($11 million).

Special items during the first six months of 2024 included $4 million of expense related to Jackson mill conversion-related activities, compared to $13 million of expense related to corrugated facility closure costs in the same period in 2023.

Paper segment income from operations decreased $7 million to $56 million, compared to the six months ended June 30, 2023.

The decrease primarily related to lower prices and mix ($19 million), and higher annual outage expenses ($9 million), partially offset by higher sales and production volumes ($14 million), lower operating costs ($5 million), lower depreciation ($2 million), and lower freight expenses ($1 million).

For both the six month periods ended June 30, 2024 and 2023, special items included $6 million of expense related to Jackson mill conversion-related activities.

Income from operations decreased $15 million, or (1.8%), during the nine months ended September 30, 2024, compared to the same period in 2023.

The first nine months of 2024 and 2023 included special items expense of $11 million and $22 million, respectively, related to Jackson mill conversion-related costs and corrugated facility closure costs.

Packaging segment operating income decreased $6 million to $804 million during the first nine months of 2024, compared to the same period last year.

The decrease related primarily to lower containerboard and corrugated products prices and mix ($257 million), higher operating and converting costs ($70 million), higher depreciation expense ($15 million), higher expenses related to corrugated plant capital projects and other costs ($7 million), and higher annual outage expenses ($1 million), partially offset by higher sales and production volumes ($314 million), and lower freight expenses ($22 million).

Special items during the first nine months of 2024 included $5 million of expense related to Jackson mill conversion-related activities and corrugated facility closure costs, compared to $13 million of expense related to corrugated facility closure costs in the same period in 2023.

Paper segment operating income increased $4 million to $95 million, compared to the nine months ended September 30, 2023.

The increase primarily related to higher sales and production volumes ($18 million), lower operating costs ($6 million), and lower depreciation ($2 million), partially offset by lower prices and mix ($22 million), and higher annual outage expenses ($3 million).

Special items during the first nine months of 2024 and 2023 included $6 million and $9 million, respectively, of expense related to Jackson mill conversion-related activities.

Non-Operating Pension Income, Interest Expense, and Income Taxes

Non-operating pension income increased $6 million during the six months ended June 30, 2024, compared to the same period in 2023.

Non-operating pension income increased $9 million during the nine months ended September 30, 2024, compared to the same period in 2023.

The increase in non-operating pension income was related to favorable 2023 asset performance and favorable assumption changes.

Interest expense, net decreased $10 million during the six months ended June 30, 2024, compared to the same period in 2023.

Interest expense, net decreased $13 million during the nine months ended September 30, 2024, compared to the same period in 2023.

The decrease in interest expense, net was primarily due to higher interest income on invested cash in 2024 due to higher rates and higher cash balances.

During the six months ended June 30, 2024, we recorded $108 million of income tax expense, compared to $128 million of expense during the six months ended June 30, 2023.

The effective tax rate for the six months ended June 30, 2024 and 2023 was 23.9% and 24.6%, respectively.

The decrease in our effective tax rate for the six months ended June 30, 2024 compared to the same period in 2023 was primarily due to higher excess tax benefits associated with employee restricted stock and performance unit vests.

During the nine months ended September 30, 2024, we recorded $189 million of income tax expense, compared to $190 million of expense during the nine months ended September 30, 2023.

The effective tax rate for the nine months ended September 30, 2024 and 2023 was 24.4% and 24.8%, respectively.

The decrease in our effective tax rate for the nine months ended September 30, 2024 compared to the same period in 2023 was primarily due to higher excess tax benefits associated with employee restricted stock and performance unit vests.

Liquidity and Capital Resources

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Our primary sources of liquidity are net cash provided by operating activities and available borrowing capacity under our revolving credit facility.

At June 30, 2024, we had $614 million of cash and cash equivalents, $559 million of marketable debt securities, and $323 million of unused borrowing capacity under the revolving credit facility, net of letters of credit.

