Overview

Packaging Corporation of America, or PCA, is the fifth largest producer of containerboard and corrugated products in the United States, based on production capacity. During the first quarter of 2009, we produced approximately 515,000 tons of containerboard at our mills, of which about 80% was consumed in our corrugated products manufacturing plants, 12% was sold to domestic customers and 8% was sold in the export market. Our corrugated products manufacturing plants sold about 6.7 billion square feet ("bsf") of corrugated products during the first quarter of 2009. Our net sales to third parties totaled $512.4 million in the first quarter.

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 our operating performance, 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, have influenced prices of containerboard. In addition to U.S. shipments, approximately 10% of all domestically produced containerboard has been exported annually for use in other countries.

The U.S. economy experienced a severe downturn in the fourth quarter of 2008 which continued into the first quarter of 2009. As a result, reported industry-wide shipments of corrugated products decreased 11.5% for the three months ended March 31, 2009 compared to the same period in 2008. During this same period, reported industry containerboard production decreased 18.6% from first quarter of 2008 levels. As reported by industry publications, containerboard prices declined $10 per ton both in January and February and an additional $15 per ton in March. Average published prices for linerboard ended March 2009 $10 per ton higher than March 2008 and average published prices for corrugating medium at the end of March 2009 were unchanged from March 2008. During this same period, industry containerboard inventory levels at the end of March 2009 decreased approximately 109,800 tons, or 4.3%, compared to March 2008. In April 2009 industry publications further reported that prices for linerboard and corrugating medium dropped an additional $15 per ton.

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. Excluding the cost of containerboard, labor and benefits costs make up the largest component of corrugated products' manufactured costs.

For the quarter ended March 31, 2009, PCA's earnings were negatively impacted by the severe economic downturn described above. First quarter corrugated products sales volume was down 12.6% compared to the first quarter of 2008 and mill downtime and slowbacks related to market conditions and a planned maintenance outage at our Valdosta, Georgia mill reduced mill production by 90,000 tons. Sales prices of containerboard and corrugated products prices were higher than last year's first quarter due to the implementation of the July 2008 containerboard price increase and the corresponding corrugated products price increases. In addition, recycled fiber and transportation costs were lower than the prior year's first quarter. However, the improvement from higher prices and reduced recycled fiber and transportation costs was more than offset by the impact of lower sales volume due to the continued weak economy and higher costs for labor and fringe benefits and chemicals.

We expect corrugated products shipments to increase in the second quarter of 2009 compared to the first quarter; however, this improvement in shipments is expected to be more than offset by the impact of the published price decreases described previously. In addition, our Counce, Tomahawk and Filer City mills will be shut down for their annual maintenance outages which will reduce our containerboard production by approximately 50,000 tons in the second quarter. Despite the expected increase in corrugated products shipments, we expect that additional market-related downtime will also be necessary during the second quarter. Considering these items and without regard to any alternative fuel mixture tax credit, described below, we expect our second quarter 2009 earnings to be lower than our earnings in the first quarter of 2009.

We have produced and consumed an alternative fuel mixture at our Counce, Tennessee and Valdosta, Georgia mills since December 2008. We filed applications with the Internal Revenue Service in December 2008 to be registered as an alternative fuel mixer and received notification on April 14, 2009 that our registration had been approved. The U.S. Internal Revenue Code allows a tax credit for alternative fuel mixtures produced by a taxpayer for sale or for use as a fuel in the taxpayer's business equal to $0.50 per gallon of alternative fuel used. We are evaluating the effect of any alternative fuel mixture tax credits for financial reporting purposes.

