10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2008
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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(I.R.S. Employer
Identification No.)
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1900 West Field Court, Lake Forest, Illinois
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60045
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(Address of Principal Executive
Offices)
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(Zip Code)
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Registrants
telephone number, including area code
(847) 482-3000
Securities
registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange
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Title of Each Class
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on Which Registered
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Common Stock, $0.01 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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
(Do not check if a smaller reporting company)
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Smaller reporting
Company o
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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
At June 30, 2008, the last business day of the
Registrants most recently completed second fiscal quarter,
the aggregate market value of the Registrants common
equity held by nonaffiliates was approximately $2,202,087,304
based on the closing sale price as reported on the New York
Stock Exchange. This calculation of market value has been made
for the purposes of this report only and should not be
considered as an admission or conclusion by the Registrant that
any person is in fact an affiliate of the Registrant.
On February 25, 2009, there were 102,398,867 shares of
Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Specified portions of the Proxy Statement for the
Registrants 2009 Annual Meeting of Stockholders are
incorporated by reference to the extent indicated in
Part III of this
Form 10-K.
PART I
General
Packaging Corporation of America (we, us, our, PCA
or the Company) is the fifth largest producer of
containerboard and corrugated products in the United States in
terms of production capacity. During 2008, we produced
approximately 2.35 million tons of containerboard at our
mills, of which about 80% was consumed in PCAs corrugated
products manufacturing plants, 11% was sold to domestic
customers and 9% was sold in the export market. Our corrugated
products manufacturing plants sold about 30.3 billion
square feet (BSF) of corrugated products. Our net sales to third
parties totaled $2.4 billion in 2008.
Containerboard
Production and Corrugated Shipments
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First
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Second
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Third
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Fourth
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Full
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Quarter
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Quarter
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Quarter
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Quarter
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Year
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Containerboard Production (thousand tons)
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2008
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586
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613
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621
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533
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2,353
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2007
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584
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615
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632
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615
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2,446
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2006
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579
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591
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621
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613
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2,404
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Corrugated Shipments (BSF)
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2008
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7.6
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8.0
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7.8
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6.9
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30.3
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2007
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7.7
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8.0
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7.9
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7.6
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31.2
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2006
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7.9
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8.0
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7.8
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7.6
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31.3
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In 2008, we produced 1.44 million tons of kraft linerboard
at our mills in Counce, Tennessee and Valdosta, Georgia, and
0.91 million tons of semi-chemical corrugating medium at
our mills in Tomahawk, Wisconsin and Filer City, Michigan. We
currently lease the cutting rights to approximately
91,000 acres of timberland located near our Counce and
Valdosta mills. We also have supply agreements with third
parties on approximately 359,000 acres of timberland.
Our corrugated products manufacturing plants produce a wide
variety of corrugated packaging products, including conventional
shipping containers used to protect and transport manufactured
goods, multi-color boxes and displays with strong visual appeal
that help to merchandise the packaged product in retail
locations. In addition, we are a large producer of meat boxes
and wax-coated boxes for the agricultural industry.
Industry
Overview
According to the Fibre Box Association, the value of industry
shipments of corrugated products was $26 billion in 2008.
The primary end-use markets for corrugated products are shown
below (as reported in the most recent 2007 Fibre Box Association
annual report):
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Food, beverages and agricultural products
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50
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Paper products
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23
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%
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Petroleum, plastic, synthetic and rubber products
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11
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Appliances, machinery and vehicles
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5
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Glass, pottery, metal products and containers
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4
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Miscellaneous manufacturing
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4
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Textile mill products and apparel
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2
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Other
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1
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%
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Corrugated products plants tend to be located in close proximity
to customers to minimize freight costs. The U.S. corrugated
products industry consists of approximately 630 companies
and 1,350 plants.
Containerboard, which includes both linerboard and corrugating
medium, is the principal raw material used to manufacture
corrugated products. Linerboard is used as the inner and outer
facings, or liners, of corrugated products. Corrugating medium
is fluted and laminated to linerboard in corrugator plants to
produce
3
corrugated sheets. The sheets are subsequently printed, cut,
folded and glued in corrugator plants or sheet plants to produce
corrugated products.
Containerboard may be manufactured from both softwood and
hardwood fibers, as well as from recycled fibers from used
corrugated and waste from converting operations. Kraft
linerboard is made predominantly from softwoods like pine.
Semi-chemical corrugating medium is made from hardwoods such as
oak. The finished paper product is wound into large rolls, which
are slit to size as required and shipped to converters.
PCA
Operations and Products
Our two linerboard mills can manufacture a broad range of
linerboard grades ranging from 26 lb. to 96 lb. Our two
semi-chemical corrugating medium mills can manufacture grades
ranging in weight from 20 lb. to 47 lb. Mill capacities
described below are estimated based on expected mix of paper
basis weights. All four of our mills have completed an extensive
independent review process to become ISO 9002 certified. ISO
9002 is an international quality certification that verifies a
facility maintains and follows stringent procedures for
manufacturing, sales and customer service.
The following four paragraphs describe our containerboard
mills annual practical maximum capacity, 2008 actual
production and production capabilities.
Counce. Our Counce, Tennessee mill is one of
the largest kraft linerboard mills in the United States. Its
estimated production capacity, as reported to the American
Forest and Paper Association (AF&PA), is
approximately 1,007,000 tons per year. In 2008, we produced
970,000 tons of kraft linerboard on two paper machines at
Counce. The mill produces a broad range of basis weights from 26
lb. to 90 lb. The mill also produces a variety of performance
and specialty grades of linerboard.
Valdosta. Our Valdosta, Georgia mill is a
kraft linerboard mill that has an estimated production capacity
of approximately 474,000 tons per year, as reported to the
AF&PA. In 2008, our single paper machine at Valdosta
produced 474,000 tons of kraft linerboard. Valdosta produces
linerboard ranging from 35 lb. to 96 lb.
Tomahawk. Our Tomahawk, Wisconsin mill is one
of the largest semi-chemical corrugating medium mills in the
United States with an estimated production capacity of 581,000
tons per year on three paper machines, as reported to the
AF&PA. In April 2005, we completed the indefinite closure
of our number three paper machine at Tomahawk and currently
operate the remaining two paper machines which have a combined
production capacity of 516,000 tons. In 2008, we produced
502,000 tons of semi-chemical corrugating medium on two paper
machines at Tomahawk. One of the two paper machines we operate
is among the largest corrugating medium machines in the world.
The Tomahawk mill produces a broad range of basis weights from
23 lb. to 47 lb. and a variety of performance and specialty
grades of corrugating medium.
Filer City. Our Filer City, Michigan mill is a
semi-chemical corrugating medium mill with an estimated
production capacity of 413,000 tons on three paper machines, as
reported to the AF&PA. In 2008, we produced 407,000 tons of
corrugating medium at Filer City. Filer City produces
corrugating medium grades ranging in basis weight from 20 lb. to
47 lb.
We operate 67 corrugated manufacturing operations, a technical
and development center, five regional graphic design centers, a
rotogravure printing operation and a complement of packaging
supplies and distribution centers. Of the 67 manufacturing
facilities, 40 operate as combining operations, commonly called
corrugated plants, that manufacture corrugated sheets and
finished corrugated containers. The remaining 27 manufacturing
facilities, commonly called sheet plants, purchase combined
sheets primarily produced at PCAs combining operations and
manufacture finished corrugated containers.
We have corrugated manufacturing operations in 26 states in
the U.S., with no manufacturing facilities outside of the
continental U.S. Each corrugated plant, for the most part,
serves a market radius that typically averages 150 miles.
Our sheet plants are generally located in close proximity to our
larger corrugated plants, which enables us to offer additional
services and converting capabilities such as small volume and
quick turnaround items.
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We produce a wide variety of 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 customers more attractive
packaging.
Timberland
We currently lease the cutting rights to approximately
91,000 acres of timberland located near our Counce and
Valdosta mills. Virtually all of the acres under cutting rights
agreements are located within 100 miles of these two mills,
which results in lower wood transportation costs and provides a
secure source of wood fiber. These leased cutting rights
agreements have terms with over 15 years remaining, on
average.
During 1999 and 2000, PCA sold approximately 800,000 acres
of timberland. We currently have in place supply agreements
covering approximately 359,000 of the 800,000 acres sold.
The majority of the acreage under supply agreement is located in
close proximity to our Counce mill. We currently hold an
approximate 29% equity ownership interest in approximately
51,000 acres owned by Southern Timber Venture, LLC (STV).
This acreage is located primarily in southern Georgia and
northern Florida, near our Valdosta, Georgia mill, and includes
both timberlands and higher beneficial use properties.
In addition to the timberland we manage ourselves, our Forest
Management Assistance Program provides professional forestry
assistance to private timberland owners to improve harvest
yields and to optimize their harvest schedule. We have managed
the regeneration of approximately 125,000 acres by
supplying pine seedlings. In exchange for our expertise, we are
given the right of first refusal over timber sales from those
lands. These private lands include over 145,000 acres of
timberland. We expect to harvest approximately 80,000 cords of
wood from these forests annually.
PCA also participates in the Sustainable Forestry Initiative.
This initiative is aimed at ensuring the long-term health and
conservation of Americas forestry resources. Activities
include limiting tree harvest sizes, replanting harvest acreage,
participating in flora and fauna research and protecting water
streams.
Solid
Wood Facilities
We own and operate one sawmill located in Ackerman, Mississippi.
During 2008, the Ackerman sawmill sold 51 million board
feet of lumber used in the building products and furniture
industries. We also have an air-dry yard operation in
Burnsville, Mississippi that holds newly cut lumber while it
dries.
Sales and
Marketing
Our corrugated products are sold through a direct sales and
marketing organization. We have sales representatives and a
sales manager at each corrugated manufacturing operation who
serve local and regional accounts. We also have corporate
account managers who serve large national accounts at multiple
customer locations. Additionally, our graphic design centers
maintain an
on-site
dedicated graphics sales force. In addition to direct sales and
marketing personnel, we utilize new product development
engineers and product graphics and design specialists. These
individuals are located at both the corrugated plants and the
graphic design centers. General marketing support is located at
our corporate headquarters.
Our containerboard sales group is responsible for the sale of
linerboard and corrugating medium to our corrugated plants, to
other domestic customers and to the export market. This group
handles order processing for all shipments of containerboard
from our mills to our corrugated plants. These personnel also
coordinate and execute all containerboard trade agreements with
other containerboard manufacturers.
Distribution
Our corrugated products are usually delivered by truck due to
our large number of customers and their demand for timely
service. Shipping costs represent a relatively high percentage
of our total costs due to the high bulk of corrugated products.
As a result, our converting operations typically service
customers within a 150 miles radius.
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Containerboard produced in our mills is shipped by rail or
truck. Rail shipments represent about 55% to 60% of the tons
shipped and the remaining 40% to 45% is comprised of truck
shipments. Our individual mills do not own or maintain outside
warehousing facilities. We use third-party warehouses for
short-term storage.
Customers
PCAs corrugated products group sells to over 9,600
customers in over 17,500 locations. About two-thirds of our
corrugated products customers are regional and local accounts,
which are broadly diversified across industries and geographic
locations. The remaining one-third of our customer base consists
primarily of national accounts, or those customers with a
national presence. These customers typically purchase corrugated
products from several of our box plants throughout the United
States.
Major Raw
Materials Used
Fiber supply. Fiber is the single largest cost
in the manufacture of containerboard. PCA consumes both wood
fiber and recycled fiber in its containerboard mills. We have no
100% recycled mills, or those mills whose fiber consumption
consists solely of recycled fiber. To reduce our fiber costs, we
have invested in processes and equipment to ensure a high degree
of fiber flexibility. Our mills have the capability to shift a
portion of their fiber consumption between softwood, hardwood
and recycled sources. All of our mills, other than our Valdosta
mill, can utilize some recycled fiber in their containerboard
production. Our ability to use various types of virgin and
recycled fiber helps mitigate the impact of changes in the
prices of various fibers. Our corrugated manufacturing
operations generate recycled fiber as a by-product from the
manufacturing process, which is sold to our mills directly or
through trade agreements. During 2008, our containerboard mills
consumed approximately 590,000 tons of recycled fiber, and our
corrugated converting operations generated approximately 195,000
tons of recycled fiber. As a result, PCA was a net recycled
fiber buyer of 395,000 tons, or 17% of PCAs total fiber
requirements.
Energy supply. Energy at the mills is obtained
through purchased electricity or through various fuels, which
are converted to steam or electricity
on-site.
Fuel sources include coal, natural gas, oil, internally produced
and purchased bark and by-products of the containerboard
manufacturing and pulping process. These fuels are burned in
boilers to produce steam. Steam turbine generators are used to
produce electricity. To reduce our mill energy cost, we have
invested in processes and equipment to ensure a high level of
purchased fuel flexibility. In recent history, natural gas and
fuel oil have exhibited higher costs per thermal unit and more
price volatility than coal and bark. During 2008,
11.7 million MMBTUs (million BTUs), or
approximately 75% of our mills purchased fuel needs, were
from purchased bark and coal, historically our two lowest cost
purchased fuels. For the same period, our mills consumed about
2.5 million MMBTUs of natural gas (16% of the
mills total purchased fuels) and 1.0 million
MMBTUs of oil (7% of the mills total purchased
fuels). Our two kraft linerboard mills at Counce and Valdosta
generate more than two-thirds of their fuel requirements from
their own by-products.
PCAs corrugated plants each have a boiler that produces
steam which is used by the corrugator. The majority of these
boilers burn natural gas, although some also have the ability to
burn fuel oil. During 2008, PCAs corrugated products
plants consumed approximately 2.0 million MMBTUs of
natural gas.
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The following table shows PCAs purchased fuel consumption
by fuel type for 2008:
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2008 Purchased MMBTUs
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% of Mill
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% of PCA
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1Q
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2Q
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3Q
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4Q
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Year
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Total
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Total
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Containerboard Mills
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Coal
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2,208,211
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1,927,613
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1,712,634
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1,855,540
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7,703,998
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49
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%
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44
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%
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Bark
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970,363
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931,865
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926,673
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1,134,560
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3,963,461
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25
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%
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23
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%
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Steam
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112,126
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92,050
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109,884
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100,769
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414,829
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3
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%
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2
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%
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Coal, Bark and Steam
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3,290,700
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2,951,528
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2,749,191
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3,090,869
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12,082,288
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77
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%
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69
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%
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Oil
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575,437
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263,883
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114,241
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92,610
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1,046,171
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7
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%
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6
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%
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Natural Gas
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771,559
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648,278
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547,311
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580,480
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2,547,628
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16
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%
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14
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%
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Total Mills Purchased Fuels
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4,637,696
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3,863,689
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3,410,743
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3,763,959
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15,676,087
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100
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%
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89
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%
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Corrugated Products Plants Natural Gas
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629,435
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461,164
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415,975
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511,953
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2,018,527
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11
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%
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Total Company Purchased Fuels
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5,267,131
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4,324,853
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3,826,718
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4,275,912
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17,694,614
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100
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%
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Approximately 40% of the electricity consumed by our four mills
is generated
on-site. Our
mills purchase approximately 9,445,000 CkWh (hundred kilowatt
hours) annually, or the equivalent of 3.2 million
MMBTUs. PCAs corrugated products plants purchase
about 2,290,000 CkWh annually, or the equivalent of
0.8 million MMBTUs.
Competition
According to industry sources, corrugated products are produced
by about 630 U.S. companies operating approximately 1,350
plants. Most corrugated products are manufactured to the
customers specifications. Corrugated producers generally
sell within a
150-mile
radius of their plants and compete with other corrugated
producers in their local market. In fact, the Fibre Box
Association tracks industry data by 47 distinct market regions.
The larger, multi-plant integrated companies may also solicit
larger, multi-plant customers who purchase for all of their
facilities on a consolidated basis. These customers are often
referred to as national or corporate accounts.
Corrugated products businesses seek to differentiate themselves
through pricing, quality, service, design and product
innovation. We compete for both local and national account
business and we compete against producers of other types of
packaging products. On a national level, our competitors include
International Paper Company, Koch Industries, Inc.,
Smurfit-Stone Container Corporation and Temple-Inland Inc.
However, with our strategic focus on local and regional
accounts, we also compete with the smaller, independent
converters.
Our principal competitors with respect to sales of our
containerboard produced but not consumed at our own corrugated
products plants are a number of large, diversified paper
companies, including International Paper Company, Koch
Industries, Inc., Smurfit-Stone Container Corporation and
Temple-Inland Inc., as well as other regional manufacturers.
Containerboard is generally considered a commodity-type product
and can be purchased from numerous suppliers.
Employees
As of December 31, 2008, we had approximately
8,100 employees. Approximately 2,400 of these employees
were salaried and approximately 5,700 were hourly. Approximately
75% of our hourly employees are represented by unions. The
majority of our unionized employees are represented by the
United Steel
7
Workers (USW), the International Brotherhood of Teamsters (IBT)
and the International Association of Machinists (IAM).
Based on an agreement reached with the USW in August 2008, the
existing labor agreements at our containerboard mills covering
USW-represented employees (91% of mill hourly workforce) were
extended five years. With this extension, the USW contracts at
our mills are currently set to expire between September 2013 and
June 2015. Agreements with other union mill employees (9% of
mill hourly workforce) expire between October 2009 and June
2012. Contracts for unionized corrugated products plant
employees expire between February 2009 and November 2014. We are
currently in negotiations to renew or extend any union contracts
that have recently expired or are expiring in the near future.
During 2008, we experienced no work stoppages and have
experienced no instances of significant work stoppages in the
five years prior to 2008. We believe we have satisfactory
relations with our employees.
Environmental
Matters
Compliance with environmental requirements is a significant
factor in our business operations. We commit substantial
resources to maintaining environmental compliance and managing
environmental risk. We are 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 us are:
1. Resource Conservation and Recovery Act (RCRA)
2. Clean Water Act (CWA)
3. Clean Air Act (CAA)
4. The Emergency Planning and Community Right-to-Know-Act
(EPCRA)
5. Toxic Substance Control Act (TSCA)
6. Safe Drinking Water Act (SDWA)
We believe that we are currently in material compliance with
these and all applicable environmental rules and regulations.
Because environmental regulations are constantly evolving, we
have incurred, and will continue to incur, costs to maintain
compliance with these and other environmental laws. For the year
ended December 31, 2008, we spent approximately
$23.5 million to comply with the requirements of these and
other environmental laws. For the years ended December 31,
2007 and 2006, the costs of environmental compliance were
approximately $19.4 million and $17.5 million,
respectively. We work diligently to anticipate and budget for
the impact of applicable environmental regulations, and do not
currently expect that future environmental compliance
obligations will materially affect our business or financial
condition.
In 1998, the United States Environmental Protection Agency (EPA)
finalized a Clean Air and Water Act commonly referred to as the
Cluster Rule. The Cluster Rules govern allowable discharges of
air and water pollutants at all pulp and paper mill operations.
As a result, PCA and its competitors were required to incur
costs to ensure compliance with these rules. We completed all of
our projects related to Cluster Rule requirements in 2006 and,
as a result, do not anticipate any further capital expenditures
related to ensuring compliance with the Cluster Rules. From 1997
through 2006, we spent approximately $39.2 million to
ensure compliance with the Cluster Rule requirements. Total
capital costs for environmental matters were $3.5 million
for 2008. We currently estimate 2009 environmental capital
expenditures will be $1.5 million.
As is the case with any industrial operation, we have in the
past incurred costs associated with the remediation of soil or
groundwater contamination. From 1994 through 2008, remediation
costs at our mills and converting plants totaled approximately
$3.2 million. We do not believe that any ongoing remedial
projects are material in nature. As of December 31, 2008,
we maintained an environmental reserve of $8.3 million,
which includes funds relating to
on-site
landfill and surface impoundments as well as ongoing and
anticipated remedial projects. Of the $8.3 million reserve,
$4.2 million is reserved for our landfill
8
obligations, which are accounted for in accordance with
SFAS No. 143, Accounting for Asset Retirement
Obligations. We believe these reserves are adequate.
We could also incur environmental liabilities as a result of
claims by third parties for civil damages, including liability
for personal injury or property damage, arising from releases of
hazardous substances or contamination. We are not aware of any
material claims of this type currently pending against us.
On April 12, 1999, Pactiv Corporation, formerly known as
Tenneco Packaging Inc., a wholly owned subsidiary of Tenneco
Inc., sold its containerboard and corrugated products business
to PCA, an entity formed by Madison Dearborn Partners, LLC, a
private equity investment firm. As a part of the April 12,
1999 transaction, Pactiv agreed to retain all liability for all
former facilities and all sites associated with pre-closing
offsite waste disposal. Pactiv also retained environmental
liability for a closed landfill located near the Filer City mill.
As of this filing, we believe that it is not reasonably possible
that future environmental expenditures above the
$8.3 million accrued as of December 31, 2008 will have
a material impact on our financial condition and results of
operations.
Available
Information
PCAs internet website address is
www.packagingcorp.com. Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
are available free of charge through our website as soon as
reasonably practicable after they are electronically filed with,
or furnished to, the Securities and Exchange Commission. In
addition, our Code of Ethics may be accessed in the Investor
Relations section of PCAs website. PCAs website and
the information contained or incorporated therein are not
intended to be incorporated into this report.
Financial
Information About Segments
We operate as one segment and our revenues are generated
primarily in one geographic segment. See Segment
Information of Note 2 Summary of
Significant Accounting Policies contained in the Notes to
Consolidated Financial Statements.
Some of the statements in this report 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, but are
not limited to, the factors described below.
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 so, 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.
9
Industry
Risks
Industry
Earnings Cyclicality Imbalances of supply and demand
for containerboard could affect the price at which we can sell
containerboard and corrugated products, and as a result, could
result in lower selling prices and earnings.
The price of containerboard could fall if the supply of
containerboard available for sale in the market exceeds the
demand. The demand for containerboard is driven by market needs
for containerboard in the United States and abroad to
manufacture corrugated shipping containers. Market needs or
demand are driven by both global and U.S. business
conditions, which severely weakened during the fourth quarter of
2008. If supply exceeds demand, prices for containerboard and
corrugated products could decline, resulting in decreased
earnings and cash generated from operations.
Competition
The intensity of competition in the containerboard and
corrugated packaging industry could result in downward pressure
on pricing and volume, which could lower earnings and cash
generated from operations.
The containerboard and corrugated products industry is highly
competitive, with no single containerboard or corrugated
packaging producer having a dominant position. Containerboard
cannot generally be differentiated by producer, which tends to
intensify price competition. The corrugated packaging industry
is also sensitive to changes in economic conditions, as well as
other factors including innovation, design, quality and service.
To the extent that one or more competitors are more successful
with respect to any key competitive factor, our business could
be adversely affected. Our products also compete, to some
extent, with various other packaging materials, including
products made of paper, plastics, wood and various types of
metal. The intensity of competition could lead to a reduction in
our market share as well as lower sales prices for our products,
both of which could reduce our earnings and cash flow.
Company
Risks
Cost
of Fiber An increase in the cost of fiber could
increase our manufacturing costs and lower our
earnings.
PCA has supply agreements at market prices for wood fiber to be
consumed at three of our four mills on approximately
359,000 acres of timberland. In addition to these supply
agreements, PCA also secures wood fiber from various other
sources at market prices.
PCA purchases recycled fiber for use at three of its four
containerboard mills. PCA currently purchases, net of recycled
fiber generated at its box plants, approximately 395,000 tons of
recycled fiber per year.
The market price of wood fiber varies based upon availability
and source. In addition, the increase in demand of products
manufactured, in whole or in part, from recycled fiber, on a
global basis, has caused an occasional tightening in the supply
of recycled fiber. These periods of supply and demand imbalance
have tended to create significant price volatility. Periods of
above average fiber costs and unusual price volatility have
occurred in the past and may occur again in the future, which
could result in lower or volatile earnings.
Cost
of Purchased Energy and Chemicals An increase in the
cost of purchased energy and chemicals could lead to higher
manufacturing costs, resulting in reduced
earnings.
PCA has the capability to use various types of purchased fuels
in its manufacturing operations, including coal, bark, natural
gas and oil. Energy prices, in particular prices for oil and
natural gas, have fluctuated dramatically in the past and have
risen substantially in recent years. In addition, costs for key
chemicals used in our manufacturing have risen. These
fluctuations impact our manufacturing costs and result in
earnings volatility. If energy and chemical prices rise, our
production costs will increase, which will lead to higher
manufacturing costs and reduced earnings.
10
Material
Disruption of Manufacturing A material disruption at
one of our manufacturing facilities could prevent us from
meeting customer demand, reduce our sales and/or negatively
impact our results of operation and financial
condition.
Our business depends on continuous operation of our facilities,
particularly at our mills. Any of our manufacturing facilities,
or any of our machines within such facilities, could cease
operations unexpectedly for a long period of time due to a
number of events, including unscheduled maintenance outages;
prolonged power failures; an equipment failure; explosion of a
boiler; labor difficulties; natural catastrophes; terrorism;
governmental regulations; and other operational problems. These
events could lead to higher costs and reduced earnings.
Environmental
Matters PCA may incur significant environmental
liabilities with respect to both past and future
operations.
We are subject to, and must comply with, a variety of federal,
state and local environmental laws, particularly those relating
to air and water quality, waste disposal and the cleanup of
contaminated soil and groundwater. Because environmental
regulations are constantly evolving, we have incurred, and will
continue to incur, costs to maintain compliance with those laws.
See Item 1. Business Environmental
Matters for certain estimates of expenditures we expect to
make for environmental compliance in the next few years.
Although we have established reserves to provide for future
environmental liability, these reserves may not be adequate. In
addition, enactment of new environmental laws or regulations or
changes in existing laws or regulations might require
significant expenditures.
Investment
Risks
Market
Price of our Common Stock The market price of our
common stock may be volatile, which could cause the value of
your investment to decline.
Securities markets worldwide have recently experienced
significant price declines and volume fluctuations. This market
volatility, as well as general economic, market or political
conditions, could reduce the market price of our common stock in
spite of our operating performance. In addition, our operating
results could be below the expectations of public market
analysts and investors, and in response, the market price of our
common stock could decrease significantly.
General
Risks
Economic
Conditions Our earnings and cash generated from
operations could be significantly lower as a result of the
severe and possibly prolonged downturn in the U.S.
economy.
Our operations and financial performance are directly impacted
by changes in the U.S. economy, and to a lesser extent, by
global economic conditions. The significant downturn in the
U.S. economy during the fourth quarter of 2008
significantly lowered the demand for our products. As a result,
to balance the production of containerboard at our mills with
demand, we reduced our fourth quarter mill production by 90,000
tons and operated our mills at about 85% of capacity. This lower
demand and production reduced our revenues, increased our unit
production costs, and lowered our earnings and our cash
generated from operations. It is uncertain if economic
conditions will deteriorate further, or when economic conditions
will improve. Until economic conditions improve, our operating
and financial performance will continue to be adversely
impacted. Lower earnings and reduced cash flow could impact our
ability to fund operations, capital requirements, and common
stock dividend payments, and a prolonged and severe downturn
could possibly impact our ability to comply with our debt
convenants.
|
|
Item 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
11
The table below provides a summary of our containerboard mills,
the principal products produced and each mills annual
practical maximum capacity based upon all of our paper
machines production capabilities:
|
|
|
|
|
|
|
Location
|
|
Function
|
|
Capacity (tons)
|
|
|
Counce, TN
|
|
Kraft linerboard mill
|
|
|
1,007,000
|
|
Valdosta, GA
|
|
Kraft linerboard mill
|
|
|
474,000
|
|
Tomahawk, WI
|
|
Semi-chemical medium mill
|
|
|
581,000
|
*
|
Filer City, MI
|
|
Semi-chemical medium mill
|
|
|
413,000
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
2,475,000
|
*
|
|
|
|
|
|
|
|
|
|
|
* |
|
In April, 2005, we shut down the number three paper machine at
our Tomahawk mill after resuming operations on the number one
paper machine at our Filer City mill. Shutting down the number
three machine (out of 3 total paper machines) at Tomahawk
reduces our total productive capacity by 65,000 tons at Tomahawk
from 581,000 tons to 516,000 tons and reduces our total
containerboard mill system capacity from 2,475,000 tons to
2,410,000 tons. This action was based on market conditions and
productivity and could change if market conditions or
productivity levels change going forward. |
We currently own our four containerboard mills and 44 of our
corrugated manufacturing operations (37 corrugated plants and
seven sheet plants). We also own one sawmill, an air-drying
yard, one warehouse and miscellaneous other property, which
includes sales offices and woodlands forest management offices.
These sales offices and woodlands forest management offices
generally have one to four employees and serve as administrative
offices. PCA leases the space for three corrugated plants, 20
sheet plants, five regional design centers, and numerous other
distribution centers, warehouses and facilities. The equipment
in these leased facilities is, in virtually all cases, owned by
PCA, except for forklifts and other rolling stock which are
generally leased.
We lease the cutting rights to approximately 91,000 acres
of timberland located near our Valdosta mill (80,000 acres)
and our Counce mill (11,000 acres). On average, these
cutting rights agreements have terms with over 15 years
remaining.
We currently lease space for our corporate headquarters in Lake
Forest, Illinois. The lease for the Lake Forest, Illinois
facility is a short term, facility use agreement lease with
automatic renewal rights. Specifically, this lease is a
continuous month-to-month lease with unlimited automatic
renewals entitling either party the right to terminate the lease
with at least 8 months notice.
We currently believe that our owned and leased space for
facilities and properties are sufficient to meet our operating
requirements for the foreseeable future.
|
|
Item 3.
|
LEGAL
PROCEEDINGS
|
PCA is a party to various legal actions arising in the ordinary
course of our business. These legal actions cover a broad
variety of claims spanning our entire business. As of the date
of this filing, we believe it is not reasonably possible that
the resolution of these legal actions will, individually or in
the aggregate, have a material adverse effect on our financial
condition, results of operations or cash flows.
|
|
Item 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of security holders in the
fourth quarter of 2008.
|
|
Item 4.1
|
EXECUTIVE
OFFICERS OF THE REGISTRANT
|
Brief statements setting forth the age at February 25,
2009, the principal occupation, employment during the past five
years, the year in which such person first became an officer of
PCA, and other information concerning each of our executive
officers appears below.
12
Paul T. Stecko is 64 years old and has served as
Chief Executive Officer of PCA since January 1999 and as
Chairman of PCA since March 1999. From November 1998 to April
1999, Mr. Stecko served as President and Chief Operating
Officer of Tenneco Inc. From January 1997 to November 1998,
Mr. Stecko served as Chief Operating Officer of Tenneco.
From December 1993 through January 1997, Mr. Stecko served
as President and Chief Executive Officer of Tenneco Packaging
Inc. Prior to joining Tenneco Packaging, Mr. Stecko spent
16 years with International Paper Company. Mr. Stecko
is a member of the board of directors of Tenneco Inc., Smurfit
Kappa Group Limited, State Farm Mutual Insurance Company and
American Forest and Paper Association.
William J. Sweeney is 68 years old and has served as
Executive Vice President Corrugated Products of PCA
since April 1999. From May 1997 to April 1999, Mr. Sweeney
served as Executive Vice President Paperboard
Packaging of Tenneco Packaging Inc. From May 1990 to May 1997,
Mr. Sweeney served as Senior Vice President and General
Manager Containerboard Products of Tenneco
Packaging. From 1983 to May 1990, Mr. Sweeney served as
General Manager and Vice President of Stone Container
Corporation. From 1978 to 1983, Mr. Sweeney served as Sales
Manager, Operations Manager and Division Vice President at
Continental Group and from 1967 to 1978, as Sales Manager and
General Manager of Boise Cascade Corporation.
Mark W. Kowlzan is 53 years old and has served as
Senior Vice President Containerboard of PCA since
March 2002 and as Vice President from April 1999 to March 2002.
From 1998 to April 1999, Tenneco Packaging Inc. employed
Mr. Kowlzan as Vice President and General
Manager Containerboard and from May 1996 to 1998, as
Operations Manager and Mill Manager of the Counce mill. Prior to
joining Tenneco Packaging, Mr. Kowlzan spent 15 years
at International Paper Company, where he held a series of
operational positions within its mill organization.
Richard B. West is 56 years old and has served as
Chief Financial Officer of PCA since March 1999 and as Senior
Vice President since March 2002. From April 1999 to June 2007,
Mr. West served as our Corporate Secretary. From April 1999
to March 2002, Mr. West served as Vice President and from
March 1999 to June 1999, Mr. West also served as
Treasurer of PCA. Mr. West served as Vice President of
Finance Paperboard Packaging of Tenneco Packaging
Inc. from 1995 to April 1999. Prior to joining Tenneco
Packaging, Mr. West spent 20 years with International
Paper Company where he served as an Internal Auditor, Internal
Audit Manager and Manufacturing Controller for the Printing
Papers Group and Director/Business Process Redesign.
Stephen T. Calhoun is 63 years old and has served as
Vice President, Human Resources of PCA since November 2002. From
July 1997 to October 2002, Mr. Calhoun served as Director,
Human Resources of Corporate and Containerboard Division. From
April 1989 to July 1997, Mr. Calhoun was employed
principally by Tenneco Packaging Inc. where he held the
positions of Area Employee Relations Manager and Human Resources
Manager. Prior to joining Tenneco Packaging in 1989,
Mr. Calhoun spent 15 years with American Can Company
where he held several human resources and manufacturing
positions.
Thomas A. Hassfurther is 53 years old and has served
as Senior Vice President, Sales and Marketing, Corrugated
Products since February 2005 and as Vice President, Sales and
Marketing from March 1998 to February 2005. Mr. Hassfurther
served as Vice President and Area General Manager from January
1991 to February 1998 for Tenneco Packaging Inc. From 1977 to
1990, Mr. Hassfurther served as a Sales Representative,
Sales Manager and General Manager within the Containerboard
Products Group.
13
PART II
|
|
Item 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
PCAs common stock is listed on the New York Stock Exchange
under the symbol PKG. The following table sets forth
the high and low sale prices and dividends as reported by the
New York Stock Exchange during the last two years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Sales Price
|
|
|
Dividends
|
|
|
Sales Price
|
|
|
Dividends
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
March 31
|
|
$
|
28.74
|
|
|
$
|
19.84
|
|
|
$
|
0.30
|
|
|
$
|
25.83
|
|
|
$
|
22.04
|
|
|
$
|
0.25
|
|
June 30
|
|
|
26.47
|
|
|
|
20.46
|
|
|
|
0.30
|
|
|
|
26.55
|
|
|
|
24.35
|
|
|
|
0.25
|
|
September 30
|
|
|
26.99
|
|
|
|
20.93
|
|
|
|
0.30
|
|
|
|
31.78
|
|
|
|
21.87
|
|
|
|
0.25
|
|
December 31
|
|
|
23.60
|
|
|
|
10.95
|
|
|
|
0.30
|
|
|
|
31.88
|
|
|
|
26.75
|
|
|
|
0.30
|
|
Stockholders
As of February 25, 2009, there were 99 holders of record of
our common stock.
Dividend
Policy
PCA expects to continue to pay regular cash dividends, although
there is no assurance as to the timing or level of future
dividend payments because they depend on future earnings,
capital requirements and financial condition.
Sales of
Unregistered Securities
No equity securities of PCA were sold by PCA during fiscal year
2008 which were not registered under the Securities Act of 1933.
Purchases
of Equity Securities
Stock
Repurchase Programs
On October 17, 2007, PCA announced that its Board of
Directors had authorized a $150.0 million common stock
repurchase program. There is no expiration date for the common
stock repurchase program. Through December 31, 2008, the
Company repurchased 3,818,729 shares of common stock for
$85.0 million. All repurchased shares were retired prior to
December 31, 2008.
The following table summarizes the Companys stock
repurchases in the fourth quarter of 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
of Shares that
|
|
|
|
Total
|
|
|
|
|
|
Part of
|
|
|
may yet be
|
|
|
|
Number of
|
|
|
Average
|
|
|
Publicly
|
|
|
Purchased Under
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Announced
|
|
|
the Plan or
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Plans or Programs
|
|
|
Program
|
|
|
October 1, 2008 to October 31, 2008
|
|
|
1,122,600
|
|
|
$
|
18.11
|
|
|
|
1,122,600
|
|
|
$
|
64,974,000
|
|
November 1, 2008 to November 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,974,000
|
|
December 1, 2008 to December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,974,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,122,600
|
|
|
$
|
18.11
|
|
|
|
1,122,600
|
|
|
$
|
64,974,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Performance
Graph
The graph below compares PCAs cumulative
5-year total
shareholder return on common stock with the cumulative total
returns of the S&P 500 index; the S&P Midcap 400
index; a New Peer Group that includes three companies, which are
International Paper Company, Smurfit-Stone Container Corp. and
Temple Inland Inc.; and an Old Peer Group of four companies,
which are International Paper Company, Smurfit-Stone Container
Corp., Temple Inland Inc. and Weyerhaeuser Company. Peer Group
member Weyerhaeuser was dropped from the Old Peer Group
comparison due to the sale of its containerboard, packaging and
recycling business to International Paper Company in August
2008. The graph tracks the performance of a $100 investment in
our common stock, in each index, and in the peer groups
(including the reinvestment of all dividends) from
December 31, 2003 through December 31, 2008. The stock
price performance included in this graph is not necessarily
indicative of future stock price performance.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Packaging Corporaton of America, The S&P 500
Index,
The S&P Midcap 400 Index, An Old Peer Group And A New Peer
Group
|
|
* |
$100 invested on
12/31/03 in
stock & index, including reinvestment of dividends.
|
Copyright©
2009 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Total Return
|
|
|
12/03
|
|
12/04
|
|
12/05
|
|
12/06
|
|
12/07
|
|
12/08
|
Packaging Corporation of America
|
|
|
100.00
|
|
|
|
110.60
|
|
|
|
112.69
|
|
|
|
113.52
|
|
|
|
150.81
|
|
|
|
76.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S & P 500
|
|
|
100.00
|
|
|
|
110.88
|
|
|
|
116.33
|
|
|
|
134.70
|
|
|
|
142.10
|
|
|
|
89.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S & P Midcap 400
|
|
|
100.00
|
|
|
|
116.48
|
|
|
|
131.11
|
|
|
|
144.64
|
|
|
|
156.18
|
|
|
|
99.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Peer Group
|
|
|
100.00
|
|
|
|
104.36
|
|
|
|
99.48
|
|
|
|
103.72
|
|
|
|
103.43
|
|
|
|
38.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Peer Group
|
|
|
100.00
|
|
|
|
101.92
|
|
|
|
89.92
|
|
|
|
90.22
|
|
|
|
88.92
|
|
|
|
27.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The information in the graph and table above is not deemed
filed with the Securities and Exchange Commission
and is not to be incorporated by reference in any of PCAs
filings under the Securities Act of 1933 or the Securities
Exchange Act of 1934, whether made before or after the date of
this Annual Report on
Form 10-K,
except to the extent that PCA specifically incorporates such
information by reference.
15
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
The following table sets forth the selected historical financial
data of PCA. The information contained in the table should be
read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the historical consolidated financial statements of PCA,
including the notes thereto, contained elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,360,493
|
|
|
$
|
2,316,006
|
|
|
$
|
2,187,046
|
|
|
$
|
1,993,658
|
|
|
$
|
1,890,085
|
|
Net income
|
|
|
135,609
|
|
|
|
170,066
|
|
|
|
125,032
|
|
|
|
52,604
|
|
|
|
68,730
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
|
|
|
1.32
|
|
|
|
1.63
|
|
|
|
1.21
|
|
|
|
0.49
|
|
|
|
0.65
|
|
diluted
|
|
|
1.31
|
|
|
|
1.61
|
|
|
|
1.20
|
|
|
|
0.49
|
|
|
|
0.64
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
|
|
|
102,753
|
|
|
|
104,483
|
|
|
|
103,599
|
|
|
|
107,334
|
|
|
|
106,358
|
|
diluted
|
|
|
103,593
|
|
|
|
105,459
|
|
|
|
104,485
|
|
|
|
108,098
|
|
|
|
107,570
|
|
Cash dividends declared per common share
|
|
|
1.20
|
|
|
|
1.05
|
|
|
|
1.00
|
|
|
|
1.00
|
|
|
|
0.60
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,939,741
|
|
|
$
|
2,035,857
|
|
|
$
|
1,986,976
|
|
|
$
|
1,973,298
|
|
|
$
|
2,082,774
|
|
Total long-term debt obligations(1)
|
|
|
681,135
|
|
|
|
677,248
|
|
|
|
686,917
|
|
|
|
695,203
|
|
|
|
694,892
|
|
Stockholders equity
|
|
|
683,949
|
|
|
|
760,861
|
|
|
|
691,771
|
|
|
|
681,420
|
|
|
|
817,570
|
|
|
|
|
(1) |
|
Total long-term debt obligations include long-term debt, capital
lease obligations, short-term debt and current maturities of
long-term debt and capital lease obligations. |
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion of historical results of operations and
financial condition should be read in conjunction with the
audited financial statements and the notes thereto which appear
elsewhere in this report.
Overview
PCA is the fifth largest producer of containerboard and
corrugated products in the United States, based on production
capacity. We operate four containerboard mills and 67 corrugated
products manufacturing plants throughout the United States.
Approximately 80% of the containerboard tons produced at our
mills are consumed in our corrugated products manufacturing
plants. The remaining 20% is sold to domestic customers or the
export market. 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
16
have multi-color printing capabilities to make high-impact
graphics boxes and displays that offer our customers more
attractive packaging.
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:
|
|
|
|
|
corrugated products demand;
|
|
|
|
corrugated products and containerboard pricing;
|
|
|
|
containerboard inventories; and
|
|
|
|
cost trends and volatility for our major costs, including wood
and recycled fiber, purchased fuels, electricity, labor and
fringe benefits and transportation costs.
|
The market for containerboard and corrugated products 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 for use in other countries.
The U.S. economy experienced a severe downturn in the
fourth quarter of 2008 and, as a result, reported industry
shipments of corrugated products decreased 10% for this period
compared to 2007. During this same period, reported industry
containerboard production levels decreased 14% from fourth
quarter of 2007 levels. The total industry reported
containerboard mill production for December was the lowest
monthly production in over 15 years. As reported by
industry publications, linerboard prices decreased $10 per ton
and corrugating medium prices decreased $20 per ton in December
2008, and additional price decreases of $10 per ton for both
linerboard and corrugating medium were reported by industry
publications in both January and February 2009. Average prices
for linerboard and corrugating medium ended 2008 at $45 per ton
and $35 per ton, respectively, higher than December 2007 levels,
reflecting the July 2008 $55 per ton increase, partially offset
by the December pricing decline.
The cost to manufacture containerboard is dependent, in large
part, on the costs of wood fiber, recycled fiber, purchased
fuels, electricity, labor and fringe benefits. While energy and
other costs are significant in the manufacture of corrugated
products, labor and fringe benefits make up the largest
component of corrugated products manufactured costs
besides the cost of containerboard.
Our costs for purchased fuels averaged approximately 30% higher
for the full year 2008 compared to 2007, while transportation
and electricity costs rose more modestly from prior year levels.
Recycled fiber costs in 2008 were lower than in 2007 and at the
end of 2008 were about 75% below year-end 2007 levels. Wood
fiber costs in 2008 were higher than they were in 2007 and, at
the end of 2008, about 5% higher than they were in December
2007. Chemical costs were also higher during 2008 compared to
2007; this was particularly significant in the second half of
2008 and is expected to continue into at least the first part of
2009.
For the year ended December 31, 2008, PCAs earnings
were negatively impacted by increased costs during the first
three quarters and by the severe economic downturn in the fourth
quarter. For the full year, 2008 earnings were approximately 20%
below the record earnings level set in 2007, but still
represented our second highest earnings for a fiscal year,
excluding special items, since becoming a standalone company in
April 1999. The reduction in earnings was primarily driven by
decreased sales volume for both containerboard and corrugated
products. Fourth quarter corrugated products sales volume was
down 9.9% compared to the fourth quarter of 2007 and market
related downtime and machine slowbacks reduced mill production
by 90,000 tons. This downtime was the most downtime our mills
have taken in a quarter since becoming a standalone company.
