e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended
June 30,
2011
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-15399
PACKAGING CORPORATION OF
AMERICA
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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36-4277050
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(State or other Jurisdiction
of
Incorporation or Organization)
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(IRS Employer Identification
No.)
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1900 West Field Court
Lake Forest, Illinois
(Address of Principal
Executive Offices)
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60045
(Zip
Code)
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(847) 482-3000
(Registrants telephone
number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for shorter period that the Registrant was
required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of July 29, 2011, the Registrant had outstanding
101,565,008 shares of common stock, par value $0.01 per
share.
PART I
FINANCIAL
INFORMATION
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Item 1.
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Financial
Statements.
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Packaging
Corporation of America
Condensed
Consolidated Balance Sheets
(Unaudited)
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June 30,
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December 31,
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2011
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2010
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(In thousands, except share and per share amounts)
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(Audited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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119,181
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$
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196,556
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Accounts receivable, net of allowance for doubtful accounts and
customer deductions of $4,498 and $5,413 as of June 30,
2011 and December 31, 2010, respectively
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331,249
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293,159
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Inventories
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226,521
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241,142
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Prepaid expenses and other current assets
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30,005
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16,952
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Federal and state income tax receivable
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3,587
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Deferred income taxes
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31,745
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50,232
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Total current assets
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742,288
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798,041
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Property, plant and equipment, net
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1,401,516
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1,337,986
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Goodwill
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53,603
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38,854
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Other intangible assets, net
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16,932
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10,975
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Other long-term assets
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44,842
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38,418
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Total assets
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$
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2,259,181
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$
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2,224,274
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Short-term debt and current maturities of long-term debt
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$
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109,000
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$
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109,000
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Capital lease obligations
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694
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670
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Accounts payable
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189,778
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154,130
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Dividends payable
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20,258
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15,351
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Accrued interest
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12,537
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12,598
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Federal and state income taxes payable
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2,601
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Accrued liabilities
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93,468
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111,208
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Total current liabilities
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425,735
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405,558
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Long-term liabilities:
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Long-term debt
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549,273
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549,099
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Capital lease obligations
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21,479
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21,832
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Deferred income taxes
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8,988
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9,190
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Pension and postretirement benefit plans
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101,988
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97,914
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Cellulosic biofuel tax reserve
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102,051
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102,051
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Other long-term liabilities
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28,462
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29,629
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Total long-term liabilities
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812,241
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809,715
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Stockholders equity:
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Common stock, par value $0.01 per share, 300,000,000 shares
authorized, 101,561,038 and 102,308,231 shares issued as of
June 30, 2011 and December 31, 2010, respectively
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1,016
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1,023
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Additional paid in capital
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331,301
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362,248
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Retained earnings
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726,208
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690,111
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Accumulated other comprehensive income (loss), net of tax:
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Unrealized gain on treasury locks, net
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7,121
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2,164
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Unrealized loss on foreign currency exchange contracts
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(405
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)
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(607
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Unfunded employee benefit obligations
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(44,036
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)
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(45,938
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)
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Total accumulated other comprehensive loss
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(37,320
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)
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(44,381
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)
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Total stockholders equity
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1,021,205
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1,009,001
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Total liabilities and stockholders equity
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$
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2,259,181
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$
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2,224,274
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See notes to condensed consolidated financial statements.
3
Packaging
Corporation of America
Condensed
Consolidated Statements of Income
(Unaudited)
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Three Months Ended
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June 30,
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2011
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2010
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(In thousands, except per share amounts)
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Net sales
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$
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665,481
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$
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615,459
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Cost of sales
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(528,580
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)
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(483,794
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)
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Gross profit
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136,901
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131,665
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Selling and administrative expenses
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(48,192
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)
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(44,653
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)
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Corporate overhead
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(16,352
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)
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(15,386
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)
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Other expense, net
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(4,498
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)
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(3,880
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)
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Income from operations
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67,859
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67,746
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Interest expense, net
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(6,321
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)
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(8,093
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)
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Income before taxes
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61,538
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59,653
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Provision for income taxes
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(22,170
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)
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(21,623
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)
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Net income
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$
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39,368
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$
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38,030
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Weighted average common shares outstanding:
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Basic
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100,094
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102,035
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Diluted
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101,128
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102,886
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Net income per common share:
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Basic
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$
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0.39
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$
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0.37
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Diluted
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$
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0.39
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$
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0.37
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Dividends declared per common share
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$
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0.20
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$
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0.15
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|
|
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|
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See notes to condensed consolidated financial statements.
4
Packaging
Corporation of America
Condensed
Consolidated Statements of Income
(Unaudited)
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Six Months Ended
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June 30,
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2011
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2010
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(In thousands, except per share amounts)
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Net sales
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$
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1,294,981
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$
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1,166,191
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Cost of sales
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(1,024,939
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)
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(947,727
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)
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Gross profit
|
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270,042
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|
|
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218,464
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Selling and administrative expenses
|
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|
(96,144
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)
|
|
|
(88,930
|
)
|
Corporate overhead
|
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|
(31,905
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)
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(28,016
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)
|
Alternative fuel mixture tax credits
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|
|
|
|
|
9,235
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|
Other expense, net
|
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|
(8,231
|
)
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|
|
(9,391
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)
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|
|
|
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Income from operations
|
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|
133,762
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101,362
|
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Interest expense, net
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(13,224
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)
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(16,816
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)
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|
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Income before taxes
|
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|
120,538
|
|
|
|
84,546
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|
Provision for income taxes
|
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|
(43,753
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)
|
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(27,322
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)
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|
|
|
|
|
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Net income
|
|
$
|
76,785
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$
|
57,224
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|
|
|
|
|
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|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
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|
Basic
|
|
|
100,416
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|
|
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101,982
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Diluted
|
|
|
101,518
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|
|
|
102,885
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|
Net income per common share:
|
|
|
|
|
|
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Basic
|
|
$
|
0.76
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|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
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|
Diluted
|
|
$
|
0.76
|
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.40
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
Packaging
Corporation of America
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
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|
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Six Months Ended
|
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June 30,
|
|
|
|
2011
|
|
|
2010
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|
(In thousands)
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
76,785
|
|
|
$
|
57,224
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
79,934
|
|
|
|
77,728
|
|
Amortization of financing costs
|
|
|
250
|
|
|
|
344
|
|
Amortization of net gain on treasury lock
|
|
|
(923
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)
|
|
|
(923
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)
|
Share-based compensation expense
|
|
|
4,704
|
|
|
|
3,788
|
|
Deferred income tax provision
|
|
|
(1,603
|
)
|
|
|
(3,639
|
)
|
Loss on disposals of property, plant and equipment
|
|
|
5,415
|
|
|
|
3,837
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in assets
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(34,361
|
)
|
|
|
(65,760
|
)
|
Alternative fuel mixture tax credits receivable
|
|
|
|
|
|
|
31,770
|
|
Inventories
|
|
|
15,535
|
|
|
|
5,529
|
|
Prepaid expenses and other current assets
|
|
|
(12,845
|
)
|
|
|
(16,964
|
)
|
Increase (decrease) in liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
36,401
|
|
|
|
39,022
|
|
Accrued liabilities
|
|
|
(9,510
|
)
|
|
|
(32,306
|
)
|
Other, net
|
|
|
5,401
|
|
|
|
8,934
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
165,183
|
|
|
|
108,584
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(145,150
|
)
|
|
|
(155,349
|
)
|
Acquisition of business
|
|
|
(26,942
|
)
|
|
|
|
|
Additions to other long term assets
|
|
|
(6,530
|
)
|
|
|
(1,711
|
)
|
Proceeds from disposals of property, plant and equipment
|
|
|
419
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(178,203
|
)
|
|
|
(156,967
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(330
|
)
|
|
|
(307
|
)
|
Settlement of treasury lock
|
|
|
9,910
|
|
|
|
|
|
Common stock dividends paid
|
|
|
(35,795
|
)
|
|
|
(30,911
|
)
|
Repurchases of common stock
|
|
|
(45,392
|
)
|
|
|
(3,111
|
)
|
Proceeds from exercise of stock options
|
|
|
6,335
|
|
|
|
2,761
|
|
Excess tax benefits from share-based awards
|
|
|
917
|
|
|
|
735
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(64,355
|
)
|
|
|
(30,833
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(77,375
|
)
|
|
|
(79,216
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
196,556
|
|
|
|
260,727
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
119,181
|
|
|
$
|
181,511
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
6
Packaging
Corporation of America
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2011
The condensed consolidated financial statements as of
June 30, 2011 and 2010 of Packaging Corporation of America
(PCA or the Company) and for the three-
and six- month periods then ended are unaudited but include all
adjustments (consisting only of normal recurring adjustments)
that management considers necessary for a fair presentation of
such financial statements. These financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States for interim financial information
and with Article 10 of SEC
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted
in the United States for complete audited financial statements.
Operating results for the period ended June 30, 2011 are
not necessarily indicative of the results that may be expected
for the year ending December 31, 2011. These condensed
consolidated financial statements should be read in conjunction
with PCAs Annual Report on
Form 10-K
for the year ended December 31, 2010.
|
|
2.
|
Summary
of Accounting Policies
|
Basis
of Consolidation
The accompanying condensed consolidated financial statements of
PCA include all majority-owned subsidiaries. All intercompany
transactions have been eliminated. The Company has one joint
venture that is accounted for under the equity method.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts in the financial statements and the accompanying notes.
Actual results could differ from those estimates.
Revenue
Recognition
The Company recognizes revenue as title to the products is
transferred to customers. Shipping and handling billings to a
customer are included in net sales. Shipping and handling costs
are included in cost of sales. In addition, the Company offers
volume rebates to certain of its customers. The total cost of
these programs is estimated and accrued as a reduction to net
sales at the time of the respective sale.