Results of Operations

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

The historical results of operations of PCA for the three months ended March 31,
2009 and 2008 are set forth below:


                                      Three Months Ended March 31,
                                        2009                 2008           Change
      (In thousands)

      Net sales                    $      512,378       $      577,474     $ (65,096 )

      Income from operations       $       49,607       $       57,146     $  (7,539 )
      Interest expense, net                (8,738 )             (6,303 )      (2,435 )

      Income before taxes                  40,869               50,843        (9,974 )
      Provision for income taxes          (15,193 )            (18,770 )       3,577

      Net income                   $       25,676       $       32,073     $  (6,397 )

Net Sales

Net sales decreased by $65.1 million, or 11.3%, for the three months ended March 31, 2009 from the comparable period in 2008, primarily as a result of decreased sales volume of corrugated products and containerboard to third parties ($86.6 million), partially offset by the impact of increased sales prices ($21.5 million). Sales prices increased as a result of the July 2008 containerboard price increase and the realization of those increases in our sales prices of corrugated products and containerboard. These price increases were partially offset by the published price reductions since December 2008 described earlier.

Corrugated products volume sold for the three months ended March 31, 2009 decreased 11.2% compared to the same period in 2008 on a shipments-per-workday basis. Total corrugated products volume sold for the three months ended March 31, 2009 decreased 12.6% to 6.7 billion square feet ("bsf") compared to 7.6 bsf in the first quarter of 2008. The percentage decrease, on a shipments-per-workday basis, was lower due to one less workday in the first quarter of 2009 (62 days), those days not falling on a weekend or holiday, than the first quarter of 2008 (63 days). Containerboard volume sold to domestic and export customers was 31.1% lower for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. Containerboard mill production for the three months ended March 31, 2009 was 515,000 tons compared to 586,000 tons during the same period in 2008, primarily as a result of the market-related downtime and slowbacks taken during the first quarter.

Income from Operations

Income from operations decreased by $7.5 million, or 13.2%, for the three months ended March 31, 2009 compared to the three months ended March 31, 2008, primarily attributable to the impact of lower sales volume ($32.5 million), increased labor and fringe benefit costs ($4.4 million) and chemical costs ($3.5 million). The impact of reduced sales volume and higher labor and chemical costs was partially offset by increased sales prices of corrugated products and containerboard ($21.5 million) and decreased costs of recycled fiber ($7.7 million) and transportation ($3.0 million).

Gross profit decreased $8.2 million, or 6.9%, for the three months ended March 31, 2009 from the comparable period in 2008. Gross profit as a percentage of net sales increased from 20.5% of net sales in the three months ended March 31, 2008 to 21.5% of net sales in the current quarter due primarily to the sales price increases described above.

Selling and administrative expenses decreased $0.3 million, or 0.7%, for the three months ended March 31, 2009 compared to the same period in 2008, primarily due to reduced expenses for travel and entertainment ($0.3 million).

Corporate overhead decreased $0.6 million, or 4.3%, for the three months ended March 31, 2009 compared to the same period in 2008, primarily attributable to the timing of share-based compensation expense ($0.4 million), reduced professional fees ($0.1) and other items which were individually insignificant.

Other expense for the three months ended March 31, 2009 increased $0.3 million, or 8.4%, compared to the three months ended March 31, 2008, primarily due to the reduction of the reserve for vacation pay which was no longer required in the first quarter of 2008 ($0.3 million).

Interest Expense, Net and Income Taxes

Net interest expense increased $2.4 million, or 38.6%, for the three months ended March 31, 2009 from the three months ended March 31, 2008, primarily as a result of lower interest income ($1.8 million) earned on PCA's cash equivalents and higher interest expense ($0.6 million) related to PCA's outstanding debt balances. The $1.8 million decrease in interest income was primarily due to lower interest income rates during the three months ended March 31, 2009 compared to the same period in 2008. The $0.6 million increase in interest expense was due to a $1.1 million increase in interest expense related to PCA's senior notes as a result of the higher interest rates on the 61/2% notes due 2018 we issued in March 2008, the proceeds of which were used to refinance the 43/8% notes due August 2008. This was partially offset by a $0.7 million decrease in interest expense related to the Company's receivables credit facility due to lower interest rates.

