News Column

PACKAGING CORP OF AMERICA - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 8, 2014

This management's discussion and analysis includes statements regarding our expectations with respect to our future performance, liquidity, and capital resources. Such statements, along with any other nonhistorical statements in the discussion, are forward-looking. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in our 2013 Annual Report on Form 10-K, as well as those factors listed in other documents we file with the Securities and Exchange Commission (SEC). We do not assume any obligation to update any forward-looking statement. Our actual results may differ materially from those contained in or implied by any of the forward-looking statements in this Form 10-Q.

Overview

PCA is the fourth largest producer of containerboard in the United States and the third largest producer of white papers in North America, based on production capacity. We operate eight mills and 100 corrugated products manufacturing plants. Our mills are comprised of five containerboard mills and three paper mills. Our corrugated products manufacturing plants produce a wide variety of corrugated packaging products, including conventional shipping containers used to protect and transport manufactured goods, multi-color boxes and displays with strong visual appeal that help to merchandise the packaged product in retail locations, and honeycomb protective packaging. In addition, we are a large producer of packaging for meat, fresh fruit and vegetables, processed food, beverages, and other industrial and consumer products. We operate primarily in the United States and have some converting operations in Europe, Mexico, and Canada.

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 with the updated 2013 Financial Statements.

Executive Summary

In second quarter 2014, sales grew 84% to $1,468.4 million, compared with $800.2 million in second quarter 2013. We reported $99.6 million of net income, or $1.01 per diluted share during second quarter 2014, compared with $66.3 million, or $0.68 per diluted share during the same period in 2013. Excluding the special items discussed below, we recorded $113.8 million of net income, or $1.16 per diluted share during second quarter 2014, compared with $71.3 million, or $0.73 per share in 2013. Sales grew 86% in the first half of 2014 to $2,899.7 million, and we reported $1.93 per diluted share, compared with $1.32 per diluted share in the first six months of 2013. Excluding special items, we recorded $220.3 million of net income, or $2.24 per diluted share during the first half of 2014, compared with $133.5 million, or $1.37 per diluted share in the first six months of 2013.

During the three and six months ended June 30, 2014, our packaging segment generated $166.4 million and $337.1 million, respectively, of reported operating income, and $258.8 million and $503.0 million, respectively, of earnings before interest, taxes, depreciation, amortization and depletion (EBITDA) excluding special items. Our paper segment, during the three and six months ended June 30, 2014, generated $33.6 million and $61.3 million, respectively, of operating income, and $44.9 million and $85.2 million, respectively, of EBITDA excluding special items.

Compared with the three and six months ended June 30, 2013, our results were positively affected by the Boise acquisition, which closed in October 2013. The acquisition was meaningfully accretive to our earnings before special items due to earnings generated by Boise as well as the synergies generated from the integration of its business. We have implemented several actions to improve productivity and reduce costs, including moving lightweight containerboard production from both our Counce, Tennessee, No. 1 linerboard machine and Valdosta, Georgia, linerboard mill to the newly-acquired DeRidder, Louisiana, mill. Our previously-announced plans to convert the Number 3 newsprint machine at the DeRidder, Louisiana, mill to produce 355,000 tons annually of lightweight linerboard and corrugating medium are on schedule and the reconfigured Number 3 machine is expected to start up by November 1, 2014.

The three and six months ended June 30, 2014, included $22.7 million ($18.9 million non-cash and $3.8 million cash) and $48.4 million ($22.0 million non-cash and $26.4 million cash) of pre-tax special items, respectively. The three months ended June 30, 2014, included $17.8 million of expenses related to the DeRidder restructuring and $4.9 million of Boise acquisition integration-related and other costs. The six months ended June 30, 2014, included $21.8 million of expenses related to the DeRidder restructuring, $17.6 million of expenses related to the settlement of a class action lawsuit, and $9.0 million of integration-related and other costs.