Segment
Information
PCA is engaged in one line of business: the integrated
manufacture and sale of packaging materials, boxes and
containers for industrial and consumer markets. No single
customer accounts for more than 10% of total net sales.
Recent
Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU)
2011-05,
Comprehensive Income (Topic 220) Presentation
of Comprehensive Income. The amendments in this ASU
require that all nonowner changes in stockholders equity
be presented either in a single continuous statement of
comprehensive income or in two separate but consecutive
statements. The provisions in this update should be applied
retrospectively and are effective for fiscal years, and interim
periods within those years, beginning after December 15,
2011. Early adoption is permitted. The Company will comply with
the additional provisions of ASU
2011-05 upon
its adoption on January 1, 2012.
In May 2011, the FASB issued ASU
2011-04,
Fair Value Measurement (Topic 820) Amendments
to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs. The
7
Packaging
Corporation of America
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2011
|
|
2.
|
Summary
of Accounting Policies (Continued)
|
amendments in this ASU clarify the application of existing fair
value measurement and disclosure requirements, which will
improve the comparability of fair value measurements presented
and disclosed in financial statements prepared in accordance
with U.S. GAAP and IFRSs. ASU
2011-04 is
effective for interim and annual periods beginning after
December 15, 2011. Early application is not permitted. The
Company does not expect the adoption of this guidance to have
any impact on its financial position, results of operations or
cash flows.
In December 2010, the FASB issued ASU
2010-28,
Intangibles Goodwill and Other (Topic 350)
When to Perform Step 2 of the Goodwill Impairment
Test for Reporting Units with Zero or Negative Carrying
Amounts. This ASU modifies Step 1 of the goodwill
impairment test for reporting units with zero or negative
carrying amounts. For such reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it
is more likely than not that a goodwill impairment exists. ASU
2010-28 is
effective for fiscal years, and interim periods within those
years, beginning after December 15, 2010. The adoption of
this guidance on January 1, 2011 did not have any impact on
the Companys financial position, results of operations or
cash flows.
In January 2010, the FASB issued ASU
2010-06,
Fair Value Measurements and Disclosures (Topic
820) Improving Disclosures about Fair Value
Measurements. This ASU requires new disclosures and
clarifies existing disclosure requirements about fair value
measurement as set forth in Accounting Standards Codification
(ASC) 820. ASU
2010-06
amends ASC 820 to now require: (1) a reporting entity
should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers; and
(2) in the reconciliation for fair value measurements using
significant unobservable inputs, a reporting entity should
present separately information about purchases, sales,
issuances, and settlements. In addition, ASU
2010-06
clarifies the requirements of existing disclosures. ASU
2010-06 is
effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward
of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those
fiscal years. As of January 1, 2011, the Company has
adopted all disclosure provisions of this guidance. See
Note 12 for additional information.
Reclassification
Prior years financial statements have been reclassified
where appropriate to conform to current year presentation.
8
Packaging
Corporation of America
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2011
The following table sets forth the computation of basic and
diluted income per common share for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,368
|
|
|
$
|
38,030
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic common shares outstanding
|
|
|
100,094
|
|
|
|
102,035
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
293
|
|
|
|
233
|
|
Unvested restricted stock
|
|
|
741
|
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
Dilutive common shares outstanding
|
|
|
101,128
|
|
|
|
102,886
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
0.39
|
|
|
$
|
0.37
|
|
Diluted income per common share
|
|
$
|
0.39
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
76,785
|
|
|
$
|
57,224
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic common shares outstanding
|
|
|
100,416
|
|
|
|
101,982
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
314
|
|
|
|
248
|
|
Unvested restricted stock
|
|
|
788
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
Dilutive common shares outstanding
|
|
|
101,518
|
|
|
|
102,885
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
0.76
|
|
|
$
|
0.56
|
|
Diluted income per common share
|
|
$
|
0.76
|
|
|
$
|
0.56
|
|
Options to purchase 0.6 million shares for the three- and
six-month periods ended June 30, 2010 were not included in
the computation of diluted common shares outstanding as their
exercise price exceeded the average market price of the
Companys common stock for each respective reporting
period. All outstanding options to purchase shares for the
three- and six-month periods ended June 30, 2011 were
included in the computation of diluted common shares outstanding.
9
Packaging
Corporation of America
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2011
Comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
(In thousands)
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,368
|
|
|
$
|
38,030
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Amortization of unfunded employee benefit obligations
|
|
|
951
|
|
|
|
894
|
|
Amortization of net gain on treasury locks
|
|
|
(281
|
)
|
|
|
(281
|
)
|
Unrealized gains (losses) on treasury locks
|
|
|
|
|
|
|
(8,273
|
)
|
Unrealized gains (losses) on foreign currency exchange contracts
|
|
|
39
|
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
40,077
|
|
|
$
|
30,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
(In thousands)
|
|
|
|
|
|
|
|
Net income
|
|
$
|
76,785
|
|
|
$
|
57,224
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Amortization of unfunded employee benefit obligations
|
|
|
1,902
|
|
|
|
1,789
|
|
Amortization of net gain on treasury locks
|
|
|
(563
|
)
|
|
|
(743
|
)
|
Unrealized gains (losses) on treasury locks
|
|
|
5,520
|
|
|
|
(8,273
|
)
|
Unrealized gains (losses) on foreign currency exchange contracts
|
|
|
202
|
|
|
|
(925
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
83,846
|
|
|
$
|
49,072
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Stock-Based
Compensation
|
In October 1999, the Company adopted a long-term equity
incentive plan, which provides for grants of stock options,
stock appreciation rights, restricted stock and performance
awards to directors, officers and employees of PCA, as well as
others who engage in services for PCA. Option awards granted to
directors, officers and employees have contractual lives of
seven or ten years. Options granted to officers and employees
vest ratably over a three-year period, and options granted to
directors vest immediately. Restricted stock awards granted to
officers and employees generally vest at the end of a four-year
period, and restricted stock awards granted to directors vest
immediately. The plan, which will terminate on October 19,
2014, provides for the issuance of up to 8,550,000 shares
of common stock over the life of the plan. As of June 30,
2011, options and restricted stock of 7,660,562 shares have
been granted, net of forfeitures. Forfeitures are added back to
the pool of shares of common stock available to be granted at a
future date.
10
Packaging
Corporation of America
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2011
|
|
5.
|
Stock-Based
Compensation (Continued)
|
Compensation expense for both stock options, which were fully
vested at June 30, 2010, and restricted stock recognized in
the condensed consolidated statements of income for the three-
and six-month periods ended June 30, 2011 and 2010 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
|
|
|
$
|
64
|
|
|
$
|
|
|
|
$
|
221
|
|
Restricted stock
|
|
|
2,954
|
|
|
|
2,488
|
|
|
|
4,704
|
|
|
|
3,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on income before income taxes
|
|
|
2,954
|
|
|
|
2,552
|
|
|
|
4,704
|
|
|
|
3,788
|
|
Income tax benefit
|
|
|
(1,149
|
)
|
|
|
(994
|
)
|
|
|
(1,830
|
)
|
|
|
(1,475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on net income
|
|
$
|
1,805
|
|
|
$
|
1,558
|
|
|
$
|
2,874
|
|
|
$
|
2,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses the Black-Scholes-Merton option-pricing model
to estimate the fair value of each option grant as of the date
of grant. Expected volatilities are based on historical
volatility of the Companys common stock. The expected life
of the option is estimated using historical data pertaining to
option exercises and employee terminations. Separate groups of
employees that have similar historical exercise behavior are
considered separately for estimating the expected life. The
risk-free interest rate is based on U.S. Treasury yields in
effect at the time of grant. The fair value of restricted stock
is determined based on the closing price of the Companys
common stock on the grant date. There were no option grants
during the first six months of 2011.
A summary of the Companys stock option activity and
related information follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding at December 31, 2010
|
|
|
1,568,384
|
|
|
$
|
21.38
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(310,182
|
)
|
|
|
20.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at June 30, 2011
|
|
|
1,258,202
|
|
|
$
|
21.61
|
|
|
|
2.0
|
|
|
$
|
8,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the three
months ended June 30, 2011 and 2010 was $1.2 million
and $0.5 million, respectively, and during the six months
ended June 30, 2011 and 2010 was $2.6 million and
$1.3 million, respectively. As of June 30, 2011, there
is no unrecognized compensation cost related to stock option
awards granted under the Companys equity incentive plan as
all outstanding awards have vested.
11
Packaging
Corporation of America
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2011
|
|
5.
|
Stock-Based
Compensation (Continued)
|
A summary of the Companys restricted stock activity
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
Fair Market
|
|
|
|
|
|
Fair Market
|
|
|
|
|
|
|
Value at
|
|
|
|
|
|
Value at
|
|
|
|
|
|
|
Date of
|
|
|
|
|
|
Date of
|
|
|
|
Shares
|
|
|
Grant
|
|
|
Shares
|
|
|
Grant
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock at January 1
|
|
|
1,478,000
|
|
|
$
|
30,600
|
|
|
|
1,235,505
|
|
|
$
|
24,718
|
|
Granted
|
|
|
574,496
|
|
|
|
15,975
|
|
|
|
448,440
|
|
|
|
9,933
|
|
Vested
|
|
|
(214,261
|
)
|
|
|
(5,498
|
)
|
|
|
(315,640
|
)
|
|
|
(6,509
|
)
|
Cancellations
|
|
|
(3,465
|
)
|
|
|
(72
|
)
|
|
|
(9,440
|
)
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock at June 30
|
|
|
1,834,770
|
|
|
$
|
41,005
|
|
|
|
1,358,865
|
|
|
$
|
27,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company generally recognizes compensation expense associated
with restricted stock awards ratably over their vesting periods.