At September 30, 2024, we had $677 million of cash and cash equivalents, $165 million of marketable debt securities, and $323 million of unused borrowing capacity under the revolving credit facility, net of letters of credit.

Currently, our primary uses of cash are for operations, capital expenditures, acquisitions, debt service, common stock dividends, and repurchases of common stock.

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

Six Months Ended

Nine Months Ended

September 30,

Net cash provided by (used for):

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Financing activities

Net (decrease) increase in cash and cash equivalents

Net increase in cash and cash equivalents

Operating Activities

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Cash requirements for operating activities are subject to PCA’s operating needs and the timing of collection of receivables and payments of payables and expenses.

During the six months ended June 30, 2024, net cash provided by operating activities was $539 million, compared to $640 million in the same period in 2023, a decrease of $101 million.

Cash from operations excluding changes in cash used for operating assets and liabilities decreased $36 million primarily due to lower income from operations in 2024 as discussed above.

During the nine months ended September 30, 2024, net cash provided by operating activities was $866 million, compared to $980 million in the same period in 2023, a decrease of $114 million.

Cash from operations excluding changes in cash used for operating assets and liabilities increased $43 million primarily due to lower pension contributions made during the first nine months in 2024 compared to the same period in 2023, higher accruals for workers’ compensation made during the first nine months in 2024 compared to the same period in 2023, and higher net income in 2024.

Cash from operations decreased by $157 million due to changes in operating assets and liabilities primarily due to the following:

a) a net unfavorable change in prepaid expenses and other current assets during the first six months of 2024 compared to the same period in 2023 primarily due to the accrued receivable for the insurance recovery related to the DeRidder litigation;

b) a net unfavorable change in accounts receivable during the first six months of 2024 compared to the same period in 2023 primarily due to an increase in accounts receivable levels for the Packaging segment in 2024 due to higher prices and sales volumes and an increase in interest receivables in the Corporate and Other segment in 2024 related to accrued interest on the proceeds received from the November 2023 debt refinancing;

c) a net unfavorable change in income taxes due to a smaller decrease of income tax receivables during the first six months of 2024 compared to the same period in 2023.

a) a net unfavorable change in accounts receivable during the first nine months of 2024 compared to the same period in 2023 primarily due to an increase in accounts receivable levels for the Packaging segment in 2024 due to higher prices and sales volumes and an increase in accounts receivable levels for the Paper segment in 2024 due to higher sales volumes;

b) a net unfavorable change in prepaid expenses and other current assets during the first nine months of 2024 compared to the same period in 2023 primarily due to the accrued receivable for the insurance recovery related to the DeRidder litigation;

c) a net unfavorable change in inventories during the first nine months of 2024 compared to the same period in 2023 primarily due to an increase in Packaging segment inventory balances related to higher volume, partially offset by a favorable change in Paper segment inventory balances primarily due to a 2023 increase in Paper segment inventory balances;

d) a net unfavorable change in income taxes due to a smaller increase in income tax payables during the first nine months of 2024 compared to the same period in 2023.

These unfavorable changes were partially offset by the following:

d) a net favorable change in accrued liabilities during the first six months of 2024 compared to the same period in 2023 primarily related to the accrued liability for the DeRidder trial compensatory damages and interest recorded during the first six months of 2024;

e) a net favorable change in accounts payable during the first six months of 2024 compared to the same period in 2023 primarily related to an increase in accounts payable levels during the first six months of 2024 due to an increase in cost of sales in 2024 and the timing of payments.

e) a net favorable change in accrued liabilities during the first nine months of 2024 compared to the same period in 2023 primarily related to the accrued liability for the DeRidder trial compensatory damages and interest recorded during the first nine months of 2024;

f) a net favorable change in accounts payable during the first nine months of 2024 compared to the same period in 2023 primarily related to a larger increase in accounts payable levels during the first nine months of 2024 due to higher volumes.

