<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
</TABLE>
Commission file number: 1-15399
PACKAGING CORPORATION OF AMERICA
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 36-4277050
(State or other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
1900 WEST FIELD COURT
LAKE FOREST, ILLINOIS 60045
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(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 March 31, 2000, the Registrant had outstanding 105,850,000 shares of
common stock, par value $0.01 per share.
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<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PACKAGING CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 24,284 $ 10,300
Accounts receivable, (net of allowance for doubtful
accounts of $4,882 and $4,681 as of March 31, 2000 and
December 31, 1999, respectively)........................ 218,729 208,356
Notes receivable.......................................... 655 698
Inventories............................................... 160,346 163,858
Prepaid expenses and other current assets................. 11,352 11,304
Deferred income taxes..................................... 7,027 8,411
---------- ----------
TOTAL CURRENT ASSETS.................................. 422,393 402,927
Timber and timberlands, at cost, less depletion............. 187,077 202,582
Property, plant and equipment, net.......................... 1,447,344 1,460,024
Intangible assets, (net of accumulated amortization of
$1,211 and $1,154 as of March 31, 2000 and December 31,
1999, respectively)....................................... 1,475 1,532
Other long-term assets...................................... 98,567 86,143
---------- ----------
TOTAL ASSETS.......................................... $2,156,856 $2,153,208
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 70 $ 829
Accounts payable.......................................... 114,464 127,365
Accrued interest.......................................... 26,672 13,633
Accrued liabilities....................................... 61,702 85,643
---------- ----------
TOTAL CURRENT LIABILITIES............................. 202,908 227,470
Long-term liabilities:
Long-term debt............................................ 1,316,213 1,329,202
Deferred income taxes..................................... 80,967 69,804
Other liabilities......................................... 7,332 7,511
---------- ----------
TOTAL LONG-TERM LIABILITIES........................... 1,404,512 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 March 31, 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 March 31, 2000 and
December 31, 1999, respectively)...................... 1,058 946
Additional paid in capital.............................. 510,565 384,549
Retained earnings....................................... 37,813 31,204
---------- ----------
TOTAL STOCKHOLDERS' EQUITY............................ 549,436 416,699
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $2,156,856 $2,153,208
========== ==========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
PACKAGING CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
GROUP (NOTE 1)
--------------
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- --------------
<S> <C> <C>
Net sales................................................... $ 456,127 $ 391,279
Cost of sales............................................... (350,145) (332,117)
--------- ---------
Gross profit.............................................. 105,982 59,162
Impairment loss............................................. -- (230,112)
Selling and administrative expenses......................... (26,519) (28,759)
Other income (expense), net................................. 2,867 (1,377)
Corporate overhead.......................................... (9,589) (13,283)
--------- ---------
Income (loss) before interest, taxes and extraordinary
item.................................................... 72,741 (214,369)
Interest expense, net....................................... (30,242) (221)
--------- ---------
Income (loss) before taxes and extraordinary item......... 42,499 (214,590)
Provision for income taxes.................................. (17,253) 84,615
--------- ---------
Income (loss) before extraordinary item................... 25,246 (129,975)
Extraordinary item, net of tax.............................. -- (6,327)
--------- ---------
Net income (loss)........................................... 25,246 (136,302)
Preferred dividends and accretion of preferred stock
issuance costs............................................ (18,637) --
--------- ---------
Net income (loss) available to common shareholders.......... $ 6,609 $(136,302)
========= =========
Weighted average common shares outstanding:
Basic..................................................... 101,583 94,600
Diluted................................................... 104,856 94,600
Basic earnings per common share:
Net income (loss) before extraordinary item............... $ 0.07 $ (1.37)
Extraordinary item........................................ -- (0.07)
--------- ---------
Net income (loss) per common share........................ $ 0.07 $ (1.44)
========= =========
Diluted earnings per common share:
Net income (loss) before extraordinary item............... $ 0.06 $ (1.37)
Extraordinary item........................................ -- (0.07)
--------- ---------
Net income (loss) per common share........................ $ 0.06 $ (1.44)
========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
PACKAGING CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
GROUP (NOTE 1)
---------------
THREE MONTHS ENDED MARCH 31,
------------------------------
2000 1999
(IN THOUSANDS) --------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 25,246 $(136,302)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization.............. 35,808 28,360
Amortization of financing costs....................... 1,694 --
Extraordinary loss--early debt extinguishment......... -- 6,327
Amortization of deferred gain......................... -- (493)
Increase in deferred income taxes..................... 12,547 9,782
Undistributed earnings of affiliated companies........ (96) (96)
(Gain) loss on disposal of property, plant and
equipment........................................... (635) 230,112
Other, net............................................ (179) 196
Changes in components of working capital:
(Increase) decrease in current assets--
Accounts receivable................................. (10,330) (23,985)
Inventories......................................... 3,512 (864)
Prepaid expenses and other.......................... (448) 8,973
Increase (decrease) in current liabilities--
Accounts payable.................................... (12,900) 18,817
Accrued liabilities................................. (8,835) 679
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 45,384 141,506
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (19,606) (19,460)
Other long term assets.................................... (1,724) (354)
Proceeds from disposals of property, plant and
equipment............................................... 1,508 668
Other, net................................................ 82 3,773
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES............ (19,740) (15,373)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................ (13,756) (27,550)
Redemption of preferred stock............................. (124,432) --
Proceeds from initial public offering..................... 126,528 --
Decrease in interdivision account......................... -- (105,652)
Working capital transactions with Tenneco and affiliated
companies--
Decrease in receivables from affiliated companies..... -- 187
Increase in factored receivables...................... -- 888
Increase in accounts payable to affiliated
companies........................................... -- 5,994
--------- ---------
NET CASH USED FOR FINANCING ACTIVITIES............ (11,660) (126,133)
--------- ---------
NET INCREASE IN CASH........................................ 13,984 --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 10,300 1
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 24,284 $ 1
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 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 March 31, 2000, and the
Group's (i.e., predecessor's) combined financial statements for the three months
ended March 31, 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 March 31, 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.
4
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 2000
2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
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 period from January 1, 1999 through March 31,
1999 has been calculated using the historical earnings of the Group 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. For the period presented, basic and diluted
earnings per share are the same because there are not potentially dilutive
securities.
The following table sets forth the computation of basic and diluted income
per common share for the period January 1, 2000 through March 31, 2000.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C>
Numerator:
Net income available to common stockholders............... $ 6,609
Denominator:
Basic common shares outstanding........................... 101,583
Effect of dilutive securities:
Stock options............................................. 2,344
Non-vested stock.......................................... 929
--------
Dilutive common shares outstanding.......................... 104,856
Basic income per common share............................... $ 0.07
Diluted income per common share............................. $ 0.06
</TABLE>
5
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 2000
4. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(IN THOUSANDS) (AUDITED)
<S> <C> <C>
Raw materials.................................. $ 76,186 $ 74,881
Work in progress............................... 5,235 5,021
Finished goods................................. 56,947 56,049
Supplies and materials......................... 46,317 49,605
-------- --------
Inventories at FIFO cost....................... 184,685 185,556
Excess of FIFO over LIFO cost.................. (24,339) (21,698)
-------- --------
Inventory, net................................. $160,346 $163,858
======== ========
</TABLE>
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. 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 $126.5 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.
6. 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).
6
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 2000
7. 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 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.
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(IN THOUSANDS) (AUDITED)
<S> <C> <C>
Current assets................................. $ 85 $12,703
Non-current assets............................. 405 14,115
---- -------
Total assets................................. 490 26,818
Current liabilities............................ 31 2,902
Non-current liabilities........................ 168 4,414
---- -------
Total liabilities............................ 199 7,316
---- -------
Net assets..................................... $291 $19,502
==== =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------------
2000 1999
(IN THOUSANDS) -------- --------
<S> <C> <C>
Net sales................................................... $-- $8,293
Pre-tax profit.............................................. 13 138
Net income (loss)........................................... 8 (369)
</TABLE>
7
<PAGE>
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 ended March 31, 1999 include the pro forma results of the Group through
March 31, 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. Historically, prices for
containerboard have reflected changes in containerboard supply that result from
capacity additions and reductions, as well as changes in inventory levels.
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. It generally
corresponds to changes in the rate of growth in the U.S. economy. Exports
represent about 20% of total linerboard shipments.
Although export shipments in 1999 were lower than in 1998, the supply/demand
balance improved throughout 1999 and the average price of linerboard increased
approximately 25% during 1999. Several major containerboard manufacturers
announced production curtailments and mill shutdowns during 1999, and only
minimal capacity additions have been publicly announced through 2002 according
to the American Forest & Paper Association. However, industry oversupply
conditions could return or economic conditions could deteriorate in the future.
Pulp & Paper Week, in its March 20, 2000 publication, reported that major
containerboard producers had implemented average price increases for linerboard
and corrugating medium of $50 per ton and $60 per ton, respectively. According
to Pulp & Paper Week, after giving effect to the price increases, average prices
in March, 2000 for linerboard and corrugating medium were 23% and 39% higher,
respectively, than March, 1999 prices.
8
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO PRO FORMA THREE MONTHS ENDED MARCH
31, 1999
NET SALES
Net sales increased by $64.8 million, or 16.6%, for the three months ended
March 31, 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.
According to Pulp & Paper Week, an industry publication, average linerboard
and semi-chemical medium prices for 42 1b. Liner-East and 26 lb. Medium-East,
which are representative benchmark grades, were $447 and $427, respectively, per
ton for the three months ended March 31, 2000. This compares to $368 and $305,
respectively, per ton for the three months ended March 31, 1999.
INCOME BEFORE INTEREST EXPENSE AND TAXES
Operating income increased by $49.9 million, or 218.6%, for the three months
ended March 31, 2000 compared to the pro forma three months ended March 31,
1999. The increase in operating income was attributable to the price increases
described above, and reduced corporate overhead and selling and administrative
expenses.
Gross margins increased $43.3 million, or 69.0%, for the three months ended
March 31, 2000 from the comparable pro forma period in 1999. Gross margins
increased to 23.2% of sales in the first quarter of 2000 from 16.0% of sales in
the pro forma first quarter of 1999 due to the price increases described above.
Selling and administrative expenses decreased $1.1 million, or 3.8%, for the
three months ended March 31, 2000 compared to the pro forma three months ended
March 31, 1999. The decrease was primarily the result of a reduction in external
consulting expenses related to software development and the elimination of Year
2000 remediation expenses in the first quarter of 2000.
Corporate overhead for the three months ended March 31, 2000 decreased by
$3.7 million, or 27.8%, 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., in the first quarter of
1999 and reduced overhead expenses incurred by PCA as a stand-alone entity in
the first quarter of 2000.
INTEREST EXPENSE AND INCOME TAXES
Interest expense decreased by $9.2 million, or 23.2%, for the three months
ended March 31, 2000 from the pro forma three months ended March 31, 1999,
primarily as a result of voluntary prepayments the company made on its three
term loans under the senior credit facility.
PCA's effective tax rate was 40.6% for the three months ended March 31, 2000
and 38.6% for the comparable period in 1999. The tax rate is higher than the
federal statutory rate of 35% 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 $15.5 million for the three months ended March 31, 2000 compared to
the pro forma three months ended March 31, 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
9
<PAGE>
of these non-recurring charges reduced net income available to common
shareholders by $16.3 million or $0.16 per diluted common share for the three
months ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities increased $17.7 million, or
64.2%, for the three months ended March 31, 2000 from the comparable pro forma
period in 1999. The increase was primarily due to increases in net income and
depreciation, depletion and amortization.
Net cash used for investing activities increased $0.2 million, or 1.2%, for
the three months ended March 31, 2000 compared to the pro forma three months
ended March 31, 1999, primarily as a result of increased capital expenditures.
Net cash used for financing activities was $11.7 million for the three
months ended March 31, 2000. In the pro forma three months ended March 31, 1999
no cash was used for financing activities. PCA's first quarter, 2000 payments
consisted of voluntary prepayments on its three term loans under the senior
credit facility.
As of March 31, 2000, PCA had commitments for capital expenditures of
$73.4 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 March 31, 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 $126.5 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.
10
<PAGE>
The following table provides the interest rate as of March 31, 2000 for each
of the term loans and the revolving credit facility.
<TABLE>
<CAPTION>
BORROWING ARRANGEMENT INTEREST RATE
- --------------------- -------------
<S> <C>
Term Loan A................................................. 8.14%
Term Loan B................................................. 9.39%
Term Loan C................................................. 9.64%
Revolver:
Revolver-Eurodollar....................................... N/A
Revolver-Base Rate........................................ N/A
</TABLE>
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 December 2001 through 2005. The Term Loan B must be repaid in quarterly
installments from June 2002 through 2007. The Term Loan C must be repaid in
quarterly installments from June 2002 through 2008. The revolving credit
facility will terminate in 2005.
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; and
- First Quarter, 2000--$13.0 million.
As a result of these voluntary prepayments, no quarterly installments are
due on the term loans until December 2001. As of March 31, 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, 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, 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 is permitted under the terms of the senior credit facility and the notes
indenture to use net proceeds from timberland sales in excess of $500.0 million,
if any, to redeem up to $100.0 million of the notes or to pay a dividend on or
repurchase its equity interests. As of May 1, 2000 PCA has received net
11
<PAGE>
proceeds of $263.3 million from timberland sales. PCA may use the net proceeds
of a timberland sale to redeem not more than 35% of the aggregate principal
amount of notes issued and outstanding under the notes indenture, excluding
notes held by PCA and its subsidiaries.
PCA must make the redemption within 60 days of the timberland sale. In the
case of the notes, PCA must pay a redemption price equal to 109.625% of the
principal amount of notes to be redeemed plus accrued and unpaid interest and
liquidated damages, if any, to the date of redemption.
PCA may only use the net proceeds of a timberland sale to pay a dividend or
repurchase its equity interest, if PCA's debt to cash flow ratio at the time of
redemption, repayment or repurchase, after giving effect to the redemption,
repayment or repurchase, the application of the proceeds of the timberland sale,
and any increase in fiber, stumpage or similar costs as a result of the
timberland sale, would be no greater than 4.5 to 1. The senior credit facility
imposes similar restrictions on the ability of PCA to use the net proceeds of a
timberland sale to make these redemptions, repayments or repurchases.
PCA believes that cash generated from operations will be adequate to meet
its anticipated debt service requirements, capital expenditures and working
capital needs for the next 12 months, and that cash generated from operations
and amounts available under the revolving credit facility will be adequate to
meet its anticipated debt service requirements, capital expenditures and working
capital needs for the foreseeable future. There can be no assurance, however,
that PCA's business will generate sufficient cash flow from operations or that
future borrowings will be available under the senior credit facility or
otherwise to enable it to service its indebtedness, including the senior credit
facility, and the notes, to retire the notes when required or to make
anticipated capital expenditures. PCA's future operating performance and its
ability to service or refinance the notes, to service, extend or refinance the
senior credit facility and to pay cash dividends, will be subject to future
economic conditions and to financial, business and other factors, many of which
are beyond PCA's control.
MARKET RISK AND RISK MANAGEMENT POLICIES
Historically, PCA has not had any material market risk due to the fact that
its debt financing and risk management activities were conducted by Pactiv or
Tenneco. As a result of the Transactions, PCA is exposed to the impact of
interest rate changes and changes in the market value of its financial
instruments. PCA periodically enters into derivative instruments in order to
minimize these risks, but not for trading purposes.
Under the senior credit facility, PCA is required to maintain interest
collar agreements for 50% of its outstanding term loan balances for a minimum of
two years after the initial borrowing. These LIBOR interest rate collar
agreements protect against rising interest rates while simultaneously
guaranteeing minimum interest rates. The notional amount of these collars was
$385.0 million as of March 31, 2000, resulting in the interest rates on
approximately 50% of PCA's term loan obligations being capped. The weighted
average floor of the interest rate collar agreements is 4.97% 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 $7.7 million
annually until the LIBOR rate exceeds the ceiling rate. At that point, only 50%
of the debt would result in additional interest rate expense. As of March 31,
2000, the interest rate on the term loans was based on a weighted average LIBOR
rate of 6.1%. 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
12
<PAGE>
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.
YEAR 2000 ISSUE
We believe we have completed the remediation or replacement of critical IT
and non-IT systems, and as of March 31, 2000, Year 2000 issues have not had and
are not expected to have a material adverse effect on our results of operations.
However, it is possible that latent Year 2000 issues could arise in the future.
If this happens, we will implement our contingency plans in an effort to
minimize the impact of the problem. Our total cost to address Year 2000 issues
was approximately $4.5 million. No material expenditures were made in the
quarter ended March 31, 2000 or are expected to be made in the future. We
expensed these costs as they were incurred, except in instances where we
determined that replacing existing computer systems or equipment was more
effective and efficient, particularly where additional functionality is
available.
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.
13
<PAGE>
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.
14
<PAGE>
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 complaints name ten major
linerboard manufacturers as defendants. The actions seek 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.
PCA used approximately $124.4 million of the net proceeds received by it
from the initial public offering completed on February 2, 2000, to redeem all of
its outstanding 12 3/8% senior exchangeable preferred stock due 2010, on March
3, 2000. PCA used the remaining net proceeds for senior credit facility
principal repayments.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On January 26, 2000, PCA's stockholders acted by written consent to:
- elect the board of directors of PCA; and
- approve and ratify the actions of the board of directors in connection
with the appointment of Ernst & Young LLP as the independent public
auditors of the company for the year ending December 31, 2000.
Stockholders holding 91,767,200 shares of common stock, or 97.0% of the
shares then outstanding, consented to the actions taken by written consent. PCA
did not solicit or receive consents from the holders of the remaining shares of
common stock.
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:
<TABLE>
<S> <C> <C>
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K:
None.
15
<PAGE>
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.
<TABLE>
<S> <C> <C>
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: May 12, 2000
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000075677
<NAME> PACKAGING CORPORATION OF AMERICA
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 24,284
<SECURITIES> 42
<RECEIVABLES> 224,266
<ALLOWANCES> 4,882
<INVENTORY> 160,346
<CURRENT-ASSETS> 422,393
<PP&E> 2,505,233
<DEPRECIATION> 870,812
<TOTAL-ASSETS> 2,156,856
<CURRENT-LIABILITIES> 202,908
<BONDS> 1,316,213
0
0
<COMMON> 1,058
<OTHER-SE> 548,378
<TOTAL-LIABILITY-AND-EQUITY> 2,156,856
<SALES> 456,127
<TOTAL-REVENUES> 456,127
<CGS> 350,145
<TOTAL-COSTS> 350,145
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 506
<INTEREST-EXPENSE> 30,242
<INCOME-PRETAX> 42,499
<INCOME-TAX> 17,253
<INCOME-CONTINUING> 25,246
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<CHANGES> 0
<NET-INCOME> 25,246
<EPS-BASIC> .07
<EPS-DILUTED> .06
</TABLE>
