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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 JUNE 30, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ 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 August 9, 2001, the Registrant had outstanding 106,855,490 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
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,689 $ 7,892
Accounts and notes receivable, net of allowance for
doubtful accounts of $6,102 and $6,394 as of June 30,
2001 and December 31, 2000, respectively................ 208,605 215,994
Inventories............................................... 152,188 159,712
Prepaid expenses and other current assets................. 14,078 5,755
Deferred income taxes..................................... 14,221 14,356
---------- ----------
TOTAL CURRENT ASSETS.................................... 404,781 403,709
Property, plant and equipment, net.......................... 1,450,026 1,455,990
Intangible assets, net of accumulated amortization of $1,493
and $1,380 as of June 30, 2001 and December 31, 2000,
respectively.............................................. 3,748 1,758
Other long-term assets...................................... 76,227 80,655
---------- ----------
TOTAL ASSETS............................................ $1,934,782 $1,942,112
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 70 $ 239
Accounts payable.......................................... 101,719 113,701
Accrued interest.......................................... 13,346 15,438
Accrued liabilities....................................... 67,884 89,170
---------- ----------
TOTAL CURRENT LIABILITIES............................... 183,019 218,548
Long-term liabilities:
Long-term debt............................................ 816,196 869,175
Deferred income taxes..................................... 173,071 151,728
Other liabilities......................................... 18,517 15,237
---------- ----------
TOTAL LONG-TERM LIABILITIES............................. 1,007,784 1,036,140
Shareholders' equity:
Common stock (par value $.01 per share, 300,000,000 shares
authorized, 106,551,944 shares and 106,248,138 shares
issued as of June 30, 2001 and December 31, 2000,
respectively)........................................... 1,065 1,062
Additional paid in capital................................ 511,138 512,208
Retained earnings......................................... 233,346 174,468
Accumulated other comprehensive loss...................... (1,256) --
Common stock held in treasury, at cost (27,470 shares).... (314) (314)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY.............................. 743,979 687,424
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $1,934,782 $1,942,112
========== ==========
See notes to condensed consolidated financial statements.
1
PACKAGING CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
------------------------
2001 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- ---------
Net sales................................................... $ 466,964 $ 492,372
Cost of sales............................................... (354,783) (363,708)
--------- ---------
Gross profit.............................................. 112,181 128,664
Selling and administrative expenses......................... (31,369) (29,552)
Other expense, net.......................................... (492) (800)
Corporate overhead.......................................... (10,766) (9,775)
--------- ---------
Income before interest and taxes.......................... 69,554 88,537
Interest expense, net....................................... (18,856) (32,151)
--------- ---------
Income before taxes....................................... 50,698 56,386
Provision for income taxes.................................. (19,439) (23,109)
--------- ---------
Net income available to common shareholders................. $ 31,259 $ 33,277
========= =========
Weighted average common shares outstanding:
Basic..................................................... 106,583 105,850
Diluted................................................... 109,117 108,193
Basic earnings per common share:
Net income per common share............................... $ 0.29 $ 0.31
========= =========
Diluted earnings per common share:
Net income per common share............................... $ 0.29 $ 0.31
========= =========
See notes to condensed consolidated financial statements.
2
PACKAGING CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
--------------------------
2001 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ---------- ----------
Net sales................................................... $ 921,630 $ 968,262
Cost of sales............................................... (702,271) (731,052)
--------- ---------
Gross profit.............................................. 219,359 237,210
Selling and administrative expenses......................... (62,011) (58,635)
Other income (expense), net................................. (711) 2,067
Corporate overhead.......................................... (21,123) (19,364)
--------- ---------
Income before interest, taxes and cumulative effect of
accounting change....................................... 135,514 161,278
Interest expense, net....................................... (38,418) (62,393)
--------- ---------
Income before taxes and cumulative effect of accounting
change.................................................. 97,096 98,885
Provision for income taxes.................................. (37,723) (40,362)
--------- ---------
Income before cumulative effect of accounting change...... 59,373 58,523
Cumulative effect of accounting change, net of tax.......... (495) --
--------- ---------
Net income.................................................. 58,878 58,523
Preferred dividends and accretion of preferred stock
issuance costs............................................ -- (18,637)
--------- ---------
Net income available to common shareholders................. $ 58,878 $ 39,886
========= =========
Weighted average common shares outstanding:
Basic..................................................... 106,499 103,716
Diluted................................................... 109,039 106,037
Basic earnings per common share:
Income before cumulative effect of accounting change...... $ 0.55 $ 0.38
Cumulative effect of accounting change.................... -- --
--------- ---------
Net income per common share............................... $ 0.55 $ 0.38
========= =========
Diluted earnings per common share:
Income before cumulative effect of accounting change...... $ 0.54 $ 0.38
Cumulative effect of accounting change.................... -- --
--------- ---------
Net income per common share............................... $ 0.54 $ 0.38
========= =========
See notes to condensed consolidated financial statements.
3
PACKAGING CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
(IN THOUSANDS) --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 58,878 $ 58,523
-------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization.................. 69,651 70,886
Amortization of financing costs........................... 2,442 3,479
Cumulative effect of accounting change.................... 495 --
Increase in deferred income taxes......................... 22,606 30,108
(Gain)/loss on disposal of property, plant and
equipment............................................... 208 (419)
Other, net................................................ 589 (162)
Changes in components of working capital:
(Increase) decrease in current assets--
Accounts receivable..................................... 8,664 (20,940)
Inventories............................................. 8,164 8,614
Prepaid expenses and other.............................. (8,323) (6,576)
Decrease in current liabilities--
Accounts payable........................................ (14,065) (17,324)
Accrued liabilities..................................... (23,446) (15,756)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 125,863 110,433
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (58,379) (57,025)
Additions to other long term assets....................... (2,098) (4,615)
Acquisition of business................................... (4,823) --
Proceeds from disposals of property, plant and
equipment............................................... 878 1,508
Other, net................................................ 591 233
-------- ---------
NET CASH USED FOR INVESTING ACTIVITIES................ (63,831) (59,899)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of preferred stock............................... -- (124,432)
Payments on long-term debt.................................. (53,169) (58,825)
Proceeds from initial public offering....................... -- 126,364
Proceeds from long-term debt issued......................... -- 436
Repurchases and retirement of common stock.................. (3,465) --
Issuance of common stock upon exercise of stock options..... 2,399 --
-------- ---------
NET CASH USED FOR FINANCING ACTIVITIES................ (54,235) (56,457)
-------- ---------
NET INCREASE (DECREASE) IN CASH............................. 7,797 (5,923)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 7,892 10,300
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 15,689 $ 4,377
======== =========
See notes to condensed consolidated financial statements.
4
PACKAGING CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2001
1. BASIS OF PRESENTATION
The consolidated financial statements as of June 30, 2001 and 2000 of
Packaging Corporation of America ("PCA" or the "Company") 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 financial
statements. Operating results during the period ended June 30, 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 condensed 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. As a
result of a recent acquisition, PCA now has a small warehouse and assembly
operation in Nogales, Mexico.
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 first
5
PACKAGING CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 2001
2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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 six months ended June 30, 2001, reported net income increased
$0.3 million ($0.5 million pre-tax) for changes in the time value of the
interest rate collars, or hedge ineffectiveness. All amounts have been included
in other expense in the statements of income. Derivative losses included in OCI
as of June 30, 2001, will be reclassified into earnings over the lives of the
collar agreements, through June 30, 2003.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets," effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill (and intangible assets deemed to have indefinite lives) will
no longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statements is not expected to have a material
impact on the Company's consolidated financial position or results of
operations. During 2002, the Company will perform the first of the required
impairment tests of goodwill and indefinite lived intangible assets as of
January 1, 2002 and has not yet determined what the effect of these tests will
be on the earnings and financial position of the Company.
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 six months ended June 30, 2001, total comprehensive income was
$1.3 million less than net income due to derivative losses. There was no
difference for the six months ended June 30, 2000.
RECLASSIFICATIONS
Prior year's financial statements have been reclassified where appropriate
to conform with current year presentation.
6
PACKAGING CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 2001
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 JUNE 30,
---------------------------
2001 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------- --------
Numerator:
Net income available to common shareholders............... $ 31,259 $ 33,277
Denominator:
Basic common shares outstanding........................... 106,583 105,850
Effect of dilutive securities:
Stock options............................................. 2,534 2,343
-------- --------
Dilutive common shares outstanding.......................... 109,117 108,193
Basic income per common share............................... $ 0.29 $ 0.31
Diluted income per common share............................. $ 0.29 $ 0.31
SIX MONTHS ENDED JUNE 30,
---------------------------
2001 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------- --------
Numerator:
Net income available to common shareholders............... $ 58,878 $ 39,886
Denominator:
Basic common shares outstanding........................... 106,499 103,716
Effect of dilutive securities:
Stock options............................................. 2,540 1,856
Non-vested stock.......................................... -- 465
-------- --------
Dilutive common shares outstanding.......................... 109,039 106,037
Basic income per common share............................... $ 0.55 $ 0.38
Diluted income per common share............................. $ 0.54 $ 0.38
4. INVENTORIES
The components of inventories are as follows:
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
(IN THOUSANDS) (AUDITED)
Raw materials............................................... $ 63,449 $ 71,256
Work in progress............................................ 7,061 5,908
Finished goods.............................................. 52,892 56,157
Supplies and materials...................................... 51,770 51,222
-------- --------
Inventories at FIFO cost.................................... 175,172 184,543
Excess of FIFO over LIFO cost............................... (22,984) (24,831)
-------- --------
Inventory, net.............................................. $152,188 $159,712
======== ========
7
PACKAGING CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 2001
4. INVENTORIES (CONTINUED)
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.
5. SHAREHOLDERS' EQUITY
On May 16, 2001, the Company announced a $100.0 million common stock
repurchase program. PCA currently expects to repurchase the shares from time to
time. During the quarter ended June 30, 2001, the Company repurchased 222,900
shares of common stock for approximately $3.5 million. These shares were retired
on June 28, 2001.
6. ACQUISITIONS
On May 25, 2001, PCA International, Inc., a wholly owned subsidiary of PCA,
was formed to acquire the assets of Sunbelt Packaging Services, Inc. for
approximately $4.8 million. The transaction was completed on June 1, 2001. The
purchase method of accounting was used to account for the acquisition. Sales and
total assets of the acquisition were not material.
7. SUMMARIZED COMBINED FINANCIAL INFORMATION ABOUT GUARANTOR SUBSIDIARIES
The following is summarized aggregated financial information for Packaging
Credit Company, LLC, Dixie Container Corporation, PCA International, Inc. 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. Separate financial statements of the
guarantor subsidiaries
8
PACKAGING CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 2001
7. SUMMARIZED COMBINED FINANCIAL INFORMATION ABOUT GUARANTOR SUBSIDIARIES
(CONTINUED)
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) ----------- -------------- ------------- ------------ ----------
JUNE 30, 2001
Current assets.................... $ 213,490 $ 83,693 $188,477 $ (80,879) $ 404,781
Non-current assets................ 1,654,685 77,359 -- (202,043) 1,530,001
---------- -------- -------- --------- ----------
Total assets.................... 1,868,175 161,052 188,477 (282,922) 1,934,782
Current liabilities............... 256,336 13,212 1,781 (88,310) 183,019
Non-current liabilities........... 881,622 162 126,000 -- 1,007,784
---------- -------- -------- --------- ----------
Total liabilities............... 1,137,958 13,374 127,781 (88,310) 1,190,803
---------- -------- -------- --------- ----------
Net assets.......................... $ 730,217 $147,678 $ 60,696 $(194,612) $ 743,979
========== ======== ======== ========= ==========
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
========== ======== ======== ========= ==========
SIX MONTHS ENDED JUNE 30, 2001
Net sales......................... $ 920,979 $ 651 $ -- $ -- $ 921,630
Pre-tax profit.................... 82,097 24,840 4,081 (13,922) 97,096
Net income........................ 49,534 15,472 2,558 (8,686) 58,878
SIX MONTHS ENDED JUNE 30, 2000
Net sales......................... $ 968,262 $ -- $ -- $ -- $ 968,262
Pre-tax profit.................... 98,860 25 -- -- 98,885
Net income........................ 58,508 15 -- -- 58,523
9
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
NET SALES
Net sales decreased by $25.4 million, or 5.2%, for the three months ended
June 30, 2001 from the comparable period in 2000. The decrease was primarily the
result of decreased sales prices of containerboard and corrugated products and
lower sales volume of containerboard.
Total corrugated products volume increased 1.1% for the three months ended
June 30, 2001 from the comparable period in 2000. Containerboard volume to
external domestic and export customers decreased 7.3%.
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 $452 and $408, respectively, per ton for the three months
ended June 30, 2001. This compares to $475 and $460, respectively, per ton for
the three months ended June 30, 2000.
INCOME BEFORE INTEREST EXPENSE AND TAXES
Operating income decreased by $19.0 million, or 21.4%, for the three months
ended June 30, 2001 compared to the three months ended June 30, 2000. The
decrease in operating income was primarily attributable to the lower sales
prices and volume described above.
Gross margins decreased $16.5 million, or 12.8%, for the three months ended
June 30, 2001 from the comparable period in 2000 due to the lower sales prices
and volume described above. Gross margins, as a percent of net sales, decreased
to 24.0% in the second quarter of 2001 from 26.1% in the second quarter of 2000
due to decreased sales prices of corrugated products and containerboard to
domestic and foreign third parties.
Selling and administrative expenses increased $1.8 million, or 6.1%, for the
three months ended June 30, 2001 compared to the three months ended June 30,
2000. The increase was primarily the result of increased salary and other
general selling related expenses.
Corporate overhead for the three months ended June 30, 2001 increased by
$1.0 million, or 10.1%, from the comparable period in 2000. The increase was
primarily due to increased salary and information technology services expenses.
10
INTEREST EXPENSE AND INCOME TAXES
Interest expense decreased by $13.3 million, or 41.4%, for the three months
ended June 30, 2001 from the three months ended June 30, 2000, primarily as a
result of voluntary prepayments PCA made on the term loans under its senior
credit facility.
PCA's effective tax rate was 38.3% for the three months ended June 30, 2001
and 41.0% for the comparable period in 2000. The tax rate is higher than the
federal statutory rate of 35% due to state income taxes.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
NET SALES
Net sales decreased by $46.6 million, or 4.8%, for the six months ended
June 30, 2001 from the comparable period in 2000. The decrease was primarily the
result of decreases in sales prices of containerboard and shipments of
containerboard to external third parties.
Containerboard volume to external domestic and export customers decreased
15.1% for the six months ended June 30, 2001 from the comparable period in 2000.
Corrugated products volume decreased 1.3% for the first half of 2001 compared to
the first half of 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 $456 and $417, respectively, per ton for the six months
ended June 30, 2001. This compares to $461 and $443, respectively, per ton for
the six months ended June 30, 2000.
INCOME BEFORE INTEREST EXPENSE AND TAXES
Operating income decreased by $25.8 million, or 16.0%, for the six months
ended June 30, 2001 compared to the six months ended June 30, 2000. The decrease
in operating income was primarily attributable to the price and volume decreases
described above.
Gross margins decreased $17.9 million, or 7.5%, for the six months ended
June 30, 2001 from the comparable period in 2000. Gross margins decreased to
23.8% of sales in the first half of 2001 from 24.5% of sales in the first half
of 2000 due primarily to the price and volume decreases described above.
Selling and administrative expenses increased $3.4 million, or 5.8%, for the
six months ended June 30, 2001 compared to the six months ended June 30, 2000.
The increase was primarily the result of increased salary and other general
selling related expenses.
Corporate overhead for the six months ended June 30, 2001 increased by
$1.8 million, or 9.1%, 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 $24.0 million, or 38.4%, for the six months
ended June 30, 2001 from the six months ended June 30, 2000, primarily as a
result of voluntary prepayments PCA made on the term loans under its senior
credit facility.
PCA's effective tax rate was 38.9% for the six months ended June 30, 2001
and 40.8% for the comparable period in 2000. The tax rate is higher than the
federal statutory rate of 35.0% due to state income taxes.
11
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities increased $15.4 million, or
14.0%, for the six months ended June 30, 2001 from the comparable period in
2000. The increase was primarily due to changes in working capital, partially
offset by a decrease in deferred income taxes.
Net cash used for investing activities increased $3.9 million, or 6.6%, for
the six months ended June 30, 2001 compared to the six months ended June 30,
2000, primarily as a result of one business acquisition and additions to
property, plant and equipment.
Net cash used for financing activities decreased $2.2 million, or 3.9%, for
the six months ended June 30, 2001 from the comparable period in 2000. The
decrease was primarily attributable to slightly lower debt prepayments,
partially offset by expenditures in 2001 to repurchase common stock.
As of June 30, 2001, PCA had commitments for capital expenditures of
$56.1 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 June 30, 2001, PCA's level of indebtedness had been reduced to approximately
$816.0 million through prepayments of its bank debt.
Concurrently with the Transactions, PCA issued $550.0 million of 9 5/8%
senior subordinated notes and $100.0 million of 12 3/8% senior exchangeable
preferred stock and entered into a senior credit facility.
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 revolving credit facility
with up to $150.0 million in availability.
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 securitization 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. As of June 30, 2001, PCA
had paid $16.0 million on this facility.
The following table provides the weighted average interest rate as of
June 30, 2001 for each of the term loans, the revolving credit facility and the
securitization facility:
WEIGHTED AVERAGE
BORROWING ARRANGEMENT INTEREST RATE
- --------------------- ----------------
Term Loan A.............................................. 6.20%
Term Loan B.............................................. 6.95%
Revolving Credit Facility:
Revolver--Eurodollar................................... N/A
Revolver--Base Rate.................................... N/A
Securitization Facility.................................. 4.97%
The borrowings under the 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
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repaid in quarterly installments from June 2003 through June 2006. The Term Loan
B must be repaid in quarterly installments from September 2003 through
June 2007. The revolving credit facility will terminate in 2006. The
securitization facility will terminate in 2003. As of June 30, 2001, PCA had
$150.0 million in availability and no borrowings outstanding under the revolving
credit facility, and $150.0 million in availability and $126.0 million
outstanding under the securitization facility.
Since April 12, 1999, PCA has made debt prepayments totalling approximately
$953.0 million, using free cash from operations of $442.0 million and proceeds
from the sales of timberland of $511.0 million, to reduce its borrowings under
the term loans and the securitization 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,
- 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 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 Inc. 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
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$220.0 million as of June 30, 2001. The weighted average floor of the interest
rate collar agreements is 5.01% and the weighted average ceiling of the interest
rate collar agreements is 6.84%. The interest rate on approximately 83% of PCA's
variable-rate debt as of June 30, 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 $2.7 million annually, until the applicable interest rate
exceeds the ceiling rate. At that point, only 17% of the variable-rate debt as
of June 30, 2001, would result in additional interest expense. As of June 30,
2001, PCA's weighted average LIBOR rate was 4.95% and the weighted average
commercial paper rate was 4.62%. 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 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.
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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 January, 2003.
PCA believes that the plaintiffs' allegations have no merit and intends 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.
PCA's 2001 Annual Meeting of Shareholders was held on May 15, 2001. At the
meeting, the Shareholders voted on two matters: (1) electing directors, and
(2) ratifying the appointment of Ernst & Young LLP as independent accountants
for the year 2001. The following persons were elected to PCA's Board of
Directors, each for a term to expire at PCA's 2002 Annual Meeting of
Shareholders:
NOMINEE NUMBER OF VOTES
- ----------------------------------------------------- -----------------------
FOR WITHHELD
----------- ---------
Paul T. Stecko....................................... 98,096,700 3,672,606
Henry F. Frigon...................................... 101,156,339 612,967
Louis A. Holland..................................... 101,158,224 611,082
Justin S. Huscher.................................... 100,901,124 868,182
Samuel M. Mencoff.................................... 100,901,624 867,682
Thomas S. Souleles................................... 100,901,183 868,123
Rayford K. Williamson................................ 101,156,166 613,140
The Shareholders also ratified the appointment of Ernst & Young LLP as PCA's
independent accountants for the year 2001 by a vote of 99,514,044 votes cast for
ratification, 2,235,606 votes cast against ratification, and 19,656 abstentions.
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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: August 10, 2001
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