As PCAs Board of Directors has the ability to accelerate
vesting of restricted stock upon an employees retirement,
the Company accelerates the recognition of compensation expense
for certain employees approaching normal retirement age. As of
June 30, 2011, there was $26.6 million of total
unrecognized compensation costs related to the above restricted
stock awards. The Company expects to recognize the cost of these
stock awards over a weighted-average period of 3.0 years.
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
(In thousands)
|
|
|
|
|
(Audited)
|
|
|
Raw materials
|
|
$
|
114,532
|
|
|
$
|
126,401
|
|
Work in process
|
|
|
7,984
|
|
|
|
6,395
|
|
Finished goods
|
|
|
72,770
|
|
|
|
73,710
|
|
Supplies and materials
|
|
|
104,136
|
|
|
|
102,720
|
|
|
|
|
|
|
|
|
|
|
Inventories at FIFO or average cost
|
|
|
299,422
|
|
|
|
309,226
|
|
Excess of FIFO or average cost over LIFO cost
|
|
|
(72,901
|
)
|
|
|
(68,084
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
226,521
|
|
|
$
|
241,142
|
|
|
|
|
|
|
|
|
|
|
An actual valuation of inventory under the LIFO method is made
only at the end of each year based on the inventory levels and
costs at that time. Accordingly, interim LIFO calculations must
necessarily be based on managements estimates of expected
year-end inventory levels and costs. Because these are subject
to many factors beyond managements control, interim
results are subject to the final year-end LIFO inventory
valuation.
12
Packaging
Corporation of America
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2011
|
|
7.
|
Goodwill
and Other Intangible Assets
|
Goodwill
Changes in the carrying amount of goodwill for the period ended
June 30, 2011 are as follows:
|
|
|
|
|
(In thousands)
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
38,854
|
|
Acquisition
|
|
|
14,749
|
|
|
|
|
|
|
Balance at June 30, 2011
|
|
$
|
53,603
|
|
|
|
|
|
|
The components of other intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011
|
|
|
As of December 31, 2010
|
|
|
|
Weighted
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Average
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Remaining Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
(Audited)
|
|
|
Customer lists and relations
|
|
|
23.6 years
|
|
|
$
|
23,711
|
|
|
$
|
6,947
|
|
|
$
|
17,441
|
|
|
$
|
6,466
|
|
Other
|
|
|
2.8 years
|
|
|
|
180
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
|
|
|
$
|
23,891
|
|
|
$
|
6,959
|
|
|
$
|
17,441
|
|
|
$
|
6,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 17 for further discussion regarding the
acquisition.
|
|
8.
|
Employee
Benefit Plans and Other Postretirement Benefits
|
For the three- and six-months ended June 30, 2011 and 2010,
net pension costs were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Net Pension Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost for benefits earned during the year
|
|
$
|
4,952
|
|
|
$
|
4,579
|
|
|
$
|
9,904
|
|
|
$
|
9,158
|
|
Interest cost on accumulated benefit obligation
|
|
|
3,368
|
|
|
|
3,023
|
|
|
|
6,736
|
|
|
|
6,045
|
|
Expected return on assets
|
|
|
(3,386
|
)
|
|
|
(2,802
|
)
|
|
|
(6,772
|
)
|
|
|
(5,604
|
)
|
Net amortization of unrecognized amounts
|
|
|
1,549
|
|
|
|
1,483
|
|
|
|
3,097
|
|
|
|
2,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension costs
|
|
$
|
6,483
|
|
|
$
|
6,283
|
|
|
$
|
12,965
|
|
|
$
|
12,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company makes pension plan contributions that are sufficient
to fund its actuarially determined costs, generally equal to the
minimum amounts required by the Employee Retirement Income
Security Act (ERISA). However, from time to time the Company may
make discretionary contributions in excess of the required
minimum amounts. The Company expects to contribute
$22.1 million to the pension plans in 2011, of which
$6.0 million has been contributed through June 30,
2011.
13
Packaging
Corporation of America
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2011
|
|
8.
|
Employee
Benefit Plans and Other Postretirement
Benefits (Continued)
|
For the three- and six-months ended June 30, 2011 and 2010,
net postretirement costs were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Net Postretirement Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost for benefits earned during the year
|
|
$
|
400
|
|
|
$
|
350
|
|
|
$
|
800
|
|
|
$
|
700
|
|
Interest cost on accumulated benefit obligation
|
|
|
297
|
|
|
|
283
|
|
|
|
595
|
|
|
|
565
|
|
Net amortization of unrecognized amounts
|
|
|
8
|
|
|
|
(19
|
)
|
|
|
16
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net postretirement costs
|
|
$
|
705
|
|
|
$
|
614
|
|
|
$
|
1,411
|
|
|
$
|
1,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Transfers
of Financial Assets
|
PCA has an on-balance sheet securitization program for its trade
accounts receivable that is accounted for as a secured borrowing
under ASC 860, Transfers and Servicing. To
effectuate this program, the Company formed a wholly owned,
limited-purpose subsidiary, Packaging Credit Company, LLC
(PCC), which in turn formed a wholly owned,
bankruptcy-remote, special-purpose subsidiary, Packaging
Receivables Company, LLC (PRC), for the purpose of
acquiring receivables from PCC. Both of these entities are
included in the consolidated financial statements of the
Company. Under this program, PCC purchases on an ongoing basis
substantially all of the receivables of the Company and sells
such receivables to PRC. PRC and lenders established a
$150.0 million receivables-backed revolving credit facility
(Receivables Credit Facility) through which PRC
obtains funds to purchase receivables from PCC. The receivables
purchased by PRC are solely the property of PRC. In the event of
liquidation of PRC, the creditors of PRC would be entitled to
satisfy their claims from PRCs assets prior to any
distribution to PCC or the Company. Credit available under the
receivables credit facility is on a borrowing-base formula. As a
result, the full amount of the facility may not be available at
all times. On March 1, 2011, PCA renewed the facility,
which was scheduled to expire on March 1, 2011, to
February 28, 2012. At June 30, 2011,
$109.0 million was outstanding and included in
Short-term debt and current maturities of long-term
debt on the condensed consolidated balance sheet.
Substantially all accounts receivable at June 30, 2011 have
been sold to PRC and are included in Accounts receivable,
net of allowance for doubtful accounts and customer
deductions on the condensed consolidated balance sheet.
|
|
10.
|
Derivative
Instruments and Hedging Activities
|
The Company records its derivatives in accordance with
ASC 815, Derivatives and Hedging. The guidance
requires the Company to recognize derivative instruments as
either assets or liabilities in the balance sheet at fair value.
The accounting for changes in the fair value of a derivative
depends on the intended use and designation of the derivative
instrument. For a derivative designated as a fair value hedge,
the gain or loss on the derivative is recognized in earnings in
the period of change in fair value together with the offsetting
gain or loss on the hedged item. For a derivative instrument
designated as a cash flow hedge, the effective portion of the
derivatives gain or loss is initially reported as a
component of accumulated other comprehensive income (loss)
(OCI) and is subsequently recognized in earnings
when the hedged exposure affects earnings. The ineffective
portion of the gain or loss is recognized in earnings.
14
Packaging
Corporation of America
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2011
|
|
10.
|
Derivative
Instruments and Hedging Activities (Continued)
|
Hedging
Strategy
PCA is exposed to certain risks relating to its ongoing
operations. When appropriate, the Company uses derivatives as a
risk management tool to mitigate the potential impact of certain
market risks. The primary risks managed by using derivative
financial instruments are interest rate and foreign currency
exchange rate risks. PCA does not enter into derivative
financial instruments for trading or speculative purposes.
Interest
Rate Risk
The Company has historically used treasury lock derivative
instruments to manage interest costs and the risk associated
with changing interest rates. On June 12, 2003 and
January 17, 2008, in connection with contemplated issuances
of ten-year debt securities, PCA entered into interest rate
protection agreements with counterparties to protect against
increases in the ten-year U.S. Treasury Note rate. These
treasury rates served as references in determining the interest
rates applicable to the debt securities the Company issued in
July 2003 and March 2008, respectively. As a result of changes
in the interest rates on those treasury securities between the
time PCA entered into the agreements and the time PCA priced and
issued the debt securities, the Company: (1) received a
payment of $22.8 million from the counterparty upon
settlement of the 2003 interest rate protection agreement on
July 21, 2003; and (2) made a payment of
$4.4 million to the counterparty upon settlement of the
2008 interest rate protection agreement on March 25, 2008.
The Company recorded the settlements in accumulated other
comprehensive income (loss), which are amortized over the terms
of the respective notes.
On May 25, 2010, in connection with a contemplated issuance
of ten-year debt securities to eventually refinance PCAs
currently outstanding $400.0 million of senior notes that
mature in 2013, PCA entered into interest rate protection
agreements with counterparties to protect against increases in
the ten-year U.S. Treasury Note rate. The treasury rate
will serve as a reference in determining the interest rate
applicable to the new debt securities the Company expects to
issue in the future. The interest rate protection agreements
were properly documented and designated as cash flow hedges at
inception. On February 4, 2011, PCA settled the treasury
locks and received a payment of $9.9 million. The
settlement was recorded in accumulated other comprehensive
income (loss) and will be amortized over the terms of the
respective notes once issued. At June 30, 2011, the Company
did not have any interest rate protection agreements outstanding.
Foreign
Currency Exchange Rate Risk
In connection with the energy optimization project at its
Counce, Tennessee mill, the Company entered into a foreign
currency forward contract on September 30, 2010 to hedge
its exposure to forecasted purchases of machinery and equipment
denominated in foreign currencies. The foreign currency forward
contract was properly documented and designated as a cash flow
hedge at inception. At June 30, 2011, the Company had a
notional value of $2.3 million in foreign currency exchange
contracts outstanding that are expected to settle by the end of
the third quarter of 2011.
