10-Q 1 a10-q.txt 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 1-15399 ------------------------ PACKAGING CORPORATION OF AMERICA (Exact Name of Registrant as Specified in its Charter) DELAWARE 36-4277050 (State or other Jurisdiction (IRS Employer Identification No.) of Incorporation or Organization) 1900 WEST FIELD COURT 60045 LAKE FOREST, ILLINOIS (Zip Code) (Address of Principal Executive Offices)
(847) 482-3000 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Applicable only to corporate issuers: As of June 30, 2000, the Registrant had outstanding 105,850,000 shares of common stock, par value $0.01 per share. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. PACKAGING CORPORATION OF AMERICA CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 2000 1999 ----------- ------------ (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 4,377 $ 10,300 Accounts receivable, (net of allowance for doubtful accounts of $5,149 and $4,681 as of June 30, 2000 and December 31, 1999, respectively)........................ 229,376 208,356 Notes receivable.......................................... 618 698 Inventories............................................... 155,244 163,858 Prepaid expenses and other current assets................. 17,480 11,304 Deferred income taxes..................................... 7,604 8,411 ---------- ---------- TOTAL CURRENT ASSETS.................................... 414,699 402,927 Timber and timberlands, at cost, less depletion............. 185,984 202,582 Property, plant and equipment, net.......................... 1,452,456 1,460,024 Intangible assets, (net of accumulated amortization of $1,267 and $1,154 as of June 30, 2000 and December 31, 1999, respectively)....................................... 1,419 1,532 Other long-term assets...................................... 100,201 86,143 ---------- ---------- TOTAL ASSETS............................................ $2,154,759 $2,153,208 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................... $ 42,111 $ 829 Accounts payable.......................................... 110,041 127,365 Accrued interest.......................................... 13,685 13,633 Accrued liabilities....................................... 66,562 85,643 ---------- ---------- TOTAL CURRENT LIABILITIES............................... 232,399 227,470 Long-term liabilities: Long-term debt............................................ 1,233,113 1,329,202 Deferred income taxes..................................... 99,105 69,804 Other liabilities......................................... 7,593 7,511 ---------- ---------- TOTAL LONG-TERM LIABILITIES............................. 1,339,811 1,406,517 Mandatorily redeemable preferred stock (liquidation preference $100 per share, 3,000,000 shares authorized, 0 shares and 1,058,094 shares issued and outstanding as of June 30, 2000 and December 31, 1999, respectively)........ -- 102,522 Stockholders' equity: Junior preferred stock (liquidation preference $1.00 per share, 100 shares authorized, issued and outstanding)... -- -- Common stock (par value $.01 per share, 300,000,000 shares authorized, 105,850,000 shares and 94,600,000 shares issued and outstanding as of June 30, 2000 and December 31, 1999, respectively)................................. 1,058 946 Additional paid in capital.................................. 510,401 384,549 Retained earnings........................................... 71,090 31,204 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY.............................. 582,549 416,699 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $2,154,759 $2,153,208 ========== ==========
See notes to consolidated financial statements. 1 PACKAGING CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
GROUP (NOTE 1) -------------- THREE MONTHS APRIL 1, 1999 APRIL 12, 1999 ENDED THROUGH THROUGH JUNE 30, 2000 APRIL 11, 1999 JUNE 30, 1999 ------------- -------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales............................................ $ 472,700 $ 41,903 $ 373,035 Cost of sales........................................ (345,357) (35,366) (297,055) ---------- --------- ---------- Gross profit....................................... 127,343 6,537 75,980 Selling and administrative expenses.................. (28,231) (1,825) (25,136) Other expense, net................................... (800) (830) (266) Corporate allocations / overhead..................... (9,775) (1,607) (5,188) ---------- --------- ---------- Income before interest and taxes................... 88,537 2,275 45,390 Interest expense, net................................ (32,151) -- (34,079) ---------- --------- ---------- Income before taxes................................ 56,386 2,275 11,311 Provision for income taxes........................... (23,109) (899) (4,545) ---------- --------- ---------- Net income........................................... 33,277 1,376 6,766 Preferred dividends and accretion of preferred stock issuance costs..................................... -- -- (2,678) ---------- --------- ---------- Net income available to common shareholders.......... $ 33,277 $ 1,376 $ 4,088 ========== ========= ========== Weighted average common shares outstanding: Basic.............................................. 105,850 94,600 93,582 Diluted............................................ 108,193 94,600 95,397 Basic earnings per common share: Net income per common share........................ $ 0.31 $ 0.01 $ 0.04 ========== ========= ========== Diluted earnings per common share: Net income per common share........................ $ 0.31 $ 0.01 $ 0.04 ========== ========= ==========
See notes to consolidated financial statements. 2 PACKAGING CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF INCOME
GROUP (NOTE 1) -------------- SIX MONTHS JAN 1, 1999 APRIL 12, 1999 ENDED THROUGH THROUGH JUNE 30, 2000 APRIL 11, 1999 JUNE 30, 1999 ------------- -------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED) Net sales.......................................... $ 928,827 $ 433,182 $ 373,035 Cost of sales...................................... (695,542) (367,483) (297,055) --------- ----------- --------- Gross profit..................................... 233,285 65,699 75,980 Impairment loss.................................... -- (230,112) -- Selling and administrative expenses................ (54,710) (30,584) (25,136) Other income (expense), net........................ 2,067 (2,207) (266) Corporate allocations / overhead................... (19,364) (14,890) (5,188) --------- ----------- --------- Income (loss) before interest, taxes and extraordinary item............................. 161,278 (212,094) 45,390 Interest expense, net.............................. (62,393) (221) (34,079) --------- ----------- --------- Income (loss) before taxes and extraordinary item........................................... 98,885 (212,315) 11,311 Provision for income taxes......................... (40,362) 83,716 (4,545) --------- ----------- --------- Income (loss) before extraordinary item.......... 58,523 (128,599) 6,766 Extraordinary item, net of tax..................... -- (6,327) -- --------- ----------- --------- Net income (loss).................................. 58,523 (134,926) 6,766 Preferred dividends and accretion of preferred stock issuance costs............................. (18,637) -- (2,678) --------- ----------- --------- Net income (loss) available to common shareholders..................................... $ 39,886 $ (134,926) $ 4,088 ========= =========== ========= Weighted average common shares outstanding: Basic............................................ 103,716 94,600 93,582 Diluted.......................................... 106,037 94,600 95,397 Basic earnings per common share: Net income (loss) before extraordinary item...... $ 0.38 $ (1.36) $ 0.04 Extraordinary item............................... -- (0.07) -- --------- ----------- --------- Net income (loss) per common share............... $ 0.38 $ (1.43) $ 0.04 ========= =========== ========= Diluted earnings per common share: Net income (loss) before extraordinary item...... $ 0.38 $ (1.36) $ 0.04 Extraordinary item............................... -- (0.07) -- --------- ----------- --------- Net income (loss) per common share............... $ 0.38 $ (1.43) $ 0.04 ========= =========== =========
See notes to consolidated financial statements. 3 PACKAGING CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF CASH FLOW
GROUP (NOTE 1) -------------- SIX MONTHS JAN. 1, 1999 APRIL 12, 1999 ENDED THROUGH THROUGH JUNE 30, 2000 APRIL 11, 1999 JUNE 30, 1999 ------------- -------------- -------------- (IN THOUSANDS) (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................ $ 58,523 $ (134,926) $ 6,766 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization............... 70,886 30,905 33,652 Amortization of financing costs........................ 3,479 -- 1,596 Extraordinary loss--early debt extinguishment.......... -- 6,327 -- Amortization of deferred gain.......................... -- (493) -- Increase in deferred income taxes...................... 30,108 9,782 4,320 Undistributed earnings of affiliated companies......... (244) (106) 394 (Gain) / loss on disposal of property, plant and equipment............................................ (419) 230,112 -- Other, net............................................. 82 56 -- Changes in components of working capital: (Increase) decrease in current assets-- Accounts receivable.................................. (20,940) (8,183) (4,621) Inventories.......................................... 8,614 (7,514) 5,418 Prepaid expenses and other........................... (6,576) 4,201 (289) Increase (decrease) in current liabilities-- Accounts payable..................................... (17,324) 26,996 45,800 Accrued liabilities.................................. (15,756) (3,508) 56,190 --------- ----------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES.......... 110,433 153,649 149,226 --------- ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment............... (57,025) (1,128,255) (23,419) Other long term assets................................... (4,615) 2,284 (1,249) Proceeds from disposals of property, plant and equipment.............................................. 1,508 825 -- Payment to Pactiv for contribution of assets to PCA...... -- -- (246,500) Other, net............................................... 233 4,001 (1,385) --------- ----------- --------- NET CASH USED FOR INVESTING ACTIVITIES............. (59,899) (1,121,145) (272,553) --------- ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from preferred stock............................ -- -- 96,500 Redemption of preferred stock............................ (124,432) -- -- Proceeds from long-term debt issued...................... 436 1,760,000 9,000 Payments on long-term debt............................... (58,825) (27,550) (84,000) Proceeds from initial public offering.................... 126,364 -- -- Financing costs.......................................... -- -- (87,819) PCA Holdings equity investment........................... -- -- 236,500 Decrease in interdivision account........................ -- (616,769) -- Working capital transactions with Tenneco and affiliated companies-- Decrease in receivables from affiliated companies...... -- 1,353 -- Increase in factored receivables....................... -- (150,099) -- Increase in accounts payable to affiliated companies... -- 561 -- --------- ----------- --------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES....................................... (56,457) 967,496 170,181 --------- ----------- --------- NET INCREASE (DECREASE) IN CASH............................ (5,923) 0 46,854 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 10,300 1 1 --------- ----------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 4,377 $ 1 $ 46,855 ========= =========== =========
See notes to consolidated financial statements. 4 PACKAGING CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 1. BASIS OF PRESENTATION On April 12, 1999, Pactiv Corporation ("Pactiv"), formerly known as Tenneco Packaging Inc., sold its containerboard and corrugated packaging products business (the "Group") to Packaging Corporation of America ("PCA") for $2.2 billion. The Group is the predecessor to PCA. The $2.2 billion purchase price paid to Pactiv for the Group consisted of $246.5 million in cash, the assumption of $1.8 billion of debt incurred by Pactiv immediately prior to the closing, and the issuance of a 45% common equity interest in PCA. PCA Holdings, an entity organized and controlled by Madison Dearborn Partners, LLC, acquired the remaining 55% common equity interest in PCA for $236.5 million in cash. These events are collectively referred to as the "Transactions." Because significant veto rights were retained by Pactiv, the carryover basis of accounting was used and no goodwill was recognized. Fees of $23.8 million were incurred as part of the Transactions and were recorded as a charge to stockholders' equity. On August 25, 1999, PCA Holdings and Pactiv agreed that the acquisition consideration should be reduced as a result of a post-closing price adjustment by $20.0 million. On September 23, 1999, Pactiv paid PCA $20.7 million, representing the $20.0 million adjustment and $0.7 million of interest through the date of payment by Pactiv. PCA's consolidated financial statements as of June 30, 2000 and for the period from April 12, 1999 to June 30, 1999, are unaudited but include all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of such financial statements. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results during the period ended June 30, 2000 are not necessarily indicative of the results that may be expected for the period ending December 31, 2000. As a result of the Group's relationship with Pactiv, the combined consolidated balance sheets and the related combined consolidated income statements are not necessarily indicative of what actually would have occurred had the Group been a stand-alone entity. Additionally, these combined financial statements are not necessarily indicative of the future financial position or results of operations of PCA. 2. SUMMARY OF ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts in the financial statements and the accompanying notes. Actual results could differ from those estimates. SEGMENT INFORMATION PCA is primarily engaged in one line of business: the manufacture and sale of packaging materials, boxes and containers for industrial and consumer markets. No single customer accounts for more than 10% of total revenues. PCA has no foreign operations. 5 PACKAGING CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) JUNE 30, 2000 2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS In December, 1999, the Securities and Exchange Commission's staff issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The SAB defines basic criteria that must be met before revenue can be recognized. This SAB is effective October 1, 2000. The Company believes that application of this SAB is not expected to have a material impact on PCA's financial position or results of operations. In June, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes new accounting and reporting standards requiring that all derivative instruments (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or a liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. This statement is effective for all fiscal years beginning after June 15, 2000. The adoption of this new standard is not expected to have a significant effect on PCA's financial position or results of operations. 3. EARNINGS PER SHARE Earnings per share for the 1999 periods has been calculated using the historical earnings of the Group and PCA, and the number of shares resulting from the April 12, 1999 transaction (430,000 common shares), as adjusted to reflect the 220-for-one stock split which became effective on October 19, 1999. 6 PACKAGING CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) JUNE 30, 2000 3. EARNINGS PER SHARE (CONTINUED) The following tables set forth the computation of basic and diluted income per common share for the periods presented. THREE MONTHS ENDED
GROUP (NOTE 1) -------------- THREE MONTHS APRIL 1, 1999 APRIL 12, 1999 ENDED THROUGH THROUGH JUNE 30, 2000 APRIL 11, 1999 JUNE 30, 1999 ------------- -------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Net income available to common stockholders........ $ 33,277 $ 1,376 $ 4,088 Denominator: Basic common shares outstanding.................... 105,850 94,600 93,582 Effect of dilutive securities: Stock options...................................... 2,343 -- 797 Non-vested stock................................... -- -- 1,018 -------- ------- ------- Dilutive common shares outstanding................... 108,193 94,600 95,397 Basic income per common share........................ $ 0.31 $ 0.01 $ 0.04 Diluted income per common share...................... $ 0.31 $ 0.01 $ 0.04
SIX MONTHS ENDED
GROUP (NOTE 1) -------------- SIX MONTHS JAN 1, 1999 APRIL 12, 1999 ENDED THROUGH THROUGH JUNE 30, 2000 APRIL 11, 1999 JUNE 30, 1999 -------------- -------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Net income available to common stockholders...... $39,886 $(134,926) $4,088 Denominator: Basic common shares outstanding.................. 103,716 94,600 93,582 Effect of dilutive securities: Stock options.................................... 1,856 -- 797 Non-vested stock................................. 465 -- 1,018 ------- --------- ------ Dilutive common shares outstanding................. 106,037 94,600 95,397 Basic income per common share...................... $ 0.38 $ (1.43) $ 0.04 Diluted income per common share.................... $ 0.38 $ (1.43) $ 0.04
7 PACKAGING CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) JUNE 30, 2000 4. INVENTORIES The components of inventories are as follows:
JUNE 30, 2000 DECEMBER 31, 1999 ------------- ----------------- (AUDITED) (IN THOUSANDS) Raw materials................................... $ 72,923 $ 74,881 Work in progress................................ 5,179 5,021 Finished goods.................................. 58,132 56,049 Supplies and materials.......................... 47,800 49,605 -------- -------- Inventories at FIFO cost........................ 184,034 185,556 Excess of FIFO over LIFO cost................... (28,790) (21,698) -------- -------- Inventory, net.................................. $155,244 $163,858 ======== ========
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. LONG-TERM DEBT
JUNE 30, 2000 DECEMBER 31, 1999 ------------- ----------------- (AUDITED) (IN THOUSANDS) Senior credit facility-- Term Loan A, interest at prime (9.50% at June 30, 2000) +0.75%, due in varying quarterly installments through June 30, 2006........................................ $ 577,041 $ 296,148 Term Loan B, interest at prime (9.50% at June 30, 2000) + 1.00%, due in varying quarterly installments through June 30, 2007........................................ 147,959 241,426 Term Loan C, interest at LIBOR (5.95% at December 31, 1999) + 3.50%, due in varying quarterly installments through April 12, 2008........................................ -- 241,426 Senior subordinated notes, interest at 9 5/8% payable semi-annually, due April 1, 2009...... 550,000 550,000 Other........................................... 224 1,031 ---------- ---------- Total......................................... 1,275,224 1,330,031 Less: Current portion........................... (42,111) (829) ---------- ---------- Total long-term debt.......................... $1,233,113 $1,329,202 ========== ==========
8 PACKAGING CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) JUNE 30, 2000 5. LONG-TERM DEBT (CONTINUED) On June 29, 2000, the Company completed the refinancing of its $735.0 million senior secured term debt and $150.0 million senior secured revolving credit facility. The new debt structure was originally at the prime rate until July 5, 2000, when the base rate loans were converted into eurodollar loans. The new refinancing lowered the Company's margins over LIBOR on Term Loans A and B and eliminated Term Loan C, resulting in an average margin reduction of about 100 basis points. The Company incurred approximately $3.4 million in bank syndication and arrangement fees, which were rolled into the current debt structure. As of June 30, 2000, annual payments for debt during the next five years and thereafter are: $42,111; $100,247; $106,539; $116,539; $123,288 and $786,500. 6. STOCKHOLDERS' EQUITY On February 2, 2000, PCA completed an initial public offering of its common stock in which Pactiv Corporation sold 35,000,000 of its 41,160,240 shares of common stock in PCA, and PCA issued an additional 11,250,000 shares. The net proceeds to PCA were approximately $126.4 million at an initial public offering price of $12.00 per share, after deducting underwriting discounts and offering expenses. PCA used substantially all of the net proceeds to redeem all outstanding shares of its 12 3/8% senior exchangeable preferred stock due 2010 (1,058,094 shares as of March 3, 2000) at a redemption price of 112.375% of its liquidation preference, plus accrued and unpaid dividends through March 3, 2000, the date of redemption. The total paid to redeem the senior exchangeable preferred stock was $124.4 million, which included $5.5 million of accrued and unpaid dividends. On April 12, 1999, PCA issued 100 shares of Junior Preferred Stock, liquidation preference of $1.00 per share. Holders of the Junior Preferred Stock are not entitled to receive any dividends or distributions and had, prior to February 2, 2000, the right to elect one director to PCA's board of directors. Shares of Junior Preferred Stock may not be reissued after being reacquired in any manner by PCA. 7. EXTRAORDINARY LOSS During the first quarter of 1999, the Group extinguished $16.6 million of debt related to mill assets. In connection with that extinguishment an extraordinary loss of $10.6 million was recorded ($6.3 million, net of the related tax effects). 8. SUMMARIZED COMBINED FINANCIAL INFORMATION ABOUT GUARANTOR SUBSIDIARIES The following is summarized aggregated financial information for Dahlonega Packaging Corporation, Dixie Container Corporation, PCA Hydro, Inc., PCA Tomahawk Corporation and PCA Valdosta Corporation, each of which was a wholly-owned subsidiary of Pactiv and included in the Group's combined financial statements. In connection with the sale of the Group to PCA, each of these companies became subsidiaries of PCA and fully, unconditionally, jointly and severally guaranteed $550 million in senior subordinated notes issued by PCA in connection with the Transactions. Effective January 1, 2000, Dahlonega Packaging Corporation, PCA Tomahawk Corporation and PCA Valdosta Corporation were 9 PACKAGING CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) JUNE 30, 2000 8. SUMMARIZED COMBINED FINANCIAL INFORMATION ABOUT GUARANTOR SUBSIDIARIES (CONTINUED) merged into PCA. Separate financial statements of the guarantor subsidiaries are not presented because, in the opinion of management, such financial statements are not material to investors.
JUNE 30, 2000 DECEMBER 31, 1999 -------------- ------------------ (IN THOUSANDS) (AUDITED) Current assets.................................. $105 $12,703 Non-current assets.............................. 397 14,115 ---- ------- Total assets.................................. 502 26,818 Current liabilities............................. 32 2,902 Non-current liabilities......................... 171 4,414 ---- ------- Total liabilities............................. 203 7,316 ---- ------- Net assets...................................... $299 $19,502 ==== =======
SIX MONTHS ENDED JUNE 30, ------------------- 2000 1999 (IN THOUSANDS) -------- -------- Net sales................................................... $-- $11,641 Pre-tax profit.............................................. 25 1,349 Net income.................................................. 15 128
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW On April 12, 1999, Pactiv Corporation, formerly known as Tenneco Packaging Inc., sold its containerboard and corrugated packaging products business to Packaging Corporation of America for $2.2 billion. We refer to that business in this report as the Group. The $2.2 billion purchase price paid to Pactiv consisted of $246.5 million in cash, the assumption of $1.8 billion of debt incurred by Pactiv immediately prior to the closing, and the issuance of a 45% common equity interest in PCA. PCA Holdings, an entity organized and controlled by Madison Dearborn Partners, LLC, acquired the remaining 55% common equity interest in PCA for $236.5 million in cash. We refer to these events in this report as the Transactions. From its formation in January 1999 through the closing of the Transactions on April 12, 1999, PCA did not have any significant operations. Accordingly, the historical financial results for the periods prior to April 12, 1999 described below are those of the Group. The historical financial results for the three months and six months ended June 30, 1999 include the pro forma results of the Group through April 11, 1999, assuming the Transactions had occurred on January 1, 1999. The Group operated as a division of Pactiv, and did not operate as a separate, stand-alone entity. As a result, the historical financial information of the Group does not reflect what the Group's financial position and results of operations would have been had the Group operated as a separate, stand-alone entity during the periods presented. PCA's acquisition of the Group as part of the Transactions was accounted for using historical values for the contributed assets. Purchase accounting was not applied because, under the applicable accounting guidance, a change of control was deemed not to have occurred as a result of the participating veto rights held by Pactiv after the closing of the Transactions under the terms of a stockholders agreement. GENERAL The market for containerboard is highly cyclical. Containerboard demand is dependent upon both domestic demand for corrugated packaging products and linerboard export activity. Domestic demand for corrugated packaging products is the more stable factor. Exports represent about 20% of total linerboard shipments. Pulp & Paper Week, an industry publication, in its July 24, 2000 publication, reported that average linerboard and semi-chemical medium prices for 42 lb. Liner-East and 26 lb. Medium-East, which are representative benchmark grades, remained at $475 and $460 per ton, respectively, for the fifth consecutive month. According to Pulp & Paper Week, average prices in July, 2000 for linerboard and corrugating medium were 12% and 15% higher, respectively, than July, 1999 prices. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO PRO FORMA THREE MONTHS ENDED JUNE 30, 1999 NET SALES Net sales increased by $57.8 million, or 13.9%, for the three months ended June 30, 2000 from the comparable pro forma period in 1999. The increase was primarily the result of increases in sales prices of containerboard and corrugated products and, to a lesser extent, increases in shipments of corrugated products and containerboard to external third parties. Corrugated products volume increased 0.7% for the three months ended June 30, 2000 from the comparable period in 1999. Containerboard volume to external domestic and export customers increased 5.9%. 11 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 $475 and $460, respectively, per ton for the three months ended June 30, 2000. This compares to $388 and $338, respectively, per ton for the three months ended June 30, 1999. INCOME BEFORE INTEREST EXPENSE AND TAXES Operating income increased by $40.1 million, or 82.6%, for the three months ended June 30, 2000 compared to the pro forma three months ended June 30, 1999. The increase in operating income was primarily attributable to the price increases described above. Gross margins increased $44.1 million, or 53.0%, for the three months ended June 30, 2000 from the comparable pro forma period in 1999. Gross margins increased to 26.9% of sales in the second quarter of 2000 from 20.1% of sales in the pro forma second quarter of 1999 due to the price increases described above. Selling and administrative expenses increased $1.4 million, or 5.2%, for the three months ended June 30, 2000 compared to the pro forma three months ended June 30, 1999. The increase was primarily the result of increased salary expense and other costs. Corporate overhead for the three months ended June 30, 2000 increased by $3.0 million, or 43.9%, from the comparable pro forma period in 1999. The pro forma second quarter 1999 expenses were lower as a result of some prior period transaction costs being reimbursed by Pactiv to PCA during the quarter. INTEREST EXPENSE AND INCOME TAXES Interest expense decreased by $6.7 million, or 17.1%, for the three months ended June 30, 2000 from the pro forma three months ended June 30, 1999, primarily as a result of voluntary prepayments PCA made on its term loans under the senior credit facility. PCA's effective tax rate was 41.0% for the three months ended June 30, 2000 and 40.3% for the comparable pro forma period in 1999. The tax rate is higher than the federal statutory rate of 35.0% due to state income taxes. SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO PRO FORMA SIX MONTHS ENDED JUNE 30, 1999 NET SALES Net sales increased by $122.6 million, or 15.2%, for the six months ended June 30, 2000 from the comparable pro forma period in 1999. The increase was primarily the result of increases in sales prices of containerboard and corrugated products and, to a lesser extent, increases in shipments of corrugated products and containerboard to external third parties. Corrugated products volume increased 1.4% for the six months ended June 30, 2000 from the comparable period in 1999. Containerboard volume to external domestic and export customers increased 14.0%. 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 $461 and $443, respectively, per ton for the six months ended June 30, 2000. This compares to $378 and $322, respectively, per ton for the six months ended June 30, 1999. 12 INCOME BEFORE INTEREST EXPENSE AND TAXES Operating income increased by $90.0 million, or 126.2%, for the six months ended June 30, 2000 compared to the pro forma six months ended June 30, 1999. The increase in operating income was primarily attributable to the price increases described above. Gross margins increased $86.6 million, or 59.1%, for the six months ended June 30, 2000 from the comparable pro forma period in 1999. Gross margins increased to 25.1% of sales in the first half of 2000 from 18.2% of sales in the pro forma first half of 1999 due primarily to the price increases described above. Selling and administrative expenses decreased $0.4 million, or 0.8%, for the six months ended June 30, 2000 compared to the pro forma six months ended June 30, 1999. The decrease was primarily the result of the elimination of Year 2000 remediation expenses in the first half of 2000. Corporate overhead for the six months ended June 30, 2000 decreased by $0.7 million, or 3.6%, from the comparable pro forma period in 1999. The reduction reflects the difference between the overhead charged to the Group by Pactiv and Pactiv's parent at the time, Tenneco Inc., from January 1, 1999 through April 11, 1999 and reduced overhead expenses incurred by PCA as a stand-alone entity in the first six months of 2000, partially offset by lower expenses during the pro forma six months ended June 30, 1999 due to the reimbursement to PCA of some prior period transaction costs described above. INTEREST EXPENSE AND INCOME TAXES Interest expense decreased by $15.8 million, or 20.2%, for the six months ended June 30, 2000 from the pro forma six months ended June 30, 1999, primarily as a result of voluntary prepayments the Company made on its term loans under the senior credit facility. PCA's effective tax rate was 40.8% for the six months ended June 30, 2000 and 36.2% for the comparable pro forma period in 1999. The tax rate is higher than the federal statutory rate of 35.0% due to state income taxes. PREFERRED STOCK DIVIDENDS AND ACCRETION OF PREFERRED STOCK ISSUANCE COSTS Preferred stock dividends and accretion of preferred stock issuance costs increased $12.4 million for the six months ended June 30, 2000 compared to the pro forma six months ended June 30, 1999. The increase was attributable to PCA's redemption of its 12 3/8% senior exchangeable preferred stock on March 3, 2000 at a redemption price of 112.375% of its liquidation preference and the write-off of the remaining preferred stock issuance costs. The redemption fee amounted to $13.1 million and the write-off of the remaining preferred stock issuance costs was recorded as a $3.2 million non-cash charge. The total of these non-recurring charges reduced net income available to common shareholders by $16.3 million or $0.15 per diluted common share for the six months ended June 30, 2000. LIQUIDITY AND CAPITAL RESOURCES Cash flow provided by operating activities increased $21.5 million, or 24.2%, for the six months ended June 30, 2000 from the comparable pro forma period in 1999. The increase was primarily due to increases in net income, deferred income taxes and depreciation, depletion and amortization. The pro forma six months ended June 30, 1999 include adjustments to working capital, which reflect the retention of liabilities by Pactiv, in accordance with the terms of the sale of the business to PCA on April 12, 1999. Net cash used for investing activities increased $14.1 million, or 30.8%, for the six months ended June 30, 2000 compared to the pro forma six months ended June 30, 1999, primarily as a result of increased capital expenditures. 13 Net cash used for financing activities decreased $18.5 million, or 24.7%, for the six months ended June 30, 2000 from the comparable pro forma period in 1999. The decrease was primarily attributable to the difference between voluntary prepayments made on PCA's term loans under its senior credit facility during the second quarter of each year. As of June 30, 2000, PCA had commitments for capital expenditures of $67.9 million. PCA believes operating cash flow from continuing operations will be sufficient to fund these commitments. PCA's primary sources of liquidity are cash flow from operations and borrowings under PCA's revolving credit facility. PCA expects to be able to fund its debt service and capital expenditures, the primary uses of its cash, from these sources. PCA incurred substantial indebtedness in connection with the Transactions. On April 12, 1999, PCA had approximately $1.8 billion of indebtedness outstanding as compared to indebtedness of $17.6 million as of December 31, 1998. As of June 30, 2000, PCA's level of indebtedness had been reduced to approximately $1.3 billion through voluntary prepayments of its senior bank debt. PCA's significant debt service obligations could have material consequences to PCA's securityholders. Concurrently with the Transactions, PCA issued 9 5/8% senior subordinated notes and 12 3/8% senior exchangeable preferred stock and entered into a senior credit facility. The senior credit facility provided for three term loans in an aggregate amount of $1.2 billion and a revolving credit facility with up to $250.0 million in availability. Upon the closing of the Transactions, PCA borrowed the full amount under the term loans and $9.0 million under the revolving credit facility. Effective December 14, 1999, PCA elected to reduce its availability under the revolving credit facility from $250.0 million to $150.0 million. PCA completed an initial public offering of its common stock on February 2, 2000 in which Pactiv Corporation sold 35,000,000 of its 41,160,240 shares of common stock in PCA, and PCA issued an additional 11,250,000 shares. The net proceeds to PCA were approximately $126.4 million at an initial public offering price of $12.00 per share, after deducting the underwriting discounts and offering expenses. PCA used substantially all of the net proceeds to redeem all outstanding shares of its 12 3/8% senior exchangeable preferred stock, plus accrued and unpaid dividends through March 3, 2000, the date of redemption. PCA completed the refinancing of its $735.0 million senior secured term debt and $150.0 million senior secured revolving credit facility on June 29, 2000. The new term debt was originally borrowed at interest rates based on the prime rate. On July 5, 2000, the base rate loans were converted to eurodollar loans. Completion of the refinancing eliminated Term Loan C. The following table provides the interest rate as of July 5, 2000 for each of the term loans and the revolving credit facility.
BORROWING ARRANGEMENT INTEREST RATE --------------------- ------------- Term Loan A................................................. 8.50% Term Loan B................................................. 8.76% Revolver: Revolver-Eurodollar....................................... N/A Revolver-Base Rate........................................ N/A
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 March 2001 through June 2006. The Term Loan B must be repaid in quarterly installments from June 2002 through June 2007. The revolving credit facility will terminate in 2006. 14 Since April 12, 1999, PCA has made voluntary prepayments using proceeds from sales of its timberland or excess cash to permanently reduce its borrowings under the term loans in the following periods in the following amounts: - Second Quarter, 1999--$75.0 million; - Third Quarter, 1999--$25.0 million; - Fourth Quarter, 1999--$331.0 million; - First Quarter, 2000--$13.0 million; and - Second Quarter, 2000--$41.0 million. As a result of these voluntary prepayments, no quarterly installments are due on the term loans until March 2001. As of June 30, 2000, PCA had $150.0 million in availability and no borrowings outstanding under the revolving credit facility. The instruments governing PCA's indebtedness, including the senior credit facility and the indenture governing the notes, contain financial and other covenants that restrict, among other things, the ability of PCA and its subsidiaries to: - incur additional indebtedness, - pay dividends or make certain other restricted payments, - consummate certain asset sales, - incur liens, - enter into certain transactions with affiliates, - merge or consolidate with any other person or sell or otherwise dispose of all or substantially all of the assets of PCA, or - use proceeds from timberlands disposition for corporate uses other than to reduce debt. These limitations, together with the highly leveraged nature of PCA, could limit corporate and operating activities. PCA is considering the possible sale of additional timberland. PCA expects to use the proceeds, if any, from these sales to prepay term loans under the senior credit facility. PCA believes that cash generated from operations will be adequate to meet its anticipated debt service requirements, capital expenditures and working capital needs for the next 12 months, and that cash generated from operations and amounts available under the revolving credit facility will be adequate to meet its anticipated debt service requirements, capital expenditures and working capital needs for the foreseeable future. There can be no assurance, however, that PCA's business will generate sufficient cash flow from operations or that future borrowings will be available under the senior credit facility or otherwise to enable it to service its indebtedness, including the senior credit facility, and the notes, to retire the notes when required or to make anticipated capital expenditures. PCA's future operating performance and its ability to service or refinance the notes, to service, extend or refinance the senior credit facility and to pay cash dividends, will be subject to future economic conditions and to financial, business and other factors, many of which are beyond PCA's control. MARKET RISK AND RISK MANAGEMENT POLICIES As a result of the Transactions, PCA is exposed to the impact of interest rate changes and changes in the market value of its financial instruments. PCA periodically enters into derivative instruments in order to minimize these risks, but not for trading purposes. 15 Currently, PCA maintains two interest rate collar agreements. These LIBOR interest rate collar agreements protect against rising interest rates while simultaneously guaranteeing minimum interest rates. The notional amount of these collars was $358.8 million as of June 30, 2000, resulting in the interest rates on approximately 49.5% of PCA's term loan obligations being capped. The weighted average floor of the interest rate collar agreements is 4.96% and the weighted average ceiling is 6.75%. On January 18, 2000, PCA terminated $110.0 million of interest rate collar agreements and received $1.9 million. The senior credit facility also provides PCA with the right to lock-in LIBOR interest rates for any amount and for terms of one, two, three or six month periods. With approval of the lenders, PCA can lock-in LIBOR interest rates for either a two-week or twelve-month period. PCA's earnings are affected by changes in short-term interest rates as a result of borrowings under the term loans. If LIBOR interest rates for these borrowings increase one percent, PCA's interest expense would increase, and income before income taxes would decrease by approximately $3.7 million annually because the LIBOR rate exceeds the ceiling rate. Therefore, only 50.5% of the debt is subject to additional interest rate expense. As of July 5, 2000, the interest rate on the term loans was based on a weighted average LIBOR rate of 6.76%. The effect of the interest rate change to the fair market value of the outstanding debt is insignificant. This analysis does not consider any other impacts on fair value that could exist in such an interest rate environment. In the event of a change in interest rates, management could take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in PCA's financial structure. ENVIRONMENTAL MATTERS PCA is subject to, and must comply with, a variety of federal, state and local environmental laws, particularly those relating to air and water quality, waste disposal and the cleanup of contaminated soil and groundwater. Because environmental regulations are constantly evolving, PCA has incurred, and will continue to incur, costs to maintain compliance with those laws. In particular, the United States Environmental Protection Agency recently finalized the Cluster Rules, which govern pulp and paper mill operations, including those at the Counce, Filer City, Valdosta and Tomahawk mills. Over the next several years, the Cluster Rules will affect PCA's allowable discharges of air and water pollutants, and require PCA to spend money to ensure compliance with those new rules. As is the case with any industrial operation, PCA has, in the past, incurred costs associated with the remediation of soil or groundwater contamination, as required by the federal Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the federal "Superfund" law, and analogous state laws. Cleanup requirements arise with respect to properties PCA currently owns or operates, former facilities and off-site facilities where PCA has disposed of hazardous substances. Because liability under these laws is strict, meaning that liability is imposed without fault, joint and several, meaning that liability is imposed on each party without regard to contribution, and retroactive, PCA could receive notifications of cleanup liability in the future and this liability could be material. Under the terms of the contribution agreement entered into in connection with the Transactions, Pactiv agreed to retain all liability for all former facilities and all sites associated with pre-closing off-site waste disposal. Pactiv also retained environmentally impaired real property in Filer City, Michigan unrelated to current mill operations. IMPACT OF INFLATION PCA does not believe that inflation has had a material impact on its financial position or results of operations during the past three years. 16 FORWARD-LOOKING STATEMENTS Certain statements in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements include statements about our future financial condition, our industry and our business strategy. Statements that contain words such as "anticipate", "believe", "expect", "intend", "estimate", "hope" or similar expressions, are forward-looking statements. These forward-looking statements are based on the current expectations of PCA. Because forward-looking statements involve inherent risks and uncertainties, the plans, actions and actual results of PCA could differ materially. Among the factors that could cause plans, actions and results to differ materially from PCA's current expectations are those identified under the caption "Risk Factors" in PCA's Registration Statements on Form S-4 and Form S-1, each filed with the Securities and Exchange Commission and available at the SEC's website at "www.sec.gov". ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. For a discussion of market risks related to PCA, see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Market Risk and Risk Management Policies" in this Quarterly Report on Form 10-Q. 17 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. In May 1999, PCA was served with a complaint filed in the United States District Court for the Eastern District of Pennsylvania (WINOFF INDUSTRIES, INC., ET AL. V. STONE CONTAINER CORPORATION, ET AL.) alleging civil violations of Section 1 of the Sherman Act in connection with the pricing and production of linerboard from October 1, 1993 through November 30, 1995. The case was consolidated with other similar cases by the Judicial Panel on Multidistrict Litigation, all of which are now referred to as MDL 1261, IN RE LINERBOARD ANTITRUST LITIGATION. Plaintiffs purport to represent a nationwide class of purchasers of corrugated containers, and the complaint names ten major linerboard manufacturers as defendants. The action seeks treble damages for allegedly unlawful corrugated container price increases, plus attorneys' fees. PCA believes the allegations have no merit, is vigorously defending itself, and believes the outcome of this litigation should not have a material adverse effect on its financial condition or results of operations. PCA also is party to various legal actions arising in the ordinary course of its business. These legal actions cover a broad variety of claims spanning the 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: 10.1 Amended and Restated Credit Agreement dated as of April 12, 1999 and Amended and Restated as of June 29, 2000, among PCA, Various Lenders, J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc., as Co-Lead Arrangers and Joint Book Runners, Deutsche Bank Securities Inc., as Syndication Agent, Goldman Sachs Credit Partners L.P., as Documentation Agent, and Morgan Guaranty Trust Company of New York, as Administrative Agent. 27.1 Financial Data Schedule. (b) Reports on Form 8-K: None. 18 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 SECRETARY (PRINCIPAL FINANCIAL OFFICER AND AUTHORIZED OFFICER)
Date: August 11, 2000 19