PCA's effective tax rate was 37.2% for the three months ended March 31, 2009 and 36.9% for the comparable period in 2008. 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.

Liquidity and Capital Resources

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


                                                           Three Months Ended March 31,
                                                             2009                 2008             Change
(In thousands)

Net cash provided by (used for):
Operating activities                                    $       50,679       $       44,566      $    6,113
Investing activities                                           (29,310 )            (35,136 )         5,826
Financing activities                                           (30,743 )             72,795        (103,538 )

Net increase (decrease) in cash and cash equivalents    $       (9,374 )     $       82,225      $  (91,599 )

Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2009 was $50.7 million compared to $44.6 million for the three months ended March 31, 2008, an increase of $6.1 million, or 13.7%. Although lower net income reduced net cash provided by operating activities by $6.4 million, this decrease was more than offset by reduced cash requirements. Cash requirements for operating activities are subject to PCA's operating needs, which were impacted by the weakened business conditions during the first quarter of 2009, the timing of collection of receivables and payments of payables and expenses, and seasonal fluctuations in the Company's operations.

Investing Activities

Net cash used for investing activities for the three months ended March 31, 2009 decreased $5.8 million, or 16.6%, to $29.3 million, compared to the three months ended March 31, 2008. The decrease was primarily related to lower additions to property, plant and equipment of $6.6 million during the three months ended March 31, 2009 compared to the same period in 2008.

Financing Activities

Net cash used for financing activities totaled $30.7 million for the three months ended March 31, 2009, an increase of $103.5 million, or 142.2%. The increase was primarily attributable to $144.4 million in net proceeds received from PCA's notes offering in 2008 described below, partially offset by a debt prepayment of $20.0 million made in the first quarter of 2008 and $20.4 million in repurchases of PCA common stock during the first quarter of 2008.

In connection with the senior notes offering in March of 2008, PCA received proceeds, net of discount, of $149.9 million and paid $4.4 million for settlement of a treasury lock that it entered into to protect it against increases in the ten-year U.S. Treasury rate, which served as a reference in determining the interest rate applicable to the notes. PCA also incurred financing costs in the amount of $1.1 million in connection with the senior notes offering. PCA later used the proceeds of this offering, together with cash on hand, to repay all of the $150.0 million of outstanding 43/8% senior notes due 2008 on August 1, 2008.

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 March 31, 2009, PCA had $172.2 million in unused borrowing capacity under its existing credit agreements, net of the impact on this borrowing capacity of $18.8 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.

The following table provides the outstanding balances, excluding unamortized debt discount of $1.5 million, and the weighted average interest rates as of March 31, 2009 for PCA's revolving credit facility, the receivables credit facility, and the senior notes:

                                                                                               Projected
                                                      Balance at          Weighted              Annual
                                                      March 31,            Average           Cash Interest
Borrowing Arrangement                                    2009           Interest Rate          Payments
(In thousands)

Revolving Credit Facility                            $          -                  N/A                  N/A
Receivables Credit Facility                               109,000                 1.35 %    $         1,477
53/4% Senior Notes (due August 1, 2013)                   400,000                 5.75               23,000
61/2% Senior Notes (due March 15, 2018)                   150,000                 6.50                9,750

Total                                                $    659,000                 5.19 %    $        34,227

The above table excludes from the projected annual cash interest payments, the non-cash income from the annual amortization of the $22.8 million received in July 2003 and the non-cash expense from the annual amortization of the $4.4 million paid in March 2008 to settle the treasury locks related to the 53/4% senior notes due

2013 and 61/2% senior notes due 2018. The amortization is being recognized over the terms of the 53/4% senior notes due 2013 and 61/2% senior notes due 2018 and is included in interest expense, net.

On April 15, 2009, PCA extended its $150.0 million receivables-backed credit facility through April 14, 2010.