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Earnings per diluted share, excluding special items, during the three and six months ended June 30, 2014 and 2013, were as follows:

Three Months Ended Six Months Ended June 30 June 30 2014 (a) 2013 2014 (a) 2013 Earnings per diluted share, as reported $ 1.01$ 0.68$ 1.93$ 1.32 Special items: DeRidder restructuring (b) 0.12 - 0.14 - Integration-related and other costs (c) 0.03 - 0.06 - Class action lawsuit settlement (d) - - 0.11 - Pension curtailment charges (e) - 0.05 - 0.05 Total special items 0.15 0.05 0.31 0.05 Earnings per diluted share, excluding special items $ 1.16$ 0.73$ 2.24$ 1.37



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(a) On October 25, 2013, we acquired Boise Inc. (Boise). The 2014 consolidated results include Boise for the full period. (b) Amounts relate primarily to our plans to convert the Number 3 newsprint machine at our DeRidder, Louisiana, mill to produce lightweight linerboard and corrugating medium and exit the newsprint business in September 2014. Most of the costs relate to accelerating the depreciation on the Number 3 newsprint machine. (c) The three and six months ended June 30, 2014, include Boise acquisition integration-related and other costs. (d) The six months ended June 30, 2014, includes $17.6 million of costs for the settlement of the Kleen Products LLC v Packaging Corp. of America et al class action lawsuit. See Note 18, Commitments, Guarantees, Indemnifications and Legal Proceedings, for more information. (e) The three and six months ended June 30, 2013, both include non-cash pension curtailment charges related to pension plan changes in which certain hourly corrugated plant employees transitioned from a defined benefit pension plan to a defined contribution (401k) plan.



Management excludes special items and uses non-GAAP measures to focus on PCA's on-going operations and assess its operating performance and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. 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.

Industry and Business Conditions

Trade publications reported that industry-wide corrugated products shipments decreased 0.6% during the second quarter of 2014, compared with the same quarter in 2013, and increased 1.0% per workday with one less workday in the second quarter of 2014. Reported industry containerboard production was 0.2% lower than second quarter 2013, with containerboard export shipments up 4.4%. In second quarter 2014, our containerboard production was 846,000 tons, up 25,000 tons compared with the first quarter, driven by two additional production days (16,000 tons) and also by higher mill productivity (9,000 tons). In second quarter 2014, our corrugated products shipments, including Boise, increased 30% over the second quarter of last year and 32% per workday with one less workday in the second quarter of 2014. Excluding Boise shipments, corrugated products shipments increased 3.8%, or 5.5% per workday. With strong internal containerboard demand needed to supply our box plants, we reduced our outside sales of containerboard, both domestic and export, a total of 8,000 tons compared with last year's second quarter and we purchased 58,000 tons of containerboard from the outside market in the second quarter of 2014. Export and domestic containerboard pricing remained steady throughout the quarter.

The market for communication papers competes heavily with electronic data transmission and document storage alternatives. Increasing shifts to these alternatives have had an adverse effect on traditional print media and usage of communication papers. Our office paper shipments decreased 2% or 4,000 tons in the second quarter of 2014, compared with Boise's shipments last year. Our printing and converting papers and pressure sensitive papers shipments were down about 26,000 tons compared with second quarter 2013, as a result of closing two paper machines at our International Falls, Minnesota, mill in the fourth quarter of 2013. In second quarter 2014, we produced 275,000 tons of white paper, with productivity up

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almost 3% over second quarter 2013. Paper inventories were up about 2,000 tons compared with the end of first quarter 2014. White paper prices improved in second quarter 2014 due to previously announced price increases for office papers, printing and converting paper, and pressure-sensitive papers.

Outlook

Looking ahead to the third quarter, we expect higher sales volumes and lower operating costs from both higher synergies from the Boise acquisition and less scheduled annual mill maintenance outage downtime than in the second quarter of 2014. These items will be partially offset by higher amortization of annual outage repair costs, higher electricity prices, higher freight and chemical costs, and increased depreciation expense. Considering these items, we expect third quarter 2014 earnings, excluding special items, to be higher than our second quarter earnings.

Results of Operations

Three Months Ended June 30, 2014, compared with Three Months Ended June 30, 2013

The historical results of operations of PCA for the three months ended June 30, 2014 and 2013, are set forth below (dollars in millions):

Three Months Ended June 30 2014 (a) 2013 Change Packaging $ 1,145.2$ 800.2$ 345.0 Paper 295.2 - 295.2 Corporate and other and eliminations 28.0 - 28.0 Net sales $ 1,468.4$ 800.2$ 668.2 Packaging $ 166.4$ 122.3$ 44.1 Paper 33.6 - 33.6 Corporate and other and eliminations (19.8 ) (12.1 ) (7.7 ) Income from operations $ 180.2$ 110.2$ 70.0 Interest expense, net (21.4 ) (9.2 ) (12.2 ) Income before taxes 158.8 101.0 57.8 Income tax provision (59.2 ) (34.7 ) (24.5 ) Net income $ 99.6$ 66.3$ 33.3 Net income excluding special items (b) $ 113.8$ 71.3$ 42.5 Earnings, before interest, taxes, depreciation, and amortization (EBITDA) $ 281.8$ 153.3$ 128.5 EBITDA excluding special items (b) $ 287.3$ 161.1$ 126.2



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(a) On October 25, 2013, we acquired Boise Inc. (Boise). The 2014 consolidated results include Boise for the full period. (b) 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. 20



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Net Sales

Net sales increased $668.2 million, or 83.5%, to $1,468.4 million during the three months ended June 30, 2014, compared with $800.2 million during the same period in 2013. The increase in the second quarter of 2014 related to a full quarter of Boise operations ($599.9 million) and increased sales in PCA's historical operations ($68.3 million).

Packaging. Sales increased $345.0 million, or 43.1%, to $1,145.2 million, compared with $800.2 million in the second quarter of 2013. A full quarter of Boise operations contributed $276.7 million of sales and the remaining $68.3 million increase related to higher sales price and mix ($28.7 million), and higher sales volumes ($39.6 million). In second quarter 2014, our corrugated products shipments increased 30% over the second quarter last year, or 32% per workday with one less workday in second quarter 2014. Excluding Boise shipments, corrugated products shipments were up 3.8% compared with last year's second quarter, and increased 5.5% per workday. Our containerboard mills produced 846,000 tons, compared with 629,000 tons in the second quarter of 2013.

Paper. Our paper segment sales include the sales for the white paper mills we acquired from Boise. Sales during the three months ended June 30, 2014, were $295.2 million. During this period, sales volumes of white paper were 271,000 tons. Compared with first quarter 2014, white paper prices improved in second quarter 2014 due to previously announced price increases.

Gross Profit

Gross profit increased $115.6 million, or 59.2%, during the three months ended June 30, 2014, compared with the same period in 2013, due primarily to a full quarter of Boise operations ($92.1 million), which included $17.4 million of non-cash charges. The charges were primarily incremental depreciation related to changing the estimated useful lives of newsprint-related assets in connection with the conversion of a newsprint machine to containerboard at the DeRidder mill we acquired from Boise. We expect to recognize approximately $14 million of additional incremental depreciation in the third quarter of 2014. Gross profit from PCA's historical packaging operations increased $23.5 million due to higher sales price, volume, and mix, partially offset by increases in depreciation, labor, wood fiber, freight, and chemicals. During the three months ended June 30, 2014, our gross profit as a percentage of net sales decreased to 21.2% of net sales, compared with 24.4% in the same period in 2013, due primarily to the addition of the white papers business whose products generally have lower margins than the products sold in the packaging business and also due to the DeRidder restructuring charges described above.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased $48.6 million, or 65.5%, during the three months ended June 30, 2014, compared with the same period in 2013. Excluding selling, general, and administrative expenses associated with the acquired Boise businesses of $41.5 million, selling, general, and administrative expenses increased $7.1 million, primarily due to increased salary and related fringe benefits expense ($5.7 million) and other increases, which were individually insignificant.

Other Expense, Net

Other expense, net, during the three months ended June 30, 2014, was $7.7 million, compared with $10.8 million during the three months ended June 30, 2013. The second quarter of 2014 included integration-related and other costs ($4.9 million) and DeRidder restructuring charges ($0.3 million), while the second quarter of 2013 included a $7.8 million pension curtailment charge. We discuss these items in more detail in Note 4, Other Expense, Net of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item1. Financial Statements" of this Form 10-Q.

Income from Operations

Income from operations increased $70.0 million, or 63.6%, during the three months ended June 30, 2014, compared with the same period in 2013. Second quarter 2014 included $22.7 million of expense from special items, including $17.8 million of charges related to restructuring the DeRidder mill we acquired from Boise and $4.9 million of integration-related and other costs. Second quarter 2013 included a $7.8 million pension curtailment charge. Excluding these special items, income from operations increased $84.9 million during the three months ended June 30, 2014, compared with the same period in 2013. The increase in earnings, excluding special items, was driven by a full quarter of Boise operations, which contributed $68.3 million, and a $16.6 million improvement in PCA's historical earnings.

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Packaging. Segment income from operations increased $44.1 million, or 36.1%, to $166.4 million, compared with $122.3 million during the three months ended June 30, 2013. Excluding $17.8 million of DeRidder restructuring charges and $4.4 million of integration-related and other costs in second quarter 2014 and the $7.8 million pension curtailment charge in second quarter 2013, segment income increased $58.5 million to $188.6 million from $130.1 million the previous year. The increase in the second quarter 2014 related to a full quarter of Boise operations ($40.3 million) and increased income in PCA's pre-acquisition operations, which related to higher sales price and mix ($28.7 million), higher sales volumes ($7.7 million), partially offset by increased costs for depreciation ($4.9 million), labor ($4.3 million), wood fiber ($3.1 million), freight ($2.5 million), chemicals ($2.1 million), and incentives ($1.5 million).

Paper. Segment income from operations was $33.6 million during the three months ended June 30, 2014, which included $1.0 million of income from integration-related and other special items. Excluding special items, segment income was $32.6 million.

Interest Expense, Net, and Income Taxes

Interest expense, net, was $21.4 million during the three months ended June 30, 2014, compared with $9.2 million during the three months ended June 30, 2013. The increase in interest expense primarily related to higher average outstanding borrowings following the acquisition of Boise.

During the three months ended June 30, 2014, we recorded $59.2 million of income tax expense, compared with $34.7 million of expense during the three months ended June 30, 2013. The effective tax rate for the three months ended June 30, 2014 and 2013, was 37.3% and 34.4%, respectively.

Six Months Ended June 30, 2014, compared with Six Months Ended June 30, 2013

The historical results of operations of PCA for the six months ended June 30, 2014 and 2013, are set forth below (dollars in millions):

Six Months Ended June 30 2014 (a) 2013 Change Packaging $ 2,242.6$ 1,555.4$ 687.2 Paper 604.5 - 604.5 Corporate and other and eliminations 52.6 - 52.6 Net sales $ 2,899.7$ 1,555.4$ 1,344.3 Packaging $ 337.1$ 240.2$ 96.9 Paper 61.3 - 61.3 Corporate and other and eliminations (57.2 ) (24.0 ) (33.2 ) Income from operations $ 341.2$ 216.2$ 125.0 Interest expense, net (42.2 ) (18.5 ) (23.7 ) Income before taxes 299.0 197.7 101.3 Income tax provision (109.4 ) (69.2 ) (40.2 ) Net income $ 189.6$ 128.5$ 61.1 Net income excluding special items (b) $ 220.3$ 133.5$ 86.8 Earnings, before interest, taxes, depreciation, and amortization (EBITDA) $ 526.2$ 301.9$ 224.3 EBITDA excluding special items (b) $ 557.4$ 309.7$ 247.7



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(a) On October 25, 2013, we acquired Boise Inc. (Boise). The 2014 consolidated results include Boise for the full period. (b) 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. 22



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Net Sales

Net sales increased $1,344.3 million, or 86.4%, to $2,899.7 million during the six months ended June 30, 2014, compared with $1,555.4 million during the same period in 2013. The increase in the first half of 2014 related to a full period of Boise operations ($1,210.7 million) and increased sales in PCA's historical operations ($133.6 million), which resulted from higher sales price and mix and higher sales volumes.

Packaging. Sales increased $687.2 million, or 44.2%, to $2,242.6 million, compared with $1,555.4 million in the first half of 2013. A full period of Boise operations contributed $553.6 million of sales and the remaining increase related to higher sales price and mix ($61.6 million), and higher sales volumes ($72.0 million) in PCA's historical operations. In the first half of 2014, our corrugated products shipments increased 30% over the first half of last year. Excluding Boise shipments, corrugated products shipments for the six months ended June 30, 2014, were up 3.6% over the comparable period last year. Our containerboard mills produced 1,667,000 tons, or 1,300,000 tons excluding Boise, compared with 1,275,000 tons in 2013.

Paper. Our paper segment sales include the sales for the white paper mills we acquired from Boise. Sales during the six months ended June 30, 2014, were $604.5 million. During this period, sales volumes of white paper were 560,000 tons.

Gross Profit

Gross profit increased $231.7 million, or 60.9%, during the six months ended June 30, 2014, compared with the same period in 2013, due primarily to a full six months of Boise operations ($195.2 million), which included $20.4 million of non-cash charges. The charges were primarily incremental depreciation related to changing the estimated useful lives of newsprint-related assets in connection with the conversion of a newsprint machine to containerboard at the DeRidder mill we acquired from Boise. We expect to recognize approximately $14 million of additional incremental depreciation in the third quarter of 2014. Gross profit from PCA's historical packaging operations increased $36.5 million due to higher sales price, volume, and mix, partially offset by increases in depreciation, labor, energy, freight, chemicals, and wood fiber. During the six months ended June 30, 2014, our gross profit as a percentage of net sales decreased to 21.1% of net sales, compared with 24.5% in the same period in 2013, due primarily to the addition of the white papers business whose products generally have lower margins than the products sold in the packaging business and also due to the DeRidder restructuring charges described above.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased $89.9 million, or 60.1%, during the six months ended June 30, 2014, compared with the same period in 2013. Excluding selling, general, and administrative expenses associated with the acquired Boise businesses of $80.9 million, selling, general, and administrative expenses increased $9.0 million, primarily due to increased salary and related fringe benefit expense ($7.2 million) and other increases, which were individually insignificant.

Other Expense, Net

Other expense, net, during the six months ended June 30, 2014, was $31.7 million, compared with $14.8 million during the six months ended June 30, 2013. The increase is primarily due to costs incurred for the settlement of the Kleen Products LLC v Packaging Corp. of America et al class action lawsuit ($17.6 million), integration-related and other costs ($9.0 million), and DeRidder restructuring charges ($1.4 million). During the six months ended June 30, 2013, we recorded a $7.8 million pension curtailment charge. We discuss these items in more detail in Note 4, Other Expense, Net, and Note 18, Commitments, Guarantees, Indemnifications and Legal Proceedings of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item1. Financial Statements" of this Form 10-Q.

Income from Operations

Income from operations increased $125.0 million, or 57.8%, during the six months ended June 30, 2014, compared with the same period in 2013. The first half of 2014 included $48.4 million of expense from special items, including $21.8 million of charges related to restructuring the DeRidder mill we acquired from Boise, $17.6 million of costs incurred for the settlement of the Kleen Products LLC v Packaging Corp. of America et al class action lawsuit, and $9.0 million of integration-related costs. Excluding special items, income from operations increased $165.6 million during the six months ended June 30, 2014, compared with the same period in 2013. The increase in earnings, excluding special items, was driven by a full six months of Boise operations, which contributed $135.2 million, and a $30.4 million improvement in PCA's historical earnings.

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Packaging. Segment income from operations increased $96.9 million, or 40.3%, to $337.1 million, compared with $240.2 million during the six months ended June 30, 2013. Excluding $21.8 million of special items related to the DeRidder restructuring and $4.4 million of integration-related and other costs during the first six months of 2014, and a $7.8 million pension curtailment charge in the first six months of 2013, segment income increased $115.3 million. The increase in the the first half of 2014 related to a full period of Boise operations ($83.2 million, excluding special items) and increased income in PCA's pre-acquisition operations, which related to higher sales price and mix ($61.6 million), higher sales volumes ($6.8 million), and lower fringe benefits ($4.0 million), partially offset by increased costs for depreciation ($8.1 million), labor ($7.2 million), energy ($6.1 million), freight ($4.9 million), chemicals ($4.5 million), wood fiber ($3.7 million), incentives ($3.4 million), and repairs ($1.9 million).

Paper. Segment income from operations was $61.3 million during the six months ended June 30, 2014, which included $0.4 million of income from integration-related and other special items. Excluding special items, segment income was $60.9 million.

Interest Expense, Net, and Income Taxes

Interest expense, net, was $42.2 million during the six months ended June 30, 2014, compared with $18.5 million during the six months ended June 30, 2013. The increase in interest expense primarily related to higher average outstanding borrowings following the acquisition of Boise.

During the six months ended June 30, 2014, we recorded $109.4 million of income tax expense, compared with $69.2 million of expense during the six months ended June 30, 2013. The effective tax rate for the six months ended June 30, 2014 and 2013, was 36.6% and 35.0%, respectively.

Liquidity and Capital Resources

Sources and Uses of Cash

Our primary sources of liquidity are net cash provided by operating activities and available borrowing capacity under our revolving credit facility. At June 30, 2014, we had $162.0 million of cash and $325.0 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, debt service (including voluntary payments of debt), and declared common stock dividends, which we expect to be able to fund from these sources.

We believe that net cash generated from operating activities, cash on hand, available borrowings under our revolving credit facility, and available capital through access to capital markets will be adequate to meet our liquidity and capital requirements, including payments of any declared common stock dividends, for the foreseeable future. As our debt or credit facilities become due, we will need to repay, extend, or replace such facilities. Our ability to do so will be subject to future economic conditions and financial, business, and other factors, many of which are beyond our control.

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

Six Months Ended June 30 2014 2013 Change Net cash provided by (used for): Operating activities $ 334.1$ 283.0$ 51.1 Investing activities (171.3 ) (82.9 ) (88.4 ) Financing activities (191.8 ) (37.5 ) (154.3 )



Net increase (decrease) in cash and cash equivalents $ (29.0 )$ 162.6$ (191.6 )

Our foreign operations are not material to our financial position or results of operations. At June 30, 2014, we had $9.3 million of cash and short-term investments held in operations outside of the United States. We indefinitely reinvest our earnings in operations outside the United States; however, if foreign earnings were repatriated at a future date, we would need to accrue

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and pay taxes. 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.

Operating Activities

During the six months ended June 30, 2014, net cash provided by operating activities was $334.1 million, compared with $283.0 million in the same period in 2013, an increase of $51.1 million. Cash provided by operating activities before changes in operating assets and liabilities increased $98.0 million in the first half of 2014, compared with the first half of 2013, primarily due to the increase in income from operations discussed above under "Results of Operations." Cash used for operating assets and liabilities totaled $84.4 million during the six months ended June 30, 2014, compared with $37.4 million during the same period in 2013. The higher requirements for operating assets and liabilities were driven primarily by (a) higher levels of inventory in our packaging business, which related to orders we could not ship at month-end due to rail and truck availability issues and increased inventory needed to adequately service our customers as a result of the railcar and truck service issues, (b) higher deferred maintenance costs at our white paper mills, related to planned annual mill outages, that are capitalized as assets and amortized over the remainder of the year, (c) a decrease in accounts payable in the first half of 2014 due to the timing of payments, compared with an increase in accounts payable in the first half of 2013, and (d) a decrease in accrued liabilities due primarily to severance payments made in 2014 related to the acquisition of Boise, partially offset by (e) a decrease in federal and state income taxes receivable in the first half of 2014. 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.

Investing Activities

Net cash used for investing activities during the six months ended June 30, 2014, increased $88.4 million, to $171.3 million, compared with $82.9 million during the same period in 2013. The increase in net cash used for investing activities was due primarily to an increase in capital spending from having a full six months of Boise capital investments, including $38.6 million of investments related to the DeRidder conversion project discussed under "Executive Summary." We spent $148.2 million for capital investments during the six months ended June 30, 2014, compared with $80.9 million during the same period in 2013. On April 28, 2014, we acquired the assets of Crockett Packaging, a corrugated products manufacturer, for $21.2 million, before $0.9 million of working capital adjustments. The assets included a corrugated plant and a sheet plant in Southern California.

We expect capital investments to total about $400 million in 2014, including capital required to achieve Boise acquisition synergies, Boiler MACT spending, and an estimated $100 million for the DeRidder conversion project. These expenditures could increase or decrease as a result of a number of factors, including our financial results, future economic conditions, and our regulatory compliance requirements. We currently estimate capital expenditures to comply with Boiler MACT regulations (as discussed below under "Environmental Matters") in 2014 of up to $25 million and we expect other environmental capital expenditures of about $1 million in 2014. Our estimated environmental expenditures could vary significantly depending upon the enactment of new environmental laws and regulations, including those related to greenhouse gas emissions and industrial boilers. For additional information, see "Environmental Matters" in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Financing Activities

During the six months ended June 30, 2014, we used $191.8 million for financing activities, compared with $37.5 million during the same period in 2013. The increase primarily relates to additional debt principal payments of $108.5 million and $48.0 million of increased dividend payments during the six months ended June 30, 2014. We only paid $30.7 million of dividends during the first six months of 2013 as we accelerated payment of the dividend that would have been paid in January 2013 to December 2012. During the six months ended June 30, 2014, we withheld 164,328 shares from vesting equity awards to cover employee tax liabilities of $11.8 million, compared with $1.3 million in first six months of 2013. Proceeds from the exercise of stock options and tax benefits from share-based awards contributed $15.3 million in the first half of 2014, compared with $7.6 million in the same period in 2013.

For more information about our debt, see Note 8, Debt, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our updated 2013 Financial Statements.

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Contractual Obligations

There have been no material changes to the contractual obligations table disclosed in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our updated 2013 Financial Statements, except as disclosed in Note 10, Debt, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item 1. Financial Statements" of this Form 10-Q.

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. Management excludes special items and uses non-GAAP measures to focus on on-going operations and assess its operating performance and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. Additionally, EBITDA and EBITDA excluding special items measures are presented because they provide a means to evaluate the performance of our segments and our company on an ongoing basis using the same measures that are used by our management and because these measures are frequently used by investors and other interested parties in the evaluation of companies and the performance of their segments. Any analysis of non-GAAP financial measures should be done in conjunction with results presented in accordance with GAAP. The non-GAAP measures are not intended to be substitutes for GAAP financial measures and should not be used as such. Reconciliations of the non-GAAP measures to the most comparable measure reported in accordance with GAAP for the three and six months ended June 30, 2014 and 2013, follow (in millions, except per share amounts):

Three Months Ended June 30 2014 (a) 2013 Income Income from Net from Net Operations Income Operations Income



As reported in accordance with GAAP $ 180.2$ 99.6$ 110.2$ 66.3 Special items: DeRidder restructuring (b)

17.8 11.2 - - Integration-related and other costs (c) 4.9 3.0 - - Pension curtailment charges (e) - - 7.8 5.0 Total special items 22.7 14.2 7.8 5.0 Excluding special items $ 202.9$ 113.8$ 118.0$ 71.3 Six Months Ended June 30 2014 (a) 2013 Income Income from Net from Net Operations Income Operations Income



As reported in accordance with GAAP $ 341.2$ 189.6$ 216.2$ 128.5 Special items: DeRidder restructuring (b)

21.8 13.8 - - Integration-related and other costs (c) 9.0 5.7 - - Class action lawsuit settlement (d) 17.6 11.2 - - Pension curtailment charges (e) - - 7.8 5.0 Total special items 48.4 30.7 7.8 5.0 Excluding special items $ 389.6$ 220.3$ 224.0$ 133.5 ________

(a) On October 25, 2013, we acquired Boise Inc. (Boise). The 2014 consolidated results include Boise for the full period. (b) Amounts relate primarily to our plans to convert the Number 3 newsprint machine at our DeRidder, Louisiana, mill to produce lightweight linerboard and corrugating medium and exit the newsprint business in September 2014. Most of the costs relate to accelerating the depreciation on the Number 3 newsprint machine. 26



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(c) The three and six months ended June 30, 2014, include Boise acquisition integration-related and other costs recorded in "Other expense, net". (d) The six months ended June 30, 2014, includes $17.6 million of costs for the settlement of the Kleen Products LLC v Packaging Corp. of America et al class action lawsuit. See Note 18, Commitments, Guarantees, Indemnifications and Legal Proceedings, for more information. These costs are recorded in "Other expense, net". (e) The three and six months ended June 30, 2013, both include non-cash pension curtailment charges related to pension plan changes in which certain hourly corrugated plant employees transitioned from a defined benefit pension plan to a defined contribution (401k) plan. These costs are recorded in "Other expense, net".



