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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
LAKE FOREST, ILLINOIS 60045
(Address of Principal Executive Offices) (Zip Code)
(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 November 5, 2001, the Registrant had outstanding 105,574,628 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
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 65,297 $ 7,892
Accounts and notes receivable, net of allowance for
doubtful accounts of $6,005 and $6,394 as of
September 30, 2001 and December 31, 2000,
respectively............................................ 222,652 215,994
Inventories............................................... 157,354 159,712
Prepaid expenses and other current assets................. 10,488 5,755
Deferred income taxes..................................... 17,706 14,356
---------- ----------
TOTAL CURRENT ASSETS.................................... 473,497 403,709
Property, plant and equipment, net.......................... 1,452,620 1,455,990
Intangible assets, net of accumulated amortization of $1,549
and $1,380 as of September 30, 2001 and December 31, 2000,
respectively.............................................. 3,681 1,758
Other long-term assets...................................... 73,111 80,655
---------- ----------
TOTAL ASSETS............................................ $2,002,909 $1,942,112
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 70 $ 239
Accounts payable.......................................... 113,986 113,701
Accrued interest.......................................... 26,779 15,438
Accrued liabilities....................................... 91,668 89,170
---------- ----------
TOTAL CURRENT LIABILITIES............................... 232,503 218,548
Long-term liabilities:
Long-term debt............................................ 816,136 869,175
Deferred income taxes..................................... 184,609 151,728
Other liabilities......................................... 22,608 15,237
---------- ----------
TOTAL LONG-TERM LIABILITIES............................. 1,023,353 1,036,140
Shareholders' equity:
Common stock (par value $.01 per share, 300,000,000 shares
authorized, 105,926,333 shares and 106,248,138 shares
issued as of September 30, 2001 and December 31, 2000,
respectively)........................................... 1,059 1,062
Additional paid in capital................................ 493,295 512,208
Retained earnings......................................... 262,500 174,468
Accumulated other comprehensive loss...................... (3,440) --
Common stock held in treasury, at cost (408,500 shares and
27,470 shares as of September 30, 2001 and December 31,
2000, respectively)..................................... (6,361) (314)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY.............................. 747,053 687,424
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $2,002,909 $1,942,112
========== ==========
See notes to condensed consolidated financial statements.
2
PACKAGING CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2001 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- ---------
Net sales................................................... $ 455,214 $ 487,676
Cost of sales............................................... (346,372) (350,431)
--------- ---------
Gross profit.............................................. 108,842 137,245
Selling and administrative expenses......................... (30,633) (28,992)
Other expense, net.......................................... (2,536) (2,165)
Corporate overhead.......................................... (10,309) (9,520)
--------- ---------
Income before interest and taxes.......................... 65,364 96,568
Interest expense, net....................................... (17,819) (29,885)
--------- ---------
Income before taxes....................................... 47,545 66,683
Provision for income taxes.................................. (18,391) (26,674)
--------- ---------
Net income available to common shareholders................. $ 29,154 $ 40,009
========= =========
Weighted average common shares outstanding:
Basic..................................................... 106,628 105,964
Diluted................................................... 109,315 108,295
Basic earnings per common share:
Net income per common share............................... $ 0.27 $ 0.38
========= =========
Diluted earnings per common share:
Net income per common share............................... $ 0.27 $ 0.37
========= =========
See notes to condensed consolidated financial statements.
3
PACKAGING CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ----------- -----------
Net sales................................................... $ 1,376,844 $ 1,455,938
Cost of sales............................................... (1,048,643) (1,081,483)
----------- -----------
Gross profit.............................................. 328,201 374,455
Selling and administrative expenses......................... (92,644) (87,628)
Other expense, net.......................................... (3,247) (98)
Corporate overhead.......................................... (31,432) (28,884)
----------- -----------
Income before interest, taxes and cumulative effect of
accounting change....................................... 200,878 257,845
Interest expense, net....................................... (56,237) (92,278)
----------- -----------
Income before taxes and cumulative effect of accounting
change.................................................. 144,641 165,567
Provision for income taxes.................................. (56,114) (67,035)
----------- -----------
Income before cumulative effect of accounting change...... 88,527 98,532
Cumulative effect of accounting change, net of tax.......... (495) --
----------- -----------
Net income.................................................. 88,032 98,532
Preferred dividends and accretion of preferred stock
issuance costs............................................ -- (18,637)
----------- -----------
Net income available to common shareholders................. $ 88,032 $ 79,895
=========== ===========
Weighted average common shares outstanding:
Basic..................................................... 106,543 104,471
Diluted................................................... 109,114 106,799
Basic earnings per common share:
Income before cumulative effect of accounting change...... $ 0.83 $ 0.76
Cumulative effect of accounting change.................... -- --
----------- -----------
Net income per common share............................... $ 0.83 $ 0.76
=========== ===========
Diluted earnings per common share:
Income before cumulative effect of accounting change...... $ 0.81 $ 0.75
Cumulative effect of accounting change.................... -- --
----------- -----------
Net income per common share............................... $ 0.81 $ 0.75
=========== ===========
See notes to condensed consolidated financial statements.
4
PACKAGING CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2001 2000
(IN THOUSANDS) --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 88,032 $ 98,532
--------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization.................. 105,230 106,087
Amortization of financing costs........................... 3,662 5,456
Cumulative effect of accounting change.................... 495 --
Increase in deferred income taxes......................... 30,808 43,056
Loss on disposal of property, plant and equipment......... 1,759 1,578
Other, net................................................ 2,248 (266)
Changes in components of working capital:
(Increase) decrease in current assets--
Accounts receivable..................................... (5,400) (18,723)
Inventories............................................. 2,998 4,303
Prepaid expenses and other.............................. (4,715) (1,183)
Increase (decrease) in current liabilities--
Accounts payable........................................ (1,797) (17,789)
Accrued liabilities..................................... 13,725 17,500
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 237,045 238,551
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (96,001) (85,148)
Additions to other long term assets....................... (2,537) (3,112)
Acquisition of businesses................................. (4,827) --
Proceeds from disposals of property, plant and
equipment............................................... 1,044 2,091
Investments in joint ventures............................. -- (500)
Other, net................................................ 884 (819)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES................ (101,437) (87,488)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of preferred stock............................... -- (124,432)
Payments on long-term debt.................................. (53,239) (127,825)
Proceeds from initial public offering....................... -- 126,364
Proceeds from long-term debt issued......................... -- 605
Repurchases of common stock................................. (30,102) (314)
Issuance of common stock upon exercise of stock options..... 5,138 912
--------- ---------
NET CASH USED FOR FINANCING ACTIVITIES................ (78,203) (124,690)
--------- ---------
NET INCREASE IN CASH........................................ 57,405 26,373
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 7,892 10,300
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 65,297 $ 36,673
========= =========
See notes to condensed consolidated financial statements.
5
PACKAGING CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2001
1. BASIS OF PRESENTATION
The consolidated financial statements as of September 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 September 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
6
PACKAGING CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 2001
2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
flow hedges. The effect of this transition adjustment was to decrease reported
net income in the first 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 nine months ended September 30, 2001, reported net income increased
$0.2 million ($0.4 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 September 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 reclassified to conform to this treatment.
COMPREHENSIVE INCOME
For the nine months ended September 30, 2001, total comprehensive income was
$3.4 million less than net income due to derivative losses. There was no
difference for the nine months ended September 30, 2000.
7
PACKAGING CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 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
SEPTEMBER 30,
---------------------------
2001 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------- --------
Numerator:
Net income available to common shareholders............... $ 29,154 $ 40,009
Denominator:
Basic common shares outstanding........................... 106,628 105,964
Effect of dilutive securities:
Stock options............................................. 2,687 2,331
-------- --------
Dilutive common shares outstanding.......................... 109,315 108,295
Basic income per common share............................... $ 0.27 $ 0.38
Diluted income per common share............................. $ 0.27 $ 0.37
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA) -------- --------
Numerator:
Net income available to common shareholders............... $ 88,032 $ 79,895
Denominator:
Basic common shares outstanding........................... 106,543 104,471
Effect of dilutive securities:
Stock options............................................. 2,571 2,019
Non-vested stock.......................................... -- 309
-------- --------
Dilutive common shares outstanding.......................... 109,114 106,799
Basic income per common share............................... $ 0.83 $ 0.76
Diluted income per common share............................. $ 0.81 $ 0.75
8
PACKAGING CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 2001
4. INVENTORIES
The components of inventories are as follows:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------- ------------------
(IN THOUSANDS) (AUDITED)
Raw materials............................................... $ 66,741 $ 71,256
Work in progress............................................ 6,660 5,908
Finished goods.............................................. 52,618 56,157
Supplies and materials...................................... 55,035 51,222
-------- --------
Inventories at FIFO cost.................................... 181,054 184,543
Excess of FIFO over LIFO cost............................... (23,700) (24,831)
-------- --------
Inventory, net.............................................. $157,354 $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.
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. Through September 30, 2001, the Company repurchased 1,812,700 shares of
common stock for approximately $30.1 million. Of these shares, 408,500 were held
in treasury at September 30, 2001 and were subsequently retired in October,
2001. The remaining shares were retired prior to September 30, 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 are not presented because, in the opinion of management,
such financial
9
PACKAGING CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 2001
7. SUMMARIZED COMBINED FINANCIAL INFORMATION ABOUT GUARANTOR SUBSIDIARIES
(CONTINUED)
statements are not material to investors. Financial information for Packaging
Receivables Company, LLC is reflected as a non-guarantor subsidiary.
NON-GUARANTOR
PCA GUARANTOR SUBS SUB ELIMINATIONS TOTAL
(IN THOUSANDS) ---------- -------------- ------------- ------------ ----------
SEPTEMBER 30, 2001
Current assets............... $ 273,786 $ 84,387 $196,726 $ (81,402) $ 473,497
Non-current assets........... 1,654,115 100,687 -- (225,390) 1,529,412
---------- -------- -------- --------- ----------
Total assets............... 1,927,901 185,074 196,726 (306,792) 2,002,909
Current liabilities.......... 302,376 24,146 1,038 (95,057) 232,503
Non-current liabilities...... 897,177 176 126,000 -- 1,023,353
---------- -------- -------- --------- ----------
Total liabilities.......... 1,199,553 24,322 127,038 (95,057) 1,255,856
---------- -------- -------- --------- ----------
Net assets................... $ 728,348 $160,752 $ 69,688 $(211,735) $ 747,053
========== ======== ======== ========= ==========
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
========== ======== ======== ========= ==========
NINE MONTHS ENDED
SEPTEMBER 30, 2001
Net sales.................... $1,373,882 $ 2,962 $ -- $ -- $1,376,844
Pre-tax profit............... 121,710 48,113 5,519 (30,701) 144,641
Net income................... 73,746 29,924 3,488 (19,126) 88,032
NINE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales.................... $1,455,938 $ -- $ -- $ -- $1,455,938
Pre-tax profit............... 165,529 38 -- -- 165,567
Net income................... 98,508 24 -- -- 98,532
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
NET SALES
Net sales decreased by $32.5 million, or 6.7%, for the three months ended
September 30, 2001 from the comparable period in 2000. The decrease was
primarily the result of decreased sales prices of containerboard and corrugated
products and, to a lesser extent, decreased shipments of containerboard to
external third parties.
Total corrugated products volume increased 1.1% for the three months ended
September 30, 2001 from the comparable period in 2000. This increase was due to
the fact that the third quarter of 2001 had one more workday, those days not
falling on a weekend or holiday, than the third quarter of 2000. On a comparable
shipments-per-workday basis, corrugated products volume was down 0.5% from the
third quarter of 2000. Containerboard volume to external domestic and export
customers decreased 4.1%.
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 $438 and $395, respectively, per ton for the three months
ended September 30, 2001. This compares to $475 and $452, respectively, per ton
for the three months ended September 30, 2000.
INCOME BEFORE INTEREST EXPENSE AND TAXES
Operating income decreased by $31.2 million, or 32.3%, for the three months
ended September 30, 2001 compared to the three months ended September 30, 2000.
The decrease in operating income was primarily attributable to the lower sales
prices described above.
Gross profit decreased $28.4 million, or 20.7%, for the three months ended
September 30, 2001 from the comparable period in 2000 due to the lower sales
prices described above.
Selling and administrative expenses increased $1.6 million, or 5.7%, for the
three months ended September 30, 2001 compared to the three months ended
September 30, 2000. The increase was primarily the result of increased salary
and other general selling related expenses.
Corporate overhead for the three months ended September 30, 2001 increased
by $0.8 million, or 8.3%, 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 $12.1 million, or 40.4%, for the three months
ended September 30, 2001 from the three months ended September 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 38.7% for the three months ended September 30,
2001 and 40.0% for the comparable period in 2000. The tax rate is higher than
the federal statutory rate of 35% due to state income taxes.
11
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
NET SALES
Net sales decreased by $79.1 million, or 5.4%, for the nine months ended
September 30, 2001 from the comparable period in 2000. The decrease was
primarily the result of decreases in sales prices of containerboard and in
shipments of containerboard to external third parties.
Containerboard volume to external domestic and export customers decreased
11.5% for the nine months ended September 30, 2001 from the comparable period in
2000. Total corrugated products volume decreased 0.5% for the first nine months
of 2001 compared to the first nine months of 2000. On a comparable
shipments-per-workday basis, corrugated products volume decreased 1.0% for the
nine months ended September 30, 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 $450 and $409, respectively, per ton for the nine months
ended September 30, 2001. This compares to $466 and $446, respectively, per ton
for the nine months ended September 30, 2000.
INCOME BEFORE INTEREST EXPENSE AND TAXES
Operating income decreased by $57.0 million, or 22.1%, for the nine months
ended September 30, 2001 compared to the nine months ended September 30, 2000.
The decrease in operating income was primarily attributable to the price and
volume decreases described above.
Gross profit decreased $46.3 million, or 12.4%, for the nine months ended
September 30, 2001 from the comparable period in 2000 due primarily to the price
and volume decreases described above.
Selling and administrative expenses increased $5.0 million, or 5.7%, for the
nine months ended September 30, 2001 compared to the nine months ended
September 30, 2000. The increase was primarily the result of increased salary
and other general selling related expenses.
Corporate overhead for the nine months ended September 30, 2001 increased by
$2.5 million, or 8.8%, 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 $36.0 million, or 39.1%, for the nine months
ended September 30, 2001 from the nine months ended September 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 38.8% for the nine months ended September 30,
2001 and 40.5% for the comparable period in 2000. The tax rate is higher than
the federal statutory rate of 35.0% due to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities decreased $1.5 million, or 0.6%,
for the nine months ended September 30, 2001 from the comparable period in 2000.
The decrease was primarily due to decreases in net income and deferred income
taxes partially offset by a reduction in working capital.
Net cash used for investing activities increased $13.9 million, or 15.9%,
for the nine months ended September 30, 2001 compared to the nine months ended
September 30, 2000, primarily as a result of increased additions to property,
plant and equipment and one business acquisition.
12
Net cash used for financing activities decreased $46.5 million, or 37.3%,
for the nine months ended September 30, 2001 from the comparable period in 2000.
The decrease was primarily attributable to lower debt prepayments, partially
offset by expenditures to repurchase common stock.
As of September 30, 2001, PCA had commitments for capital expenditures of
$50.6 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 current debt service and capital expenditures, the primary uses
of its cash, from these sources.
The following table provides the outstanding balance and the weighted
average interest rate as of September 30, 2001 for each of PCA's outstanding
term loans, the revolving credit facility and the securitization facility:
BALANCE AT
SEPTEMBER 30, WEIGHTED AVG
BORROWING ARRANGEMENT (IN THOUSANDS) 2001 INTEREST RATE
- ------------------------------------ -------------- -------------
Term Loan A......................................... $ 96,791 6.20%
Term Loan B......................................... 43,209 6.95%
Revolving Credit Facility:
Revolver--Eurodollar.............................. -- N/A
Revolver--Base Rate............................... -- N/A
Securitization Facility............................. 126,000 4.58%
In addition to the term loans and other borrowing arrangements noted above,
PCA has $550 million of 9 5/8% senior subordinated notes due 2009.
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 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 September 30, 2001, PCA had $150.0 million in availability and no
borrowings outstanding under the revolving credit facility. Under the
securitization facility, PCA had $150.0 million in availability and
$126.0 million outstanding as of September 30, 2001.
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
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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
PCA currently has interest rate collar agreements that protect against
rising interest rates and simultaneously guarantee a minimum interest rate. The
notional amount of these collar agreements is $220.0 million as of
September 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 September 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 nineteen months.
As a result of the collar agreements noted above and the current interest
rate environment, a one percent increase in interest rates would result in an
increase in interest expense and a corresponding decrease in income before taxes
of approximately $0.5 million annually. As of September 30, 2001, the weighted
average LIBOR rate was 2.59% and the weighted average commercial paper rate was
2.68%. 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.
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",
14
"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 granted plaintiffs' motion on September 4, 2001, but modified
the proposed class to exclude those purchasers whose prices were not "not tied
to the price of linerboard." The defendants have filed a petition, currently
pending before the Court of Appeals for the Third Circuit, seeking leave to
appeal the Court's ruling. 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.
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: November 13, 2001
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