e10vk
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,
2010
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
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(I.R.S. Employer
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Incorporation or
Organization)
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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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). 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
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
At June 30, 2010, 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 $2,249,160,212
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 18, 2011, there were 102,355,005 shares of
Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Specified portions of the Proxy Statement for the
Registrants 2011 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 2010, we produced
2.4 million tons of containerboard at our mills, of which
about 80% was consumed in PCAs corrugated products
manufacturing plants, 9% was sold to domestic customers and 11%
was sold in the export market. Our corrugated products
manufacturing plants sold about 31.0 billion square feet
(BSF) of corrugated products. Our net sales to third parties
totaled $2.4 billion in 2010.
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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2010
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569
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589
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646
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639
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2,443
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2009
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515
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555
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588
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600
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2,258
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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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Corrugated Shipments (BSF)
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2010
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7.6
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7.9
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7.8
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7.7
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31.0
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2009
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6.7
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7.3
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7.5
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7.4
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28.9
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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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In 2010, we produced 1.5 million tons of kraft linerboard
at our mills in Counce, Tennessee and Valdosta, Georgia, and
0.9 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
88,000 acres of timberland located near our Counce and
Valdosta mills. We also have supply agreements with third
parties on approximately 281,000 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 $25.0 billion in 2010.
The primary end-use markets for corrugated products are shown
below (as reported in the most recent 2009 Fibre Box Association
annual report):
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Food, beverages and agricultural products
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51
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Paper products
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18
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Petroleum, plastic, synthetic and rubber products
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11
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Appliances, vehicles, and metal products
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5
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Miscellaneous manufacturing
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5
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General retail and wholesale trade
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5
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Textile mill products and apparel
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2
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Other
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3
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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 585 companies
and 1,260 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
3
corrugated products. Corrugating medium is fluted and laminated
to linerboard in corrugator plants to produce 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
Containerboard
Mills
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, and production can exceed estimated capacity if a
higher-than-estimated
mix of heavier grade paper is produced. 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, 2010 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 2010, we produced
998,000 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 495,000 tons per year, as reported to the
AF&PA. In 2010, our single paper machine at Valdosta
produced 482,000 tons of kraft linerboard. Valdosta produces a
range of basis weights 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 523,000
tons per year, as reported to the AF&PA. In 2010, we
produced 529,000 tons of semi-chemical corrugating medium on two
paper machines at Tomahawk. 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 435,000 tons on three paper machines, as
reported to the AF&PA. In 2010, we produced 434,000 tons of
corrugating medium at Filer City. Filer City produces
corrugating medium grades ranging in basis weight from 20 lb. to
47 lb.
Corrugated
Products
We operate 67 corrugated manufacturing operations, a technical
and development center, six regional graphic design centers, a
rotogravure printing operation and a complement of packaging
supplies and distribution centers. Of the 67 manufacturing
facilities, 39 operate as combining operations, commonly called
corrugated plants, that manufacture corrugated sheets and
finished corrugated containers. The remaining 28 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.
4
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
88,000 acres of timberland located near our Counce,
Tennessee and Valdosta, Georgia 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 about
13 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 281,000 of the 800,000 acres sold.
The majority of the acreage under supply agreement is located in
close proximity to our Counce mill.
PCA participates in the Sustainable Forestry Initiative (SFI)
and is certified under the SFI fiber sourcing standards. These
standards are aimed at ensuring the long-term health and
conservation of forestry resources. PCA is committed to sourcing
wood fiber through environmentally, socially and economically
sustainable practices and promoting resource and conservation
stewardship ethics.
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
Containerboard produced in our mills is shipped by rail or
truck. Rail shipments represent about 50% to 55% of the tons
shipped and the remaining 45% to 50% is comprised of truck
shipments. Our individual mills do not own or maintain outside
warehousing facilities.
Our corrugated products are delivered by truck due to our large
number of customers and their demand for timely service. Our
converting operations typically service customers within a
150 miles radius. We use third-party warehouses for
short-term storage of corrugated products.
Customers
PCAs corrugated products group sells to over 9,200
customers in over 16,700 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.
5
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 mill system has the capability to
shift a portion of its 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 2010, our containerboard mills
consumed approximately 638,000 tons of recycled fiber, and our
corrugated converting operations generated approximately 200,000
tons of recycled fiber. As a result, PCA was a net recycled
fiber buyer of 438,000 tons, or 18% 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, including black liquor. 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 2010, 11.3 million MMBTUs (million
BTUs), or approximately 70% 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 3.6 million MMBTUs of natural gas (22%
of the mills total purchased fuels) and 0.3 million
MMBTUs of oil (2% of the mills total purchased
fuels).
Each of PCAs corrugated plants has 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 2010, PCAs corrugated products
plants consumed approximately 2.0 million MMBTUs of
natural gas.
The following table shows PCAs purchased fuel consumption
by fuel type for 2010:
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2010 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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1,765,530
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1,371,556
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1,477,052
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1,528,919
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6,143,057
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38
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%
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34
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%
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Bark
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1,356,350
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1,247,524
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1,207,164
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1,328,613
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5,139,651
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32
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%
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28
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%
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Steam
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262,050
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291,786
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216,688
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226,068
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996,592
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6
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%
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5
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%
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Coal, Bark and Steam
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3,383,930
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2,910,866
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2,900,904
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3,083,600
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12,279,300
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76
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%
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67
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%
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Oil
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173,145
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89,590
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22,074
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21,819
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306,628
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2
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%
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2
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%
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Natural Gas
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946,822
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742,378
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691,803
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1,244,697
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3,625,700
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22
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%
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20
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%
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Total Mills Purchased Fuels
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4,503,897
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3,742,834
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3,614,781
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4,350,116
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16,211,628
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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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656,135
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442,230
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406,500
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528,636
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2,033,501
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11
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%
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Total Company Purchased Fuels
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5,160,032
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4,185,064
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4,021,281
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4,878,752
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18,245,129
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100
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%
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Approximately 42% of the electricity consumed by our four mills
is generated
on-site. Our
mills purchase approximately 9,300,000 CkWh (hundred kilowatt
hours) annually, or the equivalent of 3.2 million
MMBTUs. PCAs corrugated products plants purchase
about 2,276,000 CkWh annually, or the equivalent of
0.8 million MMBTUs.
6
In October 2009, PCA announced that it will undertake major
energy optimization projects at the Counce and Valdosta
linerboard mills, which are expected to significantly reduce
fuel and electricity purchases at these mills and nearly
eliminate fossil fuel consumption at these facilities. The
projects include a new recovery boiler and turbine generator at
the Valdosta mill and a rebuild and upgrade of two existing
recovery boilers and a new turbine generator at the Counce mill.
The total capital expenditures for these projects are expected
to be about $295 million to be spent over two years, and
the projects are expected to be completed in the fourth quarter
of 2011.
Competition
According to industry sources, corrugated products are produced
by about 585 U.S. companies operating approximately 1,260
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 primary competitors
include International Paper Company, Georgia-Pacific (owned by
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,
Georgia-Pacific, 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, 2010, we had approximately
8,100 employees. Approximately 2,500 of these employees
were salaried and approximately 5,600 were hourly. Approximately
75% of our hourly employees are represented by unions. The
majority of our unionized employees are represented 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 our containerboard mills covering
USW-represented employees (88% 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 (12% of
mill hourly workforce) expire between June 2012 and October
2014. Based on an agreement reached with the USW in April 2009,
the labor agreement at 25 corrugated plants covering USW
represented employees was extended up to five years. Contracts
for unionized corrugated products plant employees expire between
March 2011 and October 2015. We are currently in
negotiations to renew or extend any union contracts that have
recently expired or are expiring in the near future.
During 2010, we experienced no work stoppages and have
experienced no instances of significant work stoppages in the
five years prior to 2010. We believe we have satisfactory
relations with our employees.
7
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
years ended December 31, 2010, 2009 and 2008, we spent
approximately $24.6 million, $26.4 million and
$23.5 million, respectively to comply with the requirements
of these and other environmental laws. Additionally, total
capital costs for environmental matters were $1.1 million,
$0.4 million and $3.5 million for 2010, 2009 and 2008,
respectively. We currently estimate 2011 environmental capital
expenditures will be $3.3 million. 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.
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 2010, 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, 2010,
we maintained an environmental reserve of $9.7 million,
which includes funds relating to
on-site
landfill and surface impoundments as well as ongoing and
anticipated remedial projects. Of the $9.7 million reserve,
$4.9 million is reserved for our landfill obligations,
which are accounted for in accordance with Accounting Standards
Codification (ASC) 410, Asset Retirement and
Environmental 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 the date of this filing, we believe that it is not
reasonably possible that future environmental expenditures above
the $9.7 million accrued as of December 31, 2010 will
have a material impact on our financial condition and results of
operations.
While legislation regarding the regulation of greenhouse gas
emissions has been proposed at the federal level, it is
uncertain whether such legislation will be passed and, if so,
what the breadth and scope of such legislation will be. The
result of the regulation of greenhouse gas emissions could be an
increase in our future environmental compliance costs, through
caps, taxes or additional capital expenditures to modify
facilities,
8
which may be material. However, climate change legislation and
the resulting future energy policy could also provide us with
opportunities if the use of renewable energy is encouraged. We
currently generate a significant portion of our power
requirements for our mills using bark, black liquor and biomass
as fuel, which are derived from renewable resources. Our energy
optimization projects at the Counce and Valdosta linerboard
mills are expected to nearly eliminate the use of fossil fuels
at those facilities by the end of 2011, while providing more
efficient power generation at those facilities. While we believe
we are well-positioned to take advantage of any renewable energy
incentives, it is uncertain what the ultimate costs and
opportunities of any climate change legislation will be and how
our business and industry will be affected.
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.
Industry
Risks
Industry
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. If supply exceeds demand, prices for containerboard
and corrugated products could decline, resulting in decreased
earnings and cash generated from operations.
9
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 our Counce, Tennessee and Valdosta, Georgia mills on
approximately 281,000 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 400,000 to
450,000 tons of recycled fiber per year. The amount of recycled
fiber purchased each year depends on the prices of both recycled
fiber and wood fiber as the company attempts to minimize total
fiber costs.
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.
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.
10
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 known
environmental liabilities as of the date of this filing, these
reserves may change over time due to the enactment of new
environmental laws or regulations or changes in existing laws or
regulations, which might require additional significant
environmental 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 periodically experience 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 if a severe downturn in
the U.S. economy occurs again.
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 impacted our industry and PCA in the fourth
quarter of 2008 and continued into the first half of 2009,
lowering the demand for our products and our mill production.
This lower demand and production reduced our revenues, increased
our unit production costs, and lowered our earnings and our cash
generated from operations. Demand for our products and
PCAs mill production improved during the second half of
2009 and continued to improve in 2010. It is unknown whether
economic conditions will again deteriorate or continue to
improve. In the event that economic conditions deteriorate, our
operating and financial performance will be adversely impacted.
Lower earnings and reduced cash flow could impact our ability to
fund operations, capital requirements, and common stock dividend
payments, and another prolonged and severe downturn could
possibly impact our ability to comply with our debt covenants.
|
|
Item 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
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, as reported to the
AF&PA:
|
|
|
|
|
|
|
Location
|
|
Function
|
|
Capacity (tons)
|
|
|
Counce, TN
|
|
Kraft linerboard mill
|
|
|
1,007,000
|
|
Valdosta, GA
|
|
Kraft linerboard mill
|
|
|
495,000
|
|
Tomahawk, WI
|
|
Semi-chemical medium mill
|
|
|
523,000
|
|
Filer City, MI
|
|
Semi-chemical medium mill
|
|
|
435,000
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
2,460,000
|
|
|
|
|
|
|
|
|
11
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 warehouse and miscellaneous
other property, which includes sales offices and woodlands
management offices. These sales offices and woodlands management
offices generally have one to four employees and serve as
administrative offices. PCA leases the space for two corrugated
plants, 21 sheet plants, six 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 88,000 acres
of timberland located near our Valdosta mill (77,000 acres)
and our Counce mill (11,000 acres). On average, these
cutting rights agreements have terms with approximately
13 years remaining.
Our corporate headquarters is located in Lake Forest, Illinois.
We will be relocating our corporate headquarters within Lake
Forest, IL during the second half of 2011. The headquarters
facility that we will be moving into has been leased for a
period of eleven years with provisions for two additional five
year lease extensions.
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
|
During September and October 2010, PCA and eight other
U.S. and Canadian containerboard producers were named as
defendants in five purported class action lawsuits filed in the
United States District Court for the Northern District of
Illinois, alleging violations of the Sherman Act. The lawsuits
have been consolidated in a single complaint under the caption
Kleen Products LLC v Packaging Corp. of America et al.
The consolidated complaint alleges that the defendants conspired
to limit the supply of containerboard, and that the purpose and
effect of the alleged conspiracy was to artificially increase
prices of containerboard products during the period from August
2005 to the time of filing of the complaints. The complaint was
filed as a purported class action suit on behalf of all
purchasers of containerboard products during such period. The
complaint seeks treble damages and costs, including
attorneys fees. PCA believes the allegations are without
merit and will defend this lawsuit vigorously. However, as the
lawsuit is in preliminary stages, PCA is unable to predict the
ultimate outcome or estimate a range of reasonably possible
losses.