Investing Activities

We used $324 million for investing activities during the six months ended June 30, 2024 compared to $242 million during the same period in 2023.

We spent $322 million for internal capital investments during the six months ended June 30, 2024, compared to $239 million during the same period in 2023.

We expect capital investments in 2024 to be between $670 million and $690 million.

We used $75 million for investing activities during the nine months ended September 30, 2024 compared to $331 million during the same period in 2023.

We spent $468 million for internal capital investments during the nine months ended September 30, 2024, compared to $329 million during the same period in 2023.

Additionally, in September 2024, we received $400 million in net proceeds from the maturity of our investments in time deposits, which were used to repay our 3.65% senior notes that were due on September 15, 2024.

We expect capital investments in 2024 to be within a range of $670 million to $690 million.

These expenditures could increase or decrease as a result of a number of factors, including our financial results, strategic opportunities, future economic conditions, and our regulatory compliance requirements.

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Financing Activities

During the six months ended June 30, 2024, net cash used for financing activities was $249 million, compared to $241 million of net cash used for financing activities during the same period in 2023.

We paid $224 million of dividends during the first six months of 2024, compared to $225 million of dividends paid during the comparable period in 2023.

In addition, we withheld shares to cover $24 million of employee restricted stock taxes during the first six months of 2024 compared to $16 million of employee restricted stock taxes withheld during the same period in 2023.

During the nine months ended September 30, 2024, net cash used for financing activities was $763 million, compared to $396 million of net cash used for financing activities during the same period in 2023.

We paid $337 million of dividends during the first nine months of both 2024 and 2023.

In addition, we withheld shares to cover $25 million of employee restricted stock taxes during the first nine months of 2024 compared to $16 million of employee restricted stock taxes withheld during the same period in 2023.

We did not have any repurchases and retirements of the Company’s common stock during the first nine months of 2024, compared to repurchases and retirements of 0.3 million shares of the Company's common stock for $42 million during the same period in 2023.

On September 15, 2024, we used the net proceeds received from the November 2023 offering of the 5.70% senior notes due 2033 and cash on hand to repay our outstanding 3.65% senior notes due 2024.

The repayment of the old 3.65% notes was $400 million excluding accrued interest.

In addition to the items discussed in Note 11, Debt, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item 1.

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Annual Report on Form 10-K.

Reconciliations of Non-GAAP Financial Measures to Reported Amounts

Income from operations excluding special items, net income excluding special items, EBITDA, and EBITDA excluding special items are non-GAAP financial measures.

Non-GAAP Financial Measures

Earnings per diluted share excluding special items, net income excluding special items, EBITDA, segment EBITDA, EBITDA excluding special items, and segment EBITDA excluding special items are non-GAAP financial measures.

Management excludes special items, as it believes that these items are not necessarily reflective of the ongoing operations of our business.

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The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such.

Reconciliations of the non-GAAP measures to the most comparable measure reported in accordance with GAAP for the three and six months ended June 30, 2024 and 2023 follow (dollars in millions):

Three Months Ended June 30,

Reconciliations of the non-GAAP measures to the most comparable measure reported in accordance with GAAP are detailed below.

The following table reconciles earnings per diluted share to earnings per diluted share excluding special items for the periods indicated (dollars in millions):

Three Months Ended

Nine Months Ended

September 30,

Earnings per diluted share, as reported in accordance with GAAP

Special items:

Facilities closure and other costs (a)

Jackson mill conversion-related activities (b)

Total special items

Earnings per diluted share, excluding special items

(a) For the three and nine months ended September 30, 2024, includes $0.9 million and $1.0 million of charges, respectively, consisting of closure costs related to corrugated products facilities.

For the nine months ended September 30, 2024, these charges were partially offset by income primarily related to a favorable lease buyout for a closed corrugated products facility during the first quarter of 2024.

For the three and nine

months ended September 30, 2023, includes $0.1 million of income and $13.5 million of charges, respectively, related to the closure of corrugated products facilities and design centers.

Included therein are closure costs as well as the gain on sale of a corrugated products facility.

(b) For the nine months ended September 30, 2024, includes $9.7 million of charges related to the announced discontinuation of production of UFS paper grades on the No.

3 machine at the Jackson, Alabama mill associated with the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities.

For the three and nine months ended September 30, 2023, these amounts were $2.6 million and $8.2 million, respectively.

The following tables reconcile net income to net income excluding special items for the periods indicated (dollars in millions):

Three Months Ended September 30,

As reported in accordance with GAAP

Special items:

Jackson mill conversion-related activities (a)

Facilities closure and other costs (b)

Facilities closure and other costs (income) (c)

Jackson mill conversion-related activities (d)

Total special items

Excluding special items

Six Months Ended June 30,

Nine Months Ended September 30,

As reported in accordance with GAAP

Special items:

Jackson mill conversion-related activities (a)

Facilities closure and other costs (b)

Jackson mill conversion-related activities (d)

Facilities closure and other costs (c)

Total special items

Excluding special items

(a) Includes items related to the announced discontinuation of production of UFS paper grades on the No.

(c) For the three and nine months ended September 30, 2024, includes charges consisting of closure costs related to corrugated products facilities.

For 2023, includes charges consisting of closure costs related to the closure of corrugated products facilities and design centers.

Included therein are closure costs as well as the gain on sale of a corrugated products facility.

(d) Includes items related to the announced discontinuation of production of UFS paper grades on the No.

3 machine at the Jackson, Alabama mill associated with the permanent conversion of the machine to produce linerboard and other paper-to-containerboard conversion related activities.

(b) For the three months ended June 30, 2024, includes charges consisting of closure costs related to corrugated products facilities.

For the six months ended June 30, 2024, these charges were completely offset by income primarily related to a favorable lease buyout for a closed corrugated products facility during the first quarter of 2024.

For 2023, includes charges consisting of closure costs related to corrugated products facilities and design centers.

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Non-operating pension (income) expense

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Special items:

Facilities closure and other costs (income)

Jackson mill conversion-related activities

Facilities closure and other costs

Total special items

EBITDA excluding special items

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

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

Three Months Ended

Six Months Ended

Segment income

Nine Months Ended

September 30,

Segment operating income

Depreciation, amortization, and depletion

Facilities closure and other costs

Facilities closure and other costs (income)

Jackson mill conversion-related activities

EBITDA excluding special items

Segment income

Segment operating income

Depreciation, amortization, and depletion

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Corporate and Other

Segment operating loss

Depreciation, amortization, and depletion

EBITDA excluding special items

Market Risk and Risk Management Policies

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To manage these risks, we may from time to time enter into transactions, including certain physical commodity transactions, that are determined to be derivatives.

As of June 30, 2024, we are party to certain physical commodity transactions related to natural gas supply contracts.

As of September 30, 2024, we are party to certain physical commodity transactions related to natural gas supply contracts.

These contracts qualify for the normal purchase normal sale ("NPNS") exception, and we have elected that exception.

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Financial Statements and Supplementary Data” of our 2023 Annual Report on Form 10-K.

At June 30, 2024, interest rates on 100% of PCA’s outstanding debt are fixed.

At September 30, 2024, interest rates on 100% of PCA’s outstanding debt are fixed.

Off-Balance-Sheet Activities

The Company does not have any off-balance sheet arrangements as of June 30, 2024.

The Company does not have any off-balance sheet arrangements as of September 30, 2024.

Environmental Matters

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PCA has included in its 2023 Annual Report on Form 10-K a discussion of its critical accounting policies and estimates which require management’s most difficult, subjective, or complex judgments used in the preparation of its consolidated financial statements.

PCA has not had any changes to these critical accounting estimates during the first six months of 2024.

PCA has not had any changes to these critical accounting estimates during the first nine months of 2024.

New and Recently Adopted Accounting Standards

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis