PACKAGING CORP OF AMERICA - Quarter Report: 2007 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the transition period from            to            

Commission file number 1-15399

PACKAGING CORPORATION OF AMERICA
(Exact Name of Registrant as Specified in its Charter)

(847) 482-3000
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer ý                Accelerated filer o                Non-accelerated filer o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No ý

        As of November 5, 2007, the Registrant had outstanding 105,610,556 shares of common stock, par value $0.01 per share.

PART I
FINANCIAL INFORMATION

Item 1.    Financial Statements.

Packaging Corporation of America

Condensed Consolidated Balance Sheets

See notes to condensed consolidated financial statements.

2

Packaging Corporation of America

Condensed Consolidated Statements of Income

(unaudited)

See notes to condensed consolidated financial statements.

3

Packaging Corporation of America

Condensed Consolidated Statements of Income

(unaudited)

See notes to condensed consolidated financial statements.

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Packaging Corporation of America

Condensed Consolidated Statements of Cash Flows

(unaudited)

See notes to condensed consolidated financial statements.

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Packaging Corporation of America

Notes to Condensed Consolidated Financial Statements

(unaudited)

September 30, 2007

1. Basis of Presentation

        The condensed consolidated financial statements as of September 30, 2007 and 2006 of Packaging Corporation of America ("PCA" or the "Company") and for the three- and nine-month periods then ended are unaudited but include all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of such financial statements. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete audited financial statements. Operating results for the period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. These condensed consolidated financial statements should be read in conjunction with PCA's Annual Report on Form 10-K for the year ended December 31, 2006. The condensed consolidated financial statements for the three- and nine-month periods ended September 30, 2006 have been restated for the adoption of FASB Staff Position ("FSP") No. AUG AIR-1, "Accounting for Planned Major Maintenance Activities." The Company adopted this FSP on January 1, 2007, which required prior year financial statements to be restated to account for the impact of this FSP as if it had been adopted on January 1, 2006. See Note 2, Summary of Accounting Policies—Recent Accounting Pronouncements for additional information.

2. Summary of Accounting Policies

Basis of Consolidation

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

Use of Estimates

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

Revenue Recognition

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

Segment Information

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

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Comprehensive Income

        Comprehensive income is as follows:

Reclassifications

        Prior year's financial statements have been reclassified where appropriate to conform with the current year presentation.

Recent Accounting Pronouncements

        In February 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115." This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendments to SFAS No. 115, "Accounting for Certain Investments In Debt and Equity Securities," apply to all entities with available-for-sale and trading securtities. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided that an entity also elects to apply the provisions of SFAS No. 157, "Fair Value Measurements." Currently, the Company does not plan to adopt the fair value option for any of its financial instruments.

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        In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R)." SFAS No. 158 requires plan sponsors of defined benefit pension and other postretirement benefit plans (collectively, "postretirement benefit plans") to recognize the funded status of their postretirement benefit plans in the statement of financial position, measure the fair value of plan assets and benefit obligations as of the date of the fiscal year end statement of financial position, and provide additional disclosures. These requirements were effective for fiscal years ending after December 15, 2006, with the exception of the requirement to measure plan assets and benefit obligations as of the plan sponsor's fiscal year-end. This requirement is effective for fiscal years ending after December 15, 2008. On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158. The Company is assessing the remaining provision of SFAS No. 158 to determine the impact that the adoption of those provisions may have on its results of operations.

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. This statement is effective for fiscal years beginning after November 15, 2007. The Company is assessing SFAS No. 157 and has not yet determined the impact that the adoption of SFAS No. 157 will have on its results of operations.

        In September 2006, the FASB issued FSP No. AUG AIR-1, "Accounting for Planned Major Maintenance Activities." This FSP prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods and is effective for fiscal years beginning after December 15, 2006. Prior to the adoption of this FSP, the Company determined its planned maintenance costs for the year and amortized these costs ratably throughout the year. On January 1, 2007, the Company began accounting for its planned major maintenance activities in accordance with FSP No. AUG AIR-1 using the deferral method. The implementation of FSP No. AUG AIR-1 will not have any impact on the Company's year end financial position or full year results of operations and cash flows as all maintenance costs incurred have been and continue to be expensed in the fiscal year in which the maintenance activity occurs. In accordance with FSP No. AUG AIR-1, the Company's financial position, results of operations and cash flows for each quarter of 2006

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were adjusted to apply the FSP retrospectively. The following financial statement line items as of and for the three- and nine-month period ended September 30, 2006 were adjusted as follows:

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        In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income Taxes," an interpretation of SFAS No. 109, "Accounting for Income Taxes," to create a single model to address accounting for uncertainty in tax positions. FIN No. 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN No. 48 on January 1, 2007.

        As a result of the implementation of FIN No. 48, PCA recognized a $5.1 million decrease to reserves for uncertain tax positions and an increase to the beginning balance of retained earnings on the condensed consolidated balance sheet as of January 1, 2007. After adoption on January 1, 2007, the Company had $9.1 million total gross unrecognized tax benefits. Of this total, $7.1 million (net of the federal benefit on state issues and interest) would impact its effective tax rate if recognized.

        During the third quarter of 2007, the statute of limitations for the tax year 2001 expired. Also, the federal examination of the tax year 2004 was concluded. As of result of these events, the reserve for uncertain tax positions was decreased by $0.8 million. At September 30, 2007, PCA had $7.5 million of unrecognized tax benefits.

        PCA's continuing practice is to recognize interest and penalties related to uncertain tax positions in income tax expense. After adoption of FIN No. 48 on January 1, 2007, the Company had $0.6 million accrued for interest and no reserve for penalties. During the nine-month period ended September 30, 2007, PCA recorded $0.3 million for interest in its statement of operations, increasing the accrual for interest to $0.9 million at September 30, 2007.

        PCA and its subsidiaries are subject to U.S. federal income taxes, as well as income taxes of multiple state and city jurisdictions. A federal examination of the tax years 2002 and 2004 has been concluded. The tax years 2003, 2005 and 2006 remain open to federal examination. In major state jurisdictions, tax years 2002-2006 remain open for examination.

3. Earnings Per Share

        The following table sets forth the computation of basic and diluted income per common share for the periods presented. Basic and diluted income per common share for the nine-month period ended September 30, 2006 both increased $0.02 due to the restatement of the Company's results of operations as a result of the adoption of FSP No. AUG AIR-1. Basic and diluted income per common share for the three-month period ended September 30, 2006 did not change as a result of the adoption of this

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FSP. See Note 2, Summary of Accounting Policies—Recent Accounting Pronouncements for additional information.

4. Stock-Based Compensation

        In October 1999, the Company adopted a long-term equity incentive plan which provides for grants of stock options, stock appreciation rights, restricted stock and performance awards to directors, officers and employees of PCA, as well as others who engage in services for PCA. Option awards granted to officers, employees and directors have contractual lives of seven or ten years. Options granted to officers and employees vest ratably over a three- or four-year period, whereas options granted to directors vest immediately. The plan, which will terminate on October 19, 2009, provides for the issuance of up to 6,550,000 shares of common stock. As of September 30, 2007, options or

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restricted stock for 5,822,522 shares have been granted, net of forfeitures. Forfeitures are added back to the pool of shares of common stock available to be granted at a future date.

        Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), "Share-Based Payment," using the modified-prospective-transition method. Under that transition method, stock compensation cost recognized subsequent to January 1, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Compensation expense for both stock options and restricted stock recognized in the condensed consolidated statements of income for the three- and nine- month periods ended September 30, 2007 and 2006 was as follows:

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

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

        The total intrinsic value of options exercised during the three months ended September 30, 2007 and 2006 was $1,532,000 and $5,218,000, respectively, and during the nine months ended September 30, 2007 and 2006 was $8,022,000 and $6,506,000, respectively. As of September 30, 2007, there was $2,531,000 of total unrecognized compensation cost related to non-vested stock option awards granted under the Company's equity incentive plan. The Company expects to recognize the cost of these stock option awards over a weighted-average period of 1.4 years.

        During 2003, the Company began granting shares of restricted stock to certain of its employees and directors. Restricted stock awards granted to employees vest at the end of a three- or four-year period, whereas restricted stock awards granted to directors vest at the end of a six-month period. The fair value of restricted stock is determined based on the closing price of the Company's common stock on the grant date. The Company generally recognizes compensation expense associated with restricted stock awards ratably over their vesting periods. As PCA's Board of Directors has the ability to accelerate vesting of restricted stock upon an employee's retirement, the Company accelerates the

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recognition of compensation expense for certain employees approaching normal retirement age. A summary of the Company's restricted stock activity follows:

        As of September 30, 2007, there was $9,860,000 of total unrecognized compensation costs related to the above restricted stock awards. The Company expects to recognize the cost of these stock awards over a weighted-average period of 2.6 years.

5. Inventories

        The components of inventories are as follows:

        An actual valuation of inventory under the LIFO method is made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation.

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6. Goodwill and Other Intangible Assets

Goodwill

        Changes in the carrying amount of goodwill for the period ended September 30, 2007 are as follows:

Other Intangible Assets

        The components of other intangible assets are as follows:

7. Employee Benefit Plans and Other Postretirement Benefits

        For the three and nine months ended September 30, 2007 and 2006, net pension costs were comprised of the following:

        The Company makes pension plan contributions that are sufficient to fund its actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA). However, from time to time the Company may make discretionary contributions in excess of the required minimum amounts. During the first nine months of 2007, the Company made required contributions of $18.4 million, including $8.5 million in the third quarter of

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2007. In addition to the required contributions, the Company made a discretionary contribution of $10.5 million in the third quarter. This discretionary contribution was made in anticipation of the new 2008 funding requirements of the Pension Protection Act. The Company expects to make a required contribution of $5.3 million in the fourth quarter, for a total of $34.2 million of contributions to the pension plans in 2007.

        For the three and nine months ended September 30, 2007 and 2006, net postretirement costs were comprised of the following:

8. Restructuring Charges

        In August 2005, the Company informed impacted employees that it would close a corrugated products plant by December 31, 2005. The charges related to this plant closing were recorded in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. In connection with the shutdown of the corrugated products plant, the Company recorded pre-tax restructuring charges of $1.7 million during 2005 and $325,000 during 2006. On November 3, 2006, PCA sold the building for cash proceeds of $378,000 and recorded a pre-tax gain of $378,000.

        In August 2006, the Company informed impacted employees that it would close a corrugated products plant by September 30, 2006. In connection with the closing of this plant, the Company sold the equipment and the building for cash proceeds of $1.6 million and recorded a pre-tax loss of $319,000. The Company also recorded severance of $454,000 and wrote off $174,000 of assets, primarily intangible assets during the third quarter of 2006.

        In July 2007, the Company closed a corrugated products plant. In connection with the shutdown of this plant, the Company recorded pre-tax restructuring charges, including severance, of $905,000 million during the third quarter of 2007. Restructuring costs are included in other expense, net in the statement of operations.

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        The following table presents an analysis of the 2007 activity related to the restructurings:

9. Stock Repurchase Program

        On May 16, 2001, the Company announced a $100 million common stock repurchase program permitting PCA to repurchase shares from time to time. Through September 30, 2007, the Company repurchased 5,495,600 shares of common stock for approximately $96.6 million. Of the 5,495,600 shares repurchased, 300,000 shares were repurchased during the third quarter of 2007, for approximately $7.8 million. All shares repurchased have been retired.

10. Subsequent Events

        On October 5, 2007, Packaging Receivables Company, LLC ("PRC") and Packaging Credit Company, LLC ("PCC"), both Delaware limited liability companies and wholly owned subsidiaries of PCA, amended the Credit and Security Agreement between PRC, PCC, Variable Funding Capital Company LLC and Wachovia Bank National Association. The amendment extended the scheduled termination date of the Credit and Security Agreement from October 5, 2007 to October 3, 2008.

        On October 17, 2007, PCA announced that it intends to increase the cash dividend on its common stock from an annual payout of $1.00 per share to $1.20 per share. The first quarterly dividend of $0.30 per share will be paid on January 15, 2008 to shareholders of record as of December 14, 2007. PCA also announced that its Board of Directors had authorized the repurchase of up to $150 million of its common stock. This authorization is in addition to the $100 million share repurchase program announced in 2001. The Company intends to repurchase these shares over the next 18 months.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

        Packaging Corporation of America, or PCA, is the sixth largest producer of containerboard and corrugated products in the United States, based on production capacity. Approximately 80% of the containerboard tons produced at our mills are consumed in our corrugated products manufacturing plants. The remaining 20% is sold to domestic customers or the export market. Besides containerboard, we produce a wide variety of products ranging from basic corrugated shipping containers to specialized packaging such as wax-coated boxes for the agriculture industry. We also have multi-color printing capabilities to make high-impact graphics boxes and displays that offer our customers more attractive packaging. Our operating facilities and customers are located primarily in the United States.

        In analyzing the operating performance of the company, we focus on the following factors that affect our business and are important to consider when reviewing our financial and operating results:

•

corrugated products demand;



•

corrugated products and containerboard pricing;



•

containerboard inventories; and



•

cost trends and volatility for our major costs, including wood and recycled fiber, purchased energy, labor and fringe benefits, and transportation costs.

        The market for containerboard is generally subject to changes in the U.S. economy. Historically, supply and demand, as well as industry-wide inventory levels, has influenced prices of containerboard. In addition to U.S. shipments, approximately 10% of domestically produced containerboard has been exported for use in other countries.

        Reported industry shipments of corrugated products increased 0.1% for the three months ended September 30, 2007 compared to the same period in 2006 and industry containerboard inventory levels remained at historically low levels. Industry inventories of containerboard at the end of the third quarter were at the lowest September ending level in the past 30 years on a weeks of supply basis. As reported by industry publications, linerboard prices increased $40 per ton in August 2007 and, with that increase, ended September $40 per ton higher than September of last year. The pass-through of the containerboard price increase to higher box prices began in September, and it is expected that most of this increase will be realized in the fourth quarter.

        The cost to manufacture containerboard is dependent, in large part, on the costs of wood fiber, recycled fiber, purchased fuels, electricity and labor and fringe benefits. While energy and other costs are significant in the manufacture of corrugated products, labor and fringe benefits make up the largest component of corrugated products' manufactured costs, excluding the cost of containerboard.

        Industry publications reported that recycled fiber prices increased significantly during the first half of 2007 compared to 2006 and then continued to increase more moderately during the third quarter. Average prices, for September were more than 50% higher than the same month in the prior year. Wood costs increased slightly from second quarter levels but remained well below first quarter levels. Purchased fuel costs were comparable to levels both in the third quarter of 2006 and the second quarter of 2007. Transportation and purchased electricity costs were slightly higher in the third quarter of 2007 compared to the third quarter of 2006.

        For the quarter ended September 30, 2007, PCA reported higher earnings than the prior year. This was primarily driven by increased product pricing and volume for both containerboard and corrugated products, reflecting the full realization of 2006 price increases. Outside containerboard sales to third parties increased 12,000 tons, or 9.4% and corrugated product sales volume increased 1.3%, compared

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to last year's third quarter. Partially offsetting the earnings improvement were higher recycled fiber costs as discussed earlier and labor and fringe benefit costs.

        We expect our earnings from operations for the fourth quarter to benefit from the realization of the majority of the box price increase described above. This benefit is expected to be partially offset by seasonally lower corrugated products volume and planned mill maintenance work resulting in lower production and higher costs. We also typically incur higher energy costs in the fourth quarter due to the onset of colder weather in addition to higher fiber costs.

        In addition, our Counce, Tennessee linerboard mill incurred a major, unplanned outage beginning on October 24, 2007. The entire mill was down for 2¹/2 days and experienced operational difficulties through the end of the month. This outage resulted in about 11,000 tons of lost production as well as significant additional operating costs, which will adversely impact fourth quarter net income by approximately $4.0 million.

        This outage was the result of a total mill power failure related, in part, to an extended period of heavy rain and the subsequent failure of a valve, which led to the contamination of the mill's steam and boiler water systems. There was no major equipment damage, and the mill was up and running at full capacity by November 1, 2007.

Results of Operations

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

        The historical results of operations of PCA for the three months ended September 30, 2007 and 2006 are set forth below:

Net Sales

        Net sales increased by $16.0 million, or 2.8%, for the three months ended September 30, 2007 from the comparable period in 2006, primarily as a result of increased sales prices and volume of corrugated products and containerboard to third parties.

        Corrugated products volume sold for the three months ended September 30, 2007 increased 1.3% to 7.9 billion square feet ("bsf") compared to 7.8 bsf in the third quarter of 2006. Containerboard volume sold to external domestic and export customers was 5.2% and 16.3% higher, respectively, for the three months ended September 30, 2007 from the three months ended September 30, 2006. Containerboard mill production for the three months ended September 30, 2007 was 632,000 tons compared to 621,000 tons in the same period in 2006.

Income From Operations

        Income from operations increased by $4.9 million, or 6.4%, for the three months ended September 30, 2007 compared to the three months ended September 30, 2006, primarily attributable to

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increased sales prices and sales volume ($13.1 million), partially offset by increased recycled fiber costs ($3.6 million), labor and fringe benefit costs including medical, pension and incentive compensation costs ($3.4 million) and energy costs ($1.8 million).

        Gross profit increased $5.1 million, or 3.8%, for the three months ended September 30, 2007 from the comparable period in 2006. Gross profit as a percentage of net sales increased from 23.4% of net sales in the three months ended September 30, 2006 to 23.6% of net sales in the current quarter due primarily to the improved sales prices and volume described previously.

        Selling and administrative expenses increased $1.1 million, or 2.6%, for the three months ended September 30, 2007 compared to the same period in 2006, primarily as a result of higher expenses related to salaries including merit increases, incentive compensation, new hires, and share-based compensation expense ($0.3 million), related fringe benefits ($0.5 million) and warehousing costs ($0.3 million).

        Corporate overhead decreased $0.1 million, or 0.5%, for the three months ended September 30, 2007 compared to the same period in 2006.

        Other expense for the three months ended September 30, 2007 decreased $0.8 million, or 28.9%, compared to the three months ended September 30, 2006, primarily related to a $0.8 million gain on sale of land.

Interest Expense, Net and Income Taxes

        Net interest expense decreased $2.1 million, or 26.7%, for the three months ended September 30, 2007 from the three months ended September 30, 2006, primarily as a result of increased income earned on PCA's cash equivalents due to higher cash balances.

        PCA's effective tax rate was 35.8% for the three months ended September 30, 2007 and 36.6% for the comparable period in 2006. The effective tax rate varies from the U.S. federal statutory tax rate of 35% principally due to the impact of state and local income taxes offset by the domestic manufacturers' deduction.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

        The historical results of operations of PCA for the nine months ended September 30, 2007 and 2006, are set forth below:

Net Sales

        Net sales increased by $101.8 million, or 6.2%, for the nine months ended September 30, 2007 from the comparable period in 2006, primarily as a result of increased sales prices of corrugated products and containerboard and increased sales volume of containerboard to outside third parties.

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        Total corrugated products volume sold for the nine months ended September 30, 2007 decreased 0.6% to 23.6 bsf compared to 23.7 bsf in the first nine months of 2006. Containerboard volume to external domestic and export customers increased 7.8% and 41.1%, respectively, for the nine months ended September 30, 2007 from the nine months ended September 30, 2006. Containerboard mill production for the nine months ended September 30, 2007 was 1.83 million tons compared to 1.79 million tons in the same period in 2006.

Income From Operations

        Income from operations increased by $58.8 million, or 36.8%, for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006, primarily attributable to higher sales prices, sales volume and improved product mix ($88.0 million) which was partially offset by increased costs for recycled fiber ($11.9 million), salary expenses which includes share-based compensation ($8.0 million), fringe benefits, which include medical and pension costs and incentive compensation accruals ($5.0 million) and transportation ($4.7 million).

        Gross profit increased $69.7 million, or 21.6%, for the nine months ended September 30, 2007 from the comparable period in 2006. Gross profit as a percentage of net sales increased from 19.8% of net sales in the first nine months of 2006 to 22.6% of net sales in the first nine months of 2007 due primarily to the increased prices and improved mix described previously.

        Selling and administrative expenses increased $8.6 million, or 7.3%, for the nine months ended September 30, 2007 compared to the same period in 2006, primarily as a result of expenses related to salaries including merit increases, incentive compensation, new hires, and share-based compensation expense ($4.9 million), related fringe benefits ($1.5 million), travel, meeting and entertainment expenses ($1.3 million) and warehousing costs ($0.8 million) due to increased customer requirements.

        Corporate overhead increased $4.0 million, or 10.7%, for the nine months ended September 30, 2007 compared to the same period in 2006, primarily due to increases in salary and related fringe benefit costs which include expenses recorded for merit increases, share-based compensation and incentive compensation ($2.3 million) and information technology costs ($1.7 million).

        Other expense for the nine months ended September 30, 2007 decreased $1.7 million, or 23.0%, compared to the nine months ended September 30, 2006, primarily related to a $0.8 million gain on sale of land in the third quarter and other items which were individually insignificant.

Interest Expense, Net and Income Taxes

        Net interest expense decreased $4.3 million, or 17.8%, for the nine months ended September 30, 2007 from the nine months ended September 30, 2006, primarily as a result of increased income earned on PCA's cash equivalents due to higher cash balances.

        PCA's effective tax rate was 36.5% for the nine months ended September 30, 2007 and 36.1% for the comparable period in 2006. The effective tax rate varies from the U.S. federal statutory tax rate of 35% principally due to the impact of state and local income taxes offset by the domestic manufacturers' deduction.

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Liquidity and Capital Resources

        The following table presents a summary of our cash flows for the periods presented:

Operating Activities

        Net cash provided by operating activities for the nine months ended September 30, 2007 was $182.8 million, an increase of $36.0 million, or 24.5%, from the comparable period in 2006. The increase in net cash provided by operating activities was primarily the result of higher net income in 2007 as previously described. Requirements for operating assets and liabilities was slightly higher by $1.4 million for the nine months ended September 30, 2007 compared to the same period in 2006, primarily driven by unfavorable year over year changes in accrued federal and state income taxes ($30.9 million), accrued liabilities ($4.4 million) and higher 2007 pension contributions ($11.4 million), partially offset by favorable year over year changes in accounts receivable ($25.4 million), accounts payable ($17.1 million) and inventories ($1.4 million).

Investing Activities

        Net cash used for investing activities for the nine months ended September 30, 2007 increased $8.0 million, or 13.0%, to $69.4 million, compared to the nine months ended September 30, 2006, primarily related to higher additions to property, plant and equipment of $13.5 million during the nine months ended September 30, 2007 compared to the same period in 2006, partially offset by the cost of acquisitions in 2006 of $4.2 million and lower additions to other long term assets of $2.1 million.

Financing Activities

        Net cash used for financing activities totaled $81.1 million for the nine months ended September 30, 2007, a increase of $1.3 million, or 1.6%, from the comparable period in 2006, primarily attributable to $7.8 million in repurchases of PCA common stock during the third quarter of 2007 and an additional $1.1 million of payments on long-term debt, partially offset by additional proceeds from the issuance of common stock upon exercise of stock options and an increase in excess tax benefits related to the stock option exercises of $7.3 million during the nine months ended September 30, 2007 compared to the same period in 2006.

        PCA's primary sources of liquidity are net cash provided by operating activities, borrowings under PCA's revolving credit facility, and additional borrowings under PCA's receivables credit facility. As of September 30, 2007, PCA had $121.6 million in unused borrowing capacity under its existing credit agreements, net of the impact on this borrowing capacity of $19.4 million of outstanding letters of credit. Currently, PCA's primary uses of cash are for capital expenditures, debt service and declared common stock dividends, which it expects to be able to fund from these sources.

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        The following table provides the outstanding balances and the weighted average interest rates as of September 30, 2007 for PCA's outstanding term loan, the revolving credit facility, the receivables credit facility, and the five- and ten-year senior notes: