PACKAGING CORP OF AMERICA - Quarter Report: 2010 March (Form 10-Q)
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
(Mark One) | ||
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Quarterly Period Ended March 31, 2010 | ||
or
|
||
o
|
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 (State or other Jurisdiction of Incorporation or Organization) |
36-4277050 (IRS Employer Identification No.) |
|
1900 West Field Court Lake Forest, Illinois (Address of Principal Executive Offices) |
60045 (Zip Code) |
(847) 482-3000
(Registrants 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 þ No o
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for shorter period that the Registrant was
required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of May 3, 2010, the Registrant had outstanding
103,162,860 shares of common stock, par value $0.01 per
share.
TABLE
OF CONTENTS
2
Table of Contents
PART I
FINANCIAL INFORMATION
FINANCIAL INFORMATION
Item 1. | Financial Statements. |
Packaging
Corporation of America
Condensed Consolidated Balance Sheets
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, |
December 31, |
|||||||
2010 | 2009 | |||||||
(In thousands, except share and per share amounts) | (Audited) | |||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 197,601 | $ | 260,727 | ||||
Accounts receivable, net of allowance for doubtful accounts and
customer deductions of $5,421 and $6,348 as of March 31,
2010 and December 31, 2009, respectively
|
275,727 | 243,403 | ||||||
Inventories
|
215,631 | 213,396 | ||||||
Alternative fuel mixture tax credits receivable
|
137,044 | 127,811 | ||||||
Federal and state income taxes receivable
|
9,580 | 4,707 | ||||||
Prepaid expenses and other current assets
|
21,999 | 13,045 | ||||||
Deferred income taxes
|
16,166 | 22,125 | ||||||
Total current assets
|
873,748 | 885,214 | ||||||
Property, plant and equipment, net
|
1,204,480 | 1,182,504 | ||||||
Goodwill
|
38,854 | 38,854 | ||||||
Other intangible assets, net
|
11,586 | 11,790 | ||||||
Other long-term assets
|
35,627 | 34,478 | ||||||
Total assets
|
$ | 2,164,295 | $ | 2,152,840 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities:
|
||||||||
Short-term debt and current maturities of long-term debt
|
$ | 109,000 | $ | 109,000 | ||||
Capital lease obligations
|
636 | 626 | ||||||
Accounts payable
|
158,270 | 126,813 | ||||||
Dividends payable
|
15,460 | 15,451 | ||||||
Accrued interest
|
4,455 | 12,644 | ||||||
Accrued liabilities
|
81,613 | 106,423 | ||||||
Total current liabilities
|
369,434 | 370,957 | ||||||
Long-term liabilities:
|
||||||||
Long-term debt
|
548,836 | 548,749 | ||||||
Capital lease obligations
|
22,340 | 22,503 | ||||||
Deferred income taxes
|
206,203 | 205,227 | ||||||
Pension and postretirement benefit plans
|
83,881 | 78,859 | ||||||
Other long-term liabilities
|
27,944 | 27,700 | ||||||
Total long-term liabilities
|
889,204 | 883,038 | ||||||
Stockholders equity:
|
||||||||
Common stock, par value $.01 per share, 300,000,000 shares
authorized, 103,121,490 shares and 103,018,358 shares
issued as of March 31, 2010 and December 31, 2009,
respectively
|
1,031 | 1,030 | ||||||
Additional paid in capital
|
390,948 | 387,496 | ||||||
Retained earnings
|
550,092 | 546,355 | ||||||
Accumulated other comprehensive income (loss):
|
||||||||
Unrealized gain on treasury lock, net
|
4,050 | 4,512 | ||||||
Unrealized loss on foreign currency exchange contracts
|
(811 | ) | | |||||
Unfunded employee benefit obligations, net
|
(39,653 | ) | (40,548 | ) | ||||
Total accumulated other comprehensive loss
|
(36,414 | ) | (36,036 | ) | ||||
Total stockholders equity
|
905,657 | 898,845 | ||||||
Total liabilities and stockholders equity
|
$ | 2,164,295 | $ | 2,152,840 | ||||
See notes to condensed consolidated financial statements.
3
Table of Contents
Packaging
Corporation of America
Condensed
Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands, except per share amounts) | ||||||||
Net sales
|
$ | 550,732 | $ | 512,378 | ||||
Cost of sales
|
(463,933 | ) | (402,370 | ) | ||||
Gross profit
|
86,799 | 110,008 | ||||||
Selling and administrative expenses
|
(44,277 | ) | (43,308 | ) | ||||
Corporate overhead
|
(12,630 | ) | (13,435 | ) | ||||
Alternative fuel mixture tax credits income
|
9,235 | | ||||||
Other expense, net
|
(5,511 | ) | (3,658 | ) | ||||
Income from operations
|
33,616 | 49,607 | ||||||
Interest expense, net
|
(8,723 | ) | (8,738 | ) | ||||
Income before taxes
|
24,893 | 40,869 | ||||||
Provision for income taxes
|
(5,699 | ) | (15,193 | ) | ||||
Net income
|
$ | 19,194 | $ | 25,676 | ||||
Weighted average common shares outstanding:
|
||||||||
Basic
|
101,928 | 101,362 | ||||||
Diluted
|
102,876 | 102,143 | ||||||
Net income per common share:
|
||||||||
Basic
|
$ | 0.19 | $ | 0.25 | ||||
Diluted
|
$ | 0.19 | $ | 0.25 | ||||
Dividends declared per common share
|
$ | 0.15 | $ | 0.15 | ||||
See notes to condensed consolidated financial statements.
4
Table of Contents
Packaging
Corporation of America
Condensed Consolidated Statements of Cash Flows
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Cash Flows from Operating Activities:
|
||||||||
Net income
|
$ | 19,194 | $ | 25,676 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||
Depreciation, depletion and amortization
|
38,641 | 36,932 | ||||||
Amortization of financing costs
|
191 | 197 | ||||||
Amortization of net gain on treasury lock
|
(462 | ) | (462 | ) | ||||
Share-based compensation expense
|
1,236 | 1,240 | ||||||
Deferred income tax provision
|
6,525 | (4,985 | ) | |||||
Loss on disposals of property, plant and equipment
|
2,810 | 2,377 | ||||||
Alternative fuel mixture tax credits receivable
|
(9,235 | ) | | |||||
Changes in operating assets and liabilities:
|
||||||||
(Increase) decrease in assets
|
||||||||
Accounts receivable
|
(32,822 | ) | (423 | ) | ||||
Inventories
|
(2,235 | ) | 1,501 | |||||
Prepaid expenses and other current assets
|
(13,876 | ) | (5,451 | ) | ||||
Increase (decrease) in liabilities
|
||||||||
Accounts payable
|
31,457 | 15,697 | ||||||
Accrued liabilities
|
(33,352 | ) | (16,832 | ) | ||||
Other, net
|
6,432 | (4,788 | ) | |||||
Net cash provided by operating activities
|
14,504 | 50,679 | ||||||
Cash Flows from Investing Activities:
|
||||||||
Additions to property, plant and equipment
|
(63,137 | ) | (27,940 | ) | ||||
Additions to other long term assets
|
(1,180 | ) | (1,381 | ) | ||||
Proceeds from disposals of property, plant and equipment
|
55 | 11 | ||||||
Net cash used for investing activities
|
(64,262 | ) | (29,310 | ) | ||||
Cash Flows from Financing Activities:
|
||||||||
Payments on long-term debt
|
(153 | ) | (165 | ) | ||||
Common stock dividends paid
|
(15,451 | ) | (30,719 | ) | ||||
Proceeds from exercise of stock options
|
1,906 | 14 | ||||||
Excess tax benefits from share-based awards
|
330 | 127 | ||||||
Net cash used for financing activities
|
(13,368 | ) | (30,743 | ) | ||||
Net decrease in cash and cash equivalents
|
(63,126 | ) | (9,374 | ) | ||||
Cash and cash equivalents, beginning of period
|
260,727 | 149,397 | ||||||
Cash and cash equivalents, end of period
|
$ | 197,601 | $ | 140,023 | ||||
See notes to condensed consolidated financial statements.
5
Table of Contents
Packaging
Corporation of America
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2010
1. | Basis of Presentation |
The condensed consolidated financial statements as of
March 31, 2010 and 2009 of Packaging Corporation of America
(PCA or the Company) and for the
three-month periods then ended are unaudited but include all
adjustments (consisting only of normal recurring adjustments)
that management considers necessary for a fair presentation of
such financial statements. These financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States for interim financial information
and with Article 10 of SEC
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted
in the United States for complete audited financial statements.
Operating results for the period ended March 31, 2010 are
not necessarily indicative of the results that may be expected
for the year ending December 31, 2010. These condensed
consolidated financial statements should be read in conjunction
with PCAs Annual Report on
Form 10-K
for the year ended December 31, 2009.
2. | Summary of Accounting Policies |
Basis
of Consolidation
The accompanying condensed consolidated financial statements of
PCA include all majority-owned subsidiaries. All intercompany
transactions have been eliminated. The Company has one joint
venture that is accounted for under the equity method.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts in the financial statements and the accompanying notes.
Actual results could differ from those estimates.
Revenue
Recognition
The Company recognizes revenue as title to the products is
transferred to customers. Shipping and handling billings to a
customer are included in net sales. Shipping and handling costs
are included in cost of sales. In addition, the Company offers
volume rebates to certain of its customers. The total cost of
these programs is estimated and accrued as a reduction to net
sales at the time of the respective sale.
Segment
Information
PCA is engaged in one line of business: the integrated
manufacture and sale of packaging materials, boxes and
containers for industrial and consumer markets. No single
customer accounts for more than 10% of total net sales.
6
Table of Contents
Packaging
Corporation of America
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2010
2. | Summary of Accounting Policies (Continued) |
Comprehensive
Income
Comprehensive income is as follows:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Net income
|
$ | 19,194 | $ | 25,676 | ||||
Other comprehensive income, net of tax:
|
||||||||
Amortization of unfunded employee benefit obligations
|
895 | 858 | ||||||
Amortization of net gain on treasury lock
|
(462 | ) | (462 | ) | ||||
Unrealized losses on foreign currency exchange contracts
|
(811 | ) | | |||||
Other
|
| (125 | ) | |||||
Comprehensive income
|
$ | 18,816 | $ | 25,947 | ||||
Recent
Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU)
2010-06,
Fair Value Measurements and Disclosures (Topic
820) Improving Disclosures about Fair Value
Measurements. This ASU requires new disclosures and
clarifies existing disclosure requirements about fair value
measurement as set forth in Accounting Standards Codification
(ASC) 820. ASU
2010-06
amends ASC 820 to now require: (1) a reporting entity
should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers; and
(2) in the reconciliation for fair value measurements using
significant unobservable inputs, a reporting entity should
present separately information about purchases, sales,
issuances, and settlements. In addition, ASU
2010-06
clarifies the requirements of existing disclosures. ASU
2010-06 is
effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward
of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those
fiscal years. The Company adopted this guidance on
January 1, 2010. See Note 11 for additional
information.
In December 2009, the FASB issued ASU
2009-16,
Transfers and Servicing (Topic 860) Accounting
for Transfers of Financial Assets, which formally codifies
FASB Statement No. 166, Accounting for Transfers of
Financial Assets, into the FASB Accounting Standards
Codification. ASU
2009-16
revises the provisions of former FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, and will require more
information about transfers of financial assets, including
securitization transactions, and where entities have continuing
exposure to the risks related to transferred financial assets.
ASU 2009-16
is effective at the start of a reporting entitys first
fiscal year beginning after November 15, 2009. The Company
adopted this guidance on January 1, 2010. See Note 8
for additional information.
7
Table of Contents
Packaging
Corporation of America
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2010
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, | ||||||||
2010 | 2009 | |||||||
(In thousands, except per share data) | ||||||||
Numerator:
|
||||||||
Net income
|
$ | 19,194 | $ | 25,676 | ||||
Denominator:
|
||||||||
Basic common shares outstanding
|
101,928 | 101,362 | ||||||
Effect of dilutive securities:
|
||||||||
Stock options
|
255 | 63 | ||||||
Unvested restricted stock
|
693 | 718 | ||||||
Dilutive common shares outstanding
|
102,876 | 102,143 | ||||||
Basic income per common share
|
$ | 0.19 | $ | 0.25 | ||||
Diluted income per common share
|
$ | 0.19 | $ | 0.25 |
Options to purchase 0.6 million shares and 2.0 million
shares for the three months ended March 31, 2010 and 2009,
respectively, were not included in the computation of diluted
common shares outstanding as their exercise price exceeded the
average market price of the Companys common stock for each
respective reporting period.
4. | Stock-Based Compensation |
In October 1999, the Company adopted a long-term equity
incentive plan, which provides for grants of stock options,
stock appreciation rights, restricted stock and performance
awards to directors, officers and employees of PCA, as well as
others who engage in services for PCA. Option awards granted to
directors, officers and employees have contractual lives of
seven or ten years. Options granted to officers and employees
vest ratably over a three-year period, and options granted to
directors vest immediately. Restricted stock awards granted to
employees vest at the end of a four-year period, and restricted
stock awards granted to directors vest at the end of a six-month
period. The plan, which will terminate on October 19, 2014,
provides for the issuance of up to 8,550,000 shares of
common stock over the life of the plan. As of March 31,
2010, options and restricted stock of 6,530,280 shares have
been granted, net of forfeitures. Forfeitures are added back to
the pool of shares of common stock available to be granted at a
future date.
8
Table of Contents
Packaging
Corporation of America
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2010
4. | Stock-Based Compensation (Continued) |
Compensation expense for both stock options and restricted stock
recognized in the condensed consolidated statements of income
for the three-month periods ended March 31, 2010 and 2009
was as follows:
Three Months Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Stock options
|
$ | 157 | $ | 185 | ||||
Restricted stock
|
1,079 | 1,055 | ||||||
Impact on income before income taxes
|
1,236 | 1,240 | ||||||
Income tax benefit
|
(481 | ) | (482 | ) | ||||
Impact on net income
|
$ | 755 | $ | 758 | ||||
The Company uses the Black-Scholes-Merton option-pricing model
to estimate the fair value of each option grant as of the date
of grant. Expected volatilities are based on historical
volatility of the Companys common stock. The expected life
of the option is estimated using historical data pertaining to
option exercises and employee terminations. Separate groups of
employees that have similar historical exercise behavior are
considered separately for estimating the expected life. The
risk-free interest rate is based on U.S. Treasury yields in
effect at the time of grant. The fair value of restricted stock
is determined based on the closing price of the Companys
common stock on the grant date. There were no option or
restricted stock grants during the first quarter of 2010.
A summary of the Companys stock option activity and
related information follows:
Weighted- |
||||||||||||||||
Weighted- |
Average |
|||||||||||||||
Average |
Remaining |
Aggregate |
||||||||||||||
Exercise |
Contractual |
Intrinsic |
||||||||||||||
Options | Price | Term (years) | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Outstanding at December 31, 2009
|
1,973,301 | $ | 20.92 | |||||||||||||
Exercised
|
(110,452 | ) | 17.26 | |||||||||||||
Forfeited
|
(1,583 | ) | 25.30 | |||||||||||||
Outstanding at March 31, 2010
|
1,861,266 | $ | 21.14 | 3.0 | $ | 6,711 | ||||||||||
Outstanding vested or expected to vest at
March 31, 2010
|
1,861,266 | $ | 21.14 | 3.0 | $ | 6,711 | ||||||||||
Exercisable at March 31, 2010
|
1,797,804 | $ | 20.97 | 3.0 | $ | 6,711 | ||||||||||
The total intrinsic value of options exercised during the three
months ended March 31, 2010 and 2009 was $0.8 million
and $24,000, respectively. As of March 31, 2010, there was
$0.1 million of total unrecognized compensation cost
related to non-vested stock option awards granted under the
Companys equity incentive plan. The Company expects to
recognize the cost of these stock option awards over a
weighted-average period of 0.25 years.
9
Table of Contents
Packaging
Corporation of America
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2010
4. | Stock-Based Compensation (Continued) |
A summary of the Companys restricted stock activity
follows:
2010 | 2009 | |||||||||||||||
Fair Market |
Fair Market |
|||||||||||||||
Value at |
Value at |
|||||||||||||||
Date of |
Date of |
|||||||||||||||
(Dollars in thousands) | Shares | Grant | Shares | Grant | ||||||||||||
Restricted stock at January 1
|
1,235,505 | $ | 24,718 | 1,038,270 | $ | 23,023 | ||||||||||
Vested
|
(113,580 | ) | (2,277 | ) | | | ||||||||||
Cancellations
|
(7,320 | ) | (145 | ) | (1,770 | ) | (39 | ) | ||||||||
Restricted stock at March 31
|
1,114,605 | $ | 22,296 | 1,036,500 | $ | 22,984 | ||||||||||
The Company generally recognizes compensation expense associated
with restricted stock awards ratably over their vesting periods.
As PCAs Board of Directors has the ability to accelerate
vesting of restricted stock upon an employees retirement,
the Company accelerates the recognition of compensation expense
for certain employees approaching normal retirement age. As of
March 31, 2010, there was $8.4 million of total
unrecognized compensation costs related to the above restricted
stock awards. The Company expects to recognize the cost of these
stock awards over a weighted-average period of 2.5 years.
5. | Inventories |
The components of inventories are as follows:
March 31, |
December 31, |
|||||||
2010 | 2009 | |||||||
(In thousands) | (Audited) | |||||||
Raw materials
|
$ | 113,028 | $ | 101,429 | ||||
Work in process
|
8,103 | 6,600 | ||||||
Finished goods
|
71,072 | 66,994 | ||||||
Supplies and materials
|
97,809 | 100,919 | ||||||
Inventories at FIFO or average cost
|
290,012 | 275,942 | ||||||
Excess of FIFO or average cost over LIFO cost
|
(74,381 | ) | (62,546 | ) | ||||
Inventories, net
|
$ | 215,631 | $ | 213,396 | ||||
An actual valuation of inventory under the LIFO method is made
only at the end of each year based on the inventory levels and
costs at that time. Accordingly, interim LIFO calculations must
necessarily be based on managements estimates of expected
year-end inventory levels and costs. Because these are subject
to many factors beyond managements control, interim
results are subject to the final year-end LIFO inventory
valuation.
6. | Other Intangible Assets |
The components of other intangible assets are as follows:
As of March 31, 2010 | As of December 31, 2009 | |||||||||||||||||||
Weighted |
Gross |
Gross |
||||||||||||||||||
Average |
Carrying |
Accumulated |
Carrying |
Accumulated |
||||||||||||||||
Remaining Life | Amount | Amortization | Amount | Amortization | ||||||||||||||||
(In thousands) | (Audited) | |||||||||||||||||||
Customer lists and relations
|
31.4 years | $ | 17,441 | $ | 5,855 | $ | 17,441 | $ | 5,651 |
10
Table of Contents
Packaging
Corporation of America
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2010
7. | Employee Benefit Plans and Other Postretirement Benefits |
For the three months ended March 31, 2010 and 2009, net
pension costs were comprised of the following:
Three Months |
||||||||
Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Components of Net Pension Costs
|
||||||||
Service cost for benefits earned during the year
|
$ | 4,579 | $ | 4,489 | ||||
Interest cost on accumulated benefit obligation
|
3,023 | 2,637 | ||||||
Expected return on assets
|
(2,802 | ) | (2,143 | ) | ||||
Net amortization of unrecognized amounts
|
1,483 | 1,426 | ||||||
Other
|
| (126 | ) | |||||
Net pension costs
|
$ | 6,283 | $ | 6,283 | ||||
The Company makes pension plan contributions that are sufficient
to fund its actuarially determined costs, generally equal to the
minimum amounts required by the Employee Retirement Income
Security Act (ERISA). However, from time to time the Company may
make discretionary contributions in excess of the required
minimum amounts. The Company expects to contribute
$14.0 million to the pension plans in 2010.
For the three months ended March 31, 2010 and 2009, net
postretirement costs were comprised of the following:
Three Months |
||||||||
Ended |
||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Components of Net Postretirement Costs
|
||||||||
Service cost for benefits earned during the year
|
$ | 350 | $ | 335 | ||||
Interest cost on accumulated benefit obligation
|
283 | 256 | ||||||
Net amortization of unrecognized amounts
|
(19 | ) | (22 | ) | ||||
Net postretirement costs
|
$ | 614 | $ | 569 | ||||
8. | Transfers of Financial Assets |
PCA has an on-balance sheet securitization program for its trade
accounts receivable that is accounted for as a secured borrowing
under ASC 860, Transfers and Servicing. To
effectuate this program, the Company formed a wholly owned,
limited-purpose subsidiary, Packaging Credit Company, LLC
(PCC), which in turn formed a wholly owned,
bankruptcy-remote, special-purpose subsidiary, Packaging
Receivables Company, LLC (PRC), for the purpose of
acquiring receivables from PCC. Both of these entities are
included in the consolidated financial statements of the
Company. Under this program, PCC purchases on an ongoing basis
substantially all of the receivables of the Company and sells
such receivables to PRC. PRC and lenders established a
$150.0 million receivables-backed revolving credit facility
(Receivables Credit Facility) through which PRC
obtains funds to purchase receivables from PCC. The receivables
purchased by PRC are solely the property of PRC. In the event of
liquidation of PRC, the creditors of PRC would be entitled to
satisfy their claims from PRCs assets prior to any
distribution to PCC or the Company. Credit available under the
receivables credit facility is on a borrowing-base
11
Table of Contents
Packaging
Corporation of America
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2010
8. | Transfers of Financial Assets (Continued) |
formula. As a result, the full amount of the facility may not be
available at all times. At March 31, 2010,
$109.0 million was outstanding and included in
Short-term debt and current maturities of long-term
debt on the condensed consolidated balance sheet.
Approximately $260.4 million of accounts receivable at
March 31, 2010 have been sold to PRC and are included in
Accounts receivable, net of allowance for doubtful
accounts and customer deductions on the condensed
consolidated balance sheet.
9. | Derivative Instruments and Hedging Activities |
The Company records its derivatives in accordance with
ASC 815, Derivatives and Hedging. The guidance
requires the Company to recognize derivative instruments as
either assets or liabilities in the balance sheet at fair value.
The accounting for changes in the fair value of a derivative
depends on the intended use and designation of the derivative
instrument. For a derivative designated as a fair value hedge,
the gain or loss on the derivative is recognized in earnings in
the period of change in fair value together with the offsetting
gain or loss on the hedged item. For a derivative instrument
designated as a cash flow hedge, the effective portion of the
derivatives gain or loss is initially reported as a
component of accumulated other comprehensive income (loss)
(OCI) and is subsequently recognized in earnings
when the hedged exposure affects earnings. The ineffective
portion of the gain or loss is recognized in earnings.
Hedging
Strategy
PCA is exposed to certain risks relating to its ongoing
operations. When appropriate, the Company uses derivatives as a
risk management tool to mitigate the potential impact of certain
market risks. The primary risks managed by using derivative
financial instruments are interest rate and foreign currency
exchange rate risks. PCA does not enter into derivative
financial instruments for trading or speculative purposes.
Interest
Rate Risk
The Company has historically used derivative instruments to
manage interest costs and the risk associated with changing
interest rates. On June 12, 2003 and January 17, 2008,
in connection with contemplated issuances of ten-year debt
securities, PCA entered into interest rate protection agreements
with counterparties to protect against increases in the ten-year
U.S. Treasury Note rate. These treasury rates served as
references in determining the interest rates applicable to the
debt securities the Company issued in July 2003 and March 2008,
respectively. As a result of changes in the interest rates on
those treasury securities between the time PCA entered into the
agreements and the time PCA priced and issued the debt
securities, the Company: (1) received a payment of
$22.8 million from the counterparty upon settlement of the
2003 interest rate protection agreement on July 21, 2003;
and (2) made a payment of $4.4 million to the
counterparty upon settlement of the 2008 interest rate
protection agreement on March 25, 2008. The Company
recorded the settlements in accumulated other comprehensive
income (loss). As of March 31, 2010 and 2009, the Company
was not a party to any interest rate derivative instruments.
Foreign
Currency Exchange Rate Risk
In connection with the energy optimization project at its
Valdosta, Georgia mill, the Company entered into foreign
currency forward contracts on December 18, 2009 to hedge
its exposure to forecasted purchases of machinery and equipment
denominated in foreign currencies. The foreign currency forward
contracts were properly documented and designated as cash flow
hedges at inception. At March 31, 2010, the Company had a
notional value of $11.0 million in foreign currency
exchange contracts outstanding that will settle by the end of
2010.
12
Table of Contents
Packaging
Corporation of America
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2010
9. | Derivative Instruments and Hedging Activities (Continued) |
Derivative
Instruments
The fair value of the Companys foreign currency forward
contracts at March 31, 2010 was $0.6 million and is
included in Accrued liabilities on the
Companys condensed consolidated balance sheet at
March 31, 2010.
The impact of derivative instruments on the condensed
consolidated statements of income and OCI is as follows:
Amount of |
Amount of Gain (Loss) Reclassified |
|||||||||
Gain (Loss) |
from Accumulated OCI into Income |
|||||||||
Recognized |
(Effective Portion) | |||||||||
in OCI |
Three Months |
|||||||||
(Effective Portion) |
Ended |
|||||||||
March 31, 2010 | Location | March 31, 2010 | ||||||||
(In thousands) | ||||||||||
Interest rate contracts
|
$ | 4,050 | Interest expense, net | $ | 462 | |||||
Foreign currency exchange contracts
|
(811 | ) | Cost of sales | | ||||||
Total
|
$ | 3,239 | Total | $ | 462 | |||||
The $22.8 million settlement gain and $4.4 million
settlement loss on the interest rate contracts are being
amortized to interest expense over the lives of the respective
notes, resulting in a $1.8 million net gain to be
reclassified to interest expense during the next 12 months.
The loss on the foreign currency contracts will be reclassified
into earnings in the same periods during which the hedged
transaction affects earnings. There were no ineffective portions
of these contracts during the period.
10. | Financial Instruments |
The carrying and estimated fair values of PCAs financial
instruments at March 31, 2010 and December 31, 2009
were as follows:
March 31, 2010 | December 31, 2009 | |||||||||||||||
Carrying |
Carrying |
|||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
(In thousands) | (Audited) | |||||||||||||||
Cash and cash equivalents
|
$ | 197,601 | $ | 197,601 | $ | 260,727 | $ | 260,727 | ||||||||
Long-term debt
|
||||||||||||||||
5.75% senior notes
|
(398,886 | ) | (430,000 | ) | (398,800 | ) | (427,000 | ) | ||||||||
6.50% senior notes
|
(149,950 | ) | (161,250 | ) | (149,949 | ) | (163,500 | ) | ||||||||
Receivables credit facility
|
(109,000 | ) | (109,000 | ) | (109,000 | ) | (109,000 | ) | ||||||||
Capital lease obligation
|
(22,976 | ) | (22,976 | ) | (23,129 | ) | (23,129 | ) |
The fair value of cash and cash equivalents approximates its
carrying amounts due to the short-term nature of these financial
instruments.
The fair value of the receivables credit facility approximates
its carrying amount due to the variable interest-rate feature of
the instrument. The fair values of the senior notes are based on
quoted market prices. The fair value of the capital lease
obligation was estimated to not be materially different from the
carrying amount.
13
Table of Contents
Packaging
Corporation of America
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2010
11. | Fair Value Measurements |
The following presents information about PCAs assets and
liabilities measured at fair value and the valuation techniques
used to determine those fair values. The inputs used in the
determination of fair values are categorized according to the
fair value hierarchy as being Level 1, Level 2, or
Level 3. The valuation techniques are as follows:
(a) Market approach prices and other relevant
information generated by market transactions involving identical
or comparable assets or liabilities
(b) Cost approach amount that would be required
to replace the service capacity of an asset (replacement cost)
(c) Income approach techniques to convert
future amounts to a single present amount based on market
expectations (including present value techniques, option-pricing
and excess earnings models)
Assets and liabilities measured at fair value on a recurring
basis are as follows:
As of March 31, 2010 | ||||||||||||||||||||||||
Measurement Approach | As of December 31, 2009 | |||||||||||||||||||||||
Carrying |
Fair |
Valuation |
Carrying |
Fair |
||||||||||||||||||||
Value | Value | Level | Technique | Value | Value | |||||||||||||||||||
(In thousands) | (Audited) | |||||||||||||||||||||||
Current Assets
|
$ | 197,104 | $ | 197,104 | 1 | (a | ) | $ | 260,230 | $ | 260,230 | |||||||||||||
Money market funds
|
||||||||||||||||||||||||
Current Liabilities
|
||||||||||||||||||||||||
Foreign currency exchange contracts
|
599 | 599 | 2 | (a | ) | | |
The money market funds PCA invests in include funds comprised of
U.S. Treasury obligations or backed by U.S. Treasury
obligations. The Company measures the fair value of money market
funds based on quoted prices in active markets for identical
assets.
The Company calculates the fair value of its foreign currency
forward contracts using quoted currency spot rates plus or minus
forward points to calculate forward rates.
There were no changes in the Companys valuation techniques
used to measure fair values on a recurring basis as a result of
adopting ASC 820. PCA had no assets or liabilities that
were measured on a nonrecurring basis.
12. | Environmental Liabilities |
The potential costs for various environmental matters are
uncertain due to such factors as the unknown magnitude of
possible cleanup costs, the complexity and evolving nature of
governmental laws and regulations and their interpretations, and
the timing, varying costs and effectiveness of alternative
cleanup technologies. From 1994 through March 31, 2010,
remediation costs at the PCAs mills and corrugated plants
totaled approximately $3.2 million. As of March 31,
2010, the Company maintained an environmental reserve of
$9.3 million relating to
on-site
landfills and surface impoundments as well as ongoing and
anticipated remedial projects. Liabilities recorded for
environmental contingencies are estimates of the probable costs
based upon available information and assumptions. Because of
these uncertainties, PCAs estimates may change. As of the
date of this filing, the Company believes that it is not
reasonably possible that future environmental expenditures and
asset retirement obligations above the $9.3 million accrued
as of March 31, 2010, will have a material impact on our
financial condition, results of operations, or cash flows.
14
Table of Contents
Packaging
Corporation of America
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2010
13. | Alternative Fuel Mixture Tax Credits |
The Company generates black liquor as a by-product
of its pulp manufacturing process and uses it in a mixture with
diesel fuel to produce energy at its Counce, Tennessee,
Valdosta, Georgia, and Tomahawk, Wisconsin mills. Through
December 31, 2009, the U.S. Internal Revenue Code
provided a $0.50 per gallon refundable tax credit for taxpayers
who use alternative fuels in their trade or business. The
Company filed applications with the Internal Revenue Service
(the IRS) in December 2008 to be registered as an
alternative fuel mixer and received approval in April 2009. As a
registered alternative fuel mixer, the Company believes the use
of black liquor as an alternative fuel through December 31,
2009 qualified for this tax credit. The laws governing this
credit, as well as the taxability of benefits received from this
credit, are complex. After December 31, 2009, the
alternative fuel mixture credit for a mixture of black liquor
and diesel fuel used is no longer available. During the first
quarter of 2010, the Chief Counsels Office of the Internal
Revenue Service released Memorandum AM2010-001, which provided
clarification about the calculation of the alternative fuel
mixture credit for black liquor. As a result, during the first
quarter of 2010 the Company released the reserve of
$9.2 million that was established in 2009 due to the
ambiguity in the calculation of the credit. The Company has an
alternative fuel mixture tax credit receivable of
$137.0 million recorded on its balance sheet at
March 31, 2010.
14. | Subsequent Event |
The Company has evaluated subsequent events through the filing
date of this
Form 10-Q.
On April 14, 2010, PCA renewed its $150.0 million
receivables-backed credit facility described in Note 8,
which was scheduled to expire on April 14, 2010, to
March 1, 2011.
15
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
Packaging Corporation of America, or PCA, is the fifth largest
producer of containerboard and corrugated products in the United
States, based on production capacity. We produce a wide variety
of corrugated products ranging from basic corrugated shipping
containers to specialized packaging, such as wax-coated boxes
for the agriculture industry. We also have multi-color printing
capabilities to make high-impact graphics boxes and displays
that offer our customers more attractive packaging. Our
operating facilities and customers are located primarily in the
United States.
In analyzing our operating performance, we focus on the
following factors that affect our business and are important to
consider when reviewing our financial and operating results:
| containerboard and corrugated products demand; | |
| corrugated products and containerboard pricing and mix; | |
| cost trends and volatility for our major costs, including wood and recycled fiber, purchased fuels, electricity, labor and fringe benefits, and transportation costs; and | |
| cash flow from operations and capital expenditures. |
The cost to manufacture containerboard is dependent, in large
part, on the costs of wood fiber, recycled fiber, purchased
fuels, electricity and labor and fringe benefits. Excluding the
cost of containerboard, labor and benefits costs make up the
largest component of corrugated products manufactured
costs.
The market for containerboard is generally subject to changes in
the U.S. economy. Historically, supply and demand, as well
as industry-wide inventory levels, have influenced prices of
containerboard and corrugated products. In addition to
U.S. shipments, approximately 10% of domestically produced
containerboard has been exported annually for use in other
countries.
Industry
Conditions
The market for containerboard and corrugated products continued
to improve for both the industry and PCA in the first quarter of
2010. Industry-wide shipments of corrugated products increased
3.7% for the three months ended March 31, 2010 compared to
the same period in 2009, and first quarter 2010 industry
containerboard production increased 13.2% from the first quarter
of 2009. Industry containerboard export shipments increased
42.2% over the same time period in 2009. Industry published
prices for containerboard increased $50 per ton in January and
increased an additional $60 per ton in April. Reported industry
containerboard inventories at the end of March 2010 were at
their lowest level in nearly 30 years, approximately
344,000 tons below March 2009.
PCA
Operations Summary
During the first quarter of 2010, we produced approximately
569,000 tons of containerboard at our mills, of which about 83%
was consumed in our corrugated products manufacturing plants, 9%
was sold to domestic customers and 8% was sold in the export
market. In the first quarter, our production was reduced by a
total of 35,000 tons due to 20,000 tons of downtime from our
Counce, Tennessee annual mill maintenance outage, an additional
8,000 tons from our Valdosta, Georgia outage required to
complete preliminary tie-in work related to our major energy
project (which will be completed in the fourth quarter of 2011),
and 7,000 tons of downtime at our Counce, Tennessee mill from
wood shortages.
Our corrugated products manufacturing plants sold about
7.6 billion square feet (bsf) of corrugated
products during the first quarter of 2010. Corrugated products
shipments were up 14.2% compared to the first quarter of 2009
and essentially equaled our corrugated volume in the first
quarter of 2008. Containerboard volume sold to domestic and
export customers increased 48.0% for the three months ended
March 31, 2010 compared to the same period in 2009. Sales
prices of corrugated products were lower than the first quarter
of 2009 as a result of containerboard and corrugated products
price decreases that occurred throughout 2009. During the first
quarter, recycled fiber prices rose significantly and for the
quarter were nearly $100 per ton above first quarter 2009
levels. In addition, poor
16
Table of Contents
weather conditions in the U.S. South made access to wood
fiber very difficult, which resulted in the previously mentioned
downtime at our Counce, Tennessee linerboard mill and higher
wood costs. Purchased energy costs were lower than last
years first quarter with prices paid for fuels decreasing
by more than 20%.
Our earnings for the first quarter of 2010 benefitted from
income related to alternative fuel tax mixture credits generated
in 2009 ($9.2 million), which is fully described in
Note 13 to the condensed consolidated financial statements.
Looking ahead to the second quarter our earnings are expected to
be significantly higher than the first quarter from the full
realization of the first quarter containerboard and corrugated
products price increases. In addition, our April containerboard
price increase and May corrugated products price increases will
increase earnings; however, the majority of the impact from
these increases will not be fully realized until the third
quarter. Planned mill outages will reduce production by
approximately 35,000 tons and increase operating costs, which
will be partially offset by lower energy costs with warmer
weather and lower wood costs. Outside shipments of
containerboard are expected to be lower due to our low
containerboard inventory. Considering these items, we expect our
second quarter 2010 earnings to be significantly higher than our
first quarter earnings of $12.5 million, which excludes
income of $9.2 million related to the alternative fuel
mixture tax credits generated in 2009 and a $2.5 million
after tax charge from asset disposals related to the energy
optimization projects and the announced closure of the Ackerman,
Mississippi facility.
Results
of Operations
Three
Months Ended March 31, 2010 Compared to Three Months Ended
March 31, 2009
The historical results of operations of PCA for the three months
ended March 31, 2010 and 2009 are set forth below:
Three Months Ended |
||||||||||||
March 31, | ||||||||||||
2010 | 2009 | Change | ||||||||||
(In thousands) | ||||||||||||
Net sales
|
$ | 550,732 | $ | 512,378 | $ | 38,354 | ||||||
Income from operations
|
$ | 33,616 | $ | 49,607 | $ | (15,991 | ) | |||||
Interest expense, net
|
(8,723 | ) | (8,738 | ) | 15 | |||||||
Income before taxes
|
24,893 | 40,869 | (15,976 | ) | ||||||||
Provision for income taxes
|
(5,699 | ) | (15,193 | ) | 9,494 | |||||||
Net income
|
$ | 19,194 | $ | 25,676 | $ | (6,482 | ) | |||||
Net
Sales
Net sales increased by $38.4 million, or 7.5%, for the
three months ended March 31, 2010 from the comparable
period in 2009, primarily as a result of the impact of increased
sales volume of corrugated products and containerboard to third
parties ($81.0 million), partially offset by decreased
sales prices ($42.6 million). Sales prices decreased as a
result of published industry containerboard price decreases and
corrugated products price decreases throughout 2009.
Corrugated products shipments were up 14.2% compared to the
first quarter of 2009 and on per-workday basis increased 12.4%.
The percentage increase, on a
shipments-per-workday
basis, was lower due to one more workday in the first quarter of
2010 (63 days), those days not falling on a weekend or
holiday, than the first quarter of 2009 (62 days).
Containerboard volume sold to domestic and export customers was
48.0% higher for the three months ended March 31, 2010
compared to the three months ended March 31, 2009.
Containerboard mill production for the three months ended
March 31, 2010 was 569,000 tons compared to 515,000 tons
during the same period in 2009, up 54,000 tons due to the
market-related downtime taken during the first quarter of 2009,
partially offset by planned maintenance and wood fiber shortage
outages taken in first quarter 2010.
17
Table of Contents
Income
from Operations
Income from operations decreased by $16.0 million, or
32.2%, for the three months ended March 31, 2010 compared
to the three months ended March 31, 2009, primarily due to
lower sales prices ($42.6 million), increased fiber costs
($15.7 million), charges related to the closure of the
Ackerman, Mississippi wood products facility ($2.0 million)
and asset disposals required for our major energy project at our
Counce, Tennessee and Valdosta, Georgia linerboard mills
($2.0 million). Partially offsetting these items was
increased containerboard and corrugated products sales volume
($26.1 million), decreased energy ($6.7 million) and
chemical costs ($3.0 million) in addition to income related
to alternative fuel tax mixture credits generated in 2009
($9.2 million), which is fully described in Note 13 to
the condensed consolidated financial statements.
Excluding the alternative fuel mixture tax credit, the charges
related to the announced Ackerman, Mississippi wood products
facility sawmill closure and the asset disposals related to the
major mill energy project, income from operations decreased
$21.3 million, or 42.9% primarily attributable to the items
described above.
Gross profit decreased $23.2 million, or 21.1%, for the
three months ended March 31, 2010 from the comparable
period in 2009. Gross profit as a percentage of net sales
decreased from 21.5% of net sales in the three months ended
March 31, 2009 to 15.8% of net sales in the current quarter
due primarily to decreased prices.
Selling and administrative expenses increased $1.0 million,
or 2.2%, for the three months ended March 31, 2010 compared
to the same period in 2009, as a result of increased public
warehousing costs ($0.5 million) related to increased
customer requirements and increased costs for travel
($0.2 million) and relocation ($0.2 million).
Corporate overhead decreased $0.8 million, or 6.0%, for the
three months ended March 31, 2010 compared to the same
period in 2009, primarily attributable to a decrease in salary
expense due to the timing of incentive compensation
($1.1 million).
Other expense for the three months ended March 31, 2010
increased $1.9 million or 50.7% compared to the first
quarter of 2009, primarily due to the charge related to the
Ackerman, Mississippi sawmill closure ($2.0 million).
Interest
Expense, Net and Income Taxes
Net interest expense decreased by 0.2% for the three months
ended March 31, 2010 from the three months ended
March 31, 2009.
PCAs effective tax rate was 22.9% for the three months
ended March 31, 2010 and 37.2% for the comparable period in
2009. The effective tax rate in 2010 varies from the
U.S. federal statutory tax rate of 35% principally due to
the impact of the alternative fuel mixture tax credit, state and
local income taxes, and the domestic manufacturers
deduction. The Company had no material changes to its uncertain
tax positions under ASC 740, Income Taxes,
during the first three months of 2010.
Liquidity
and Capital Resources
The following table presents a summary of our cash flows for the
periods presented:
Three Months Ended |
||||||||||||
March 31, | ||||||||||||
2010 | 2009 | Change | ||||||||||
(In thousands) | ||||||||||||
Net cash provided by (used for):
|
||||||||||||
Operating activities
|
$ | 14,504 | $ | 50,679 | $ | (36,175 | ) | |||||
Investing activities
|
(64,262 | ) | (29,310 | ) | (34,952 | ) | ||||||
Financing activities
|
(13,368 | ) | (30,743 | ) | 17,375 | |||||||
Net decrease in cash and cash equivalents
|
$ | (63,126 | ) | $ | (9,374 | ) | $ | (53,752 | ) | |||
18
Table of Contents
Operating
Activities
Net cash provided by operating activities for the three months
ended March 31, 2010 was $14.5 million compared to
$50.7 million for the three months ended March 31,
2009, a decrease of $36.2 million, or 71.4%. Net income,
excluding the income from the alternative fuel mixture tax
credits of $9.2 million (described in Note 13 to the
financial statements included in this report) and the
$2.5 million charge from asset disposals related to the
mill energy projects and the announced closure of Ackerman, was
$12.5 million for the first three months of 2010 compared
to $25.7 million for the comparable period in 2009, a
decrease of $13.2 million that reduced net cash provided by
operating activities. This was partially offset by a higher
deferred tax provision in 2010 of $11.5 million.
Additionally, requirements for operating assets and liabilities
were higher by $34.1 million in 2010 compared to 2009. This
was primarily due to higher accounts receivable levels of
$32.4 million as a result of the higher sales volumes in
2010 previously described. Cash requirements for operating
activities are subject to PCAs operating needs, the timing
of collection of receivables and payments of payables and
expenses, and seasonal fluctuations in the Companys
operations.
Investing
Activities
Net cash used for investing activities for the three months
ended March 31, 2010 increased $35.0 million, or
119.2%, to $64.3 million, compared to the three months
ended March 31, 2009. The increase was primarily related to
higher additions to property, plant and equipment of
$35.2 million, which included $39.7 million for the
major energy optimization projects, during the three months
ended March 31, 2010 compared to the same period in 2009.
Financing
Activities
Net cash used for financing activities totaled
$13.4 million for the three months ended March 31,
2010, a decrease of $17.4 million, or 56.5%, compared to
the same period in 2009. The difference was primarily
attributable to lower common stock dividends paid of
$15.3 million during the first three months of 2010
compared to the same period in 2009.
PCAs primary sources of liquidity are net cash provided by
operating activities, borrowings under PCAs revolving
credit facility, and additional borrowings under PCAs
receivables credit facility. As of March 31, 2010, PCA had
$172.2 million in unused borrowing capacity under its
existing credit agreements, net of the impact on this borrowing
capacity of $18.8 million of outstanding letters of credit.
Currently, PCAs primary uses of cash are for operations,
capital expenditures, debt service and declared common stock
dividends, which it expects to be able to fund from these
sources.
The following table provides the outstanding balances and the
weighted average interest rates as of March 31, 2010 for
PCAs revolving credit facility, the receivables credit
facility, and the senior notes:
Projected |
||||||||||||
Balance at |
Weighted |
Annual |
||||||||||
March 31, |
Average |
Cash Interest |
||||||||||
Borrowing Arrangement | 2010 | Interest Rate | Payments | |||||||||
(In thousands) | ||||||||||||
Revolving Credit Facility
|
$ | | N/A | N/A | ||||||||
Receivables Credit Facility
|
109,000 | 1.96 | % | $ | 2,133 | |||||||
53/4% Senior
Notes (due August 1, 2013)
|
400,000 | 5.75 | 23,000 | |||||||||
61/2% Senior
Notes (due March 15, 2018)
|
150,000 | 6.50 | 9,750 | |||||||||
Total
|
$ | 659,000 | 5.29 | % | $ | 34,883 | ||||||
The above table excludes unamortized debt discount of
$1.2 million at March 31, 2010. It also excludes from
the projected annual cash interest payments, the non-cash income
from the annual amortization of the $22.8 million received
in July 2003 and the non-cash expense from the annual
amortization of the $4.4 million paid in March 2008 to
settle the treasury locks related to the
53/4% senior
notes due 2013 and
61/2% senior
notes due 2018. The amortization is being recognized over the
terms of the
53/4% senior
notes due 2013 and
61/2% senior
notes due 2018 and is included in interest expense, net.
19
Table of Contents
On April 14, 2010, PCA extended its $150.0 million
receivables-backed credit facility through March 1, 2011.
The instruments governing PCAs indebtedness contain
financial and other covenants that limit, among other things,
the ability of PCA and its subsidiaries to:
| enter into sale and leaseback transactions, | |
| incur liens, | |
| incur indebtedness at the subsidiary level, | |
| enter into certain transactions with affiliates, or | |
| merge or consolidate with any other person or sell or otherwise dispose of all or substantially all of the assets of PCA. |
These limitations could limit corporate and operating activities.
In addition, PCA must maintain minimum net worth and maximum
debt to total capitalization and minimum interest coverage
ratios under the revolving credit facility. A failure to comply
with the restrictions contained in the revolving credit facility
could lead to an event of default, which could result in an
acceleration of any outstanding indebtedness
and/or
prohibit PCA from drawing on the revolving credit facility. Such
an acceleration may also constitute an event of default under
the senior notes indentures and the receivables credit facility.
As of March 31, 2010, PCA was in compliance with these
covenants.
PCA currently expects to incur capital expenditures of about
$300.0 million in 2010, including up to $176.0 million
for major energy optimization projects at its Counce and
Valdosta mills. The remaining $124.0 million in
expenditures will be used primarily for maintenance capital,
cost reduction, business growth and environmental compliance. As
of March 31, 2010, PCA spent $63.1 million for capital
expenditures and had committed to spend an additional
$275.0 million in the remainder of 2010 and beyond.
PCA believes that net cash generated from operating activities,
available cash reserves and alternative fuel mixture tax credit
receivable, and available borrowings under its committed credit
facilities and available capital through access to capital
markets will be adequate to meet its liquidity and capital
requirements, including payments of any declared common stock
dividends, for the foreseeable future. As its debt or credit
facilities become due, PCA will need to repay, extend or replace
such facilities, which will be subject to future economic
conditions and financial, business and other factors, many of
which are beyond PCAs control.
Market
Risk and Risk Management Policies
PCA is exposed to the impact of interest rate changes and
changes in the market value of its financial instruments. PCA
periodically enters into derivatives in order to minimize these
risks, but not for trading purposes. For a discussion of
derivatives and hedging activities, see Note 9 to
PCAs condensed consolidated financial statement included
elsewhere in this report.
The interest rates on approximately 84% of PCAs debt are
fixed. A one percent increase in interest rates related to
variable rate debt would have resulted in an increase in
interest expense and a corresponding decrease in income before
taxes of $1.1 million annually. In the event of a change in
interest rates, management could take actions to mitigate its
exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects,
the sensitivity analysis assumes no changes in PCAs
financial structure.
Environmental
Matters
PCA is subject to, and must comply with, a variety of federal,
state and local environmental laws, particularly those relating
to air and water quality, waste disposal and the cleanup of
contaminated soil and groundwater. The most significant of these
laws affecting the Company are:
| Resource Conservation and Recovery Act (RCRA); | |
| Clean Water Act (CWA); |
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| Clean Air Act (CAA); | |
| The Emergency Planning and Community Right-to-Know-Act (EPCRA); | |
| Toxic Substance Control Act (TSCA); and | |
| Safe Drinking Water Act (SDWA). |
PCA believes that it is currently in material compliance with
these and all applicable environmental rules and regulations.
Because environmental regulations are constantly evolving, the
Company has incurred, and will continue to incur, costs to
maintain compliance with these and other environmental laws. PCA
works diligently to anticipate and budget for the impact of
applicable environmental regulations, and does not currently
expect that future environmental compliance obligations will
materially affect its business or financial condition.
Impact of
Inflation
PCA does not believe that inflation has had a material impact on
its financial position or results of operations during the
three-month periods ending March 31, 2010 and 2009.
Off-Balance
Sheet Arrangements
PCA does not have any off-balance sheet arrangements as of
March 31, 2010 that would require disclosure under SEC
FR-67, Disclosure in Managements Discussion and
Analysis About Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations.
Critical
Accounting Policies and Estimates
Managements discussion and analysis of PCAs
financial condition and results of operations are based upon the
Companys consolidated financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On an ongoing
basis, PCA evaluates its estimates, including those related to
bad debts, inventories, intangible assets, pensions and other
postretirement benefits, income taxes, contingencies and
litigation. PCA bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
PCA has included in its Annual Report on
Form 10-K
for the year ended December 31, 2009, a discussion of its
critical accounting policies which it believes affect its more
significant judgments and estimates used in the preparation of
its consolidated financial statements. PCA has not made any
changes in any of these critical accounting policies during the
first three months of 2010.
Forward-Looking
Statements
Some of the statements in this Quarterly Report on
Form 10-Q,
and in particular, statements found in Managements
Discussion and Analysis of Financial Condition and Results of
Operations, that are not historical in nature are
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are
often identified by the words will,
should, anticipate, believe,
expect, intend, estimate,
hope, or similar expressions. These statements
reflect managements current views with respect to future
events and are subject to risks and uncertainties. There are
important factors that could cause actual results to differ
materially from those in forward-looking statements, many of
which are beyond our control. These factors, risks and
uncertainties include the following:
| the impact of general economic conditions; | |
| containerboard and corrugated products general industry conditions, including competition, product demand and product pricing; |
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| fluctuations in wood fiber and recycled fiber costs; | |
| fluctuations in purchased energy costs; | |
| the possibility of unplanned outages or interruptions at our principal facilities; and | |
| legislative or regulatory actions or requirements, particularly concerning environmental or tax matters. |
Our actual results, performance or achievement could differ
materially from those expressed in, or implied by, these
forward-looking statements, and accordingly, we can give no
assurances that any of the events anticipated by the
forward-looking statements will transpire or occur, or if any of
them do occur, what impact they will have on our results of
operations or financial condition. In view of these
uncertainties, investors are cautioned not to place undue
reliance on these forward-looking statements. We expressly
disclaim any obligation to publicly revise any forward-looking
statements that have been made to reflect the occurrence of
events after the date hereof. For a discussion of other factors,
risks and uncertainties that may affect our business, see
Item 1A. Risk Factors included in our Annual Report on
Form 10-K
for the year ended December 31, 2009.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
For a discussion of market risks related to PCA, see
Part I, Item 2, Managements Discussion and
Analysis of Financial Condition and Results of
Operations Market Risk and Risk Management
Policies in this Quarterly Report on
Form 10-Q.
Item 4. | Controls and Procedures. |
PCA maintains disclosure controls and procedures (as defined in
Rule 13a-15(e)
of the Securities Exchange Act of 1934) that are designed
to provide reasonable assurance that information required to be
disclosed in PCAs filings under the Securities Exchange
Act is recorded, processed, summarized and reported within the
periods specified in the rules and forms of the SEC and that
such information is accumulated and communicated to PCAs
management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Prior to filing this report, PCA completed an evaluation under
the supervision and with the participation of PCAs
management, including PCAs Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of PCAs disclosure controls and procedures as of
March 31, 2010. The evaluation of PCAs disclosure
controls and procedures included a review of the controls
objectives and design, PCAs implementation of the controls
and the effect of the controls on the information generated for
use in this report. Based on this evaluation, PCAs Chief
Executive Officer and Chief Financial Officer concluded that
PCAs disclosure controls and procedures were effective at
the reasonable assurance level as of March 31, 2010.
During the quarter ended March 31, 2010, there were no
changes in internal controls over financial reporting that have
materially affected, or are reasonably likely to materially
affect, PCAs internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. | Legal Proceedings. |
PCA is a party to various legal actions arising in the ordinary
course of our business. These legal actions cover a broad
variety of claims spanning our entire business. As of the date
of this filing, we believe it is not reasonably possible that
the resolution of these legal actions will, individually or in
the aggregate, have a material adverse effect on our financial
condition, results of operations or cash flows.
Item 1A. | Risk Factors |
There have been no material changes to the risk factors
disclosed in Item 1A. Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2009.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
The Company did not repurchase any of its stock in the first
quarter of 2010.
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. |
10 | .1 | Amendment No. 2 to Amended and Restated Credit and Security Agreement, dated as of April 14, 2010, among Packaging Receivables Company, LLC, Packaging Credit Company, LLC, YC SUSI Trust and Bank of America, National Association (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on April 15, 2010). | ||
31 | .1 | Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31 | .2 | Certification of Chief Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32 | .1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
32 | .2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
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/ Paul
T. Stecko
|
Chairman and Chief Executive Officer
By: |
/s/ Richard
B. West
|
Senior Vice President and Chief Financial Officer
Date: May 5, 2010
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