Sales prices rose compared to 2007 with the implementation of
the containerboard price increase in July 2008 and the
corresponding corrugated products price increases. Partially
offsetting the beneficial impact of the price increases were
cost increases mentioned previously in energy, chemicals and
wood fiber in addition to higher labor and fringe benefits
costs, including medical costs.
In the first quarter 2009, our Valdosta mill will be down for
its annual maintenance outage and in addition, market related
downtime is likely. Energy usage will be higher with colder
weather, and we also
17
expect higher chemical costs. Considering these items and with
the current economic conditions and uncertainty, we expect our
first quarter 2009 earnings to be lower than our earnings in the
fourth quarter of 2008.
Results
of Operations
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
The historical results of operations of PCA for the years ended
December 31, 2008 and 2007 are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
Net sales
|
|
$
|
2,360.5
|
|
|
$
|
2,316.0
|
|
|
$
|
44.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
241.8
|
|
|
$
|
293.5
|
|
|
$
|
(51.7
|
)
|
Interest expense, net
|
|
|
(31.7
|
)
|
|
|
(25.6
|
)
|
|
|
(6.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
210.1
|
|
|
|
267.9
|
|
|
|
(57.8
|
)
|
Provision for income taxes
|
|
|
(74.5
|
)
|
|
|
(97.8
|
)
|
|
|
23.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
135.6
|
|
|
$
|
170.1
|
|
|
$
|
(34.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
Net sales increased by $44.5 million, or 1.9%, for the year
ended December 31, 2008 from the year ended
December 31, 2007. Net sales increased primarily due to
increased sales prices of corrugated products and containerboard
($111.0 million), partially offset by the impact of lower
sales volume ($66.5 million).
Total corrugated products volume sold decreased 2.9% to
30.3 billion square feet in 2008 compared to
31.2 billion square feet in 2007. On a comparable
shipment-per-workday
basis, corrugated products sales volume decreased 3.3% in 2008
from 2007.
Shipments-per-workday
is calculated by dividing our total corrugated products volume
during the year by the number of workdays within the year. The
larger percentage decrease on a
shipment-per-workday
basis was due to the fact that 2008 had one more workday
(252 days), those days not falling on a weekend or holiday,
than 2007 (251 days). Containerboard sales volume to
external domestic and export customers decreased 11.7% to
478,000 tons for the year ended December 31, 2008 from
541,000 tons in 2007.
Income
from Operations
Income from operations decreased by $51.7 million, or
17.6%, for the year ended December 31, 2008 compared to
2007. The decrease in income from operations was primarily
attributable to increased energy and energy related costs
including transportation ($56.2 million), lower sales
volume ($44.4 million), increased costs for wood fiber
($25.1 million), labor ($17.6 million), medical
($8.9 million), bad debts ($4.1 million), legal
matters ($3.4 million),
start-up
costs of two major mill projects ($3.2 million) and fixed
asset disposals ($3.1 million). The impact of higher costs
and lower volume was partially offset by increased sales prices
($111.0 million) and lower recycled fiber costs
($3.6 million).
Gross profit decreased $33.3 million, or 6.3%, for the year
ended December 31, 2008 from the year ended
December 31, 2007. Gross profit as a percentage of net
sales decreased from 22.7% of net sales in the year ended
December 31, 2007 to 20.8% of net sales in the year ended
December 31, 2008 primarily due to the cost increases and
reduced sales volume described previously.
Selling and administrative expenses increased $3.8 million,
or 2.2%, for the year ended December 31, 2008 from the year
ended December 31, 2007. The increase was primarily the
result of higher expenses related
18
to labor and fringe benefit costs ($1.5 million),
warehousing costs due to customer requirements
($1.5 million) and travel, meeting and entertainment
expenses ($0.5 million).
Corporate overhead for the year ended December 31, 2008
increased $4.8 million, or 8.6%, from the year ended
December 31, 2007. The increase was primarily attributable
to increased salary and fringe benefit expenses
($4.5 million).
Other expense, net, increased $8.8 million, or 134.5% for
the year ended December 31, 2008 compared to the year ended
December 31, 2007. The increase was primarily due to higher
legal related costs ($3.4 million), fixed asset disposal
costs ($3.1 million), storm damage to our facilities
($1.0 million) and a gain on sale of land occurring in 2007
($0.8 million).
Interest
Expense, Net and Income Taxes
Interest expense, net of interest income, increased by
$6.1 million, or 23.8%, for the year ended
December 31, 2008 compared to the year ended
December 31, 2007, primarily as a result of lower interest
income ($6.2 million) earned on PCAs cash
equivalents, partially offset by lower interest expense
($0.1 million) related to PCAs outstanding debt
balances. The $6.2 million decrease in interest income was
due both to lower interest income rates and lower cash balances
during 2008 compared to 2007. The $0.1 million decrease in
interest expense was due to a $2.4 million decrease in
interest expense related to the Companys receivables
credit facility due to lower interest rates and a
$1.4 million decrease in term loan interest expense as a
result of the repayment of the term loan in March 2008. This was
almost completely offset by a $3.7 million increase in
interest expense related to the issuance in March 2008 of
PCAs
61/2% notes
due 2018, the proceeds of which were used to repay the
43/8% notes
due August 2008.
PCAs effective tax rate was 35.5% for the year ended
December 31, 2008 and 36.5% for the year ended
December 31, 2007. The effective tax rate varies from the
U.S. federal statutory tax rate of 35.0% principally due to
the impact of state and local income taxes offset by the
domestic manufacturers deduction. PCA had no material
changes impacting FIN No. 48 in 2008.
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
The historical results of operations of PCA for the years ended
December 31, 2007 and 2006 are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
Net sales
|
|
$
|
2,316.0
|
|
|
$
|
2,187.0
|
|
|
$
|
129.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
293.5
|
|
|
$
|
225.9
|
|
|
$
|
67.6
|
|
Interest expense, net
|
|
|
(25.6
|
)
|
|
|
(31.2
|
)
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
267.9
|
|
|
|
194.7
|
|
|
|
73.2
|
|
Provision for income taxes
|
|
|
(97.8
|
)
|
|
|
(69.7
|
)
|
|
|
(28.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
170.1
|
|
|
$
|
125.0
|
|
|
$
|
45.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
Net sales increased by $129.0 million, or 5.9%, for the
year ended December 31, 2007 from the year ended
December 31, 2006. Approximately $123.1 million of the
increase resulted from higher sales prices and approximately
$5.9 million of the increase resulted from higher sales
volumes.
The increased sales prices resulted from the August 2007
increase in containerboard prices and the realization of those
price increases in our sales of corrugated products.
19
Total corrugated products volume sold decreased 0.3% to
31.2 billion square feet in 2007 compared to
31.3 billion square feet in 2006. On a comparable
shipment-per-workday
basis, corrugated products sales volume decreased 1.1% in 2007
from 2006.
Shipments-per-workday
is calculated by dividing our total corrugated products volume
during the year by the number of workdays within the year. The
larger percentage decrease on a
shipment-per-workday
basis was due to the fact that 2007 had two more workdays
(251 days), those days not falling on a weekend or holiday,
than 2006 (249 days). Containerboard sales volume to
external domestic and export customers increased 12.3% to
541,000 tons for the year ended December 31, 2007 from
482,000 tons in 2006.
Income
from Operations
Income from operations increased by $67.6 million, or
29.9%, for the year ended December 31, 2007 compared to the
year ended December 31, 2006. The increase in income from
operations was primarily attributable to higher sales prices and
volume ($120.1 million), partially offset by increased
costs for recycled fiber ($16.8 million), wage increases
for hourly and salaried personnel ($16.8 million), medical,
pension, benefit and incentive costs ($6.3 million),
transportation costs ($5.4 million), wood fiber costs
($3.1 million) and the impact of a fourth quarter 2007
unplanned outage at the Counce, Tennessee linerboard mill
($5.0 million, net of insurance recovery).
Gross profit increased $81.1 million, or 18.3%, for the
year ended December 31, 2007 from the year ended
December 31, 2006. Gross profit as a percentage of net
sales increased from 20.3% of net sales in 2006 to 22.7% of net
sales in the current year primarily due to the increased sales
prices described previously.
Selling and administrative expenses increased
$10.6 million, or 6.7%, for the year ended
December 31, 2007 from the year ended December 31,
2006. The increase was primarily the result of increased salary
and incentive compensation expense ($6.3 million) and
related fringe benefit costs ($1.7 million), increased
travel and entertainment expenses ($1.1 million) and higher
warehousing costs due to customer requirements
($0.8 million).
Corporate overhead for the year ended December 31, 2007,
increased $4.4 million, or 8.7%, from the year ended
December 31, 2006. The increase was primarily attributable
to higher salary, incentive and related benefit expenses
($2.8 million) and increased information technology
infrastructure costs ($1.2 million).
Other expense, net, decreased $0.5 million, or 5.5% for the
year ended December 31, 2007 compared to the year ended
December 31, 2006. The decrease was primarily due to a
$0.8 million gain on the sale of land in the third quarter
and other individually insignificant items.
Interest
Expense, Net and Income Taxes
Interest expense, net of interest income, decreased by
$5.6 million, or 18.0%, for the year ended
December 31, 2007 compared to the year ended
December 31, 2006, primarily as a result of increased
income earned on PCAs cash equivalents due to higher cash
balances.
PCAs effective tax rate was 36.5% for the year ended
December 31, 2007 and 35.8% for the year ended
December 31, 2006. For both 2007 and 2006, tax rates were
higher than the federal statutory rate of 35.0% due principally
to state income taxes.
20
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Net cash provided by (used for):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
269.3
|
|
|
$
|
300.1
|
|
|
$
|
246.6
|
|
Investing activities
|
|
|
(134.5
|
)
|
|
|
(113.2
|
)
|
|
|
(93.9
|
)
|
Financing activities
|
|
|
(213.5
|
)
|
|
|
(120.6
|
)
|
|
|
(103.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
$
|
(78.7
|
)
|
|
$
|
66.3
|
|
|
$
|
49.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Net cash provided by operating activities decreased
$30.8 million, or 10.3% to $269.3 million for the year
ended December 31, 2008 compared to the year ended
December 31, 2007. The decrease in net cash provided by
operating activities was primarily the result of lower net
income in 2008 of $34.5 million as previously described,
partially offset by lower requirements for operating assets and
liabilities of $1.5 million. During 2008, PCAs cash
taxes paid for both federal and state income taxes were
$89.4 million, or 42.5% of book income before taxes of
$210.1 million, compared to PCAs effective tax rate
of 35.5% in 2008.
The lower requirements for operating assets and liabilities were
driven by favorable year over year changes in accounts
receivable ($33.7 million) and inventories
($5.9 million) and lower 2008 pension contributions
($12.1 million), partially offset by unfavorable year over
year changes in accounts payable ($43.9 million) and
accrued liabilities ($10.5 million). The higher pension
contributions in 2007 were driven in part by expected additional
funding requirements beginning in 2008. Changes in balances of
operating assets and liabilities reflected the ordinary course
operation of PCAs business during 2008. Requirements for
operating assets and liabilities are subject to PCAs
operating needs, the timing of collection of receivables and the
payments of payables and expenses, and to seasonal fluctuations
in PCAs operations. Working capital requirements were
affected by the weak business conditions and significantly lower
than expected demand for containerboard and corrugated products
during the fourth quarter of 2008, resulting in a net increase
in the requirements for accounts payable, accrued liabilities
and accounts receivable of $32.6 million for the three
months ended December 31, 2008 compared to the same period
in 2007.
Net cash provided by operating activities increased
$53.5 million, or 21.7%, to $300.1 million for the
year ended December 31, 2007 compared to the year ended
December 31, 2006. The increase in net cash provided by
operating activities was primarily the result of higher net
income in 2007 as previously described and lower requirements
for operating assets and liabilities of $3.5 million for
the year ended December 31, 2007 compared to the same
period in 2006. During 2007, PCAs cash taxes paid for both
federal and state income taxes were $105.5 million, or
39.4% of book income before taxes of $267.9 million,
compared to PCAs effective tax rate of 36.5% in 2007.
Requirements for operating assets and liabilities were lower by
$3.5 million for the year ended December 31, 2007
compared to the same period in 2006, primarily driven by
favorable year-over-year changes in accounts receivable
($35.3 million) and accounts payable ($20.6 million),
partially offset by unfavorable year-over-year changes in
accrued liabilities ($32.6 million), inventories
($5.0 million) and higher 2007 pension contributions
($12.1 million).
Investing
Activities
Net cash used for investing activities increased by
$21.3 million, or 18.8%, to $134.5 million for the
year ended December 31, 2008 compared to the year ended
December 31, 2007. The increase was primarily related to
higher additions to property, plant and equipment of
$19.5 million and higher additions to other long term
assets of $1.4 million in the year ended December 31,
2008 compared to the year ended December 31, 2007.
21
Net cash used for investing activities increased by
$19.2 million, or 20.5%, to $113.2 million for the
year ended December 31, 2007 compared to the year ended
December 31, 2006. The increase was primarily related to
higher additions to property, plant and equipment of
$25.2 million in 2007 compared to 2006, partially offset by
the cost of acquisitions in 2006 of $4.3 million and lower
additions to other long term assets of $2.4 million.
As of December 31, 2008, PCA had commitments for general
purpose capital expenditures of $43.0 million for 2009. PCA
believes cash flow from operations will be sufficient to fund
these commitments.
Financing
Activities
Net cash used for financing activities totaled
$213.5 million for the year ended December 31, 2008,
an increase of $92.9 million, or 77.0%, from the year ended
December 31, 2007. The increase was primarily attributable
to higher debt payments of $160.2 million, higher
repurchases of PCA common stock of $35.1 million,
$20.0 million in additional dividends paid on PCAs
common stock and lower proceeds from the issuance of common
stock upon exercise of stock options of $21.9 million
during 2008 compared to 2007, partially offset by
$145.2 million in net proceeds received from PCAs
notes offering described below.
In connection with the senior notes offering in March of 2008,
PCA received proceeds, net of discount, of $149.9 million
and paid $4.4 million for settlement of a treasury lock
that it entered into to protect against increases in the
ten-year U.S. Treasury rate, which served as a reference in
determining the interest rate applicable to the notes. PCA also
incurred financing costs in the amount of $0.3 million in
connection with the senior notes offering. PCA used the proceeds
of this offering, together with cash on hand, to repay all of
the $150.0 million of outstanding
43/8% senior
notes that were due on August 1, 2008.
Net cash used for financing activities totaled
$120.7 million for the year ended December 31, 2007,
an increase of $17.1 million, or 16.6%, from the year ended
December 31, 2006. The increase was primarily attributable
to $30.5 million in repurchases of PCA common stock in
2007, partially offset by additional proceeds from the issuance
of common stock upon exercise of stock options of
$14.4 million during 2007 compared to 2006.
PCA holds an approximate 29% equity ownership interest in STV.
PCA did not receive any dividends from STV in 2008, 2007 or 2006.
On November 29, 2000, PCA established an on-balance sheet
securitization program for its trade accounts receivable. To
effectuate this program, PCA formed a wholly-owned limited
purpose subsidiary, Packaging Credit Company, LLC, or PCC, which
in turn formed a wholly-owned, bankruptcy-remote,
special-purpose subsidiary, Packaging Receivables Company, LLC,
or PRC, for the purpose of acquiring receivables from PCC. Both
of these entities are included in the consolidated financial
statements of PCA. Under this program, PCC purchases on an
ongoing basis substantially all of the receivables of PCA and
sells such receivables to PRC. PRC and lenders established a
$150.0 million receivables-backed revolving credit facility
through which PRC obtains funds to purchase receivables from
PCC. The receivables purchased by PRC are and will be solely the
property of PRC. In the event of a liquidation of PRC, the
creditors of PRC would be entitled to satisfy their claims from
PRCs assets prior to any distribution to PCC or PCA.
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
September 19, 2008, PCA extended its receivables credit
facility through September 18, 2009. As of
December 31, 2008, $109.0 million was outstanding and
$41.0 million was available for additional borrowing under
the receivables credit facility. The highest outstanding
principal balance under the receivables credit facility during
fiscal 2008 was $109.0 million.
On July 21, 2003, PCA closed its offering and private
placement of $150.0 million of
43/8% senior
notes due August 1, 2008 and $400.0 million of
53/4% senior
notes due August 1, 2013. On March 25, 2008, PCA
issued $150.0 million of
61/2% senior
notes due March 15, 2018 through a registered public
offering. The proceeds of this offering, together with cash on
hand, were used to repay all of the $150.0 million of
43/8% senior
notes which matured on August 1, 2008.
22
On March 31, 2008, PCA repaid all borrowings under its old
senior credit facility. This facility was replaced with a senior
credit facility that provides a new $150.0 million
revolving credit facility, including a $35.0 million
subfacility for letters of credit. The new senior credit
facility closed on April 15, 2008. The new revolving credit
facility is available to fund PCAs working capital
requirements, capital expenditures and other general corporate
purposes. The new revolving credit facility will terminate in
April 2013. As of December 31, 2008, PCA had
$130.6 million in unused borrowing capacity under the
senior credit facility, net of the impact on this borrowing
capacity of $19.4 million of outstanding letters of credit.
Off-Balance
Sheet Arrangements
The Company does not have any off-balance sheet arrangements as
of December 31, 2008 that would require disclosure under
SEC FR-67, Disclosure in Managements Discussion and
Analysis About Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations.
Contractual
Obligations
The following table summarizes PCAs contractual
obligations at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Receivables credit facility
|
|
$
|
109,000
|
|
|
$
|
109,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
53/4% senior
notes (due August 1, 2013)
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
61/2% senior
notes (due March 15, 2018)
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term and long-term debt
|
|
|
659,000
|
|
|
|
109,000
|
|
|
|
|
|
|
|
400,000
|
|
|
|
150,000
|
|
Capital lease obligations
|
|
|
43,511
|
|
|
|
2,224
|
|
|
|
4,404
|
|
|
|
4,404
|
|
|
|
32,479
|
|
Operating leases
|
|
|
107,255
|
|
|
|
27,425
|
|
|
|
39,846
|
|
|
|
15,149
|
|
|
|
24,835
|
|
Capital commitments
|
|
|
42,975
|
|
|
|
42,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase commitments
|
|
|
38,897
|
|
|
|
6,258
|
|
|
|
6,820
|
|
|
|
2,973
|
|
|
|
22,846
|
|
Letters of credit
|
|
|
19,373
|
|
|
|
19,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension contributions
|
|
|
36,800
|
|
|
|
36,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
947,811
|
|
|
$
|
244,055
|
|
|
$
|
51,070
|
|
|
$
|
422,526
|
|
|
$
|
230,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table excludes unamortized debt discount of
$1.6 million at December 31, 2008 and interest
payments on debt outstanding. Based on interest rates in effect
and long-term debt balances outstanding as of December 31,
2008, projected contractual interest payments would be
approximately $36.0 million in 2009 and for each future
year. For the purpose of this disclosure, PCAs variable
and fixed rate long-term debt would be replaced at maturity with
similar long-term debt and similar interest rates. This
disclosure does not attempt to predict changes in interest
rates. See Item 7A. Quantitative and Qualitative
Disclosures About Market Risk for the impact of changes in
interest rates on PCAs future cash flows.
The operating lease commitments, capital commitments, purchase
commitments and letters of credit are not reflected on
PCAs consolidated balance sheet as of December 31,
2008. See Notes 8 and 12 to the audited consolidated
financial statements for additional information. PCA currently
does not have any projections for future pension contributions
beyond 2009.
As of December 31, 2008, the Companys expected
payment for significant contractual obligations excludes
$10.4 million of obligations for unrecognized tax benefits
because the Company cannot make a reasonably reliable estimate
of the period of cash settlement for such liability. See
Note 14 to the audited consolidated financial statements
for additional information.
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 December 31, 2008, PCA
had $171.6 million in unused borrowing capacity under its
existing credit facilities, net of the
23
impact on this borrowing capacity of $19.4 million of
outstanding letters of credit. Currently, PCAs primary
uses of cash are for 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 December 31, 2008 for
PCAs revolving credit facility, the receivables credit
facility and the senior notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Projected Annual
|
|
|
|
December 31,
|
|
|
Weighted Average
|
|
|
Cash Interest
|
|
Borrowing Arrangement
|
|
2008
|
|
|
Interest Rate
|
|
|
Payments
|
|
|
|
(Dollars in thousands)
|
|
|
Revolving Credit facility
|
|
$
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Receivables Credit Facility
|
|
|
109,000
|
|
|
|
3.01
|
|
|
$
|
3,280
|
|
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
|
|
|
|
5.47
|
%
|
|
$
|
36,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table excludes unamortized debt discount of
$1.6 million at December 31, 2008. 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 the
61/2%
senior notes due 2018. The amortization is being recognized over
the terms of the
53/4% senior
notes due 2013 and the
61/2%
senior notes due 2018 and is included in interest expense, net.
The instruments governing PCAs indebtedness contain
financial and other covenants that limit, among other things,
the ability of PCA and its subsidiaries to:
|
|
|
|
|
enter into sale and leaseback transactions,
|
|
|
|
incur liens,
|
|
|
|
incur indebtedness at the subsidiary level,
|
|
|
|
enter into certain transactions with affiliates, or
|
|
|
|
merge or consolidate with any other person or sell or otherwise
dispose of all or substantially all of the assets of PCA.
|
These limitations could limit corporate and operating activities.
In addition, we 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 our revolving credit facility
could lead to an event of default, which could result in an
acceleration of any outstanding indebtedness
and/or
prohibit us from drawing on the revolving credit facility. Such
a default may also constitute an event of default under the
senior notes indentures and the receivables credit facility. At
December 31, 2008, PCA was in compliance with these
covenants.
PCA currently expects to incur capital expenditures of
$90.0 million in 2009. These expenditures will be used
primarily for maintenance capital, cost reduction, business
growth and environmental compliance.
PCA believes that net cash generated from operating activities,
available cash reserves and available borrowings under its
committed credit facilities and available capital through access
to capital markets will be adequate to meet its liquidity and
capital requirements, including payments of any declared common
stock dividends, for the foreseeable future. As its debt or
credit facilities become due, PCA will need to repay, extend or
replace such facilities, which will be subject to future
economic conditions and financial, business and other factors,
many of which are beyond PCAs control.
24
Environmental
Matters
We are 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 us 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).
|
We believe that we are currently in material compliance with
these and all applicable environmental rules and regulations.
Because environmental regulations are constantly evolving, we
have incurred, and will continue to incur, costs to maintain
compliance with these and other environmental laws. We work
diligently to anticipate and budget for the impact of applicable
environmental regulations, and do not currently expect that
future environmental compliance obligations will materially
affect our business or financial condition. For the year ended
December 31, 2008, we spent approximately $23.5 million to
comply with the requirements of these and other environmental
laws. For the years ended December 31, 2007 and 2006, the
costs of environmental compliance were approximately
$19.4 million and $17.5 million, respectively.
In addition, the Cluster Rules govern allowable discharges of
air and water pollutants at all pulp and paper mill operations,
including those at the Counce, Filer City, Valdosta and Tomahawk
mills. We have completed all of our projects to ensure
compliance with the Cluster Rules and as of this filing, we
believe that it is not reasonably possible that future
expenditures related to Cluster Rule compliance will have a
material impact on our financial condition and results of
operations.
As is the case with any industrial operation, we have, in the
past, incurred costs associated with the remediation of soil or
groundwater contamination, as required by the federal
Comprehensive Environmental Response, Compensation and Liability
Act, commonly known as the federal Superfund law,
and analogous state laws. Cleanup requirements arise with
respect to properties we currently own or operate, former
facilities and off-site facilities where we have disposed of
hazardous substances. Under the terms of the contribution
agreement, Pactiv has agreed to retain all liability for all
former facilities and all sites associated with pre-closing
off-site waste disposal. Pactiv has also retained
environmentally impaired real property in Filer City, Michigan
unrelated to current mill operations.
Because liability for remediation costs under environmental laws
is strict, meaning that liability is imposed without fault,
joint and several, meaning that liability is imposed on each
party without regard to contribution, and retroactive, we could
receive notifications of cleanup liability in the future and
this liability could be material. From 1994 through 2008,
remediation costs at our mills and corrugated plants totaled
approximately $3.2 million. As of December 31, 2008,
we maintained an environmental reserve of $8.3 million
relating to
on-site
landfills and surface impoundments as well as ongoing and
anticipated remedial projects. Total capital costs for
environmental matters were $3.5 million for 2008 and we
currently estimate 2009 environmental capital expenditures will
be $1.5 million. As of this filing, we believe that it is
not reasonably possible that future environmental expenditures
above the $8.3 million accrued as of December 31, 2008
will have a material impact on our financial condition, results
of operations and cash flows.
Critical
Accounting Policies
Managements discussion and analysis of our financial
condition and results of operations are based upon our
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 us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses,
25
and related disclosures of contingent assets and liabilities. On
an ongoing basis, we evaluate our estimates, including those
related to bad debts, inventories, goodwill and intangible
assets, pensions and other postretirement benefits, income
taxes, environmental liabilities, stock based compensation, and
contingencies and litigation. We base our 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.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our consolidated financial statements. For a further
discussion on the application of these and other accounting
policies, see Note 2 to our consolidated financial
statements included elsewhere in this report.
Accounts
Receivable Allowance for Doubtful Accounts and
Customer Deductions
We evaluate the collectibility of our accounts receivable based
upon a combination of factors. In circumstances where we are
aware of a specific customers inability to meet its
financial obligations to us (e.g., bankruptcy filings,
substantial downgrading of credit sources), we record a specific
reserve for bad debts against amounts due to us to reduce the
net recorded receivable to the amount we reasonably believe will
be collected. For all other customers, we recognize reserves for
bad debts consisting of 0.3% for amounts less than 90 days
past due their contractual terms and 30% for amounts more than
90 days past due their contractual terms based on our
historical collection experience. If our collection experience
deteriorates (i.e., higher than expected defaults or an
unexpected material adverse change in a major customers
ability to meet its financial obligations to us), our estimates
of the recoverability of amounts due us could be reduced by a
material amount.
The customer deductions reserve represents the estimated amount
required for customer returns, allowances and earned discounts.
Based on our experience, customer returns, allowances and earned
discounts have averaged 1.0% of our gross selling price.
Accordingly, we reserve 1.0% of our open customer accounts
receivable balance for these items.
As of December 31, 2008, the balance in the allowance for
doubtful accounts reserve was $4.4 million, compared to
$2.9 million at December 31, 2007. Bad debt expense in
2008 was $4.2 million, compared to $0.1 million in
2007. The increase in bad debt expense of $4.1 million was
primarily attributable to a $2.7 million increase in
expense related to customers who had filed for bankruptcy and an
increase of $1.1 million reserved for specific customers at
the 90% level of their accounts receivable balance as of
December 31, 2008. For the year ended December 31,
2007, bad debt expense was $0.1 million compared to
$3.2 million in 2006. The decrease of $3.1 million was
primarily attributable to a $1.8 million decrease in
expense related to customers who had filed for bankruptcy and a
decrease of $0.9 million in connection with specific
customers that were reserved for at the 90% level of their
accounts receivable balance as of December 31, 2007.
Inventories
We record our inventories at the lower of cost or market and
include all costs directly associated with manufacturing
products: materials, labor and manufacturing overhead. The
estimated market value is based on assumptions for future demand
and related pricing. If actual market conditions are less
favorable than those projected by management, reductions in the
carrying value of inventories may be required. Raw materials,
work in process and finished goods valued using the
last-in,
first-out (LIFO) cost method comprised 64% of
inventories at current cost at both December 31, 2008 and
2007, respectively. Supplies and materials inventories are
valued using a moving average cost.
Pension
and Postretirement Benefits
The Company accounts for defined benefit pension plans and
postretirement plans in accordance with SFAS No. 87,
Employers Accounting for Pensions,
SFAS No. 106, Employers Accounting for
26
Postretirement Benefits Other than Pensions and
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement
Plans An Amendment of FASB Statements No. 87,
88, 106 and 132(R).
One of the principal assumptions used to calculate net periodic
pension cost is the expected long-term rate of return on plan
assets. The expected long-term rate of return on plan assets may
result in recognized returns that are greater or less than the
actual returns on those plan assets in any given year. Over
time, however, the expected long-term rate of return on plan
assets is designed to approximate the actual long term returns.
The discount rate assumptions used to calculate net periodic
pension and postretirement costs reflect the rates available on
high-quality, fixed-income debt instruments on December 31.
The rate of compensation increase is another significant
assumption used to calculate net periodic pension cost and is
determined by us based upon annual reviews.
For postretirement health care plan accounting, we review
external data and our own historical trends for health care
costs to determine the health care cost trend rate assumption.
Environmental
Liabilities
PCA accounts for its retirement obligations related to its
landfills under SFAS No. 143, Accounting for
Asset Retirement Obligations, which requires legal
obligations associated with the retirement of long-lived assets
to be recognized at their fair value at the time that the
obligations are incurred. Upon initial recognition of a
liability, that cost is capitalized as part of the related
long-lived asset and amortized to expense over the useful life
of the asset.
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. Liabilities recorded for environmental
contingencies are estimates of the probable costs based upon
available information and assumptions. Because of these
uncertainties, however, our estimates may change. We believe
that any additional costs identified as further information
becomes available would not have a material effect on our
financial statements.
In connection with the sale to PCA of the containerboard and
corrugated products business of Pactiv Corporation in April
1999, Pactiv agreed to retain all liability for all former
facilities and all sites associated with off-site waste disposal
prior to April 12, 1999. Pactiv also retained the
environmental liability for a closed landfill located near the
Filer City mill.
Revenue
Recognition
PCA recognizes revenue as title to the products is transferred
to customers. Shipping and handling costs are included in cost
of sales. Shipping and handling billings to a customer are
included in net sales. In addition, PCA 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.
Impairment
of Goodwill and Long-Lived Assets
Goodwill is tested for impairment annually in the fourth quarter
or sooner if events or changes in circumstances indicate that
the carrying amount may exceed fair value. Recoverability of
goodwill is determined by comparing the fair value of the
reporting unit with its carrying value, including goodwill. If
the carrying amount of the reporting unit exceeds the fair
value, the implied fair value of the reporting units
goodwill is compared to the carrying amount of its goodwill to
determine if a write-down to fair value is necessary.
Long-lived assets other than goodwill are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of any long-lived asset may not be
fully recoverable. In the event that facts and circumstances
indicate that the carrying amount of any long-lived assets may
be impaired,
27
an evaluation of recoverability would be performed. If an
evaluation were required, the estimated future undiscounted cash
flows associated with the asset (or group of assets) would be
compared to the assets (or group of assets) carrying
amount to determine if a write-down to fair value is required.
Stock-Based
Compensation
PCA measures and records stock-based compensation cost in
accordance with SFAS No. 123(R), Share-Based
Payment. Stock compensation cost includes:
(a) compensation cost for all share-based payments granted
prior to, but not vested as of January 1, 2006, the
effective date of SFAS No. 123(R), based on the grant
date fair value estimated in accordance with the original
provisions of SFAS No. 123, and (b) compensation
cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of
SFAS No. 123(R).
PCA recognizes compensation expense associated with option
awards ratably over their vesting periods. 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 awards is determined based on
the closing price of PCAs common stock on the grant date.
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
the vesting of restricted stock upon an employees
retirement, the Company accelerates the recognition of
compensation expense for certain employees approaching normal
retirement age.
Income
Taxes
PCAs annual tax rate is determined based on income,
statutory tax rates and the tax impacts of items treated
differently for tax purposes than for financial reporting
purposes. Tax law requires some items to be included in the tax
return at different times than the items reflected in the
financial statements. As a result, the annual tax rate in the
financial statements is different than the rate reported on
PCAs tax return. Some of these differences are permanent,
such as expenses that are not deductible in the tax return, and
some differences are temporary, reversing over time, such as
depreciation expense. These temporary differences create
deferred tax assets and liabilities.
Inherent in determining the annual tax rate are judgments
regarding business plans, planning opportunities and
expectations about future outcomes. Significant management
judgments are required for the following items:
|
|
|
|
|
Management reviews PCAs deferred tax assets for
realizability. Valuation allowances are established when
management believes that it is more likely than not that some
portion of the deferred tax assets will not be realized. Changes
in valuation allowances from period to period are included in
the tax provision.
|
|
|
|
PCA establishes accruals for uncertain tax contingencies when,
despite the belief that PCAs tax return positions are
fully supported, PCA believes that an uncertain tax position
does not meet the recognition threshold of FASB Interpretation
(FIN) No. 48, Accounting for Uncertainty
in Income Taxes. The tax contingency accruals are adjusted
in light of changing facts and circumstances, such as the
progress of tax audits, the expiration of the statute of
limitations for the relevant taxing authority to examine a tax
return, case law and emerging legislation. While it is difficult
to predict the final outcome or timing of resolution for any
particular tax matter, PCA believes that the accruals for
uncertain tax contingencies at December 31, 2008 reflect
the likely outcome of known tax contingencies as of such date in
accordance with FIN No. 48.
|
28
|
|
Item 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
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. On January 17, 2008,
in connection with a contemplated issuance of ten-year debt
securities in March 2008, PCA entered into an interest rate
protection agreement with a counterparty to lock in the then
current interest rate on ten-year U.S. Treasury notes to
protect against increases in the ten-year U.S. Treasury
note rate. This rate served as a reference in determining the
interest rate applicable to the ten-year notes due 2018 issued
in March 2008. As a result of a decrease in the interest rate on
the ten-year U.S. Treasury notes between the date of the
agreement and the time PCA priced its offering of those notes,
PCA paid $4.4 million to the counterparty on March 25,
2008, the date of settlement. As of December 31, 2008, PCA
was not a party to any derivative instruments.
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.
|
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The response to this item is included in a separate section of
this report beginning on
page F-1,
which is incorporated by reference herein.
|
|
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
|
None.
|
|
Item 9A.
|
CONTROLS
AND PROCEDURES
|
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
December 31, 2008. 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 December 31, 2008.
During the quarter ended December 31, 2008, 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.
29
Managements
Report on Internal Control Over Financial Reporting
PCAs management is responsible for establishing and
maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act
Rule 13a-15(f).
Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the Companys assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures are being made only with proper authorizations; and
(3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or
disposition of the Companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, PCAs internal control
over financial reporting may not prevent or detect
misstatements. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute,
assurance that objectives of the control system are met. Because
of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been
detected. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls become
inadequate because of changes in conditions, or that the degree
of compliance with the policies and procedures may deteriorate.
PCAs management, under the supervision of and with the
participation of the Chief Executive Officer and Chief Financial
Officer, assessed the Companys internal control over
financial reporting as of December 31, 2008, based on
criteria for effective control over financial reporting
described in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
assessment, PCAs management concluded that its internal
control over financial reporting was effective as of
December 31, 2008, based on the specified criteria.
Ernst & Young LLP, the independent registered public
accounting firm that audited PCAs financial statements
included in this
Form 10-K,
has also audited the effectiveness of the Companys
internal control over financial reporting. Their attestation
report precedes PCAs audited financial statements included
elsewhere in this report.
Item 9B. OTHER
INFORMATION
Because this Annual Report on
Form 10-K
is being filed within four business days after the applicable
triggering event, the below disclosure is being made under
Part II, Item 9B of this Annual Report on
Form 10-K
instead of under Item 5.02 (Departure of Directors or
Certain Officers; Election of Directors; Appointment of Certain
Officers; Compensatory Arrangements of Certain Officers) of
Form 8-K.
On February 25, 2009, PCAs board of directors
approved an amendment to the Deferred Compensation Plan that is
filed as Exhibit 10.15 to this Annual Report on
Form 10-K.
The amended plan provides Paul T. Stecko with a monthly
deferred compensation benefit and will replace
Mr. Steckos Supplemental Executive Retirement Plan
(the SERP) (filed as Exhibit A to Exhibit 10.14
hereto and amendment filed as Exhibit 10.17 hereto)
effective March 15, 2009, on which date
Mr. Steckos benefits under the SERP terminate and are
paid out.
PART III
|
|
Item 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information regarding PCAs executive officers required by
this Item 10 is set forth in Item 4.1 of Part I
of this report.
30
The following information required by this Item 10 will be
included in PCAs Proxy Statement for the 2009 Annual
Meeting of Stockholders and is incorporated by reference herein:
|
|
|
|
|
Information regarding PCAs directors included under the
caption Election of Directors
|
|
|
|
Information regarding PCAs Audit Committee and financial
experts included under the caption Election of
Directors Audit Committee
|
|
|
|
Information regarding PCAs code of ethics included under
the caption Election of Directors Code of
Ethics
|
|
|
|
Information regarding PCAs stockholder nominating
procedures included under the captions Other
Information Recommendations for Board
Nominated Director Nominees and Other
Information Procedures for Nominating Directors or
Bringing Business Before the 2009 Annual Meeting
|
|
|
|
Information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 included under the caption
Section 16(a) Beneficial Ownership Reporting
Compliance
|
|
|
Item 11.
|
EXECUTIVE
COMPENSATION
|
Information with respect to executive compensation required by
this Item 11 will be included in PCAs Proxy Statement
under the captions Compensation Discussion and
Analysis and Executive Officer and Director
Compensation (including all subcaptions and tables
thereunder) and is incorporated herein by reference.
|
|
Item 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information with respect to security ownership of certain
beneficial owners and management required by this Item 12
will be included in PCAs Proxy Statement under the caption
Ownership of Our Stock and is incorporated herein by
reference.
Authorization of Securities under Equity Compensation
Plans. Securities authorized for issuance under
equity compensation plans at December 31, 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Securities to
|
|
|
Average
|
|
|
Available for
|
|
|
|
be Issued
|
|
|
Exercise
|
|
|
Future
|
|
|
|
Upon Exercise of
|
|
|
Price of
|
|
|
Issuance
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Under Equity
|
|
|
|
Options and
|
|
|
Options and
|
|
|
Compensation
|
|
Plan Category
|
|
Rights
|
|
|
Rights
|
|
|
Plans(a)
|
|
|
Equity compensation plans approved by security holders
|
|
|
2,227,032
|
|
|
$
|
19.85
|
|
|
|
377,492
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,227,032
|
|
|
$
|
19.85
|
|
|
|
377,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Excludes securities reflected in the first column, Number
of securities to be issued upon exercise of outstanding options
and rights. |
|
|
Item 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information with respect to certain relationships and related
transactions and director independence required by this
Item 13 will be included in PCAs Proxy Statement
under the captions Transactions with Related Persons
and Election of Directors Determination of
Director Independence, respectively, and is incorporated
herein by reference.
31
|
|
Item 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information with respect to fees and services of the principal
accountant required by this Item 14 will be included in
PCAs Proxy Statement under the caption Ratification
of Appointment of the Independent Registered Public Accounting
Firm Fees to the Independent Registered Public
Accounting Firm and is incorporated herein by reference.
PART IV
|
|
Item 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a) The following documents are filed as a part of this
report:
(1) The financial statements listed in the Index to
Financial Statements.
(2) Financial Statement Schedule.
The following consolidated financial statement schedule of PCA
for the years ended December 31, 2008, 2007 and 2006 is
included in this report.
Schedule II Packaging Corporation of
America Valuation and Qualifying Accounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning of
|
|
|
Charged to
|
|
|
|
|
|
End of
|
|
Description
|
|
Year
|
|
|
Expenses
|
|
|
Deductions
|
|
|
Year
|
|
|
|
(Dollars in thousands)
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from assets accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2,917
|
|
|
$
|
4,162
|
|
|
$
|
(2,724
|
)(1)
|
|
$
|
4,355
|
|
Reserve for customer deductions
|
|
|
2,734
|
|
|
|
23,767
|
|
|
|
(23,994
|
)(2)
|
|
|
2,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,651
|
|
|
$
|
27,929
|
|
|
$
|
(26,718
|
)
|
|
$
|
6,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from assets accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
3,827
|
|
|
$
|
105
|
|
|
$
|
(1,015
|
)(1)
|
|
$
|
2,917
|
|
Reserve for customer deductions
|
|
|
2,636
|
|
|
|
24,732
|
|
|
|
(24,634
|
)(2)
|
|
|
2,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,463
|
|
|
$
|
24,837
|
|
|
$
|
(25,649
|
)
|
|
$
|
5,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from assets accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
3,287
|
|
|
$
|
3,218
|
|
|
$
|
(2,678
|
)(1)
|
|
$
|
3,827
|
|
Reserve for customer deductions
|
|
|
2,117
|
|
|
|
24,891
|
|
|
|
(24,372
|
)(2)
|
|
|
2,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,404
|
|
|
$
|
28,109
|
|
|
$
|
(27,050
|
)
|
|
$
|
6,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists primarily of uncollectable accounts written off, net of
recoveries, during the year. |
|
(2) |
|
Consists primarily of discounts taken by customers during the
year. |
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions, are
inapplicable or not material, or the information called for
thereby is otherwise included in the financial statements or the
accompanying notes to the financial statements and therefore,
have been omitted.
32
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Contribution Agreement, dated as of January 25, 1999, among
Pactiv Corporation (formerly known as Tenneco Packaging Inc.)
(Pactiv), PCA Holdings LLC (PCA
Holdings) and Packaging Corporation of America
(PCA). (Incorporated herein by reference to
Exhibit 2.1 to PCAs registration Statement on
Form S-4,
Registration
No. 333-79511).
|
|
2
|
.2
|
|
Letter Agreement Amending the Contribution Agreement, dated as
of April 12, 1999, among Pactiv, PCA Holdings and PCA.
(Incorporated herein by reference to Exhibit 2.2 to
PCAs Registration Statement on
Form S-4,
Registration
No. 333-79511).
|
|
3
|
.1
|
|
Restated Certificate of Incorporation of PCA. (Incorporated
herein by reference to Exhibit 3.1 to PCAs
Registration Statement on
Form S-4,
Registration
No. 333-79511).
|
|
3
|
.2
|
|
Certificate of Amendment to Restated Certificate of
Incorporation of PCA. (Incorporated herein by reference to
Exhbit 3.2 to PCAs Registration Statement on
Form S-4,
Registration
No. 333-109437.)
|
|
3
|
.3
|
|
Amended and Restated By-laws of PCA. (Incorporated herein by
reference to Exhibit 3.1 to PCAs Current Report on
Form 8-K
filed December 5, 2008, File
No. 1-15399.)
|
|
4
|
.1
|
|
Form of certificate representing shares of common stock.
(Incorporated herein by reference to Exhibit 4.9 to
PCAs Registration Statement on
Form S-1,
Registration
No. 333-86963.)
|
|
4
|
.2
|
|
Indenture, dated as of July 21, 2003, between PCA and U.S.
Bank National Association. (Incorporated herein by reference to
Exhibit 4.2 to PCAs Quarterly Report on
Form 10-Q
for the period ended June 30, 2003, File
No. 1-15399.)
|
|
4
|
.3
|
|
First Supplemental Indenture, dated as of July 21, 2003,
between PCA and U.S. Bank National Association. (Incorporated
herein by reference to Exhibit 4.3 to PCAs Quarterly
Report on
Form 10-Q
for the period ended June 30, 2003, File
No. 1-15399.)
|
|
4
|
.4
|
|
Form of Rule 144A Global Note. (Incorporated herein by
reference to Exhibit 4.5 to PCAs Quarterly Report on
Form 10-Q
for the period ended June 30, 2003, File
No. 1-15399.)
|
|
4
|
.5
|
|
Officers Certificate, dated March 25, 2008, pursuant
to Section 301 of the Indenture, dated July 21, 2003,
by and between PCA and U.S. Bank National Association
(Incorporated herein by reference to Exhibit 4.1 to
PCAs Current Report on
Form 8-K
filed March 25, 2008, File
No. 1-15399.)
|
|
4
|
.6
|
|
6.50% Senior Notes due 2018. (Incorporated herein by
reference to Exhibit 4.2 to PCAs Current Report on
Form 8-K
filed March 25, 2008, File
No. 1-15399.)
|
|
10
|
.1
|
|
Five Year Credit Agreement, dated as of April 15, 2008, by
and among PCA and the lenders and agents named therein.
(Incorporated herein by reference to Exhibit 10.1 to
PCAs Current Report on
Form 8-K
filed April 18, 2008, File
No. 1-15399.)
|
|
10
|
.2
|
|
Amended and Restated Credit and Security Agreement, dated as of
September 19, 2008, by and among PCA and the lenders and
agents named therein. (Incorporated herein by reference to
Exhibit 10.1 to PCAs Current Report on
Form 8-K
filed September 25, 2008, File
No. 1-15399.)
|
|
10
|
.3
|
|
Receivables Sale Agreement, dated as of November 29, 2000,
between PCC and PCA. (Incorporated herein by reference to
Exhibit 10.24 to PCAs Annual Report on
Form 10-K
for the fiscal year ended December 31, 2001, File
No. 1-15399.)
|
|
10
|
.4
|
|
Purchase and Sale Agreement, dated as of November 29, 2000,
between PCC and PRC. (Incorporated herein by reference to
Exhibit 10.25 to PCAs Annual Report on
Form 10-K
for the fiscal year ended December 31, 2001. File
No. 1-15399)
|
|
10
|
.5
|
|
Letter Agreement Regarding Terms of Employment, dated as of
January 25, 1999, between PCA and Paul T. Stecko. (
Incorporated herein by reference to Exhibit 10.16 to
PCAs registration Statement on From
S-4,
Registration
No. 333-79511)*
|
|
10
|
.6
|
|
Letter Agreement Regarding Terms of Employment, dated as of
May 19, 1999, between PCA and Paul T. Stecko. (
Incorporated herein by reference to Exhibit 10.17 to
PCAs registration Statement on From
S-4,
Registration
No. 333-79511)*
|
|
10
|
.7
|
|
Packaging Corporation of America Thrift Plan for Hourly
Employees and First Amendment of Packaging Corporation of
America Thrift Plan for Hourly Employees, effective
February 1, 2000. (Incorporated herein by reference to
Exhibit 4.5 to PCAs Registration Statement on
Form S-8,
Registration
No. 333-33176.)*
|
33
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.8
|
|
Packaging Corporation of America Retirement Savings Plan ,
effective February 1, 2000. (Incorporated herein by
reference to Exhibit 4.6 to PCAs Registration
Statement on
Form S-8,
Registration
No. 333-33176.)*
|
|
10
|
.9
|
|
Amended and Restated 1999 Long-Term Equity Incentive Plan,
effective as of May 4, 2005. (Incorporated herein by
reference to Appendix B to PCAs Definitive Proxy
Statement on Schedule 14A, filed with the Commission on
March 24, 2005.)*
|
|
10
|
.10
|
|
Form of Stock Option Agreement for employees under the Amended
and Restated 1999 Long-term Equity Incentive Plan. (Incorporated
herein by reference to Exhibit 10.1 to PCAs Current
Report on
Form 8-K,
dated March 14, 2006, File
No. 1-15399.)*
|
|
10
|
.11
|
|
Form of Stock Option Agreement for non-employee directors under
the Amended and Restated 1999 Long-term Equity Incentive Plan.
(Incorporated herein by reference to Exhibit 10.2 to
PCAs Current Report on
Form 8-K,
dated March 14, 2006, File
No. 1-15399.)*
|
|
10
|
.12
|
|
Form of Restricted Stock Award Agreement for employees and
non-employee directors under the Amended and Restated 1999
Long-term Equity Incentive Plan. (Incorporated herein by
reference to Exhibit 10.3 to PCAs Current Report on
Form 8-K,
dated March 14, 2006, File
No. 1-15399.)*
|
|
10
|
.13
|
|
Amended and Restated 1999 Executive Incentive Compensation Plan,
effective as of July 26, 2006. (Incorporated herein by
reference to Exhibit 10.1 to PCAs Quarterly Report on
From 10-Q
for the period ended June 30, 2006, File
No. 1-15399.)*
|
|
10
|
.14
|
|
Packaging Corporation of America Supplemental Executive
Retirement Plan, as Amended and Restated Effective as of
January 1, 2005. (Incorporated herein by reference to
Exhibit 10.31 to PCAs Annual Report on
Form 10-K
for the year ended December 31, 2006, File
No. 1-15399.)*
|
|
10
|
.15
|
|
Packaging Corporation of America Deferred Compensation Plan,
effective as of January 1, 2009.*
|
|
10
|
.16
|
|
Packaging Corporation of America Amended and Restated Executive
Incentive Compensation Plan, effective as of February 28,
2007. (Incorporated herein by reference to Exhibit 10.32 to
PCAs Annual Report on
Form 10-K
for the year ended December 31, 2006, File
No. 1-15399.)*
|
|
10
|
.17
|
|
First Amendment of Packaging Corporation of America Supplemental
Executive Retirement Plan, effective as of January 1,
2008.*
|
|
12
|
.1
|
|
Statement Regarding Computation of Ratio of Earnings to Fixed
Charges
|
|
21
|
.1
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP.
|
|
24
|
.1
|
|
Powers of Attorney.
|
|
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.
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
|
|
|
Filed herewith. |
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on February 27, 2009.
Packaging Corporation of America
Name: Paul T. Stecko
|
|
|
|
Title:
|
Chairman and Chief Executive Officer
|
Name: Richard B. West
|
|
|
|
Title:
|
Senior Vice President and Chief Financial
|
Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on
February 27, 2009.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Paul
T. Stecko
Paul
T. Stecko
|
|
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/ Richard
B. West
Richard
B. West
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
*
Cheryl
K. Beebe
|
|
Director
|
|
|
|
*
Henry
F. Frigon
|
|
Director
|
|
|
|
*
Hasan
Jameel
|
|
Director
|
|
|
|
*
Samuel
M. Mencoff
|
|
Director
|
|
|
|
*
Roger
B. Porter
|
|
Director
|
|
|
|
*
Rayford
K. Williamson
|
|
Director
|
|
|
|
*By: /s/ Richard
B. West
Richard
B. West
(Attorney-In-Fact)
|
|
|
35
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Packaging Corporation of America
Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheets of
Packaging Corporation of America (the Company) as of
December 31, 2008 and 2007, and the related consolidated
statements of income, changes in stockholders equity, and
cash flows for each of the three years in the period ended
December 31, 2008. Our audits also included the financial
statement schedule listed in the index at Item 15(a). These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Packaging Corporation of America at
December 31, 2008 and 2007, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 6 to the financial statements, the
Company changed its method of accounting for pension and
postretirement benefits effective December 31, 2008, and as
discussed in Note 14 to the financial statements, the
Company changed its method of accounting for uncertainty in
income taxes effective January 1, 2007.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Packaging Corporation of Americas internal control over
financial reporting as of December 31, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 16,
2009 expressed an unqualified opinion thereon.
Ernst & Young LLP
Chicago, Illinois
February16, 2009
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Packaging Corporation of America
Board of Directors and Stockholders
We have audited Packaging Corporation of Americas internal
control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Packaging Corporation of Americas management is
responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting included in
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Packaging Corporation of America maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2008, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Packaging Corporation of America
as of December 31, 2008 and 2007, and the related
consolidated statements of income, changes in stockholders
equity, and cash flows for each of the three years in the period
ended December 31, 2008, and our report dated
February 16, 2009, expressed an unqualified opinion thereon.
Ernst & Young LLP
Chicago, Illinois
February 16, 2009
F-3
Packaging
Corporation of America
As of
December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
149,397
|
|
|
$
|
228,143
|
|
Accounts receivable, net of allowance for doubtful accounts and
customer deductions of $6,862 and $5,651 as of December 31,
2008 and 2007, respectively
|
|
|
254,898
|
|
|
|
275,921
|
|
Inventories
|
|
|
206,954
|
|
|
|
204,356
|
|
Prepaid expenses and other current assets
|
|
|
6,684
|
|
|
|
6,702
|
|
Deferred income taxes
|
|
|
15,240
|
|
|
|
17,915
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
633,173
|
|
|
|
733,037
|
|
Property, plant and equipment, net
|
|
|
1,221,019
|
|
|
|
1,215,298
|
|
Goodwill
|
|
|
37,163
|
|
|
|
37,163
|
|
Other intangible assets, net
|
|
|
12,669
|
|
|
|
13,753
|
|
Other long-term assets
|
|
|
35,717
|
|
|
|
36,606
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,939,741
|
|
|
$
|
2,035,857
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term debt and current maturities of long-term debt
|
|
$
|
109,000
|
|
|
$
|
278,567
|
|
Capital lease obligations
|
|
|
606
|
|
|
|
180
|
|
Accounts payable
|
|
|
101,064
|
|
|
|
132,197
|
|
Dividends payable
|
|
|
30,719
|
|
|
|
31,534
|
|
Accrued interest
|
|
|
12,723
|
|
|
|
12,828
|
|
Accrued federal and state income taxes
|
|
|
1,282
|
|
|
|
6,062
|
|
Accrued liabilities
|
|
|
106,588
|
|
|
|
101,209
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
361,982
|
|
|
|
562,577
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
548,400
|
|
|
|
398,479
|
|
Capital lease obligations
|
|
|
23,129
|
|
|
|
22
|
|
Deferred income taxes
|
|
|
208,879
|
|
|
|
240,707
|
|
Pension and postretirement benefits
|
|
|
85,964
|
|
|
|
48,284
|
|
Other long-term liabilities
|
|
|
27,438
|
|
|
|
24,927
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
893,810
|
|
|
|
712,419
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock (par value $.01 per share, 300,000,000 shares
authorized, 102,397,952 and 105,018,679 shares issued as of
December 31, 2008 and 2007, respectively)
|
|
|
1,024
|
|
|
|
1,050
|
|
Additional paid in capital
|
|
|
379,104
|
|
|
|
432,916
|
|
Retained earnings
|
|
|
342,072
|
|
|
|
334,060
|
|
Accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Unrealized gain on treasury lock, net
|
|
|
6,358
|
|
|
|
13,151
|
|
Unfunded employee benefit obligations, net
|
|
|
(44,609
|
)
|
|
|
(20,313
|
)
|
Cumulative foreign currency translation adjustments
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss)
|
|
|
(38,251
|
)
|
|
|
(7,165
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
683,949
|
|
|
|
760,861
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,939,741
|
|
|
$
|
2,035,857
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
Packaging
Corporation of America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
2,360,493
|
|
|
$
|
2,316,006
|
|
|
$
|
2,187,046
|
|
Cost of sales
|
|
|
(1,869,135
|
)
|
|
|
(1,791,358
|
)
|
|
|
(1,743,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
491,358
|
|
|
|
524,648
|
|
|
|
443,761
|
|
Selling and administrative expenses
|
|
|
(173,257
|
)
|
|
|
(169,472
|
)
|
|
|
(158,833
|
)
|
Corporate overhead
|
|
|
(61,030
|
)
|
|
|
(56,217
|
)
|
|
|
(51,892
|
)
|
Gain on sale of investment
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
Other expense, net
|
|
|
(15,259
|
)
|
|
|
(6,507
|
)
|
|
|
(7,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
241,812
|
|
|
|
293,452
|
|
|
|
225,927
|
|
Interest expense, net
|
|
|
(31,669
|
)
|
|
|
(25,584
|
)
|
|
|
(31,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
210,143
|
|
|
|
267,868
|
|
|
|
194,724
|
|
Provision for income taxes
|
|
|
(74,534
|
)
|
|
|
(97,802
|
)
|
|
|
(69,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
135,609
|
|
|
$
|
170,066
|
|
|
$
|
125,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
102,753
|
|
|
|
104,483
|
|
|
|
103,599
|
|
Diluted
|
|
|
103,593
|
|
|
|
105,459
|
|
|
|
104,485
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.32
|
|
|
$
|
1.63
|
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.31
|
|
|
$
|
1.61
|
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
1.20
|
|
|
$
|
1.05
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
Packaging
Corporation of America
For the
Period January 1, 2006 through December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
on
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Restricted
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
(In thousands except share data)
|
|
|
Balance at January 1, 2006
|
|
|
103,686,284
|
|
|
$
|
1,037
|
|
|
$
|
418,621
|
|
|
$
|
(6,005
|
)
|
|
$
|
248,404
|
|
|
$
|
19,363
|
|
|
$
|
681,420
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,032
|
|
|
|
|
|
|
|
125,032
|
|
Amortization of treasury lock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,108
|
)
|
|
|
(3,108
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,925
|
|
Reclassification of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
(6,005
|
)
|
|
|
6,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded employee benefit obligations, net of tax of
$15.7 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,335
|
)
|
|
|
(24,335
|
)
|
Exercise of stock options
|
|
|
682,247
|
|
|
|
7
|
|
|
|
10,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,655
|
|
Common stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(104,140
|
)
|
|
|
|
|
|
|
(104,140
|
)
|
Restricted stock grants and cancellations
|
|
|
242,650
|
|
|
|
2
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
6,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
104,611,181
|
|
|
|
1,046
|
|
|
|
429,508
|
|
|
|
|
|
|
|
269,296
|
|
|
|
(8,079
|
)
|
|
|
691,771
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,066
|
|
|
|
|
|
|
|
170,066
|
|
Amortization of treasury lock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,108
|
)
|
|
|
(3,108
|
)
|
Amortization of unfunded employee benefit obligations, net of
tax of $1.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,820
|
|
|
|
1,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168,778
|
|
Adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,103
|
|
|
|
|
|
|
|
5,103
|
|
Unfunded employee benefit obligations, net of tax of
$1.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,202
|
|
|
|
2,202
|
|
Exercise of stock options
|
|
|
1,260,768
|
|
|
|
13
|
|
|
|
25,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,073
|
|
Common stock repurchases and retirements
|
|
|
(1,088,200
|
)
|
|
|
(11
|
)
|
|
|
(30,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,528
|
)
|
Common stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110,405
|
)
|
|
|
|
|
|
|
(110,405
|
)
|
Restricted stock grants and cancellations
|
|
|
234,930
|
|
|
|
2
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
449
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
8,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
105,018,679
|
|
|
|
1,050
|
|
|
|
432,916
|
|
|
|
|
|
|
|
334,060
|
|
|
|
(7,165
|
)
|
|
|
760,861
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,609
|
|
|
|
|
|
|
|
135,609
|
|
Amortization of treasury lock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,407
|
)
|
|
|
(2,407
|
)
|
Amortization of unfunded employee benefit obligations, net of
tax of $1.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,975
|
|
|
|
1,975
|
|
Settlement of treasury lock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,386
|
)
|
|
|
(4,386
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,794
|
|
Effects of changing the pension and postretirement benefit plans
measurement date pursuant to SFAS No. 158:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost, interest cost and expected return on plan assets
for October 1 December 31, 2007, net of tax of
$1.8 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,884
|
)
|
|
|
|
|
|
|
(2,884
|
)
|
Amortization of prior service cost and net loss for October
1 December 31, 2007, net of tax of
$0.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(494
|
)
|
|
|
494
|
|
|
|
|
|
Unfunded employee benefit obligations, net of tax of
$17.0 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,765
|
)
|
|
|
(26,765
|
)
|
Exercise of stock options
|
|
|
152,313
|
|
|
|
1
|
|
|
|
3,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,213
|
|
Common stock repurchases and retirements
|
|
|
(3,142,600
|
)
|
|
|
(31
|
)
|
|
|
(65,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,666
|
)
|
Common stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(124,219
|
)
|
|
|
|
|
|
|
(124,219
|
)
|
Restricted stock grants and cancellations
|
|
|
369,560
|
|
|
|
4
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80
|
)
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
8,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
102,397,952
|
|
|
$
|
1,024
|
|
|
$
|
379,104
|
|
|
$
|
|
|
|
$
|
342,072
|
|
|
$
|
(38,251
|
)
|
|
$
|
683,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
Packaging
Corporation of America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
135,609
|
|
|
$
|
170,066
|
|
|
$
|
125,032
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
147,769
|
|
|
|
148,091
|
|
|
|
154,832
|
|
Amortization of financing costs
|
|
|
685
|
|
|
|
687
|
|
|
|
687
|
|
Amortization of net gain on treasury lock
|
|
|
(2,407
|
)
|
|
|
(3,108
|
)
|
|
|
(3,108
|
)
|
Share-based compensation expense
|
|
|
8,695
|
|
|
|
8,418
|
|
|
|
6,062
|
|
Deferred income tax provision
|
|
|
(10,814
|
)
|
|
|
(11,024
|
)
|
|
|
(20,142
|
)
|
Loss on disposals of property, plant and equipment
|
|
|
5,825
|
|
|
|
4,130
|
|
|
|
4,090
|
|
Excess tax benefits from share-based awards
|
|
|
|
|
|
|
412
|
|
|
|
236
|
|
Changes in operating assets and liabilities (net of effects of
acquisitions):
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
21,023
|
|
|
|
(12,724
|
)
|
|
|
(48,068
|
)
|
Inventories
|
|
|
(2,598
|
)
|
|
|
(8,494
|
)
|
|
|
(3,526
|
)
|
Prepaid expenses and other current assets
|
|
|
(8
|
)
|
|
|
(292
|
)
|
|
|
363
|
|
Increase (decrease) in liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(31,133
|
)
|
|
|
12,800
|
|
|
|
(7,777
|
)
|
Accrued liabilities
|
|
|
(9,855
|
)
|
|
|
691
|
|
|
|
33,289
|
|
Other, net
|
|
|
6,531
|
|
|
|
(9,504
|
)
|
|
|
4,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
269,322
|
|
|
|
300,149
|
|
|
|
246,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(132,972
|
)
|
|
|
(113,446
|
)
|
|
|
(88,221
|
)
|
Acquisitions of businesses
|
|
|
|
|
|
|
|
|
|
|
(4,314
|
)
|
Additions to other long term assets
|
|
|
(3,267
|
)
|
|
|
(1,859
|
)
|
|
|
(4,262
|
)
|
Proceeds from disposals of property, plant and equipment
|
|
|
1,703
|
|
|
|
1,118
|
|
|
|
2,842
|
|
Proceeds from sale of investment
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(134,536
|
)
|
|
|
(113,187
|
)
|
|
|
(93,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
149,939
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(170,320
|
)
|
|
|
(10,149
|
)
|
|
|
(9,096
|
)
|
Financing costs paid
|
|
|
(1,176
|
)
|
|
|
|
|
|
|
|
|
Settlement of treasury lock
|
|
|
(4,386
|
)
|
|
|
|
|
|
|
|
|
Common stock dividends paid
|
|
|
(125,057
|
)
|
|
|
(105,048
|
)
|
|
|
(105,052
|
)
|
Repurchases of common stock
|
|
|
(65,666
|
)
|
|
|
(30,528
|
)
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
2,410
|
|
|
|
20,336
|
|
|
|
7,754
|
|
Excess tax benefits from share-based awards
|
|
|
724
|
|
|
|
4,733
|
|
|
|
2,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(213,532
|
)
|
|
|
(120,656
|
)
|
|
|
(103,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(78,746
|
)
|
|
|
66,306
|
|
|
|
49,168
|
|
Cash and cash equivalents, beginning of year
|
|
|
228,143
|
|
|
|
161,837
|
|
|
|
112,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
149,397
|
|
|
$
|
228,143
|
|
|
$
|
161,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-7
Packaging
Corporation of America
December 31,
2008
1. BASIS
OF PRESENTATION AND NATURE OF BUSINESS
Packaging Corporation of America (PCA or the
Company) was incorporated on January 25, 1999.
On April 12, 1999, PCA acquired the containerboard and
corrugated packaging products business of Pactiv Corporation
(Pactiv), formerly known as Tenneco Packaging Inc.,
a wholly owned subsidiary of Tenneco Inc. PCA had no operations
from the date of incorporation on January 25, 1999 to
April 11, 1999.
The Company is comprised of mills and corrugated manufacturing
operations. The mill operations (the Mills) consist
of two kraft linerboard mills located in Counce, Tennessee, and
Valdosta, Georgia, and two medium mills located in Filer City,
Michigan, and Tomahawk, Wisconsin. The Company leased the
cutting rights to approximately 91,000 acres of timberland
as of December 31, 2008. The Mills transfer the majority of
their containerboard produced to PCAs corrugated products
plants.
PCAs corrugated manufacturing operations consist of 67
plants, with 40 operating as combining operations, or corrugated
plants, and 27 as sheet plants; a technical and development
center; five graphic design centers; a rotogravure printing
operation and a complement of packaging supplies and
distribution centers. All plants are located in the continental
United States. Corrugated plants combine linerboard and medium
into sheets that are converted into corrugated shipping
containers, point-of-sale graphics packaging, point-of-purchase
displays and other specialized packaging. Sheet plants purchase
sheets primarily from PCA corrugated products plants to use in
the finished corrugated products converting process. The
corrugated manufacturing operations sell to diverse customers
primarily in North America.
As of December 31, 2008, PCA had approximately
8,100 employees. Approximately 2,400 of these employees
were salaried and approximately 5,700 were hourly. Approximately
75% of its hourly employees are represented by unions. The
majority of its unionized employees are represented primarily by
the United Steel Workers (USW), the International Brotherhood of
Teamsters (IBT), and the International Association of Machinists
(IAM).
Based on an agreement reached with the USW in August 2008, the
existing labor agreements at PCAs containerboard mills
covering USW represented employees (91% of mill hourly
workforce) were extended five years. With this extension,
the USW contracts at PCAs mills are currently set to
expire between September 2013 and June 2015. Agreements with
other unions representing the remaining mill unionized employees
(9% of mill hourly workforce) expire between October 2009 and
June 2012. Contracts for unionized corrugated products plant
employees expire between February 2009 and November 2014. The
Company is currently in negotiations to renew or extend any
union contracts that have recently expired or are expiring in
the near future.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Consolidation
The accompanying 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.
F-8
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
Cash
and Cash Equivalents
Cash and cash equivalents include all cash balances and highly
liquid investments with a maturity, when acquired, of three
months or less. Cash equivalents are stated at cost, which
approximates market.
Accounts
Receivable
The collectibility of PCAs accounts receivable is based
upon a combination of factors. In circumstances where a specific
customer is unable to meet its financial obligations to PCA
(e.g., bankruptcy filings, substantial downgrading of credit
sources), a specific reserve for bad debts is recorded against
amounts due to the Company to reduce the net recorded receivable
to the amount the Company reasonably believes will be collected.
For all other customers, reserves for bad debts are recognized
consisting of 0.3% for amounts less than 90 days past due
their contractual terms and 30% for amounts more than
90 days past due their contractual terms based on
historical collection experience. If collection experience
deteriorates (i.e., higher than expected defaults or an
unexpected material adverse change in a major customers
ability to meet its financial obligations to us), the estimate
of the recoverability of amounts due could be reduced by a
material amount.
The customer deductions reserve represents the estimated amount
required for customer returns, allowances and earned discounts.
Based on the Companys experience, customer returns,
allowances and earned discounts have averaged 1.0% of gross
selling price. Accordingly, PCA reserves 1.0% of its open
customer accounts receivable balance for these items.
At December 31, 2008 and 2007, the allowance for doubtful
accounts was $4.4 million and $2.9 million,
respectively. Also offsetting the accounts receivable balance at
December 31, 2008 and 2007, were reserves for customer
deductions of $2.5 million and $2.7 million,
respectively.
Inventories
With the exception of inventories at PCAs Chicago
corrugated products plant, which was acquired in 2004, raw
materials, work in process and finished goods are valued using
the last-in,
first-out (LIFO) cost method. Inventories at the
Chicago plant are valued at the
first-in,
first-out (FIFO) cost method. Supplies and materials
are valued using a moving average cost. All inventories are
stated at the lower of cost or market and include all costs
directly associated with manufacturing products: materials,
labor and manufacturing overhead. Inventories valued using the
LIFO method totaled $173.5 million and $162.6 million,
respectively, as of December 31, 2008 and 2007, compared to
total inventory values (before the LIFO inventory reserve) of
$272.8 million and $255.1 million for the same
respective periods.
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
106,165
|
|
|
$
|
89,576
|
|
Work in process
|
|
|
6,560
|
|
|
|
6,709
|
|
Finished goods
|
|
|
65,213
|
|
|
|
71,983
|
|
Supplies and materials
|
|
|
94,849
|
|
|
|
86,818
|
|
|
|
|
|
|
|
|
|
|
Inventories at FIFO or average cost
|
|
|
272,787
|
|
|
|
255,086
|
|
Excess of FIFO or average cost over LIFO cost
|
|
|
(65,833
|
)
|
|
|
(50,730
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
206,954
|
|
|
$
|
204,356
|
|
|
|
|
|
|
|
|
|
|
F-9
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
Property,
Plant and Equipment
Property, plant and equipment are recorded at cost, and consist
of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Land and land improvements
|
|
$
|
98,943
|
|
|
$
|
94,997
|
|
Buildings
|
|
|
335,125
|
|
|
|
329,148
|
|
Machinery and equipment
|
|
|
2,588,996
|
|
|
|
2,500,286
|
|
Construction in progress
|
|
|
50,310
|
|
|
|
66,726
|
|
Other
|
|
|
26,459
|
|
|
|
28,980
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost
|
|
|
3,099,833
|
|
|
|
3,020,137
|
|
Less accumulated depreciation
|
|
|
(1,878,814
|
)
|
|
|
(1,804,839
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
1,221,019
|
|
|
$
|
1,215,298
|
|
|
|
|
|
|
|
|
|
|
The amount of interest capitalized related to construction in
progress was $1.3 million, $1.0 million and
$0.5 million for the years ended December 31, 2008,
2007 and 2006, respectively.
Depreciation is computed on the straight-line basis over the
estimated useful lives of the related assets. Assets under
capital leases are depreciated on the straight-line method over
the term of the lease or the useful life, if shorter. The
following lives are used for the various categories of assets:
|
|
|
|
|
Buildings and land improvements
|
|
|
5 to 40 years
|
|
Machinery and equipment
|
|
|
3 to 25 years
|
|
Trucks and automobiles
|
|
|
3 to 10 years
|
|
Furniture and fixtures
|
|
|
3 to 20 years
|
|
Computers and hardware
|
|
|
3 to 7 years
|
|
Leasehold improvements
|
|
|
Period of the lease or
useful life, if shorter
|
|
The amount of depreciation expense was $143.3 million,
$144.6 million and $150.0 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
Expenditures for repairs and maintenance are expensed as
incurred.
Goodwill
and Intangible Assets
The Company has capitalized certain intangible assets, primarily
customer lists and relationships, covenants not to compete and
goodwill, based on their estimated fair value at the date of
acquisition. Amortization is provided for customer lists and
relationships on a straight-line basis over periods ranging from
six to 40 years. Covenants not to compete are amortized on
a straight-line basis over the terms of the respective
agreements. Goodwill, which amounted to $37.2 million as of
both December 31, 2008 and 2007, respectively, is not being
amortized but is subject to annual impairment tests in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets. The Company performs the impairment
tests in the fourth quarter or sooner if events or changes in
circumstances indicate that the carrying amount may exceed fair
value. Recoverability of goodwill is determined by comparing the
fair value of the reporting unit with its carrying value,
including goodwill. If the carrying amount of the reporting unit
exceeds the fair value, the implied fair value of the reporting
units goodwill is compared to the carrying amount of its
goodwill to determine if a write-down to fair value is
necessary. The Company
F-10
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
concluded that no impairment of goodwill existed at the time of
the annual impairment tests in 2008, 2007 and 2006.
Other
Long-Term Assets
PCA has capitalized certain costs related to obtaining its
financing. These costs are amortized to interest expense using
the effective interest rate method over the terms of the senior
credit facilities and senior notes, which range from five to ten
years. Unamortized deferred financing costs were
$2.4 million and $1.9 million as of December 31,
2008 and 2007, respectively.
PCA leases the cutting rights to approximately 91,000 acres
of timberland and capitalizes the annual lease payments and
reforestation costs associated with these leases. These costs
are recorded as depletion when timber is harvested and used in
PCAs business operations or sold to customers. Capitalized
long-term lease costs were $22.1 million and
$21.5 million as of December 31, 2008 and 2007,
respectively. The amount of depletion expense was
$1.4 million, $1.5 million and $2.2 million for
the years ended December 31, 2008, 2007 and 2006,
respectively.
PCA capitalizes certain costs related to the purchase and
development of software which is used in its business
operations. The costs attributable to these software systems are
amortized over their estimated useful lives based on various
factors such as the effects of obsolescence, technology and
other economic factors. Net capitalized software costs were
$1.8 million and $0.9 million as of December 31,
2008 and 2007, respectively. Software amortization expense was
$0.3 million, $0.4 million and $1.1 million for
the years ended December 31, 2008, 2007 and 2006,
respectively.
Impairment
of Long-Lived Assets
Long-lived assets other than goodwill are reviewed for
impairment in accordance with provisions of
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. In the event that facts and
circumstances indicate that the carrying amount of any
long-lived assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the
asset (or group of assets) would be compared to the assets
(or group of assets) carrying amount to determine if a
write-down to fair value is required. The Company concluded that
no impairment of long-lived assets existed in 2008, 2007 and
2006.
Pension
and Postretirement Benefits
One of the principal assumptions used to calculate net periodic
pension cost is the expected long-term rate of return on plan
assets. The expected long-term rate of return on plan assets may
result in recognized returns that are greater or less than the
actual returns on those plan assets in any given year. Over
time, however, the expected long-term rate of return on plan
assets is designed to approximate the actual long term returns.
The discount rate assumptions used to calculate net periodic
pension and postretirement cost reflect the rates available on
high-quality, fixed-income debt instruments on
December 31st of
each year. The rate of compensation increase is another
significant assumption used to calculate net periodic pension
cost and is determined by the Company based upon annual reviews.
For postretirement health care plan accounting, the Company
reviews external data and its own historical trends for health
care costs to determine the health care cost trend rate
assumption.
F-11
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
Environmental
Matters
Environmental expenditures related to existing conditions
resulting from past or current operations from which no current
or future benefit is discernible are expensed as incurred.
Environmental expenditures that extend the life of the related
property or mitigate or prevent future environmental
contamination are capitalized. Liabilities are recorded for
environmental contingencies when such costs are probable and
reasonably estimable. These liabilities are adjusted as further
information develops or circumstances change.
Asset
Retirement Obligations
The Company accounts for its retirement obligations related to
its landfills under SFAS No. 143, Accounting for
Asset Retirement Obligations, which requires legal
obligations associated with the retirement of long-lived assets
to be recognized at their fair value at the time that the
obligations are incurred. Upon initial recognition of a
liability, that cost is capitalized as part of the related
long-lived asset and amortized to expense over the useful life
of the asset.
Income
Taxes
PCA utilizes the liability method of accounting for income taxes
whereby it recognizes deferred tax assets and liabilities for
the future tax consequences of temporary differences between the
tax basis of assets and liabilities and their reported amounts
in the financial statements. Deferred tax assets will be reduced
by a valuation allowance if, based upon managements
estimates, it is more likely than not, that a portion of the
deferred tax assets will not be realized in a future period. The
estimates utilized in the recognition of deferred tax assets are
subject to revision in future periods based on new facts or
circumstances.
PCAs practice is to recognize interest and penalties
related to uncertain tax positions in income tax expense.
Planned
Major Maintenance Activities
The Company accounts for its planned major maintenance
activities in accordance with FSP No. AUG AIR-1,
Accounting for Planned Major Maintenance Activities,
using the deferral method. All maintenance costs incurred during
the year are expensed in the fiscal year in which the
maintenance activity occurs.
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.
Research
and Development
Research and development costs are expensed as incurred. The
amount charged to expense was $6.9 million,
$7.6 million and $6.9 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
Interest
Expense, Net
Interest expense, net, includes interest income of
$5.2 million, $9.5 million and $4.8 million for
the years ended December 31, 2008, 2007 and 2006,
respectively, and amortization of the net gain on treasury lock
settlements in July 2003 and March 2008 of $2.4 million in
2008 and $3.1 million in both 2007 and 2006.
F-12
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
Industry
Agreements
PCA regularly trades containerboard with other manufacturers
primarily to reduce shipping costs. Containerboard trade
agreements are a long-standing industry practice. These
agreements are entered into on an annual basis, in which both
parties agree to ship an identical number of tons to each other
within the agreement period. These agreements minimize
transportation cost by allowing each partys containerboard
mills to ship containerboard to the other partys closest
corrugated products plant. PCA tracks each shipment to ensure
that the other partys shipments to the Company match its
shipments to them during the agreement period. Such transfers
are possible because containerboard is a commodity product with
no distinguishing product characteristics. These transactions
are accounted for at carrying value, and sales are not recorded
as the transactions do not represent the culmination of an
earnings process. The transactions are recorded into inventory
accounts, and no income is recorded until such inventory is
converted to a finished product and sold to an end-use customer.
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.
Derivative
Instruments and Hedging Activities
The Company records its derivatives in accordance with
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement requires
the Company to recognize derivative instruments as either assets
or liabilities in the balance sheet at fair value. It further
provides criteria for derivative instruments to be designated as
fair value, cash flow or foreign currency hedges and establishes
respective accounting standards for reporting changes in the
fair value of the derivative instruments. The gains or losses
resulting from adjusting the derivative instruments to fair
value are recorded in net income or accumulated other
comprehensive income (loss) (OCI), as appropriate.
The Company has historically used derivative instruments to
manage interest costs and the risk associated with changing
interest rates. The Companys objectives for holding
derivatives are to minimize the risks using the most effective
methods to eliminate or reduce the impacts of these exposures.
On June 12, 2003, in connection with a contemplated
issuance of ten-year debt securities, PCA entered into an
interest rate protection agreement with a counterparty to
protect against increases in the ten-year U.S. Treasury
Note rate. On January 17, 2008, in connection with a
contemplated issuance of ten-year debt securities, PCA entered
into an interest rate protection agreement with a counterparty
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) and is amortizing the
$22.8 million gain and the $4.4 million loss to
interest expense over the lives of the respective notes. As of
December 31, 2008, 2007 and 2006, the Company was not a
party to any derivative instruments.
F-13
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
Recent
Accounting Pronouncements
In October 2008, the Financial Accounting Standards Board
(FASB) issued Staff Position
No. 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active. FSP
No. 157-3
clarifies the application of SFAS No. 157 in a market
that is not active and addresses application issues such as the
use of internal assumptions when relevant observable data does
not exist, the use of observable market information when the
market is not active, and the use of market quotes when
assessing the relevance of observable and unobservable data. FSP
No. 157-3
is effective for all periods presented in accordance with
SFAS No. 157. The Company considered the additional
guidance with respect to the valuation of its financial assets
and liabilities and their corresponding designation within the
fair value hierarchy. For additional information, see
Note 10.
In June 2008, the FASB issued FSP
No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities. FSP
No. EITF 03-6-1
was issued to clarify that unvested share-based payment awards
with a right to receive nonforfeitable dividends are
participating securities. This FSP also provides guidance on how
to allocate earnings to participating securities and compute
basic EPS using the two-class method. FSP
No. EITF 03-6-1
is effective for fiscal years beginning after December 15,
2008. The Company does not expect the adoption of this FSP to
have a material impact on its earnings per share calculations.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities. SFAS No. 161 changes the disclosure
requirements for derivative instruments and hedging activities.
Entities will be required to provide enhanced disclosures about
how and why an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted
for under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities and its
related interpretations, and how derivative instruments and
related items affect an entitys financial position,
operations and cash flows. SFAS No. 161 is effective
as of the beginning of an entitys fiscal year that begins
after November 15, 2008. Early adoption is permitted. To
the extent that PCA is a party to any derivative instruments
after December 31, 2008, SFAS No. 161 will impact
PCAs disclosures related to derivative instruments and
hedging activities.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. SFAS No. 141(R)
significantly changes the accounting for and reporting of
business combination transactions in consolidated financial
statements. These significant changes include
(1) recognition of 100% of the fair value of assets
acquired, liabilities assumed and noncontrolling interests of
acquired businesses, even if 100% of the acquisition has not
been acquired; (2) recognition of contingent consideration
arrangements and preacquisition gain and loss contingencies at
their acquisition-date fair values; (3) capitalization of
research and development assets acquired at acquisition-date
fair value; (4) recognition of acquisition-related
transaction costs as expense when incurred; and
(5) recognition of acquisition-related restructuring cost
accruals only if the criteria in SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, are met as of the acquisition date.
SFAS No. 141(R) is effective for fiscal years
beginning after December 15, 2008. Early adoption is not
permitted. To the extent the Company makes an acquisition after
December 31, 2008, SFAS No. 141(R) will impact
the Companys accounting for such acquisition.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115. SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other
items at fair value. Most of the provisions of
SFAS No. 159 apply only to entities that elect the
fair value option. However, the amendments to
SFAS No. 115, Accounting for Certain Investments
In Debt and Equity Securities, apply to all entities with
available-for-sale and trading securities.
SFAS No. 159 was effective as of the beginning of an
entitys first
F-14
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
fiscal year that began after November 15, 2007. On
January 1, 2008, the Company decided not to adopt the fair
value option for any of its financial instruments.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106 and 132(R).
SFAS No. 158 requires plan sponsors of defined benefit
pension and other postretirement benefit plans (collectively,
postretirement benefit plans) to recognize the
funded status of their postretirement benefit plans in the
statement of financial position, measure the fair value of plan
assets and benefit obligations as of the date of the fiscal year
end statement of financial position, and provide additional
disclosures. These requirements were effective for fiscal years
ending after December 15, 2006, with the exception of the
requirement to measure plan assets and benefit obligations as of
the plan sponsors fiscal year-end. This requirement was
effective for fiscal years ending after December 15, 2008.
On December 31, 2006, the Company adopted the recognition
and disclosure provisions of SFAS No. 158. On
December 31, 2008, the Company adopted the measurement
provision of SFAS No. 158. The effect of adopting this
provision on the Companys consolidated balance sheet at
December 31, 2008 has been included in the accompanying
consolidated financial statements. See Note 6 for further
discussion of the effect of adopting the measurement provision
of SFAS No. 158 on the Companys consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157
clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing an asset
or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions.
Under the standard, fair value measurements would be separately
disclosed by level within the fair value hierarchy. This
Statement was effective for fiscal years beginning after
November 15, 2007. The Company adopted
SFAS No. 157 on January 1, 2008. For additional
information regarding SFAS No. 157, see Note 10.
Reclassification
Prior years financial statements have been reclassified
where appropriate to conform with current year presentation.
3. EARNINGS
PER SHARE
The following table sets forth the computation of basic and
diluted income per common share for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
135,609
|
|
|
$
|
170,066
|
|
|
$
|
125,032
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common shares outstanding
|
|
|
102,753
|
|
|
|
104,483
|
|
|
|
103,599
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
317
|
|
|
|
640
|
|
|
|
709
|
|
Unvested restricted stock
|
|
|
523
|
|
|
|
336
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common shares outstanding
|
|
|
103,593
|
|
|
|
105,459
|
|
|
|
104,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
1.32
|
|
|
$
|
1.63
|
|
|
$
|
1.21
|
|
Diluted income per common share
|
|
$
|
1.31
|
|
|
$
|
1.61
|
|
|
$
|
1.20
|
|
F-15
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
4. STOCK-BASED
COMPENSATION
In October 1999, the Company adopted a long-term equity
incentive plan, which provides for grants of stock options,
stock appreciation rights, restricted stock and performance
awards to directors, officers and employees of PCA, as well as
others who engage in services for PCA. Option awards granted to
directors, officers and employees have contractual lives of
seven or ten years. Options granted to officers and employees
vest ratably over a three- or four-year period, whereas options
granted to directors vest immediately. The plan, which will
terminate on October 19, 2009, provides for the issuance of
up to 6,550,000 shares of common stock. As of
December 31, 2008, options or restricted stock for
6,172,508 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.
The Company measures and records stock-based compensation cost
in accordance with SFAS No. 123(R), Share-Based
Payment. Stock compensation cost includes:
(a) compensation cost for all share-based payments granted
prior to, but not vested as of January 1, 2006, the
effective date of SFAS No. 123(R), based on the grant
date fair value estimated in accordance with the original
provisions of SFAS No. 123, and (b) compensation
cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of
SFAS No. 123(R).
Compensation expense for both stock options and restricted stock
recognized in the consolidated statements of income for the year
ended December 31, 2008, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Stock options
|
|
$
|
1,457
|
|
|
$
|
2,451
|
|
|
$
|
3,273
|
|
Restricted stock
|
|
|
7,238
|
|
|
|
5,967
|
|
|
|
2,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on income before income taxes
|
|
|
8,695
|
|
|
|
8,418
|
|
|
|
6,062
|
|
Income tax benefit
|
|
|
(3,382
|
)
|
|
|
(3,271
|
)
|
|
|
(2,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on net income
|
|
$
|
5,313
|
|
|
$
|
5,147
|
|
|
$
|
3,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. There were no option grants in
2008. The estimated weighted-average fair values of and related
assumptions for the 2007 and 2006 option grants were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average fair value of options granted($)
|
|
|
4.90
|
|
|
|
3.82
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
Dividend yield (%)
|
|
|
3.80
|
|
|
|
4.77
|
|
Expected volatility (%)
|
|
|
22.75
|
|
|
|
25.49
|
|
Risk-free interest rate (%)
|
|
|
4.96
|
|
|
|
5.14
|
|
Expected life of employee options (years)
|
|
|
5.33
|
|
|
|
5.00
|
|
F-16
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
A summary of the Companys stock option activity and
related information follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Term (years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding at December 31, 2005
|
|
|
3,843,109
|
|
|
$
|
16.57
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
337,795
|
|
|
|
21.01
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(682,247
|
)
|
|
|
11.35
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(47,580
|
)
|
|
|
21.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
3,451,077
|
|
|
|
17.96
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
221,267
|
|
|
|
25.82
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,260,768
|
)
|
|
|
16.10
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(15,480
|
)
|
|
|
22.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
2,396,096
|
|
|
|
19.62
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(152,313
|
)
|
|
|
16.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(16,751
|
)
|
|
|
22.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
2,227,032
|
|
|
$
|
19.85
|
|
|
|
4.1
|
|
|
$
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding-vested or expected to vest at December 31, 2008
|
|
|
2,221,241
|
|
|
$
|
19.84
|
|
|
|
4.0
|
|
|
$
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
1,980,464
|
|
|
$
|
19.36
|
|
|
|
3.9
|
|
|
$
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the years
ended December 31, 2008 and 2007 was $1,397,000 and
$14,189,000, respectively. As of December 31, 2008, there
was $712,000 of total unrecognized compensation costs related to
non-vested stock option awards granted under the Companys
equity incentive plan. That cost is expected to be recognized
over a weighted-average period of 1.2 years.
Restricted stock awards granted to employees vest at the end of
a three- or four-year period, whereas restricted stock awards
granted to directors vest at the end of a six-month period. The
fair value of restricted stock is determined based on the
closing price of the Companys common stock on the grant
date. 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.
A summary of the Companys restricted stock activity
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Fair Market
|
|
|
|
|
|
Fair Market
|
|
|
|
|
|
Fair Market
|
|
|
|
|
|
|
Value at
|
|
|
|
|
|
Value at
|
|
|
|
|
|
Value at
|
|
|
|
|
|
|
Date of
|
|
|
|
|
|
Date of
|
|
|
|
|
|
Date of
|
|
|
|
Shares
|
|
|
Grant
|
|
|
Shares
|
|
|
Grant
|
|
|
Shares
|
|
|
Grant
|
|
|
|
(Dollars in thousands)
|
|
|
Restricted stock at January 1
|
|
|
764,705
|
|
|
$
|
17,490
|
|
|
|
610,380
|
|
|
$
|
12,964
|
|
|
|
387,030
|
|
|
$
|
8,256
|
|
Granted
|
|
|
374,455
|
|
|
|
7,947
|
|
|
|
240,920
|
|
|
|
6,210
|
|
|
|
251,550
|
|
|
|
5,301
|
|
Vested
|
|
|
(95,995
|
)
|
|
|
(2,304
|
)
|
|
|
(80,605
|
)
|
|
|
(1,549
|
)
|
|
|
(19,300
|
)
|
|
|
(405
|
)
|
Cancellations
|
|
|
(4,895
|
)
|
|
|
(110
|
)
|
|
|
(5,990
|
)
|
|
|
(135
|
)
|
|
|
(8,900
|
)
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock at December 31
|
|
|
1,038,270
|
|
|
$
|
23,023
|
|
|
|
764,705
|
|
|
$
|
17,490
|
|
|
|
610,380
|
|
|
$
|
12,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
As of December 31, 2008, there was $9,046,000 of total
unrecognized compensation costs related to the restricted stock
awards. The Company expects to recognize the cost of these stock
awards over a weighted-average period of 2.7 years.
5. ACCRUED
LIABILITIES
The components of accrued liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Bonuses and incentives
|
|
$
|
30,583
|
|
|
$
|
34,282
|
|
Medical insurance and workers compensation
|
|
|
18,496
|
|
|
|
16,943
|
|
Vacation and holiday pay
|
|
|
15,315
|
|
|
|
15,213
|
|
Customer volume discounts and rebates
|
|
|
12,735
|
|
|
|
13,359
|
|
Current portion of pension and postretirement benefits
|
|
|
12,543
|
|
|
|
2,194
|
|
Franchise, property, sales and use taxes
|
|
|
8,372
|
|
|
|
7,790
|
|
Payroll and payroll taxes
|
|
|
3,309
|
|
|
|
6,231
|
|
Other
|
|
|
5,235
|
|
|
|
5,197
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
106,588
|
|
|
$
|
101,209
|
|
|
|
|
|
|
|
|
|
|
6. EMPLOYEE
BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS
In connection with the acquisition from Pactiv, PCA and Pactiv
entered into a human resources agreement which, among other
items, granted PCA employees continued participation in the
Pactiv pension plan for a period of up to five years following
the closing of the acquisition for an agreed upon fee.
Effective January 1, 2003, PCA adopted a mirror-image
pension plan for eligible hourly employees to succeed the Pactiv
pension plan in which PCA hourly employees had participated
though December 31, 2002. The PCA pension plan for hourly
employees recognizes service earned under both the PCA plan and
the prior Pactiv plan. Benefits earned under the PCA plan are
reduced by retirement benefits earned under the Pactiv plan
through December 31, 2002. All assets and liabilities
associated with benefits earned through December 31, 2002
for hourly employees and retirees of PCA were retained by the
Pactiv plan.
Effective May 1, 2004, PCA adopted a grandfathered pension
plan for eligible salaried employees who had previously
participated in the Pactiv pension plan. The benefit formula for
the new PCA pension plan for salaried employees is comparable to
that of the Pactiv plan except that the PCA plan uses career
average base pay in the benefit formula in lieu of final average
base pay. The PCA pension plan for salaried employees recognizes
service earned under both the PCA plan and the prior Pactiv
plan. Benefits earned under the PCA plan are reduced by
retirement benefits earned under the Pactiv plan through
April 30, 2004. All assets and liabilities associated with
benefits earned through April 30, 2004 for salaried
employees and retirees of PCA were retained by the Pactiv plan.
PCA maintains a supplemental executive retirement plan
(SERP), which augments pension benefits for eligible
executives (excluding the CEO) earned under the PCA pension plan
for salaried employees. Benefits are determined using the same
formula as the PCA pension plan but in addition to counting
career average base pay, the SERP also recognizes bonuses and
any pay earned in excess of IRS qualified plan compensation
limits. Benefits earned under the SERP are reduced by benefits
paid from the PCA salaried pension plan and any prior qualified
pension and SERP benefits earned under the Pactiv plan.
F-18
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
PCA also maintains a separate supplemental executive retirement
benefit for its CEO which will provide a supplemental pension
benefit calculated on the basis of the following formula:
(annual salary + bonus) x (years of service) x (0.0167), where
years of service equals years of service with PCA +
five years. The supplemental pension benefit is payable in a
lump sum.
PCA provides certain medical benefits for retired salaried
employees and certain medical and life insurance benefits for
certain hourly employees. For salaried employees, the plan
covers employees retiring from PCA on or after attaining
age 58 who have had at least 10 years of full-time
service with PCA after attaining age 48. For hourly
employees, the postretirement medical coverage, where
applicable, is available according to the eligibility provisions
in effect at the employees work location. Per the human
resources agreement referred to above, Pactiv retained the
liability relating to retiree medical and life benefits for PCA
employees who had retired on or before April 12, 1999 or
who were eligible to retire within two years of that date. On
January 1, 2003, the Company adopted a new plan design for
salaried employees incorporating annual dollar caps in
determining the maximum amount of employer contributions made
towards the total cost of postretirement medical coverage.
Adoption
of SFAS No. 158
On December 31, 2008, the Company adopted the measurement
provision of SFAS No. 158, which required the Company
to measure the fair value of plan assets and benefit obligations
as of the date of the Companys year end. The Company had
previously measured these as of September 30th of each
year. The Company adopted the measurement provision using the
transition method based on the data as of the September 30,
2007 measurement date. As a result, the following adjustments
were made to PCAs balance sheet as of December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to
|
|
|
Effect of
|
|
|
|
|
|
|
Adopting
|
|
|
Adopting
|
|
|
As Reported at
|
|
|
|
SFAS No. 158
|
|
|
SFAS No. 158
|
|
|
December 31, 2008
|
|
|
|
(In thousands)
|
|
|
Pension and postretirement benefit plans
|
|
$
|
81,243
|
|
|
$
|
4,721
|
|
|
$
|
85,964
|
|
Deferred income taxes (noncurrent)
|
|
|
210,716
|
|
|
|
(1,837
|
)
|
|
|
208,879
|
|
Total long-term liabilities
|
|
|
890,926
|
|
|
|
2,884
|
|
|
|
893,810
|
|
Accumulated other comprehensive income (loss)
|
|
|
(38,745
|
)
|
|
|
494
|
|
|
|
(38,251
|
)
|
Retained earnings
|
|
|
345,450
|
|
|
|
(3,378
|
)
|
|
|
342,072
|
|
Total stockholders equity
|
|
|
686,833
|
|
|
|
(2,884
|
)
|
|
|
683,949
|
|
Total liabilities and stockholders equity
|
|
|
1,939,741
|
|
|
|
|
|
|
|
1,939,741
|
|
Included in accumulated other comprehensive income (loss) at
December 31, 2008 and 2007 are the following amounts that
have not yet been recognized in net periodic pension cost:
unrecognized prior service costs of $43.1 million
($26.3 million net of tax) and $31.5 million
($19.1 million net of tax), respectively, and unrecognized
actuarial gains (losses) of $30.1 million ($18.3 net
of tax) and $1.9 million ($1.2 million net of tax),
respectively. The pre-tax amounts of prior service cost and
actuarial loss included in accumulated other comprehensive
income (loss) and recognized in net periodic pension cost for
the year ended December 31, 2008 were $2.9 million
($1.7 million net of tax)and $3.9 million
($2.4 million net of tax), respectively. For the year ended
December 31, 2009, the Company expects to recognize in net
periodic pension cost $4.9 million ($3.0 million net
of tax) and $(0.4) million ($0.3 million net of tax)
of prior service cost for pension and postretirement plans,
respectively, and $0.8 million ($0.5 million net of
tax) and $0.3 million ($0.2 million net of tax) of
actuarial loss for pension and postretirement plans,
respectively, included in accumulated other comprehensive income
(loss) at December 31, 2008.
F-19
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
The following tables provide information related to the
Companys pension and postretirement benefit plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
|
$
|
129,913
|
|
|
$
|
108,965
|
|
|
$
|
81,495
|
|
|
$
|
13,342
|
|
|
$
|
11,288
|
|
|
$
|
10,729
|
|
Service cost(1)
|
|
|
22,224
|
|
|
|
17,973
|
|
|
|
18,291
|
|
|
|
1,334
|
|
|
|
1,003
|
|
|
|
945
|
|
Interest cost(1)
|
|
|
9,785
|
|
|
|
6,251
|
|
|
|
4,472
|
|
|
|
985
|
|
|
|
654
|
|
|
|
586
|
|
Plan amendments
|
|
|
14,570
|
|
|
|
2,686
|
|
|
|
8,834
|
|
|
|
616
|
|
|
|
(2
|
)
|
|
|
(9
|
)
|
Actuarial loss (gain)
|
|
|
3,442
|
|
|
|
(5,273
|
)
|
|
|
(3,762
|
)
|
|
|
1,877
|
|
|
|
1,120
|
|
|
|
(524
|
)
|
Participant contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
575
|
|
|
|
376
|
|
|
|
282
|
|
Benefits paid
|
|
|
(1,479
|
)
|
|
|
(689
|
)
|
|
|
(365
|
)
|
|
|
(1,429
|
)
|
|
|
(1,097
|
)
|
|
|
(721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at plan year end
|
|
$
|
178,455
|
|
|
$
|
129,913
|
|
|
$
|
108,965
|
|
|
$
|
17,300
|
|
|
$
|
13,342
|
|
|
$
|
11,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation portion of above
|
|
$
|
117,729
|
|
|
$
|
102,470
|
|
|
$
|
78,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Fair Value of Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at fair value at beginning of period
|
|
$
|
87,321
|
|
|
$
|
47,591
|
|
|
$
|
24,604
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
(16,116
|
)
|
|
|
6,919
|
|
|
|
2,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company contributions
|
|
|
27,522
|
|
|
|
33,500
|
|
|
|
20,654
|
|
|
|
854
|
|
|
|
721
|
|
|
|
439
|
|
Participant contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
575
|
|
|
|
376
|
|
|
|
282
|
|
Benefits paid
|
|
|
(1,479
|
)
|
|
|
(689
|
)
|
|
|
(365
|
)
|
|
|
(1,429
|
)
|
|
|
(1,097
|
)
|
|
|
(721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at plan year end
|
|
$
|
97,248
|
|
|
$
|
87,321
|
|
|
$
|
47,591
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Service cost and interest cost for 2008 include amounts for the
period October 1 December 31, 2007. |
F-20
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Development of Net Amount Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation in excess of plan assets
|
|
$
|
(81,207
|
)
|
|
$
|
(42,592
|
)
|
|
$
|
(17,300
|
)
|
|
$
|
(13,342
|
)
|
Fourth quarter contributions
|
|
|
|
|
|
|
5,306
|
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation in excess of plan assets at December 31
|
|
$
|
(81,207
|
)
|
|
$
|
(37,286
|
)
|
|
$
|
(17,300
|
)
|
|
$
|
(13,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in Statement of Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
(11,900
|
)
|
|
$
|
(1,561
|
)
|
|
$
|
(643
|
)
|
|
$
|
(633
|
)
|
Noncurrent liabilities
|
|
|
(69,307
|
)
|
|
|
(35,725
|
)
|
|
|
(16,657
|
)
|
|
|
(12,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit recognized at December 31
|
|
$
|
(81,207
|
)
|
|
$
|
(37,286
|
)
|
|
$
|
(17,300
|
)
|
|
$
|
(13,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in Accumulated Other Comprehensive Income
(Loss), Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
27,523
|
|
|
$
|
21,109
|
|
|
$
|
(1,241
|
)
|
|
$
|
(1,969
|
)
|
Actuarial loss
|
|
|
14,697
|
|
|
|
(1,483
|
)
|
|
|
3,630
|
|
|
|
2,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,220
|
|
|
$
|
19,626
|
|
|
$
|
2,389
|
|
|
$
|
687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-Average Assumptions Used to Determine Benefit
Obligations at December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Weighted-Average Assumptions Used to Determine Net Periodic
Benefit Cost for the Years Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
|
|
5.50
|
%
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
|
|
5.50
|
%
|
Expected return on plan assets
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
During the year ended December 31, 2008, PCA recorded
pension plan expense of $24.0 million and made pension
contributions of $22.2 million. PCA currently expects to
record pension plan expense of $25.1 million in 2009 and
make pension contributions of $36.8 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost for benefits earned during the year
|
|
$
|
17,779
|
|
|
$
|
17,973
|
|
|
$
|
18,291
|
|
|
$
|
1,067
|
|
|
$
|
1,003
|
|
|
$
|
945
|
|
Interest cost on accumulated benefit obligation
|
|
|
7,828
|
|
|
|
6,251
|
|
|
|
4,472
|
|
|
|
788
|
|
|
|
654
|
|
|
|
586
|
|
Expected return on plan assets
|
|
|
(8,578
|
)
|
|
|
(4,761
|
)
|
|
|
(2,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amortization of unrecognized amounts
|
|
|
7,002
|
|
|
|
3,233
|
|
|
|
2,800
|
|
|
|
(239
|
)
|
|
|
(236
|
)
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
24,031
|
|
|
$
|
22,696
|
|
|
$
|
22,795
|
|
|
$
|
1,616
|
|
|
$
|
1,421
|
|
|
$
|
1,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
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. Pension plans assets were invested in the
following classes of securities at December 31, 2008 and
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
of Fair Value
|
|
|
|
2008
|
|
|
2007
|
|
|
Equity securities
|
|
|
23
|
%
|
|
|
35
|
%
|
Debt securities
|
|
|
74
|
%
|
|
|
64
|
%
|
Other
|
|
|
3
|
%
|
|
|
1
|
%
|
PCA has retained the services of a professional advisor to
oversee our pension investments and provide recommendations
regarding investment strategy. PCAs overall strategy and
related apportionments between equity and debt securities may
change from time to time based on market conditions, external
economic factors, and the funding status of the plans.
The expected return on pension plan assets reflects the expected
long-term rates of return for the categories of investments
currently held in the plan as well as anticipated returns for
additional contributions made in the future. The expected
long-term rate of return is adjusted when there are fundamental
changes in expected returns on the plan investments.
The discount rate assumptions used to calculate the present
value of pension and postretirement benefit obligations reflect
the rates available on high-quality, fixed-income debt
instruments on December 31st beginning in 2008. Prior
to 2008, the discount rate assumptions were based on rates as of
September 30th of each year. The rate of compensation
increase is another significant assumption used for pension
accounting and is determined by the Company based upon annual
reviews.
In determining net pension and postretirement benefit costs, the
Company elected to amortize prior service cost on a
straight-line basis over the average remaining service period of
employees expected to receive benefits under the plans. A 10%
corridor is used to determine the amount of the unrecognized net
gain or loss to be amortized. The excess, if any, of the
unrecognized net gain or loss over 10% of the greater of the
projected benefit obligation or the market-related value of plan
assets is amortized over the average remaining service period
until retirement for active participants and included in the net
periodic benefit cost.
As of December 31, 2008, the Company assumed health care
cost trend rates for its postretirement benefit plans were 7.50%
in 2009, 7.00% in 2010, 6.50% in 2011, 6.00% in 2012, 5.50% in
2013, and 5.00% in 2014 and thereafter. As of September 30,
2007, the Company assumed health care cost trend rates for its
postretirement benefit plans were 7.50% for 2008, 7.00% for
2009, 6.50% for 2010, 6.00% for 2011, 5.50% for 2012 and 5.00%
for 2013 and thereafter. As of September 30, 2006, the
Company assumed health care cost trend rates were 9.00% for
2007, 8.00% for 2008, 7.00% for 2009, 6.00% for 2010 and 5.00%
for 2011 and thereafter.
Increasing the assumed health care cost trend rate by one
percentage point would increase the 2008 postretirement benefit
obligation by approximately $0.6 million and would increase
the 2008 net postretirement benefit cost by approximately
$0.1 million. Decreasing the assumed health care cost trend
rate by one percentage point would decrease the 2008
postretirement benefit obligation by approximately
$0.5 million and would decrease the 2008 net
postretirement benefit cost by approximately $0.1 million.
F-22
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
The following are estimated benefit payments to be paid to
current plan participants by year:
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
11,900
|
|
|
$
|
643
|
|
2010
|
|
|
3,709
|
|
|
|
842
|
|
2011
|
|
|
4,699
|
|
|
|
1,072
|
|
2012
|
|
|
5,829
|
|
|
|
1,092
|
|
2013
|
|
|
7,068
|
|
|
|
1,218
|
|
2014 2018
|
|
|
57,148
|
|
|
|
8,257
|
|
The Company has two defined contribution 401(k) benefit plans
that cover all full-time salaried employees and certain hourly
employees at several of the Companys facilities. Employees
can make voluntary contributions in accordance with the
provisions of their respective plan. The Company made
employer-matching contributions of $9.4 million,
$9.0 million and $8.5 million during the years ended
December 31, 2008, 2007 and 2006, respectively.
Salaried employees who are not participants in the grandfathered
pension plan (generally those hired on or after April 12,
1999) receive a service-related Company retirement
contribution to their 401(k) account in addition to any employer
matching contribution. This contribution increases with years of
service and ranges from 3% to 5% of base pay. The Company
expensed $2.5 million, $2.2 million and
$1.8 million for this retirement contribution during the
years ended December 31, 2008, 2007 and 2006, respectively.
7. OTHER
INTANGIBLE ASSETS
The components of other intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
As of December 31, 2008
|
|
|
As of December 31, 2007
|
|
|
|
Remaining
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
|
|
|
(In thousands)
|
|
|
Customer lists and relations
|
|
|
31.3 years
|
|
|
$
|
17,441
|
|
|
$
|
4,836
|
|
|
$
|
17,441
|
|
|
$
|
4,022
|
|
Covenants not to compete
|
|
|
0.4 years
|
|
|
|
2,292
|
|
|
|
2,228
|
|
|
|
2,292
|
|
|
|
1,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
|
|
|
$
|
19,733
|
|
|
$
|
7,064
|
|
|
$
|
19,733
|
|
|
$
|
5,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of amortization expense was $1.1 million for
each of the years ended December 31, 2008, 2007 and 2006,
respectively. Estimated amortization of intangible assets over
the next five years is expected to approximate $0.9 million
(2009), $0.8 million (2010), $0.6 million (2011),
$0.5 million (2012) and $0.4 million (2013).
F-23
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
8. DEBT
A summary of debt is set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Senior credit facility
|
|
|
|
|
|
|
|
|
Term loan, effective interest rate of 6.13% as of
December 31, 2007, repaid March 31, 2008
|
|
$
|
|
|
|
$
|
20,000
|
|
Receivables credit facility, effective interest rate of 3.01%
and 5.39% as of December 31, 2008 and 2007, respectively,
due September 18, 2009
|
|
|
109,000
|
|
|
|
109,000
|
|
Senior notes, net of discount of $68 as of December 31,
2007, interest at 4.38% payable semi-annually, repaid
August 1, 2008
|
|
|
|
|
|
|
149,932
|
|
Senior notes, net of discount of $1,543 and $1,886 as of
December 31, 2008 and 2007, respectively, interest at 5.75%
payable semi-annually, due August 1, 2013
|
|
|
398,457
|
|
|
|
398,114
|
|
Senior notes, net of discount of $57 as of December 31,
2008, interest at 6.50% payable semi-annually, due
March 15, 2018
|
|
|
149,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
657,400
|
|
|
|
677,046
|
|
Less current portion
|
|
|
109,000
|
|
|
|
278,567
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
548,400
|
|
|
$
|
398,479
|
|
|
|
|
|
|
|
|
|
|
On July 21, 2003, PCA closed its offering and private
placement of $150.0 million of
43/8% senior
notes due 2008 and $400.0 million of
53/4% senior
notes due 2013. The
43/8% senior
notes due 2008 were repaid on August 1, 2008, and the
53/4% senior
notes are due August 1, 2013.
On March 25, 2008, PCA issued $150.0 million of
6.50% senior notes due March 15, 2018 through a
registered public offering. PCA used the proceeds of this
offering, together with cash on hand, to repay all of the
$150.0 million of outstanding
43/8% senior
notes on August 1, 2008.
On April 15, 2008, PCA replaced its existing senior credit
facility that was scheduled to expire later in 2008, with a new
five-year $150.0 million senior revolving credit facility.
The Company had $19.4 million of outstanding letters of
credit under this facility, resulting in $130.6 million in
unused borrowing capacity as of December 31, 2008.
On September 19, 2008, the Company extended its receivable
credit facility through September 18, 2009. The Company had
$41.0 million in additional borrowing capacity available
under this facility as of December 31, 2008.
The instruments governing PCAs indebtedness contain
covenants that limit 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, merge or consolidate with any
other person or sell or otherwise dispose of all or
substantially all of its assets. The senior credit facility also
requires PCA to comply with certain financial covenants,
including maintaining a minimum interest coverage ratio, a
maximum ratio of debt to total capitalization, and a minimum net
worth level. A failure to comply with these restrictions could
lead to an event of default, which could result in an
acceleration of any outstanding indebtedness
and/or
prohibit the Company from drawing on the revolving credit
facility. Such a default may also constitute an event of default
under the senior notes indenture and the receivables credit
facility. At December 31, 2008, the Company was in
compliance with these financial covenants.
F-24
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
Additional information regarding PCAs variable rate debt
is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Reference Interest
|
|
|
|
|
|
|
Rate
|
|
|
Applicable Margin
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
LIBOR based debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
|
N/A
|
|
|
|
4.88
|
%
|
|
|
N/A
|
|
|
|
1.25
|
%
|
Commercial paper based debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables credit facility
|
|
|
2.31
|
%
|
|
|
5.11
|
%
|
|
|
0.70
|
%
|
|
|
0.28
|
%
|
As of December 31, 2008, annual principal maturities for
debt, excluding unamortized debt discount, are:
$109.0 million (2009), $400.0 million (2013) and
$150.0 (2018).
Interest payments in connection with the Companys debt
obligations for the years ended December 31, 2008, 2007 and
2006, amounted to $38.9 million, $38.0 million, and
$38.2 million, respectively.
On November 29, 2000, the Company established an on-balance
sheet securitization program for its trade accounts receivable.
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. At December 31, 2008, $109.0 million was
outstanding and $41.0 million was available for additional
borrowing under the receivables credit facility. The highest
outstanding principal balance under the receivables credit
facility during 2008 was $109.0 million.
A summary of the Companys drawings under credit
facilities, including the impact of $19.4 million of
outstanding letters of credit, as of December 31, 2008
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
Utilized
|
|
|
Available
|
|
|
|
(In thousands)
|
|
|
Receivables credit facility
|
|
$
|
150,000
|
|
|
$
|
109,000
|
|
|
$
|
41,000
|
|
Senior revolving credit facility
|
|
|
150,000
|
|
|
|
19,373
|
|
|
|
130,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
300,000
|
|
|
$
|
128,373
|
|
|
$
|
171,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCA is required to pay commitment fees on the unused portions of
the credit facilities. The Companys outstanding letters of
credit of $19.4 million at December 31, 2008 are for
workers compensation.
F-25
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
9. FINANCIAL
INSTRUMENTS
The carrying and estimated fair values of PCAs financial
instruments at December 31, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
149,397
|
|
|
$
|
149,397
|
|
|
$
|
228,143
|
|
|
$
|
228,143
|
|
Accounts receivable, net
|
|
|
254,898
|
|
|
|
254,898
|
|
|
|
275,921
|
|
|
|
275,921
|
|
Accounts and dividends payable
|
|
|
(131,783
|
)
|
|
|
(131,783
|
)
|
|
|
(163,731
|
)
|
|
|
(163,731
|
)
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
|
|
|
|
|
|
|
|
|
(20,000
|
)
|
|
|
(20,000
|
)
|
4.38% senior notes
|
|
|
|
|
|
|
|
|
|
|
(149,932
|
)
|
|
|
(150,102
|
)
|
5.75% senior notes
|
|
|
(398,457
|
)
|
|
|
(367,000
|
)
|
|
|
(398,114
|
)
|
|
|
(409,745
|
)
|
6.50% senior notes
|
|
|
(149,943
|
)
|
|
|
(133,500
|
)
|
|
|
|
|
|
|
|
|
Receivables credit facility
|
|
|
(109,000
|
)
|
|
|
(109,000
|
)
|
|
|
(109,000
|
)
|
|
|
(109,000
|
)
|
Capital lease obligations
|
|
|
(23,735
|
)
|
|
|
(23,735
|
)
|
|
|
(202
|
)
|
|
|
(202
|
)
|
The fair value of cash and cash equivalents, accounts
receivable, net and accounts and dividends payable approximate
their carrying amounts due to the short-term nature of these
financial instruments.
The fair value of the term loan and the receivables credit
facility approximates their carrying amount due to the variable
interest-rate feature of the instruments. 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.
|
|
10.
|
FAIR
VALUE MEASUREMENTS
|
PCA adopted SFAS No. 157 on January 1, 2008.
SFAS No. 157 defines fair value, establishes a
consistent framework for measuring fair value and expands
disclosure for each major asset and liability category measured
at fair value on either a recurring or nonrecurring basis.
SFAS No. 157 clarifies that fair value is an exit
price, representing the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a
market-based measurement that should be determined based on
assumptions that market participants would use in pricing an
asset or liability. As a basis for considering such assumptions,
SFAS No. 157 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair
value as follows:
Level 1 observable inputs such as quoted prices
in active markets
Level 2 inputs, other than quoted prices in
active markets, that are observable either directly or indirectly
Level 3 unobservable inputs in which there is
little or no market data, which require the reporting entity to
develop its own assumptions
Assets and liabilities measured at fair value are based on one
or more of three valuation techniques noted in
SFAS No. 157. 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
F-26
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
(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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Valuation
|
|
|
|
2008
|
|
|
(Level 1)
|
|
|
Technique
|
|
|
|
(In thousands)
|
|
|
Money Market Funds
|
|
$
|
148,903
|
|
|
$
|
148,903
|
|
|
|
(a
|
)
|
The money market funds PCA invests in include funds comprised of
U.S. Treasury obligations or backed by U.S. Treasury
obligations.
There were no changes in the Companys valuation techniques
used to measure fair values on a recurring basis as a result of
adopting SFAS No. 157. PCA had no assets or
liabilities that were measured on a nonrecurring basis.
11. STOCKHOLDERS
EQUITY
On May 16, 2001, PCA announced that its Board of Directors
had authorized a $100.0 million common stock repurchase
program, which it completed in the fourth quarter of 2007.
Through December 31, 2007, the Company repurchased
5,607,671 shares of common stock for $100.0 million.
All repurchased shares were retired prior to December 31,
2007.
On October 17, 2007, PCA announced that its Board of
Directors authorized a $150.0 million common stock
repurchase program. There is no expiration date for the common
stock repurchase program. Through December 31, 2008, the
Company repurchased 3,818,729 shares of common stock, with
3,142,600 shares repurchased during 2008 and
676,129 shares repurchased during 2007. All repurchased
shares were retired prior to December 31, 2008. As of
December 31, 2008, $65.0 million of the
$150.0 million authorization remained available for
repurchase of the Companys common stock.
12. COMMITMENTS
AND CONTINGENCIES
Capital
Commitments
The Company had authorized capital expenditures of approximately
$43.0 million and $58.3 million as of
December 31, 2008 and 2007, respectively, in connection
with the expansion and replacement of existing facilities and
equipment.
F-27
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
Lease
Obligations
PCA leases space for certain of its facilities and cutting
rights to approximately 91,000 acres of timberland under
long-term leases. The Company also leases equipment, primarily
vehicles and rolling stock, and other assets under long-term
leases with a duration generally of three years. The minimum
lease payments under non-cancelable operating leases with lease
terms in excess of one year are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
27,425
|
|
2010
|
|
|
23,568
|
|
2011
|
|
|
16,278
|
|
2012
|
|
|
9,202
|
|
2013
|
|
|
5,947
|
|
Thereafter
|
|
|
24,835
|
|
|
|
|
|
|
Total
|
|
$
|
107,255
|
|
|
|
|
|
|
Total lease expense, including base rent on all leases and
executory costs, such as insurance, taxes, and maintenance, for
the years ended December 31, 2008, 2007 and 2006 was
$41.6 million, $39.8 million and $38.5 million,
respectively. These costs are included in cost of goods sold and
selling and administrative expenses.
PCA was obligated under capital leases covering buildings and
machinery and equipment in the amount of $23.7 million and
$0.2 million at December 31, 2008 and 2007,
respectively. During the fourth quarter of 2008, the Company
entered into a capital lease relating to buildings and
machinery, totaling $23.9 million, payable over
20 years. This capital lease amount is a non-cash
transaction and, accordingly, has been excluded from the
consolidated statements of cash flows. Assets held under capital
lease obligations are included in property, plant and equipment
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Land and land improvements
|
|
$
|
|
|
|
$
|
38
|
|
Buildings
|
|
|
250
|
|
|
|
137
|
|
Machinery and equipment
|
|
|
23,931
|
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24,181
|
|
|
|
504
|
|
Less accumulated amortization
|
|
|
(472
|
)
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,709
|
|
|
$
|
403
|
|
|
|
|
|
|
|
|
|
|
Amortization of assets under capital lease obligations is
included in depreciation expense.
F-28
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
The future minimum payments under capitalized leases at
December 31, 2008 are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
2,224
|
|
2010
|
|
|
2,202
|
|
2011
|
|
|
2,202
|
|
2012
|
|
|
2,202
|
|
2013
|
|
|
2,202
|
|
Thereafter
|
|
|
32,479
|
|
|
|
|
|
|
Total minimum capital lease payments
|
|
|
43,511
|
|
Less amounts representing interest
|
|
|
19,776
|
|
|
|
|
|
|
Present value of net minimum capital lease payments
|
|
|
23,735
|
|
Less current maturities of capital lease obligations
|
|
|
606
|
|
|
|
|
|
|
Total long-term capital lease obligations
|
|
$
|
23,129
|
|
|
|
|
|
|
Interest paid as part of the capital lease obligations was
$0.4 million during the year ended December 31, 2008.
The amounts were nominal during the years ended
December 31, 2007 and 2006.
Purchase
Commitments
The Company has entered into various purchase agreements for
minimum amounts of pulpwood processing and energy over periods
ranging from one to twenty years at fixed prices. Total purchase
commitments are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
6,258
|
|
2010
|
|
|
5,041
|
|
2011
|
|
|
1,779
|
|
2012
|
|
|
1,486
|
|
2013
|
|
|
1,487
|
|
Thereafter
|
|
|
22,846
|
|
|
|
|
|
|
Total
|
|
$
|
38,897
|
|
|
|
|
|
|
These purchase agreements are not marked to market. The Company
purchased $29.4 million, $14.5 million, and
$22.5 million during the years ended December 31,
2008, 2007 and 2006, respectively, under these purchase
agreements.
Litigation
PCA is a party to various legal actions arising in the ordinary
course of business. These legal actions cover a broad variety of
claims spanning our entire business. As of the date of this
filing, the Company believes it is not reasonably possible that
the resolution of these legal actions will, individually or in
the aggregate, have a material adverse effect on its financial
position, results of operations, or cash flows.
Environmental
Liabilities
In 1998, the United States Environmental Protection Agency (EPA)
finalized a Clean Air and Water Act commonly referred to as the
Cluster Rules. The Cluster Rules govern allowable discharges of
air and water
F-29
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
pollutants at all pulp and paper mill operations. As a result,
PCA and its competitors were required to incur costs to ensure
compliance with these rules. The Company completed all of the
projects related to Cluster Rule requirements in 2006 and, as a
result, does not anticipate any further capital expenditures
related to compliance with Cluster Rules. From 1997 through
2006, the Company spent approximately $39.2 million to
ensure compliance with Cluster Rule requirements. Total capital
costs for environmental matters were $3.5 for 2008 and
$4.5 million for 2007. The Company currently estimates 2009
environmental capital expenditures will be approximately
$1.5 million.
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 2008, remediation costs
at the Companys mills and corrugated plants totaled
approximately $3.2 million. As of December 31, 2008,
the Company maintained an environmental reserve of
$8.3 million relating to
on-site
landfills (see Note 13) and surface impoundments as
well as ongoing and anticipated remedial projects. Liabilities
recorded for environmental contingencies are estimates of the
probable costs based upon available information and assumptions.
Because of these uncertainties, PCAs estimates may change.
As of the date of this filing, the Company believes that it is
not reasonably possible that future environmental expenditures
and asset retirement obligations above the $8.3 million
accrued as of December 31, 2008, will have a material
impact on its financial condition, results of operations, or
cash flows.
In connection with the sale to PCA of its containerboard and
corrugated products business, Pactiv agreed to retain all
liability for all former facilities and all sites associated
with pre-closing off-site waste disposal and all environmental
liabilities related to a closed landfill located near the
Companys Filer City mill.
13. ASSET
RETIREMENT OBLIGATIONS
Asset retirement obligations consist primarily of landfill
capping and closure and post-closure costs. PCA is legally
required to perform capping and closure and post-closure care on
the landfills at each of the Companys mills. In accordance
with SFAS No. 143, Accounting for Asset
Retirement Obligations, PCA recognizes the fair value of
these liabilities as an asset retirement obligation for each
landfill and capitalizes that cost as part of the cost basis of
the related asset. The liability is accreted to its estimated
value of the asset retirement obligation over time, and the
related assets are depreciated on a straight-line basis over
their useful lives. Upon settlement of the liability, PCA will
recognize a gain or loss for any difference between the
settlement amount and the recorded liability.
The following table describes changes to PCAs asset
retirement obligation liability:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Asset retirement obligation, January 1
|
|
$
|
4,071
|
|
|
$
|
3,466
|
|
Accretion expense
|
|
|
248
|
|
|
|
201
|
|
New cell additions
|
|
|
90
|
|
|
|
485
|
|
Revisions in estimated cash flows
|
|
|
|
|
|
|
(81
|
)
|
Payments
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligation, December 31
|
|
$
|
4,188
|
|
|
$
|
4,071
|
|
|
|
|
|
|
|
|
|
|
F-30
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
14. INCOME
TAXES
Following is an analysis of the components of the consolidated
income tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S
|
|
$
|
74,399
|
|
|
$
|
97,657
|
|
|
$
|
82,999
|
|
State and local
|
|
|
10,949
|
|
|
|
11,169
|
|
|
|
6,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision for taxes
|
|
|
85,348
|
|
|
|
108,826
|
|
|
|
89,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S
|
|
|
(10,098
|
)
|
|
|
(10,399
|
)
|
|
|
(17,871
|
)
|
State and local
|
|
|
(716
|
)
|
|
|
(625
|
)
|
|
|
(2,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision for taxes
|
|
|
(10,814
|
)
|
|
|
(11,024
|
)
|
|
|
(20,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for taxes
|
|
$
|
74,534
|
|
|
$
|
97,802
|
|
|
$
|
69,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate varies from the U.S. Federal
statutory tax rate principally due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Provision computed at U.S. Federal statutory rate of 35%
|
|
$
|
73,550
|
|
|
$
|
93,754
|
|
|
$
|
68,154
|
|
State and local taxes, net of federal benefit
|
|
|
6,212
|
|
|
|
8,598
|
|
|
|
6,613
|
|
Domestic manufacturers deduction
|
|
|
(4,413
|
)
|
|
|
(5,625
|
)
|
|
|
(2,044
|
)
|
Adjustments to prior years accrual
|
|
|
712
|
|
|
|
745
|
|
|
|
(972
|
)
|
Other
|
|
|
(1,527
|
)
|
|
|
330
|
|
|
|
(2,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74,534
|
|
|
$
|
97,802
|
|
|
$
|
69,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities at December 31 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
7,539
|
|
|
$
|
7,001
|
|
Employee benefits and compensation
|
|
|
7,818
|
|
|
|
9,863
|
|
Reserve for doubtful accounts
|
|
|
56
|
|
|
|
|
|
Inventories
|
|
|
3,187
|
|
|
|
3,332
|
|
Stock options and restricted stock
|
|
|
7,052
|
|
|
|
4,722
|
|
Pension and postretirement benefits
|
|
|
36,675
|
|
|
|
19,859
|
|
State operating loss carry forwards
|
|
|
|
|
|
|
2,286
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
62,327
|
|
|
$
|
47,063
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
(228,101
|
)
|
|
$
|
(241,154
|
)
|
Investment in joint venture
|
|
|
(27,865
|
)
|
|
|
(28,353
|
)
|
Reserve for doubtful accounts
|
|
|
|
|
|
|
(348
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
(255,966
|
)
|
|
$
|
(269,855
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(193,639
|
)
|
|
$
|
(222,792
|
)
|
|
|
|
|
|
|
|
|
|
F-31
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
The net deferred tax liabilities at December 31 are classified
in the balance sheet as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Current deferred tax assets
|
|
$
|
15,240
|
|
|
$
|
17,915
|
|
Non-current deferred tax liabilities
|
|
|
(208,879
|
)
|
|
|
(240,707
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(193,639
|
)
|
|
$
|
(222,792
|
)
|
|
|
|
|
|
|
|
|
|
Cash payments for income taxes were $89.4 million,
$105.5 million and $65.1 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
The Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN No. 48) on January 1, 2007. As a result
of the adoption of FIN No. 48, PCA recognized a
$5.1 million decrease to reserves for uncertain tax
positions and an increase to the beginning balance of retained
earnings on January 1, 2007.
The following table summarizes the changes related to PCAs
gross unrecognized tax benefits excluding interest:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Balance as of January 1
|
|
$
|
(9,358
|
)
|
|
$
|
(8,845
|
)
|
Decreases related to prior years tax positions
|
|
|
190
|
|
|
|
87
|
|
Increases related to current year tax positions
|
|
|
(1,354
|
)
|
|
|
(1,640
|
)
|
Settlements with taxing authorities
|
|
|
|
|
|
|
212
|
|
Expiration of the statute of limitations
|
|
|
96
|
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
(10,426
|
)
|
|
$
|
(9,358
|
)
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2007, the statute of limitations for
the tax year 2001 expired and the Federal examination of the tax
year 2004 was concluded. As a result of these events, the
reserve for uncertain tax positions was decreased by
$1.0 million gross or $0.8 million net of the federal
benefit for state taxes during the third quarter of 2007. At
December 31, 2008, PCA had $10.4 million unrecognized
tax benefits excluding interest. Of the total, $7.5 million
(net of the federal benefit for state taxes) would impact the
effective tax rate if recognized.
During the years ended December 31, 2008 and 2007, PCA
recorded $0.1 million gross ($0.06 million net) and
$0.6 million gross ($0.4 million net), respectively,
in its statement of income, increasing the accrual for interest
to $1.7 million gross ($1.0 million net) and
$1.6 million gross ($1.0 million, net) at
December 31, 2008 and 2007, respectively. No accrual for
penalties was made.
PCA and its subsidiaries are subject to U.S. federal income
taxes, as well as income taxes of multiple state and city
jurisdictions. A federal examination of the tax years 2002 and
2004 have been concluded. The tax years 2003 and
2005 2007 remain open to federal examination. PCA
does not expect the unrecognized tax benefits to change
significantly over the next 12 months.
|
|
15.
|
RELATED
PARTY TRANSACTIONS
|
At December 31, 2008 and 2007, PCA owned approximately 29%
of Southern Timber Venture, LLC (STV). At
December 31, 2008 and 2007, PCA had not guaranteed the debt
of STV and has no future funding requirements. At
December 31, 2008 and 2007, there is no carrying value of
the Companys
F-32
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
investment in STV under the equity method. PCA did not receive
any dividends from STV in 2008, 2007 or 2006. STV currently owns
approximately 51,000 acres of land, including timberlands
and higher beneficial use properties, located primarily in
southern Georgia and northern Florida.
Currently, PCA purchases pulpwood directly from STV for its
Valdosta mill in accordance with the terms of a fiber supply
agreement between the two companies which expires
December 31, 2017. The price of pulpwood in this agreement
is based upon the market value of pulpwood and is adjusted
annually for any changes in market value. PCA purchased
$3.0 million, $3.2 million and $3.3 million of
pulpwood for its Valdosta, Georgia mill from STV during the
years ended December 31, 2008, 2007 and 2006, respectively.
In December 2007, PCA sold a portion of its interest in STV for
$1.0 million and recognized a pre-tax gain of
$1.0 million.
Unaudited Financial information for STV is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
5,910
|
|
|
$
|
6,373
|
|
|
$
|
8,134
|
|
Gross profit (loss)
|
|
|
(660
|
)
|
|
|
(573
|
)
|
|
|
1,151
|
|
Gain from sale of timberlands
|
|
|
342
|
|
|
|
1,080
|
|
|
|
1,125
|
|
Net loss
|
|
|
(4,734
|
)
|
|
|
(4,045
|
)
|
|
|
(3,876
|
)
|
During the second quarter of 2006, PCA acquired a sheet plant in
Miami, Florida for $4.3 million, which expanded the
Companys presence in southern Florida. The purchase method
of accounting was used to account for the acquisition. Goodwill
of $2.9 million (which is deductible for income tax
purposes) was recorded in connection with the acquisition. Net
sales and total assets of the plant acquired were not material.
Operating results of the plant subsequent to the date of
acquisition are included in the Companys operating results.
During the fourth quarter of 2006, PCA sold its Fulton,
Mississippi sawmill and received $0.7 million in proceeds
and recognized a $0.3 million pre-tax gain. In 2006,
through the date of the sale of the facility, the sawmill had
net sales of $5.7 million.
|
|
18.
|
BUSINESS
INTERRUPTION INSURANCE RECOVERY
|
On October 24, 2007, PCAs Counce, Tennessee
linerboard mill incurred a major, unplanned outage due to a
total mill power failure. The mill was down for
21/2
days and experienced operational difficulties through the end of
the month. This outage resulted in about 11,000 tons of lost
production as well as significant additional operating costs of
$7.4 million ($4.7 million net of tax). In December
2007, the Company received $2.4 million ($1.5 million
net of tax) in business interruption insurance proceeds. The
amount of the loss, net of the insurance recovery, is included
in cost of sales in the statement of income for the year ended
December 31, 2007. The insurance proceeds are included in
net cash provided by operating activities in the statement of
cash flows for the year ended December 31, 2007.
F-33
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31, 2008
|
|
19.
|
QUARTERLY
FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
|
(In thousands, except per share amounts)
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
577,474
|
|
|
$
|
616,183
|
|
|
$
|
620,785
|
|
|
$
|
546,051
|
|
|
$
|
2,360,493
|
|
Gross profit
|
|
|
118,161
|
|
|
|
127,196
|
|
|
|
132,051
|
|
|
|
113,950
|
|
|
|
491,358
|
|
Income from operations
|
|
|
57,146
|
|
|
|
64,173
|
|
|
|
68,705
|
|
|
|
51,788
|
|
|
|
241,812
|
|
Net income
|
|
|
32,073
|
|
|
|
35,192
|
|
|
|
38,102
|
|
|
|
30,242
|
|
|
|
135,609
|
|
Basic earnings per share
|
|
|
0.31
|
|
|
|
0.34
|
|
|
|
0.37
|
|
|
|
0.30
|
|
|
|
1.32
|
|
Diluted earnings per share
|
|
|
0.31
|
|
|
|
0.34
|
|
|
|
0.37
|
|
|
|
0.30
|
|
|
|
1.31
|
|
Stock price high
|
|
|
28.74
|
|
|
|
26.47
|
|
|
|
26.99
|
|
|
|
23.60
|
|
|
|
28.74
|
|
Stock price low
|
|
|
19.84
|
|
|
|
20.46
|
|
|
|
20.93
|
|
|
|
10.95
|
|
|
|
10.95
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
559,159
|
|
|
$
|
585,628
|
|
|
$
|
591,041
|
|
|
$
|
580,178
|
|
|
$
|
2,316,006
|
|
Gross profit
|
|
|
112,877
|
|
|
|
140,119
|
|
|
|
139,454
|
|
|
|
132,198
|
|
|
|
524,648
|
|
Income from operations
|
|
|
56,696
|
|
|
|
80,224
|
|
|
|
81,490
|
|
|
|
75,042
|
|
|
|
293,452
|
|
Net income
|
|
|
31,191
|
|
|
|
46,227
|
|
|
|
48,656
|
|
|
|
43,992
|
|
|
|
170,066
|
|
Basic earnings per share
|
|
|
0.30
|
|
|
|
0.44
|
|
|
|
0.46
|
|
|
|
0.42
|
|
|
|
1.63
|
|
Diluted earnings per share
|
|
|
0.30
|
|
|
|
0.44
|
|
|
|
0.46
|
|
|
|
0.42
|
|
|
|
1.61
|
|
Stock price high
|
|
|
25.83
|
|
|
|
26.55
|
|
|
|
31.78
|
|
|
|
31.88
|
|
|
|
31.88
|
|
Stock price low
|
|
|
22.04
|
|
|
|
24.35
|
|
|
|
21.87
|
|
|
|
26.75
|
|
|
|
21.87
|
|
|
|
Note: |
The sum of the quarters may not equal the total of the
respective years earnings per share on either a basic or
diluted basis due to changes in the weighted average shares
outstanding throughout the year.
|
For the three months ended December 31, 2008, tax expense
was reduced by $2.9 million or $0.03 per share primarily
due to a reduction in the Companys state tax rate.
For the three months ended December 31, 2007, net income
was reduced by $3.2 million or $0.03 per share due to the
major, unplanned outage at the Companys Counce, Tennessee
linerboard mill in October of 2007.
F-34