Counterparty
Credit Risk
The Company is exposed to credit risk in the event of
non-performance by counterparties to these derivative financial
instruments. The amount of counterparty credit exposure is the
unrealized gains, if any, on such derivative contracts. To
minimize credit risk, the Company only enters into these types
of transactions with investment grade counterparties. On a
quarterly basis, the Company evaluates each hedges net
position relative to the counterpartys ability to cover
its position. Although no assurances can be given, the Company
does not expect any of the counterparties to these derivative
financial instruments to fail to meet its obligations.
15
Packaging
Corporation of America
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2011
|
|
10.
|
Derivative
Instruments and Hedging Activities (Continued)
|
Derivative
Instruments
The fair value of the foreign currency forward contract at
June 30, 2011 was $0.1 million, which is included in
Prepaid expenses and other current assets on the
Companys condensed consolidated balance sheet at
June 30, 2011.
The impact of derivative instruments on the condensed
consolidated statements of income and accumulated OCI is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Amount of Net Gain
|
|
|
|
(Loss) Recognized in
|
|
|
|
Accumulated OCI
|
|
|
|
(Effective Portion)
|
|
|
|
June 30,
|
|
|
Dec. 31,
|
|
|
|
2011
|
|
|
2010
|
|
(In thousands)
|
|
|
|
|
Audited
|
|
|
Treasury locks, net of tax
|
|
$
|
7,121
|
|
|
$
|
2,164
|
|
Foreign currency exchange contracts, net of tax
|
|
|
(405
|
)
|
|
|
(607
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,716
|
|
|
$
|
1,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
|
|
|
Reclassified from Accumulated
|
|
|
OCI into Income
|
|
|
(Effective Portion)
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
Location
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
461
|
|
|
$
|
461
|
|
|
$
|
923
|
|
|
$
|
923
|
|
The amount of gain recognized from accumulated OCI into income
is associated with settlements of treasury locks in 2003 and
2008. The net amount of settlement gains or losses on derivative
instruments included in accumulated OCI to be realized during
the next 12 months is a net gain of $1.8 million
($1.2 million after tax) at June 30, 2011. Mark to
market gains and losses on derivative instruments included in
accumulated OCI will be reclassified into earnings in the same
periods during which the hedged transactions affect earnings.
There were no ineffective portions of these contracts during the
period.
16
Packaging
Corporation of America
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2011
|
|
11.
|
Financial
Instruments
|
The carrying and estimated fair values of PCAs financial
instruments at June 30, 2011 and December 31, 2010
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
(In thousands)
|
|
|
|
|
|
|
|
(Audited)
|
|
|
Cash and cash equivalents
|
|
$
|
119,181
|
|
|
$
|
119,181
|
|
|
$
|
196,556
|
|
|
$
|
196,556
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.75% senior notes
|
|
|
(399,315
|
)
|
|
|
(431,808
|
)
|
|
|
(399,143
|
)
|
|
|
(430,464
|
)
|
6.50% senior notes
|
|
|
(149,958
|
)
|
|
|
(162,717
|
)
|
|
|
(149,956
|
)
|
|
|
(158,800
|
)
|
Receivables credit facility
|
|
|
(109,000
|
)
|
|
|
(109,000
|
)
|
|
|
(109,000
|
)
|
|
|
(109,000
|
)
|
Capital lease obligations
|
|
|
(22,173
|
)
|
|
|
(22,173
|
)
|
|
|
(22,502
|
)
|
|
|
(22,502
|
)
|
The fair value of cash and cash equivalents approximates its
carrying amounts due to the short-term nature of these financial
instruments.
The fair value of the receivables credit facility approximates
its carrying amount due to the variable interest-rate feature of
the instrument. The fair values of the senior notes are based on
quoted market prices. The fair value of the capital lease
obligations was estimated to not be materially different from
the carrying amount.
|
|
12.
|
Fair
Value Measurements
|
The following presents information about PCAs assets and
liabilities measured at fair value and the valuation techniques
used to determine those fair values. The inputs used in the
determination of fair values are categorized according to the
fair value hierarchy as being Level 1, Level 2 or
Level 3 in accordance with ASC 820, Fair Value
Measurements and Disclosures. The valuation techniques are
as follows:
(a) Market approach prices and other relevant
information generated by market transactions involving identical
or comparable assets or liabilities
(b) Cost approach amount that would be required
to replace the service capacity of an asset (replacement cost)
(c) Income approach techniques to convert
future amounts to a single present amount based on market
expectations (including present value techniques, option-pricing
and excess earnings models)
Assets and liabilities measured at fair value on a recurring
basis are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement
|
|
|
|
|
|
|
|
|
|
|
|
|
Approach
|
|
|
As of December 31, 2010
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
|
|
Valuation
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Level
|
|
|
Technique
|
|
|
Value
|
|
|
Value
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Audited)
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
118,682
|
|
|
$
|
118,682
|
|
|
|
1
|
|
|
|
(a
|
)
|
|
$
|
196,058
|
|
|
$
|
196,058
|
|
Foreign currency exchange contracts
|
|
|
143
|
|
|
|
143
|
|
|
|
2
|
|
|
|
(a
|
)
|
|
|
12
|
|
|
|
12
|
|
Long-Term Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury locks
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
(a
|
)
|
|
|
872
|
|
|
|
872
|
|
17
Packaging
Corporation of America
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2011
|
|
12.
|
Fair
Value Measurements (Continued)
|
The money market funds PCA invests in include funds comprised of
U.S. Treasury obligations or backed by U.S. Treasury
obligations. The Company measures the fair value of money market
funds based on quoted prices in active markets for identical
assets.
The Company calculates the fair value of its foreign currency
forward contracts using quoted currency spot rates plus or minus
forward points to calculate forward rates.
There were no changes in the Companys valuation techniques
used to measure fair values on a recurring basis as a result of
adopting ASC 820. PCA had no assets or liabilities that
were measured on a nonrecurring basis.
|
|
13.
|
Environmental
Liabilities
|
The potential costs for various environmental matters are
uncertain due to such factors as the unknown magnitude of
possible cleanup costs, the complexity and evolving nature of
governmental laws and regulations and their interpretations, and
the timing, varying costs and effectiveness of alternative
cleanup technologies. From 1994 through June 30, 2011,
remediation costs at PCAs mills and corrugated plants
totaled approximately $3.2 million. As of June 30,
2011, the Company maintained an environmental reserve of
$9.9 million relating to
on-site
landfills and surface impoundments as well as ongoing and
anticipated remedial projects. Liabilities recorded for
environmental contingencies are estimates of the probable costs
based upon available information and assumptions. Because of
these uncertainties, PCAs estimates may change. As of the
date of this filing, the Company believes that it is not
reasonably possible that future environmental expenditures for
remediation costs and asset retirement obligations above the
$9.9 million accrued as of June 30, 2011, will have a
material impact on its financial condition, results of
operations, or cash flows.
|
|
14.
|
Stock
Repurchase Program
|
On October 17, 2007, PCA announced that its Board of
Directors authorized a $150.0 million common stock
repurchase program, which it completed in the second quarter of
2011. Through June 30, 2011, the Company repurchased
6,422,587 shares of common stock, with 245,230 shares
repurchased for $6.9 million, or $28.08 per share, during
the second quarter of 2011. All repurchased shares were retired
prior to June 30, 2011.
On February 22, 2011, PCA announced that its Board of
Directors had authorized the repurchase of an additional
$100.0 million of the Companys outstanding common
stock. During the second quarter of 2011, the Company
repurchased 689,940 shares of common stock for
$19.3 million, or $28.00 per share, under this
authorization. All repurchased shares were retired prior to
June 30, 2011. As of June 30, 2011, $80.7 million
of the $100.0 million authorization remained available for
repurchase of the Companys common stock.
|
|
15.
|
Alternative
Energy Tax Credits
|
The Company generated black liquor as a by-product of its pulp
manufacturing process and used it in a mixture with diesel fuel
during 2009 to produce energy at its Counce, Tennessee,
Valdosta, Georgia, and Tomahawk, Wisconsin mills. Through
December 31, 2009, the U.S. Internal Revenue Code
provided a $0.50 per gallon refundable tax credit for taxpayers
who used alternative fuels in their trade or business. During
the first quarter of 2010, the IRS released a memorandum which
provided clarification about the calculation of the alternative
fuel mixture credit for black liquor. As a result, during the
first quarter of 2010 the Company released a reserve of
$9.2 million that was established in 2009 due to the
ambiguity in the calculation of the credit. This reserve release
resulted in additional income of $9.2 million, which was
recorded in alternative fuel mixture tax credits on the income
statement in the first quarter of 2010.
18
Packaging
Corporation of America
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2011
|
|
15.
|
Alternative
Energy Tax Credits (Continued)
|
The laws governing the taxability of the alternative fuel
mixture credit are not completely defined. The IRS has not
issued definitive guidance regarding such taxability. PCA
believes that the manner in which the credit was claimed will
not subject the Company to federal or state income taxes on such
benefits. If it is determined that any of the alternative fuel
mixture credits are subject to taxation, PCA will be required to
pay those taxes and take a corresponding charge to its income.
In an IRS memorandum released during the second quarter of 2010,
the IRS concluded that black liquor also qualifies for the
taxable cellulosic biofuel producer credit of $1.01 per gallon
of biofuel produced in 2009. In a subsequent memorandum, the IRS
concluded that a black liquor producer may claim the alternative
fuel mixture credit and the cellulosic biofuel producer credit
in the same taxable year for different volumes of black liquor
(the same gallon of fuel cannot receive both credits but can be
claimed as either alternative fuel mixture credit or the
cellulosic biofuel producer credit). PCA received the required
cellulosic biofuel producer registration code in September 2010.
Based upon both the IRS memoranda and guidance regarding the
cellulosic biofuel producer credit, the Company analyzed the
additional potential benefits from claiming the cellulosic
biofuel producer credit for 2009 instead of the alternative fuel
mixture credit, or claiming a combination of the two credits for
2009. For the gallons of alternative fuels produced in 2009, PCA
claimed about two-thirds of the gallons as cellulosic biofuel
producer credits and about one-third of the gallons as
alternative fuel mixture credits, resulting in additional income
of $33.4 million recorded during the third quarter of 2010.
During the fourth quarter of 2010 the Company determined that
its proprietary biofuel process at the Filer City, Michigan mill
would likely qualify for the 2009 cellulosic biofuel producer
credit. The Company amended the 2009 federal return in December
2010 to claim these gallons, resulting in $107.0 million of
cellulosic biofuel producer credits. Due to the unique and
proprietary nature of the Filer City mill process, IRS
guidelines do not specifically address the process and
uncertainty exists. As a result, the Company increased the
reserve for uncertain tax positions under ASC 740 by
$102.0 million, which resulted in a net benefit of
$5.0 million recorded during the fourth quarter of 2010.
During the first quarter of 2011, the Company received
notification that the IRS will begin its review of the
cellulosic biofuel producer tax credits claimed in the 2009
federal income tax return, and such review is under way.
The amount of credits that the Company can apply against future
federal taxes owed will be dependent upon the timing and amount
of PCAs future taxable income. As of June 30, 2011,
including the reserve for uncertain tax positions, PCA has as
much as $179 million of tax credits to be used to offset
future tax payments. The cellulosic biofuel producer credit
carryforward must be utilized to offset federal taxes owed by
December 31, 2015, at which time the credit carryforward
expires. A valuation allowance was not recorded against the
deferred tax asset for this credit carryforward since the
Company believes the credit can be fully utilized before
expiration. If it is determined that any of the credit
carryforward will become subject to expiration, PCA will reduce
the deferred tax asset and record a corresponding charge to
income.
During September and October 2010, PCA and eight other
U.S. and Canadian containerboard producers were named as
defendants in five purported class action lawsuits filed in the
United States District Court for the Northern District of
Illinois, alleging violations of the Sherman Act. The lawsuits
have been consolidated in a single complaint under the caption
Kleen Products LLC v Packaging Corp. of America et al.
The consolidated complaint alleges that the defendants
conspired to limit the supply of containerboard, and that the
purpose and effect of the alleged conspiracy was to artificially
increase prices of containerboard products during the period of
August 2005 to the time of filing of the complaints. The
complaint was filed as a purported class action suit on behalf
of all
19
Packaging
Corporation of America
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2011
|
|
16.
|
Legal
Proceedings (Continued)
|
purchasers of containerboard products during such period. The
complaint seeks treble damages and costs, including
attorneys fees. The defendants motions to dismiss
the complaint were denied by the court in April 2011. PCA
believes the allegations are without merit and will defend this
lawsuit vigorously. However, as the lawsuit is in preliminary
stages, PCA is unable to predict the ultimate outcome or
estimate a range of reasonably possible losses.
On April 14, 2011, the Company acquired Field Packaging
Group, a corrugated products manufacturer located in Chicago,
Illinois, for $26.9 million. Sales and total assets of the
acquisition were not material to the Companys overall
sales and total assets prior to the acquisition. Operating
results of the acquisition subsequent to April 14, 2011 are
included in the Companys 2011 operating results. The
Company has preliminarily allocated the purchase price to the
assets acquired and liabilities assumed, of which
$14.7 million has been allocated to goodwill,
$6.3 million to customer lists (amortized over a life of
ten years) and $0.2 million to other intangibles assets
(amortized over a life of three years). The Company plans on
finalizing the purchase price allocation prior to the end of the
third quarter of 2011.
|
|
18.
|
Valdosta
Mill Fire Insurance Recovery
|
On April 4, 2011, the Companys Valdosta, Georgia mill
had a fire that was confined to the turbine generator room. The
fire resulted in production and sales volume losses of 11,000
tons and significant repair and demolition expenses to affected
buildings and equipment. PCA is insured for the lost production,
replacement value of destroyed assets, and related expenses,
subject to a $3 million deductible. The Company filed an
insurance claim for the total cost of the fire and received
$6.5 million, net of the $3.0 million deductible, for
losses incurred and capital expenditures during the quarter. The
$6.5 million in insurance proceeds is included in net cash
provided by operating activities ($5.5 million) and in net
cash used for investing activities ($1.0 million) based on
the nature of the reimbursement. PCA expects to receive
additional insurance proceeds for capital expenditures as work
is completed.
The Company has evaluated subsequent events through the filing
date of this
Form 10-Q
and determined there were no events to disclose.
20
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Overview
Packaging Corporation of America, or PCA, is the fifth largest
producer of containerboard and corrugated products in the United
States, based on production capacity. We produce a wide variety
of corrugated products ranging from basic corrugated shipping
containers to specialized packaging, such as wax-coated boxes
for the agriculture industry. We also have multi-color printing
capabilities to make high-impact graphics boxes and displays
that offer our customers more attractive packaging. Our
operating facilities and customers are located primarily in the
United States.
In analyzing our operating performance, we focus on the
following factors that affect our business and are important to
consider when reviewing our financial and operating results:
|
|
|
|
|
containerboard and corrugated products demand;
|
|
|
|
corrugated products and containerboard pricing and mix;
|
|
|
|
cost trends and volatility for our major costs, including wood
and recycled fiber, purchased fuels, electricity, labor and
fringe benefits, and transportation costs; and
|
|
|
|
cash flow from operations and capital expenditures.
|
The cost to manufacture containerboard is dependent, in large
part, on the costs of wood fiber, recycled fiber, purchased
fuels, electricity and labor and fringe benefits. Excluding the
cost of containerboard, labor and benefits costs make up the
largest component of corrugated products manufactured
costs.
The market for containerboard is generally subject to changes in
the U.S. economy. Historically, supply and demand, as well
as industry-wide inventory levels, have influenced prices of
containerboard and corrugated products. In addition to
U.S. shipments, approximately 10% of domestically produced
containerboard has been exported annually for use in other
countries.
Industry
Conditions
As reported by the Fibre Box Association, industry-wide
shipments of corrugated products decreased 0.5% for the three
months ended June 30, 2011 compared to the same period in
2010 and June corrugated products shipments were essentially
unchanged from June 2010 levels. Industry shipments of
containerboard to export markets increased 13.3% for second
quarter 2011 compared to the same period in 2010. Industry
containerboard production decreased 0.5% for the three months
ended June 30, 2011 compared to the same period in 2010 and
reported industry containerboard inventories at the end of the
second quarter 2011 were at the second lowest level for June in
30 years at approximately 2.15 million tons. Published
prices for containerboard did not change during second quarter
2011.
PCA
Operations Summary
During the second quarter of 2011, we produced approximately
606,000 tons of containerboard at our mills and sold about
8.2 billion square feet (bsf) of corrugated
products. Our corrugated products shipments were up 3.2%
compared to the second quarter of 2010. Containerboard volume
sold to domestic and export customers increased 19.5% for the
three months ended June 30, 2011 compared to the same
period in 2010. Sales prices of containerboard and corrugated
products were higher than the second quarter of 2010 as a result
of January and April 2010 containerboard price increases and the
pass-through of those price increases to corrugated products.
Industry published recycled fiber prices were up compared to the
second quarter 2010 average price by 30% and increased an
additional $14 per ton, or 8%, in July. Chemical costs increased
in the second quarter of 2011 compared to last year with the
largest increase due to caustic soda prices, which increased by
$130 per ton, or 45%. Transportation costs also increased
largely due to higher diesel costs, which were 33% higher than
second quarter 2010. Purchased fuel costs in the second quarter
of 2011 increased 9% compared to the second quarter 2010. Energy
costs in the third quarter of 2011 are expected to increase
driven by higher electricity and fuel prices. Wood fiber costs
decreased slightly compared to both second quarter 2010 and
first quarter 2011.
21
Work on the major energy project at our Counce, Tennessee and
Valdosta, Georgia linerboard mills continued and is scheduled
for completion in the fourth quarter of 2011. The majority of
the earnings benefits from the project is expected to come from
reduced energy costs, and from improvements in production
capability and flexibility, as well as cost reductions in other
areas. The dollar amount of the earnings benefit from the
project as well as the project returns are dependent upon energy
prices, mill operating rates, and the capital cost to complete
the project.
As disclosed in Note 15 to the condensed consolidated
financial statements, the Company is a producer of black liquor,
which is considered an alternative fuel when mixed with diesel,
making the black liquor an alternative fuel eligible for a $0.50
per gallon refundable alternative fuel mixture tax credit
through December 31, 2009. During the first quarter of
2010, the IRS released a memorandum which provided clarification
about the calculation of the alternative fuel mixture credit for
black liquor. As a result, during the first quarter of 2010 the
Company released the reserve of $9.2 million that was
established in 2009 due to the ambiguity in the calculation of
the credit. This reserve release resulted in additional income
of $9.2 million, which was recorded in alternative fuel
mixture tax credits on the income statement in the first quarter
of 2010.
Excluding a charge of $1.2 million, or $0.01 per share, for
asset disposals related to our mill energy projects and income
of $1.0 million, or $0.01 per share, from an adjustment to
reserves related to medical benefits, we earned net income of
$39.6 million ($0.39 per diluted share) in the second
quarter of 2011 compared with $39.1 million ($0.38 per
diluted share) in the second quarter of 2010, excluding a charge
of $1.1 million, or $0.01 per share, for energy project
asset disposals. Management uses these measures to focus on
PCAs on-going operations and assess its operating
performance and believes that it is useful to investors because
it enables them to perform meaningful comparisons of past and
present operating results. Reconciliations to the most
comparable measure reported in accordance with GAAP are included
elsewhere in this section under Reconciliations of
Non-GAAP Financial Measures to Reported Amounts.
Looking ahead to the third quarter of 2011, our earnings,
excluding special items, are expected to be higher than the
second quarter of 2011 due to higher sales volumes and increased
mill production with less downtime than the second quarter.
However, our Counce, Tennessee mill will be slowed back as a
result of the recovery boiler rebuilds as part of the mill
energy projects described above. In addition, costs for recycled
fiber, electricity and fuels are expected to be higher than the
second quarter.
Results
of Operations
Three
Months Ended June 30, 2011 Compared to Three Months Ended
June 30, 2010
The historical results of operations of PCA for the three months
ended June 30, 2011 and 2010 are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
665,481
|
|
|
$
|
615,459
|
|
|
$
|
50,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
67,859
|
|
|
$
|
67,746
|
|
|
$
|
113
|
|
Interest expense, net
|
|
|
(6,321
|
)
|
|
|
(8,093
|
)
|
|
|
1,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
61,538
|
|
|
|
59,653
|
|
|
|
1,885
|
|
Provision for income taxes
|
|
|
(22,170
|
)
|
|
|
(21,623
|
)
|
|
|
(547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,368
|
|
|
$
|
38,030
|
|
|
$
|
1,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
Net sales increased by $50.0 million, or 8.1%, for the
three months ended June 30, 2011 from the comparable period
in 2010, primarily as a result of higher sales volumes
($35.9 million) and increased sales prices
($14.1 million) of corrugated products and containerboard
to third parties.
22
Corrugated products shipments for the second quarter increased
3.2% compared to the second quarter of 2010, both on a total
basis and on a
shipments-per-workday
basis. Total corrugated products volume sold for the three
months ended June 30, 2011 increased 0.3 billion
square feet (bsf) to 8.2 bsf compared to 7.9 bsf in
the second quarter of 2010. The percentage increase was the same
on a total basis and shipments per workday basis since both
quarters contained 63 workdays, those days not falling on a
weekend or holiday.
Containerboard volume sold to outside domestic and export
customers increased by 22,000 tons, or 19.5%, for the three
months ended June 30, 2011 compared to the same period in
2010. Containerboard mill production during the second quarter
was 606,000 tons compared to 589,000 tons during the second
quarter of 2010.
Income
from Operations
Income from operations increased by $0.1 million, or 0.2%,
for the three months ended June 30, 2011 compared to the
three months ended June 30, 2010. Excluding special items,
income from operations decreased $1.2 million, as increases
of sales prices ($14.1 million) and volume
($10.0 million) were offset by increased costs for
chemicals ($6.1 million), transportation
($4.2 million), labor ($3.4 million), energy
($2.4 million), recycled fiber ($2.2 million),
depreciation ($1.6 million), medical and workers
compensation ($1.5 million), legal matters
($0.8 million) and obsolete storeroom items
($0.8 million).
Gross profit increased $5.2 million, or 4.0%, for the three
months ended June 30, 2011 from the comparable period in
2010, primarily due to sales price and volume increases of
containerboard and corrugated products. Gross profit as a
percentage of net sales decreased to 20.6% of net sales for
second quarter 2011 compared to 21.4% in the second quarter of
2010 primarily attributable to the cost increases on a per unit
basis described above.
Selling and administrative expenses increased $3.5 million,
or 7.9%, for the three months ended June 30, 2011 compared
to the same period in 2010, as a result of higher costs for
salaries and fringe benefits ($1.6 million), warehousing
($0.6 million), travel, entertainment and meetings
($0.5 million), and other items which were individually
insignificant.
Corporate overhead increased $1.0 million, or 6.3%, for the
three months ended June 30, 2011 compared to the same
period in 2010, primarily due to increased expenses related to
outside services for legal matters ($0.8 million).
Other expense for the three months ended June 30, 2011
increased $0.6 million or 15.9% compared to the second
quarter of 2010, primarily due to expense related to the
write-off of obsolete storeroom items ($0.8 million).
Interest
Expense, Net and Income Taxes
Net interest expense decreased $1.8 million, or 21.9%, for
the three months ended June 30, 2011 from the three months
ended June 30, 2010, primarily as a result of higher
capitalized interest ($1.5 million) related to the Counce
and Valdosta major energy optimization projects during the three
months ended June 30, 2011 compared to the same period in
2010.
PCAs effective tax rate was 36.0% for the three months
ended June 30, 2011 and 36.2% for the comparable period in
2010. The effective tax rate varies from the U.S. federal
statutory tax rate of 35% principally due to state and local
income taxes and the domestic manufacturers deduction.
23
Six
Months Ended June 30, 2011 Compared to Six Months Ended
June 30, 2010
The historical results of operations of PCA for the six months
ended June 30, 2011 and 2010 are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,294,981
|
|
|
$
|
1,166,191
|
|
|
$
|
128,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
133,762
|
|
|
$
|
101,362
|
|
|
$
|
32,400
|
|
Interest expense, net
|
|
|
(13,224
|
)
|
|
|
(16,816
|
)
|
|
|
3,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
120,538
|
|
|
|
84,546
|
|
|
|
35,992
|
|
Provision for income taxes
|
|
|
(43,753
|
)
|
|
|
(27,322
|
)
|
|
|
(16,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
76,785
|
|
|
$
|
57,224
|
|
|
$
|
19,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
Net sales increased by $128.8 million, or 11.0%, for the
six months ended June 30, 2011 from the comparable period
in 2010, primarily as a result of increased sales prices
($72.1 million) and higher sales volumes
($56.7 million) of corrugated products and containerboard
to third parties.
Corrugated products shipments for the first half of 2011
increased 3.2% compared to the first half of 2010 and on a
shipments-per-workday
basis increased 2.4%. Total corrugated products volume sold for
the six months ended June 30, 2011 increased
0.5 billion square feet (bsf) to 16.1 bsf
compared to 15.6 bsf for the same period in 2010. The percentage
increase, on a shipments per workday basis, was lower due to one
more workday in the first half of 2011 (127 days), those
days not falling on a weekend or holiday, than the first half of
2010 (126 days).
Containerboard volume sold to outside domestic and export
customers increased 9.8% for the six months ended June 30,
2011 compared to the same period in 2010. Containerboard mill
production during the first half was 1,208,000 tons compared to
1,158,000 tons during the first half of 2010.
Income
from Operations
Income from operations increased by $32.4 million, or
32.0%, for the six months ended June 30, 2011 compared to
the six months ended June 30, 2010. Excluding special
items, income from operations increased $39.6 million,
primarily due to higher sales prices ($72.1 million) and
volume ($19.7 million). Partially offsetting these items
were increased costs for chemicals ($11.0 million),
transportation ($9.0 million), labor ($7.2 million),
medical and workers compensation ($4.6 million),
recycled fiber ($3.9 million), the impact of severe winter
weather in first quarter 2011 ($3.5 million), incentive
compensation timing ($2.9 million), depreciation
($2.8 million), energy ($2.0 million), other fringe
benefits ($1.4 million), legal matters ($1.4 million)
and obsolete storeroom items ($0.9 million).
Gross profit increased $51.6 million, or 23.6%, for the six
months ended June 30, 2011 from the comparable period in
2010, primarily due to the sales price and volume increases
described above. Gross profit as a percentage of net sales
increased to 20.9% of net sales for first half 2011 compared to
18.7% in the first half of 2010.
Selling and administrative expenses increased $7.2 million,
or 8.1%, for the six months ended June 30, 2011 compared to
the same period in 2010, as a result of higher salaries
($3.5 million) from annual merit increases, as well as the
timing of incentive compensation charges and related fringe
benefits ($0.7 million). Other cost increases included
travel, entertainment and meetings ($1.1 million),
warehousing ($0.6 million), sample and development
($0.3 million) and broker commissions ($0.3 million).
Corporate overhead increased $3.9 million, or 13.9%, for
the first half of 2011 compared to the same period in 2010,
primarily due to higher salaries and fringe benefits
($1.8 million) from annual merit and benefit cost
increases, the timing of incentive compensation charges
($1.3 million) and increased expenses related to legal
24
matters ($1.4 million). These increases were partially
offset by lower expenses for travel, entertainment and meetings
($0.5 million) and information technology
($0.3 million).
Other expense for the six months ended June 30, 2011
decreased $1.2 million or 12.4% compared to the first half
of 2010, primarily due to expense related to the closure of the
Ackerman, Mississippi sawmill in the first quarter of 2010
($2.0 million) partially offset by an increase in
write-offs of obsolete storeroom items ($0.9 million).
Interest
Expense, Net and Income Taxes
Net interest expense decreased $3.6 million, or 21.4%, for
the six months ended June 30, 2011 from the six months
ended June 30, 2010, primarily as a result of higher
capitalized interest ($3.1 million) related to the Counce
and Valdosta major energy optimization projects during the six
months ended June 30, 2011 compared to the same period in
2010.
PCAs effective tax rate was 36.3% for the six months ended
June 30, 2011 and 32.3% for the comparable period in 2010
due to the impact of recording the alternative fuel mixture tax
credits in 2010. Excluding the impact of the tax credits, the
2010 effective rate would have been 36.3% for the six months
ended June 30, 2010. The effective tax rate varies from the
U.S. federal statutory tax rate of 35% principally due to
the impact of the alternative fuel mixture tax credits (in
2010), state and local income taxes and the domestic
manufacturers deduction. PCA had no material changes to
its uncertain tax positions under ASC 740, Income
Taxes, during the first half of 2011. In March 2011, the
Company was notified by the Internal Revenue Service that it
will begin its review of the 2008 and 2009 federal tax returns
in the second quarter of 2011. This review is under way.
