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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO ______________ TO ______________
COMMISSION FILE NUMBER 1-15399
------------------------
PACKAGING CORPORATION OF AMERICA
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-4277050
(State or other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
1900 WEST FIELD COURT 60045
LAKE FOREST, ILLINOIS (Zip Code)
(Address of Principal Executive
Offices)
(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 /X/ No / /
As of May 11, 2001, the Registrant had outstanding 106,637,794 shares of
common stock, par value $0.01 per share.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PACKAGING CORPORATION OF AMERICA
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 46,271 $ 7,892
Accounts and notes receivable, net of allowance for
doubtful accounts of $5,855 and $6,394 as of March 31,
2001 and December 31, 2000, respectively................ 203,979 215,994
Inventories............................................... 153,259 159,712
Prepaid expenses and other current assets................. 11,373 5,755
Deferred income taxes..................................... 8,300 14,356
---------- ----------
TOTAL CURRENT ASSETS................................ 423,182 403,709
Property, plant and equipment, net.......................... 1,443,155 1,455,990
Intangible assets, net of accumulated amortization of $1,436
and $1,380 as of March 31, 2001 and December 31, 2000,
respectively.............................................. 1,701 1,758
Other long-term assets...................................... 78,785 80,655
---------- ----------
TOTAL ASSETS........................................ $1,946,823 $1,942,112
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 70 $ 239
Accounts payable.......................................... 100,196 113,701
Accrued interest.......................................... 26,589 15,438
Accrued liabilities....................................... 67,477 89,170
---------- ----------
TOTAL CURRENT LIABILITIES........................... 194,332 218,548
Long-term liabilities:
Long-term debt............................................ 858,185 869,175
Deferred income taxes..................................... 161,035 151,728
Other liabilities......................................... 17,622 15,237
---------- ----------
TOTAL LONG-TERM LIABILITIES......................... 1,036,842 1,036,140
Shareholders' equity:
Common stock (par value $.01 per share, 300,000,000 shares
authorized, 106,569,762 shares and 106,248,138 shares
issued as of March 31, 2001 and December 31, 2000,
respectively)........................................... 1,065 1,062
Additional paid in capital................................ 513,668 512,208
Retained earnings......................................... 202,087 174,468
Accumulated other comprehensive loss...................... (857) --
Common stock held in treasury, at cost (27,470 shares at
March 31, 2001 and December 31, 2000, respectively)..... (314) (314)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY.......................... 715,649 687,424
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $1,946,823 $1,942,112
========== ==========
See notes to consolidated financial statements.
1
PACKAGING CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2001 2000
------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales................................................... $ 454,666 $ 475,890
Cost of sales............................................... (347,488) (367,344)
--------- ---------
Gross profit.............................................. 107,178 108,546
Selling and administrative expenses......................... (30,642) (29,083)
Other income (expense), net................................. (219) 2,867
Corporate overhead.......................................... (10,357) (9,589)
--------- ---------
Income before interest, taxes and cumulative effect of
accounting change....................................... 65,960 72,741
Interest expense, net....................................... (19,562) (30,242)
--------- ---------
Income before taxes and cumulative effect of accounting
change.................................................. 46,398 42,499
Provision for income taxes.................................. (18,284) (17,253)
--------- ---------
Income before cumulative effect of accounting change...... 28,114 25,246
Cumulative effect of accounting change, net of tax.......... (495) --
--------- ---------
Net income.................................................. 27,619 25,246
Preferred dividends and accretion of preferred stock
issuance costs............................................ -- (18,637)
--------- ---------
Net income available to common shareholders................. $ 27,619 $ 6,609
========= =========
Weighted average common shares outstanding:
Basic..................................................... 106,414 101,583
Diluted................................................... 108,959 104,856
Basic earnings per common share:
Income before cumulative effect of accounting change...... $ 0.26 $ 0.07
Cumulative effect of change in accounting principle....... -- --
--------- ---------
Net income per common share............................... $ 0.26 $ 0.07
========= =========
Diluted earnings per common share:
Income before cumulative effect of accounting change...... $ 0.25 $ 0.06
Cumulative effect of accounting change.................... -- --
--------- ---------
Net income per common share............................... $ 0.25 $ 0.06
========= =========
See notes to consolidated financial statements.