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 June 30 June 30 2014 2013 2014 2013 Net income $ 99.6$ 66.3$ 189.6$ 128.5 Interest expense, net 21.4 9.2 42.2 18.5 Income tax provision 59.2 34.7 109.4 69.2 Depreciation, amortization, and depletion 101.6 43.1 185.0 85.7 EBITDA $ 281.8$ 153.3$ 526.2$ 301.9 Special items: DeRidder restructuring $ 0.6 $ - $ 4.6 $ - Integration-related and other costs 4.9 - 9.0 - Class action lawsuit settlement - - 17.6 - Pension curtailment charges - 7.8 - 7.8 EBITDA excluding special items $ 287.3$ 161.1$ 557.4$ 309.7 27



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The following table reconciles segment income (loss) to EBITDA and EBITDA excluding special items: Three Months Ended Six Months Ended June 30 June 30 2014 2013 2014 2013 Packaging Segment income $ 166.4$ 122.3$ 337.1$ 240.2



Depreciation, amortization, and depletion 87.4 42.7 156.9 85.0 EBITDA

253.8 165.0 494.0 325.2 DeRidder restructuring 0.6 - 4.6 - Integration-related and other costs 4.4 - 4.4 - Pension curtailment charges - 7.8 - 7.8 EBITDA excluding special items $ 258.8$ 172.8$ 503.0$ 333.0



Paper

Segment income $ 33.6 $ - $ 61.3 $ - Depreciation, amortization, and depletion 12.3 - 24.3 - EBITDA 45.9 - 85.6 - Integration-related and other costs (1.0 ) - (0.4 ) - EBITDA excluding special items $ 44.9 $ - $ 85.2 $ - Corporate and Other Segment loss $ (19.8 )$ (12.1 )$ (57.2 )$ (24.0 )



Depreciation, amortization, and depletion 1.9 0.4 3.8 0.7 EBITDA

(17.9 ) (11.7 ) (53.4 ) (23.3 ) Integration-related and other costs 1.5 - 5.0 - Class action lawsuit settlement - - 17.6 - EBITDA excluding special items $ (16.4 )$ (11.7 )$ (30.8 )$ (23.3 ) EBITDA $ 281.8$ 153.3$ 526.2$ 301.9 EBITDA excluding special items $ 287.3$ 161.1$ 557.4$ 309.7



Market Risk and Risk Management Policies

PCA is exposed to the impact of interest rate changes and changes in the market value of its financial instruments. We periodically enter into derivatives to minimize these risks, but not for trading purposes. At June 30, 2014, we had no derivative instruments outstanding. For a discussion of derivatives and hedging activities, see Note 11, Derivative Instruments and Hedging Activities, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of our updated 2013 Financial Statements.

The interest rates on approximately 51% of PCA's debt are fixed. A one percent increase in interest rates related to variable-rate debt would have resulted in an increase in interest expense and a corresponding decrease in income before taxes of $11.8 million annually.

Off-Balance-Sheet Activities

The Company does not have any off-balance sheet arrangements as of June 30, 2014.

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Environmental Matters

There have been no material changes to the disclosure set forth in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters" filed with our updated 2013 Financial Statements.

Critical Accounting Policies and Estimates

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

PCA has included in its updated 2013 Financial Statements, 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 2014.

New and Recently Adopted Accounting Standards

For a listing of our new and recently adopted accounting standards, see Note 17, New and Recently Adopted Accounting Standards, of the Condensed Notes to Unaudited Quarterly Consolidated Financial Statements in "Part I, Item 1. Financial Statements" of this Form 10-Q.

Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q, and in particular, statements found in this Management's Discussion and Analysis of Financial Condition and Results of Operations, that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are often identified by the words "will," "should," "anticipate," "believe," "expect," "intend," "estimate," "hope," or similar expressions. These statements reflect management's current views with respect to future events and are subject to risks and uncertainties. There are important factors that could cause actual results to differ materially from those in forward-looking statements, many of which are beyond our control. These factors, risks and uncertainties include the following: the impact of general economic conditions;

the impact of the Boise acquisition and risks and uncertainties relating to the integration of Boise's business into our business; containerboard, corrugated products, and white paper, general industry conditions, including competition, product demand and product pricing;



fluctuations in wood fiber and recycled fiber costs;

fluctuations in purchased energy costs;

the possibility of unplanned outages or interruptions at our principal facilities; and legislative or regulatory actions or requirements, particularly concerning environmental or tax matters.



Our actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do occur, what impact they will have on our results of operations or financial condition. Given these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We expressly disclaim any obligation to publicly revise any forward-looking statements that have been made to

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reflect the occurrence of events after the date hereof. For a discussion of other factors, risks and uncertainties that may affect our business, see Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2013.


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