Liquidity
and Capital Resources
The following table presents a summary of our cash flows for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
165,183
|
|
|
$
|
108,584
|
|
|
$
|
56,599
|
|
Investing activities
|
|
|
(178,203
|
)
|
|
|
(156,967
|
)
|
|
|
(21,236
|
)
|
Financing activities
|
|
|
(64,355
|
)
|
|
|
(30,833
|
)
|
|
|
(33,522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(77,375
|
)
|
|
$
|
(79,216
|
)
|
|
$
|
1,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Net cash provided by operating activities for the six months
ended June 30, 2011 was $165.2 million compared to
$108.6 million for the six months ended June 30, 2010,
an increase of $56.6 million, or 52.1%. Net income,
excluding the income from the tax credits (described in
Note 15 to the financial statements included in this
report) of $9.2 million in 2010, was $76.8 million and
$48.0 million, respectively, for the first six months of
2011 and 2010, an increase of $28.8 million that increased
net cash provided by operating activities. Additionally,
requirements for operating assets and liabilities were lower by
$30.4 million in 2011 compared to 2010, primarily due to
favorable changes in accounts receivable of $31.4 million
resulting from price increases in 2010. Cash requirements for
operating activities are subject to PCAs operating needs,
the timing of collection of receivables and payments of payables
and expenses, and seasonal fluctuations in its operations.
Investing
Activities
Net cash used for investing activities for the six months ended
June 30, 2011 increased $21.2 million, or 13.5%, to
$178.2 million, compared to the six months ended
June 30, 2010. The increase was primarily related to a
$26.9 million acquisition completed in April 2011,
partially offset by lower additions to property, plant and
equipment and other long-term assets of $4.3 million during
the six months ended June 30, 2011 compared to the same
period in 2010 and fire-related insurance proceeds of
$1.0 million received in June 2011 (see Note 18).
25
Financing
Activities
Net cash used for financing activities totaled
$64.4 million for the six months ended June 30, 2011,
a difference of $33.5 million, or 108.7%, compared to the
same period in 2010. The difference was primarily attributable
to additional repurchases of PCA common stock of
$42.3 million, as well as higher dividends paid of
$4.9 million during the first six months of 2011. These
increases were partially offset by $9.9 million in proceeds
from the settlement of treasury locks in February 2011 and
additional proceeds received from stock option exercises of
$3.8 million during the first six months of 2011 compared
to the same period in 2010.
On February 22, 2011, PCA announced that its board of
directors authorized an increase in the quarterly dividend from
$0.15 to $0.20 per share of its common stock, beginning with the
dividend paid on April 15, 2011. The timing and amount of
future dividends are subject to the determination of PCAs
board of directors.
PCAs primary sources of liquidity are net cash provided by
operating activities, borrowings under PCAs revolving
credit facility, and additional borrowings under PCAs
receivables credit facility. As of June 30, 2011, PCA had
$176.7 million in unused borrowing capacity under its
existing credit agreements, net of the impact on this borrowing
capacity of $14.3 million of outstanding letters of credit.
Currently, PCAs primary uses of cash are for operations,
capital expenditures, debt service and declared common stock
dividends, which it expects to be able to fund from these
sources.
The following table provides the outstanding balances and the
weighted average interest rates as of June 30, 2011 for
PCAs revolving credit facility, the receivables credit
facility, and the senior notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
|
|
|
|
Balance at
|
|
|
Weighted
|
|
|
Annual
|
|
|
|
June 30,
|
|
|
Average
|
|
|
Cash Interest
|
|
Borrowing Arrangement
|
|
2011
|
|
|
Interest Rate
|
|
|
Payments
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility
|
|
$
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Receivables Credit Facility
|
|
|
109,000
|
|
|
|
1.04
|
%
|
|
$
|
1,134
|
|
53/4% Senior
Notes (due August 1, 2013)
|
|
|
400,000
|
|
|
|
5.75
|
|
|
|
23,000
|
|
61/2% Senior
Notes (due March 15, 2018)
|
|
|
150,000
|
|
|
|
6.50
|
|
|
|
9,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
659,000
|
|
|
|
5.14
|
%
|
|
$
|
33,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table excludes unamortized debt discount of
$0.7 million at June 30, 2011. It also excludes from
the projected annual cash interest payments, the non-cash income
from the annual amortization of the $22.8 million received
in July 2003 and the non-cash expense from the annual
amortization of the $4.4 million paid in March 2008 to
settle the treasury locks related to the
53/4% senior
notes due 2013 and
61/2% senior
notes due 2018. The amortization is being recognized over the
terms of the
53/4% senior
notes due 2013 and
61/2% senior
notes due 2018 and is included in interest expense, net.
On March 1, 2011, PCA renewed the receivables credit
facility, which was scheduled to expire on March 1, 2011,
to February 28, 2012.
The instruments governing PCAs indebtedness contain
financial and other covenants that limit, among other things,
the ability of PCA and its subsidiaries to:
|
|
|
|
|
enter into sale and leaseback transactions,
|
|
|
|
incur liens,
|
|
|
|
incur indebtedness at the subsidiary level,
|
|
|
|
enter into certain transactions with affiliates, or
|
|
|
|
merge or consolidate with any other person or sell or otherwise
dispose of all or substantially all of the assets of PCA.
|
These limitations could limit corporate and operating activities.
26
In addition, PCA must maintain minimum net worth and maximum
debt to total capitalization and minimum interest coverage
ratios under the revolving credit facility. A failure to comply
with the restrictions contained in the revolving credit facility
could lead to an event of default, which could result in an
acceleration of any outstanding indebtedness
and/or
prohibit PCA from drawing on the revolving credit facility. Such
an acceleration may also constitute an event of default under
the senior notes indentures and the receivables credit facility.
As of June 30, 2011, PCA was in compliance with these
covenants.
PCA currently expects to incur capital expenditures of
$260.0 million in 2011, including $115.0 million for
major energy optimization projects at its Counce and Valdosta
mills and $40.0 million for strategic projects in the box
plants. The remaining $105.0 million in expenditures will
be used primarily for maintenance capital, cost reduction,
business growth and environmental compliance. As of
June 30, 2011, PCA spent $145.2 million for capital
expenditures and had committed to spend an additional
$93.9 million in the remainder of 2011 and beyond.
PCA believes that net cash generated from operating activities,
available cash reserves, available borrowings under its
committed credit facilities and available capital through access
to capital markets will be adequate to meet its liquidity and
capital requirements, including payments of any declared common
stock dividends, for the foreseeable future. As its debt or
credit facilities become due, PCA will need to repay, extend or
replace such facilities, which will be subject to future
economic conditions and financial, business and other factors,
many of which are beyond PCAs control.
Reconciliations
of Non-GAAP Financial Measures to Reported
Amounts
Income from operations, net income and diluted earnings per
share excluding special items are non-GAAP financial measures.
Reconciliations of those non-GAAP measures to the most
comparable measure reported in accordance with GAAP for the
three and six months ended June 30, 2011 and 2010 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Income from
|
|
|
|
|
|
|
|
|
Income from
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
Net Income
|
|
|
Diluted EPS
|
|
|
Operations
|
|
|
Net Income
|
|
|
Diluted EPS
|
|
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported in accordance with GAAP
|
|
$
|
67.9
|
|
|
$
|
39.4
|
|
|
$
|
0.39
|
|
|
$
|
67.7
|
|
|
$
|
38.0
|
|
|
$
|
0.37
|
|
Special items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits reserve adjustment
|
|
|
(1.6
|
)
|
|
|
(1.0
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset disposal charges
|
|
|
1.9
|
|
|
|
1.2
|
|
|
|
0.01
|
|
|
|
1.7
|
|
|
|
1.1
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total special items
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
|
|
|
|
1.7
|
|
|
|
1.1
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding special items
|
|
$
|
68.2
|
|
|
$
|
39.6
|
|
|
$
|
0.39
|
|
|
$
|
69.4
|
|
|
$
|
39.1
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Income from
|
|
|
|
|
|
|
|
|
Income from
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
Net Income
|
|
|
Diluted EPS
|
|
|
Operations
|
|
|
Net Income
|
|
|
Diluted EPS
|
|
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported in accordance with GAAP
|
|
$
|
133.8
|
|
|
$
|
76.8
|
|
|
$
|
0.76
|
|
|
$
|
101.4
|
|
|
$
|
57.2
|
|
|
$
|
0.56
|
|
Special items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits reserve adjustment
|
|
|
(1.6
|
)
|
|
|
(1.0
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset disposal charges
|
|
|
5.1
|
|
|
|
3.3
|
|
|
|
0.03
|
|
|
|
5.5
|
|
|
|
3.6
|
|
|
|
0.03
|
|
Biofuel tax credits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9.2
|
)
|
|
|
(9.2
|
)
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total special items
|
|
|
3.5
|
|
|
|
2.3
|
|
|
|
0.02
|
|
|
|
(3.7
|
)
|
|
|
(5.6
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding special items
|
|
$
|
137.4
|
|
|
$
|
79.1
|
|
|
$
|
0.78
|
|
|
$
|
97.7
|
|
|
$
|
51.6
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Market
Risk and Risk Management Policies
PCA is exposed to the impact of interest rate changes and
changes in the market value of its financial instruments. PCA
periodically enters into derivatives in order to minimize these
risks, but not for trading purposes. For a discussion of
derivatives and hedging activities, see Note 10 to
PCAs unaudited condensed consolidated financial statements
included elsewhere in this report.
The interest rates on approximately 84% of PCAs debt are
fixed. A one percent increase in interest rates related to
variable rate debt would have resulted in an increase in
interest expense and a corresponding decrease in income before
taxes of $1.1 million annually. In the event of a change in
interest rates, management could take actions to mitigate its
exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects,
the sensitivity analysis assumes no changes in PCAs
financial structure.
Environmental
Matters
PCA is subject to, and must comply with, a variety of federal,
state and local environmental laws, particularly those relating
to air and water quality, waste disposal and the cleanup of
contaminated soil and groundwater. The most significant of these
laws affecting the Company are:
|
|
|
|
|
Resource Conservation and Recovery Act (RCRA);
|
|
|
|
Clean Water Act (CWA);
|
|
|
|
Clean Air Act (CAA);
|
|
|
|
The Emergency Planning and Community
Right-to-Know-Act
(EPCRA);
|
|
|
|
Toxic Substance Control Act (TSCA); and
|
|
|
|
Safe Drinking Water Act (SDWA).
|
PCA believes that it is currently in material compliance with
these and all applicable environmental rules and regulations.
Because environmental regulations are constantly evolving, the
Company has incurred, and will continue to incur, costs to
maintain compliance with these and other environmental laws. PCA
works diligently to anticipate and budget for the impact of
applicable environmental regulations, and does not currently
expect that future environmental compliance obligations will
materially affect its business or financial condition.
In 2004, the U.S. Environmental Protection Agency (the
EPA) published the Boiler MACT regulations affecting
certain industrial boilers. These regulations were vacated and
remanded by the U.S. Court of Appeals for the D.C. Circuit
in 2007. The EPA proposed final regulations in 2011, which would
require compliance in 2014. PCA is currently assessing the
impact of these regulations on its operations which could
require significant modifications to certain of PCAs
boilers. Due to the complexity of these regulations, and the
potential for future regulatory or judicial modification to
these regulations, the timing and amount of expenditures to be
made by PCA are uncertain, but could be significant during the
period before compliance is required. During the second quarter,
the EPA delayed the effective date of the rules, pending
reconsideration of the rules.
Impact of
Inflation
PCA does not believe that inflation has had a material impact on
its financial position or results of operations during the
three- and six-month periods ending June 30, 2011 and 2010.
Off-Balance
Sheet Arrangements
PCA does not have any off-balance sheet arrangements as of
June 30, 2011 that would require disclosure under SEC
FR-67, Disclosure in Managements Discussion and
Analysis About Off-Balance Sheet Arrangement and Aggregate
Contractual Obligations.
28
Critical
Accounting Policies and Estimates
Managements discussion and analysis of PCAs
financial condition and results of operations are based upon the
Companys consolidated financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On an ongoing
basis, PCA evaluates its estimates, including those related to
bad debts, inventories, intangible assets, pensions and other
postretirement benefits, income taxes, contingencies and
litigation. PCA bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
PCA has included in its Annual Report on
Form 10-K
for the year ended December 31, 2010, a discussion of its
critical accounting policies which it believes affect its more
significant judgments and estimates used in the preparation of
its consolidated financial statements. PCA has not made any
changes in any of these critical accounting policies during the
first six months of 2011.
Forward-Looking
Statements
Some of the statements in this Quarterly Report on
Form 10-Q,
and in particular, statements found in Managements
Discussion and Analysis of Financial Condition and Results of
Operations, that are not historical in nature are
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are
often identified by the words will,
should, anticipate, believe,
expect, intend, estimate,
hope, or similar expressions. These statements
reflect managements current views with respect to future
events and are subject to risks and uncertainties. There are
important factors that could cause actual results to differ
materially from those in forward-looking statements, many of
which are beyond our control. These factors, risks and
uncertainties include the following:
|
|
|
|
|
the impact of general economic conditions;
|
|
|
|
containerboard and corrugated products general industry
conditions, including competition, product demand and product
pricing;
|
|
|
|
fluctuations in wood fiber and recycled fiber costs;
|
|
|
|
fluctuations in purchased energy costs;
|
|
|
|
the possibility of unplanned outages or interruptions at our
principal facilities; and
|
|
|
|
legislative or regulatory actions or requirements, particularly
concerning environmental or tax matters.
|
Our actual results, performance or achievement could differ
materially from those expressed in, or implied by, these
forward-looking statements, and accordingly, we can give no
assurances that any of the events anticipated by the
forward-looking statements will transpire or occur, or if any of
them do occur, what impact they will have on our results of
operations or financial condition. In view of these
uncertainties, investors are cautioned not to place undue
reliance on these forward-looking statements. We expressly
disclaim any obligation to publicly revise any forward-looking
statements that have been made to reflect the occurrence of
events after the date hereof. For a discussion of other factors,
risks and uncertainties that may affect our business, see
Item 1A. Risk Factors included in our Annual Report on
Form 10-K
for the year ended December 31, 2010.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
For a discussion of market risks related to PCA, see
Part I, Item 2, Managements Discussion and
Analysis of Financial Condition and Results of
Operations Market Risk and Risk Management
Policies in this Quarterly Report on
Form 10-Q.
29
|
|
Item 4.
|
Controls
and Procedures.
|
PCA maintains disclosure controls and procedures (as defined in
Rule 13a-15(e)
of the Securities Exchange Act of 1934) that are designed
to provide reasonable assurance that information required to be
disclosed in PCAs filings under the Securities Exchange
Act is recorded, processed, summarized and reported within the
periods specified in the rules and forms of the SEC and that
such information is accumulated and communicated to PCAs
management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Prior to filing this report, PCA completed an evaluation under
the supervision and with the participation of PCAs
management, including PCAs Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of PCAs disclosure controls and procedures as of
June 30, 2011. The evaluation of PCAs disclosure
controls and procedures included a review of the controls
objectives and design, PCAs implementation of the controls
and the effect of the controls on the information generated for
use in this report. Based on this evaluation, PCAs Chief
Executive Officer and Chief Financial Officer concluded that
PCAs disclosure controls and procedures were effective at
the reasonable assurance level as of June 30, 2011.
During the quarter ended June 30, 2011, there were no
changes in internal controls over financial reporting that have
materially affected, or are reasonably likely to materially
affect, PCAs internal control over financial reporting.
30
PART II
OTHER
INFORMATION
|
|
Item 1.
|
Legal
Proceedings.
|
During September and October 2010, PCA and eight other
U.S. and Canadian containerboard producers were named as
defendants in five purported class action lawsuits filed in the
United States District Court for the Northern District of
Illinois, alleging violations of the Sherman Act. The lawsuits
have been consolidated in a single complaint under the caption
Kleen Products LLC v Packaging Corp. of America et al.
The consolidated complaint alleges that the defendants
conspired to limit the supply of containerboard, and that the
purpose and effect of the alleged conspiracy was to artificially
increase prices of containerboard products during the period of
August 2005 to the time of filing of the complaints. The
complaint was filed as a purported class action suit on behalf
of all purchasers of containerboard products during such period.
The complaint seeks treble damages and costs, including
attorneys fees. The defendants motions to dismiss
the complaint were denied by the court in April 2011. PCA
believes the allegations are without merit and will defend this
lawsuit vigorously. However, as the lawsuit is in preliminary
stages, PCA is unable to predict the ultimate outcome or
estimate a range of reasonably possible losses.
PCA is a party to various other legal actions arising in the
ordinary course of our business. These legal actions cover a
broad variety of claims spanning our entire business. As of the
date of this filing, we believe it is not reasonably possible
that the resolution of these legal actions will, individually or
in the aggregate, have a material adverse effect on our
financial condition, results of operations or cash flows.
There have been no material changes to the risk factors
disclosed in Item 1A. Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2010.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
The following table summarizes the Companys stock
repurchases in the second quarter of 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
of Shares that
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
may yet be
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
Purchased Under
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced
|
|
|
the Plan or
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Plans or Programs
|
|
|
Program
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
April 1, 2011 to April 30, 2011
|
|
|
66,430
|
|
|
$
|
27.44
|
|
|
|
66,430
|
|
|
$
|
105,064
|
|
May 1, 2011 to May 31, 2011
|
|
|
638,710
|
|
|
|
28.40
|
|
|
|
638,710
|
|
|
|
86,923
|
|
June 1, 2011 to June 30, 2011
|
|
|
230,030
|
|
|
|
27.13
|
|
|
|
230,030
|
|
|
|
80,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
935,170
|
|
|
$
|
28.02
|
|
|
|
935,170
|
|
|
$
|
80,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 17, 2007, PCA announced that its Board of
Directors authorized a $150.0 million common stock
repurchase program, which it completed during the second quarter
of 2011. All shares repurchased under this authorization have
been retired as of June 30, 2011.
On February 22, 2011, PCA announced that its Board of
Directors had authorized the repurchase of an additional
$100.0 million of the Companys outstanding common
stock, of which $80.7 million remains available as of
June 30, 2011 for repurchase of the Companys common
stock.
|
|
Item 3.
|
Defaults
Upon Senior Securities.
|
None.
31
|
|
Item 5.
|
Other
Information.
|
None.
|
|
|
|
|
|
31
|
.1
|
|
Certification of Chief Executive Officer, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Certification of Chief Financial Officer, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
Certification of Chief Executive Officer Pursuant to
18 U.S.C. §1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
Certification of Chief Financial Officer Pursuant to
18 U.S.C. §1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
101
|
|
|
The following financial information from Packaging Corporation
of Americas Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2011, formatted in XBRL
(eXtensible Business Reporting Language): (i) Condensed
Consolidated Balance Sheets at June 30, 2011 and
December 31, 2010, (ii) Condensed Consolidated
Statements of Income for the three and six months ended
June 30, 2011 and 2010, (iii) Condensed Consolidated
Statements of Cash Flows for the six months ended June 30,
2011 and 2010, and (iv) the Notes to Condensed Consolidated
Financial Statements.
|
32
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)
Chief Executive Officer
Senior Vice President and Chief Financial Officer
Date: August 4, 2011
33