2
PACKAGING CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2001 2000
(IN THOUSANDS) ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 27,619 $ 25,246
---------- ----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization................ 34,221 35,808
Amortization of financing costs......................... 1,222 1,694
Cumulative effect of accounting change.................. 495 --
Increase in deferred income taxes....................... 16,234 12,547
Gain on disposal of property, plant and equipment....... (587) (635)
Other, net.............................................. 418 (275)
Changes in components of working capital:
(Increase) decrease in current assets--
Accounts receivable................................... 12,015 (10,330)
Inventories........................................... 6,453 3,512
Prepaid expenses and other............................ (5,618) (448)
Decrease in current liabilities--
Accounts payable...................................... (13,505) (12,900)
Accrued liabilities................................... (10,542) (8,835)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 68,425 45,384
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (20,049) (19,606)
Additions to other long term assets....................... (1,346) (1,724)
Proceeds from disposals of property, plant and
equipment............................................... 878 1,508
Other, net................................................ 177 82
---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES.............. (20,340) (19,740)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of preferred stock............................... -- (124,432)
Payments on long-term debt.................................. (11,169) (13,756)
Proceeds from initial public offering....................... -- 126,528
Issuance of common stock upon exercise of stock options..... 1,463 --
---------- ----------
NET CASH USED FOR FINANCING ACTIVITIES.............. (9,706) (11,660)
---------- ----------
NET INCREASE IN CASH........................................ 38,379 13,984
Cash and cash equivalents, beginning of period.............. 7,892 10,300
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 46,271 $ 24,284
========== ==========
See notes to consolidated financial statements.
3
PACKAGING CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2001
1. BASIS OF PRESENTATION
Packaging Corporation of America ("PCA" or the "Company") was incorporated
on January 25, 1999 pursuant to the General Corporation Law of the State of
Delaware. PCA was formed to acquire the containerboard and corrugated packaging
products business (the "Group") of Pactiv Corporation, formerly known as Tenneco
Packaging Inc., a wholly owned subsidiary of Tenneco Inc. PCA had no operations
from the date of incorporation on January 25, 1999 to April 11, 1999.
On April 12, 1999, Pactiv Corporation ("Pactiv") sold the Group to PCA for
$2.2 billion. The Group is the predecessor to PCA. The $2.2 billion purchase
price paid to Pactiv for the Group consisted of $246.5 million in cash, the
assumption of $1.8 billion of debt incurred by Pactiv immediately prior to
closing, and the issuance of a 45% common equity interest in PCA. PCA
Holdings LLC, an entity organized and controlled by Madison Dearborn Partners,
LLC, acquired the remaining 55% common equity interest in PCA for
$236.5 million in cash. These events are collectively referred to as the
"Transactions". Because significant veto rights were retained by Pactiv, the
carryover basis of accounting was used and no goodwill was recognized.
PCA's consolidated financial statements as of March 31, 2001 and 2000 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 generally accepted accounting principles 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 generally accepted
accounting principles for complete financial statements. Operating results
during the period ended March 31, 2001 are not necessarily indicative of the
results that may be expected for the period ending December 31, 2001.
2. SUMMARY OF ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements of Packaging Corporation
of America include all majority-owned subsidiaries. All significant intercompany
transactions have been eliminated. The Company has two joint ventures that are
carried under the equity method.
USE OF ESTIMATES
The preparation of financial statements in conformity with 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.
SEGMENT INFORMATION
PCA is primarily engaged in one line of business: the manufacture and sale
of packaging materials, boxes and containers for industrial and consumer
markets. No single customer accounts for more than 10% of total revenues. PCA
has no foreign operations.
4
PACKAGING CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 2001
2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No.
133 requires the Company to recognize all derivatives as either assets or
liabilities and to measure those instruments at fair value. It further provides
criteria for derivative instruments to be designated as fair value, cash flow or
foreign currency hedges and establishes respective accounting standards for
reporting changes in the fair value of the derivative instruments. The Company
is required to adjust hedging instruments to fair value in the balance sheet and
recognize the offsetting gains or losses as adjustments reported in net income
or accumulated other comprehensive income (OCI), as appropriate.
The Company recorded a transition adjustment upon adoption of SFAS No. 133
to recognize its derivative instruments at fair value and to recognize the
effective and ineffective portions of the cash flow hedges. The effect of this
transition adjustment was to decrease reported net income in the quarter by
approximately $0.5 million ($0.8 million pre-tax). The Company also recorded a
minimal transition adjustment in OCI and an increase in noncurrent liabilities
of approximately $0.8 million.
The Company uses derivative instruments to manage exposures to interest rate
risk. The Company's objectives for holding derivatives are to minimize the risks
using the most effective methods to eliminate or reduce the impacts of these
exposures. The Company has two interest rate collar agreements that protect
against rising interest rates and simultaneously guarantee a minimum interest
rate. Interest rate collar agreements are accounted for as cash flow hedges.
For the three months ended March 31, 2001, reported net income decreased
$0.1 million ($0.1 million pre-tax) for changes in the time value of the
interest rate collars, or hedge ineffectiveness. OCI decreased $0.9 million
($1.4 million pre-tax) for hedge effectiveness. Derivative losses included in
OCI as of March 31, 2001, will be reclassified into earnings over the lives of
the collar agreements, through June 30, 2003.
REVENUE RECOGNITION
The Company recognizes revenue as title to the products is transferred to
customers.
In the fourth quarter of 2000, the Company adopted EITF 00-10, "Accounting
for Shipping and Handling Fees and Costs." Shipping and handling costs are
included in cost of sales. Shipping and handling billings to a customer in a
sales transaction are included in revenue. Prior year amounts have been
reclassed to conform to this treatment.
COMPREHENSIVE INCOME
For the three months ended March 31, 2001, total comprehensive income was
$0.9 million less than net income due to derivative losses. There was no
difference for the three months ended March 31, 2000.
5
PACKAGING CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 2001
2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Prior year's financial statements have been reclassified where appropriate
to conform with current year presentation.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted income
per common share for the periods presented.
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------- --------
Numerator:
Net income available to common shareholders............... $ 27,619 $ 6,609
Denominator:
Basic common shares outstanding........................... 106,414 101,583
Effect of dilutive securities:
Stock options............................................. 2,545 2,344
Non-vested stock.......................................... -- 929
-------- --------
Dilutive common shares outstanding.......................... 108,959 104,856
Basic income per common share............................... $ 0.26 $ 0.07
Diluted income per common share............................. $ 0.25 $ 0.06
4. INVENTORIES
The components of inventories are as follows:
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
(IN THOUSANDS) (AUDITED)
Raw materials.................................. $ 66,723 $ 71,256
Work in progress............................... 6,083 5,908
Finished goods................................. 54,567 56,157
Supplies and materials......................... 50,823 51,222
--------- ---------
Inventories at FIFO cost....................... 178,196 184,543
Excess of FIFO over LIFO cost.................. (24,937) (24,831)
--------- ---------
Inventory, net................................. $ 153,259 $ 159,712
========= =========
An actual valuation of inventory under the LIFO method can be 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 forces beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
6
PACKAGING CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 2001
5. SUMMARIZED COMBINED FINANCIAL INFORMATION ABOUT GUARANTOR SUBSIDIARIES
The following is summarized aggregated financial information for Packaging
Credit Company, LLC, Dixie Container Corporation and PCA Hydro, Inc., each of
which was a wholly-owned subsidiary of PCA and included in the Company's
consolidated financial statements. Each of these subsidiaries fully,
unconditionally, jointly and severally guaranteed $550.0 million in senior
subordinated notes issued by PCA in connection with the Transactions. Separate
financial statements of the guarantor subsidiaries are not presented because, in
the opinion of management, such financial statements are not material to
investors.
NON-GUARANTOR
PCA GUARANTOR SUBS SUBS ELIMINATIONS TOTAL
(IN THOUSANDS) ---------- -------------- ------------- ------------ ----------
MARCH 31, 2001
Current assets............... $ 230,990 $ 76,612 $189,637 $ (74,057) $ 423,182
Non-current assets........... 1,648,511 65,878 -- (190,748) 1,523,641
---------- -------- -------- --------- ----------
Total assets............... 1,879,501 142,490 189,637 (264,805) 1,946,823
Current liabilities.......... 266,091 7,072 764 (79,595) 194,332
Non-current liabilities...... 905,683 159 131,000 -- 1,036,842
---------- -------- -------- --------- ----------
Total liabilities.......... 1,171,774 7,231 131,764 (79,595) 1,231,174
---------- -------- -------- --------- ----------
Net assets................... $ 707,727 $135,259 $ 57,873 $(185,210) $ 715,649
========== ======== ======== ========= ==========
DECEMBER 31, 2000
Current assets............... $ 192,295 $ 63,501 $207,976 $ (60,063) $ 403,709
Non-current assets........... 1,663,269 65,883 -- (190,749) 1,538,403
---------- -------- -------- --------- ----------
Total assets............... 1,855,564 129,384 207,976 (250,812) 1,942,112
Current liabilities.......... 278,581 3,441 1,372 (64,846) 218,548
Non-current liabilities...... 893,978 162 142,000 -- 1,036,140
---------- -------- -------- --------- ----------
Total liabilities.......... 1,172,559 3,603 143,372 (64,846) 1,254,688
---------- -------- -------- --------- ----------
Net assets................... $ 683,005 $125,781 $ 64,604 $(185,966) $ 687,424
========== ======== ======== ========= ==========
THREE MONTHS ENDED MARCH 31, 2001
Net sales.................... $ 454,666 $ -- $ -- $ -- $ 454,666
Pre-tax profit............... 40,775 13,111 1,970 (9,458) 46,398
Net income................... 24,116 8,168 1,227 (5,892) 27,619
THREE MONTHS ENDED MARCH 31, 2000
Net Sales.................... $ 475,890 $ -- $ -- $ -- $ 475,890
Pre-tax profit............... 42,486 13 -- -- 42,499
Net income................... 25,238 8 -- -- 25,246
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
On April 12, 1999, Pactiv Corporation, formerly known as Tenneco
Packaging Inc., sold its containerboard and corrugated packaging products
business to Packaging Corporation of America for $2.2 billion. We refer to that
business in this report as the Group. The $2.2 billion purchase price paid to
Pactiv consisted of $246.5 million in cash, the assumption of $1.8 billion of
debt incurred by Pactiv immediately prior to the closing, and the issuance of a
45% common equity interest in PCA. PCA Holdings LLC, an entity organized and
controlled by Madison Dearborn Partners, LLC, acquired the remaining 55% common
equity interest in PCA for $236.5 million in cash. We refer to these events in
this report as the Transactions.
PCA's acquisition of the Group as part of the Transactions was accounted for
using historical values for the contributed assets. Purchase accounting was not
applied because, under the applicable accounting guidance, a change of control
was deemed not to have occurred as a result of the participating veto rights
held by Pactiv after the closing of the Transactions under the terms of a
stockholders agreement.
GENERAL
Historically, prices for containerboard have reflected changes in
containerboard supply that result from capacity additions and reductions, as
well as changes in demand. Containerboard demand is dependent upon both domestic
demand for corrugated products and linerboard export activity.
Pulp & Paper Week, an industry publication, in its April 23, 2001
publication, reported that average linerboard and semi-chemical medium prices
for 42 lb. Liner-East and 26 lb. Medium-East, which are representative benchmark
grades, decreased $5 per ton, or 1%, and $10 per ton, or 2%, respectively, from
the previous month. According to Pulp & Paper Week, average prices in April,
2001 for linerboard and corrugating medium were 4% and 10% lower, respectively,
than April, 2000 prices.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
NET SALES
Net sales decreased by $21.2 million, or 4.5%, for the three months ended
March 31, 2001 from the comparable period in 2000. The decrease was primarily
the result of lower sales volumes of containerboard and corrugated products,
partially offset by increased sales prices of corrugated products and
containerboard to domestic third parties.
Total corrugated products volume decreased 3.7% for the three months ended
March 31, 2001 from the comparable period in 2000.
According to Pulp & Paper Week, average linerboard and semi-chemical medium
prices for 42 lb. Liner-East and 26 lb. Medium-East, which are representative
benchmark grades, were $460 and $425, respectively, per ton for the three months
ended March 31, 2001. This compares to $447 and $427, respectively, per ton for
the three months ended March 31, 2000.
INCOME BEFORE INTEREST EXPENSE AND TAXES
Operating income decreased by $6.8 million, or 9.3%, for the three months
ended March 31, 2001 compared to the three months ended March 31, 2000. The
decrease in operating income was primarily attributable to the lower sales
volumes described above.
Gross margins decreased $1.4 million, or 1.3%, for the three months ended
March 31, 2001 from the comparable period in 2000 due to the lower sales volumes
described above. Gross margins, as a percent of
8
net sales, increased to 23.6% in the first quarter of 2001 from 22.8% in the
first quarter of 2000 due to increased sales prices of corrugated products and
containerboard to domestic third parties.