The instruments governing PCA's indebtedness contain financial and other covenants that limit, among other things, the ability of PCA and its subsidiaries to:

• enter into sale and leaseback transactions,

• incur liens,

• incur indebtedness at the subsidiary level,

• enter into certain transactions with affiliates, or

• merge or consolidate with any other person or sell or otherwise dispose of all or substantially all of the assets of PCA.

These limitations could limit corporate and operating activities.

In addition, PCA must maintain minimum net worth and maximum debt to total capitalization and minimum interest coverage ratios under the revolving credit facility. A failure to comply with the restrictions contained in the revolving credit facility could lead to an event of default, which could result in an acceleration of any outstanding indebtedness and/or prohibit PCA from drawing on the revolving credit facility. Such an acceleration may also constitute an event of default under the senior notes indentures and the receivables credit facility. As of March 31, 2009, PCA was in compliance with these covenants.

PCA currently expects to incur capital expenditures of about $90.0 million in 2009. These expenditures will be used primarily for maintenance capital, cost reduction, business growth and environmental compliance. As of March 31, 2009, PCA spent $27.9 million for capital expenditures and had committed to spend an additional $32.0 million in the remainder of 2009 and beyond.

On February 26, 2009, PCA announced that it had reduced its quarterly common stock dividend from $0.30 per share to $0.15 per share effective for the dividend payable April 15, 2009 to shareholders of record as of March 13, 2009.

PCA believes that net cash generated from operating activities, available cash reserves and available borrowings under its committed credit facilities and available capital through access to capital markets will be adequate to meet its liquidity and capital requirements, including payments of any declared common stock dividends, for the foreseeable future. As its debt or credit facilities become due, PCA will need to repay, extend or replace such facilities, which will be subject to future economic conditions and financial, business and other factors, many of which are beyond PCA's control.

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. PCA periodically enters into derivatives in order to minimize these risks, but not for trading purposes. As of March 31, 2009, PCA was not a party to any derivative instruments.

The interest rates on approximately 84% 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 $1.1 million annually. In the event of a change in interest rates, management could take actions to mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in PCA's financial structure.

Environmental Matters

PCA is subject to, and must comply with, a variety of federal, state and local environmental laws, particularly those relating to air and water quality, waste disposal and the cleanup of contaminated soil and groundwater. The most significant of these laws affecting the Company are:

• Resource Conservation and Recovery Act (RCRA);

• Clean Water Act (CWA);

• Clean Air Act (CAA);

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

• Toxic Substance Control Act (TSCA); and

• Safe Drinking Water Act (SDWA).

PCA believes that it is currently in material compliance with these and all applicable environmental rules and regulations. Because environmental regulations are constantly evolving, the Company has incurred, and will continue to incur, costs to maintain compliance with these and other environmental laws. PCA works diligently to anticipate and budget for the impact of applicable environmental regulations, and does not currently expect that future environmental compliance obligations will materially affect its business or financial condition.

Impact of Inflation

PCA does not believe that inflation has had a material impact on its financial position or results of operations during the three month periods ending March 31, 2009 and 2008.

Off-Balance Sheet Arrangements

PCA does not have any off-balance sheet arrangements as of March 31, 2009 that would require disclosure under SEC FR-67, "Disclosure in Management's Discussion and Analysis About Off-Balance Sheet Arrangement and Aggregate Contractual Obligations."

Critical Accounting Policies and Estimates

Management's discussion and analysis of PCA's 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 the Company 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 bad debts, inventories, intangible assets, pensions and other postretirement benefits, income taxes, contingencies and litigation. 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 Annual Report on Form 10-K for the year ended December 31, 2008, a discussion of its critical accounting policies which it believes affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. PCA has not made any changes in any of these critical accounting policies during the first three months of 2009.

Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q, and in particular, statements found in 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;

• containerboard and corrugated products 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. In view of 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 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, 2008.