Selling and administrative expenses increased $1.6 million, or 5.4%, for the
three months ended March 31, 2001 compared to the three months ended March 31,
2000. The increase was primarily the result of increased salary and other
general selling related expenses.
Corporate overhead for the three months ended March 31, 2001 increased by
$0.8 million, or 8.0%, from the comparable period in 2000. The increase was
primarily due to increased salary and information technology services expenses.
INTEREST EXPENSE AND INCOME TAXES
Interest expense decreased by $10.7 million, or 35.3%, for the three months
ended March 31, 2001 from the three months ended March 31, 2000, primarily as a
result of voluntary prepayments PCA made on its term loans under the senior
credit facility.
PCA's effective tax rate was 39.4% for the three months ended March 31, 2001
and 40.6% for the comparable period in 2000. The tax rate is higher than the
federal statutory rate of 35% due to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities increased $23.0 million, or
50.8%, for the three months ended March 31, 2001 from the comparable period in
2000. The increase was primarily due to increases in net income and deferred
income taxes and a reduction of working capital.
Net cash used for investing activities increased $0.6 million, or 3.0%, for
the three months ended March 31, 2001 compared to the three months ended
March 31, 2000, primarily as a result of decreased proceeds from asset disposals
and increased capital expenditures.
Net cash used for financing activities decreased $2.0 million, or 16.8%, for
the three months ended March 31, 2001 from the comparable period in 2000. The
decrease was primarily attributable to lower debt prepayments and increased
proceeds from the issuance of common stock upon exercise of stock options.
As of March 31, 2001, PCA had commitments for capital expenditures of
$62.3 million. PCA's primary sources of liquidity are cash flow from operations
and borrowings under PCA's senior revolving credit facility. PCA expects to be
able to fund its debt service and capital expenditures, the primary uses of its
cash, from these sources.
PCA incurred substantial indebtedness in connection with the Transactions.
On April 12, 1999, PCA had approximately $1.8 billion of indebtedness as a
result of the debt assumed in connection with completion of the Transactions. As
of March 31, 2001, PCA's level of indebtedness had been reduced to approximately
$858.0 million through prepayments of its bank debt.
Concurrently with the Transactions, PCA issued 9 5/8% senior subordinated
notes and 12 3/8% senior exchangeable preferred stock and entered into a senior
credit facility. The senior credit facility provided for three term loans in an
aggregate amount of $1.2 billion and a revolving credit facility with up to
$250.0 million in availability. Upon the closing of the Transactions, PCA
borrowed the full amount under the term loans. Effective December 14, 1999, PCA
elected to reduce its availability under the senior revolving credit facility
from $250.0 million to $150.0 million.
In October and November 1999, PCA completed the sales of approximately
405,000 acres of timberland. Total proceeds received from the sales were
$263.3 million, resulting in a pre-tax gain of $12.2 million.
9
On January 28, 2000, PCA became a publicly traded company with an initial
public offering of its common stock. On March 3, 2000, PCA used the net proceeds
from the offering to redeem all of its outstanding shares of 12 3/8% senior
exchangeable preferred stock due 2010.
On June 29, 2000, PCA completed the refinancing of its $885.0 million senior
credit facility. The refinanced senior credit facility provided for two term
loans in an aggregate amount of $735.0 million and a senior revolving credit
facility with up to $150.0 million in availability.
On November 16, 2000, PCA completed the sale of approximately 385,000 acres
of timberland to Southern Timber Venture, LLC. The Company received
$247.9 million in cash and a 33 1/3% equity ownership interest in Southern
Timber Venture, LLC. PCA recorded a pre-tax gain of $60.4 million, and a portion
of the gain was not recognized as a result of PCA's continuing ownership
interest.
On November 29, 2000, PCA entered into a three-year, $150.0 million
revolving credit facility in connection with the securitization of trade
receivables. The facility is secured by PCA's receivables and bears interest at
a floating rate based upon commercial paper plus an allowed margin under the
agreement. Proceeds received of $142.0 million were used to repay the term loans
under the senior credit facility.
The following table provides the weighted average interest rate as of
March 31, 2001 for each of the term loans and the revolving credit facility:
WEIGHTED AVERAGE
BORROWING ARRANGEMENT INTEREST RATE
- --------------------- ----------------
Term Loan A 6.63 %
Term Loan B 7.10 %
Senior Revolving Credit Facility:
Revolver--Eurodollar N/A
Revolver--Base Rate N/A
Three-year Revolving Credit Facility 5.39 %
The borrowings under the senior revolving credit facility are available to
fund PCA's working capital requirements, capital expenditures and other general
corporate purposes. The Term Loan A must be repaid in quarterly installments
from December 2002 through June 2006. The Term Loan B must be repaid in
quarterly installments from December 2002 through June 2007. The senior
revolving credit facility will terminate in 2006. The three-year revolving
credit facility will terminate in 2003. As of March 31, 2001, PCA had
$150.0 million in availability and no borrowings outstanding under the senior
revolving credit facility, and $150.0 million in availability and
$131.0 million outstanding under the three-year revolving credit facility.
Since April 12, 1999, PCA has made debt prepayments totalling approximately
$911.0 million, using free cash from operations of $400.0 million and proceeds
from the sales of timberland of $511.0 million to reduce its borrowings under
the term loans and the three-year revolving credit facility.
The instruments governing PCA's indebtedness, including the senior credit
facility and the indenture governing the notes, contain financial and other
covenants that restrict, among other things, the ability of PCA and its
subsidiaries to:
- incur additional indebtedness,
- pay dividends or make certain other restricted payments,
- consummate certain asset sales,
- incur liens,
10
- 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.
PCA believes that cash generated from operations will be adequate to meet
its anticipated debt service requirements, capital expenditures and working
capital needs for the next 12 months, and that cash generated from operations
and amounts available under the senior revolving credit facility will be
adequate to meet its anticipated debt service requirements, capital expenditures
and working capital needs for the foreseeable future. There can be no assurance,
however, that PCA's business will generate sufficient cash flow from operations
or that future borrowings will be available under the senior credit facility or
otherwise to enable it to service its indebtedness, including the senior credit
facility, and the notes, to retire the notes when required or to make
anticipated capital expenditures. PCA's future operating performance and its
ability to service or refinance the notes, to service, extend or refinance the
senior credit facility and to pay cash dividends, will be subject to future
economic conditions and to financial, business and other factors, many of which
are beyond PCA's control.
MARKET RISK AND RISK MANAGEMENT POLICIES
Historically, the Group has not had any material market risk due to the fact
that its debt financing and risk management activities were conducted by Pactiv
or Tenneco. As a result of the Transactions, 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.
Under the terms of the senior credit agreement dated as of April 12, 1999,
PCA was required to maintain for at least two years after the closing of the
transactions interest rate protection agreements establishing a fixed maximum
interest rate with respect to at least 50% of the outstanding term loans under
the senior credit agreement. Upon the refinancing of the senior credit agreement
on June 29, 2000, this requirement was deleted.
PCA currently has interest rate collar agreements that protect against
rising interest rates and simultaneously guarantee a minimum interest rate. The
original notional amount of these collar agreements was $720.0 million. As PCA
has made debt prepayments, the need for these collar agreements has diminished.
Accordingly, PCA has reduced the notional amount of its collars to
$250.0 million as of March 31, 2001. The weighted average floor of the interest
rate collar agreements is 5.00% and the weighted average ceiling of the interest
rate collar agreements is 6.83%. The interest rate on approximately 81% of PCA's
variable-rate debt as of March 31, 2001 is capped. PCA receives payments under
the collar agreements if the applicable interest rate (LIBOR or commercial
paper) exceeds the ceiling. Correspondingly, PCA makes payments under the collar
agreements if the applicable interest rate drops below the floor. In both cases,
the amounts received or paid are based upon the notional amount and the
difference between the actual interest rate and the ceiling or floor rate. The
weighted average duration of the interest rate collar agreements is
approximately two years.
PCA's earnings are affected by changes in short-term interest rates as a
result of borrowings under its variable-rate debt instruments. If interest rates
(LIBOR or commercial paper) for these borrowings increase one percent, PCA's
interest expense would increase, and income before income taxes would decrease,
by approximately $3.1 million annually, until the applicable interest rate
exceeds the ceiling rate. At that point, only 19% of the variable-rate debt as
of March 31, 2001, would result in additional interest expense. As of March 31,
2001, the weighted average LIBOR rate was 5.12% and the weighted average
commercial paper rate was 5.04%. The effect of an interest rate change to the
fair market value of the outstanding debt is insignificant. This analysis does
not consider any other impact on fair value that could exist in such an interest
rate environment. In the event of a change in interest rates, management could
take actions to further mitigate its exposure to the change. However, due to the
uncertainty of the specific
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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. Because
environmental regulations are constantly evolving, PCA has incurred, and will
continue to incur, costs to maintain compliance with those laws. In particular,
the United States Environmental Protection Agency recently finalized the Cluster
Rules, which govern pulp and paper mill operations, including those at the
Counce, Filer City, Valdosta and Tomahawk mills. Over the next several years,
the Cluster Rules will affect PCA's allowable discharges of air and water
pollutants, and require PCA to spend money to ensure compliance with those new
rules.
As is the case with any industrial operation, PCA has, in the past, incurred
costs associated with the remediation of soil or groundwater contamination, as
required by the federal Comprehensive Environmental Response, Compensation and
Liability Act, commonly known as the federal "Superfund" law, and analogous
state laws. Cleanup requirements arise with respect to properties PCA currently
owns or operates, former facilities and off-site facilities where PCA has
disposed of hazardous substances. Because liability under these laws is strict,
meaning that liability is imposed without fault, joint and several, meaning that
liability is imposed on each party without regard to contribution, and
retroactive, PCA could receive notifications of cleanup liability in the future
and this liability could be material. Under the terms of the contribution
agreement entered into in connection with the Transactions, Pactiv agreed to
retain all liability for all former facilities and all sites associated with
pre-closing off-site waste disposal. Pactiv also retained environmentally
impaired real property in Filer City, Michigan unrelated to current mill
operations.
IMPACT OF INFLATION
PCA does not believe that inflation has had a material impact on its
financial position or results of operations during the past three years.
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q are forward-looking
statements. Forward-looking statements include statements about our future
financial condition, our industry and our business strategy. Statements that
contain words such as "anticipate", "believe", "expect", "intend", "estimate",
"hope" or similar expressions, are forward-looking statements. These
forward-looking statements are based on the current expectations of PCA. Because
forward-looking statements involve inherent risks and uncertainties, the plans,
actions and actual results of PCA could differ materially. Among the factors
that could cause plans, actions and results to differ materially from PCA's
current expectations are those identified under the caption "Risk Factors" in
PCA's Registration Statements on Form S-4 and Form S-1, each filed with the
Securities and Exchange Commission and available at the SEC's website at
"www.sec.gov".
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For a discussion of market risks related to PCA, see Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Market Risk and Risk Management Policies" in this Quarterly Report
on Form 10-Q.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On May 14, 1999, PCA was named as a defendant in a Consolidated Class Action
Complaint which alleged a civil violation of Section 1 of the Sherman Act. The
suit, captioned WINOFF INDUSTRIES, INC. V. STONE CONTAINER CORPORATION, MDL
No. 1261 (E.D. Pa.), names PCA as a defendant based solely on the allegation
that PCA is a successor to the interests of Tenneco Packaging Inc. and Tenneco
Inc., both of which were also named as defendants in the suit, along with nine
other linerboard manufacturers. The complaint alleges that the defendants,
during the period from October 1, 1993 through November 30, 1995, conspired to
limit the supply of linerboard, and that the purpose and effect of the alleged
conspiracy was artificially to increase prices of corrugated containers. The
plaintiffs have moved to certify a class of all persons in the United States who
purchased corrugated containers directly from any defendant during the above
period, and seek treble damages and attorneys' fees on behalf of the purported
class. The Court has yet to rule on the plaintiffs' motion for class
certification, and the case is currently set for trial in June, 2002. PCA
believes that the plaintiffs' allegations have no merit and intend to defend
against the suit vigorously. PCA does not believe that the outcome of this
litigation should have a material adverse effect on its financial position,
results of operations, or cash flow.
PCA is also party to various legal actions arising in the ordinary course of
its business. These legal actions cover a broad variety of claims spanning its
entire business. PCA believes that the resolution of these legal actions will
not, individually or in the aggregate, have a material adverse effect on its
financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included in this Quarterly Report on
Form 10-Q:
None.
(b) Reports on Form 8-K:
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACKAGING CORPORATION OF AMERICA
(Registrant)
By: /s/ RICHARD B. WEST
---------------------------------------------
Richard B. West
CHIEF FINANCIAL OFFICER, VICE PRESIDENT AND
CORPORATE SECRETARY (PRINCIPAL FINANCIAL
OFFICER AND AUTHORIZED OFFICER)
Date: May 15, 2001
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