PCA is a party to various other legal actions arising in the
ordinary course of our business. These legal actions cover a
broad variety of claims spanning our entire business. As of the
date of this filing, we believe it is not reasonably possible
that the resolution of these legal actions will, individually or
in the aggregate, have a material adverse effect on our
financial condition, results of operations or cash flows.
|
|
Item 4.
|
REMOVED
AND RESERVED
|
|
|
Item 4.1
|
EXECUTIVE
OFFICERS OF THE REGISTRANT
|
Brief statements setting forth the age at February 22,
2011, 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.
Paul T. Stecko is 66 years old and has served as
Executive Chairman of PCA since July 2010. He served as Chief
Executive Officer from January 1999 through June 2010 and has
been Chairman of PCAs Board of Directors 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
and State Farm Mutual Insurance Company.
12
Mark W. Kowlzan is 55 years old and has served as
Chief Executive Officer and a director of PCA since July 2010.
From 1998 through June 2010, Mr. Kowlzan led the
companys containerboard mill system, first as Vice
President and General Manager and then as Senior Vice
President Containerboard. From 1996 through 1998,
Mr. Kowlzan served in various senior mill-related operating
positions with PCA and Tenneco Packaging, including as manager
of the Counce linerboard mill. Prior to joining Tenneco
Packaging, Mr. Kowlzan spent 15 years at International
Paper Company, where he held a series of operational and
managerial positions within its mill organization. In
February 2011, Mr. Kowlzan was elected to the board of
American Forest and Paper Association.
Thomas A. Hassfurther is 55 years old and has served
as Executive Vice President Corrugated Products of
PCA since September 2009. From February 2005 to September 2009,
Mr. Hassfurther served as Senior Vice President
Sales and Marketing, Corrugated Products. Prior to this he held
various senior-level management and sales positions at PCA and
Tenneco Packaging. Mr. Hassfurther joined the company in
1977. He recently served as chairman of the Fibre Box
Association for two terms.
Richard B. West is 58 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 also served as Corporate Secretary. From 1995
through April 1999, Mr. West served in various senior
financial positions with PCA and Tenneco Packaging. Prior to
joining Tenneco Packaging, Mr. West spent 20 years
with International Paper Company in various financial positions.
Thomas W.H. Walton is 51 years old and has served as
Senior Vice President Sales and Marketing,
Corrugated Products since October 2009. Prior to this, he served
as a Vice President and Area General Manager within the
Corrugated Products Group since 1998. Mr. Walton joined the
company in 1981 and has also held plant positions in production,
sales and general management.
Stephen T. Calhoun is 65 years old and has served as
Vice President Human Resources of PCA since November
2002. Prior to this, he served in a variety of human resource
positions at both the operational and corporate level. Prior to
joining the company in 1989, Mr. Calhoun spent
15 years with American Can Company where he held several
human resources and manufacturing positions.
Charles J. Carter is 51 years old and has served as
Vice President Containerboard Mill Operations since
January 2011. From March 2010 to January 2011, Mr. Carter
served as PCAs Director of Papermaking Technology. Prior
to joining PCA in 2010, Mr. Carter spent 28 years with
various pulp and paper companies in managerial and technical
positions of increasing responsibility, most recently as Vice
President and General Manager of the Calhoun, Tennessee mill of
Abitibi Bowater from 2007 to 2010 and as manager of
SP Newsprints Dublin, Georgia mill from 1999 to 2007.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Sales Price
|
|
|
Dividends
|
|
|
Sales Price
|
|
|
Dividends
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
March 31
|
|
$
|
25.83
|
|
|
$
|
20.63
|
|
|
$
|
0.15
|
|
|
$
|
15.49
|
|
|
$
|
9.66
|
|
|
$
|
0.15
|
|
June 30
|
|
|
26.48
|
|
|
|
20.00
|
|
|
|
0.15
|
|
|
|
17.24
|
|
|
|
12.43
|
|
|
|
0.15
|
|
September 30
|
|
|
25.50
|
|
|
|
21.19
|
|
|
|
0.15
|
|
|
|
21.99
|
|
|
|
15.19
|
|
|
|
0.15
|
|
December 31
|
|
|
27.08
|
|
|
|
22.68
|
|
|
|
0.15
|
|
|
|
24.18
|
|
|
|
18.21
|
|
|
|
0.15
|
|
13
Stockholders
As of February 18, 2011, there were 88 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
2010 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 authorized a $150.0 million common stock
repurchase program. There is no expiration date for the common
stock repurchase program. Through December 31, 2010, the
Company repurchased 5,559,121 shares of common stock, with
1,740,392 shares repurchased for $40.9 million, or an
average of $23.47 per share during 2010. Of these shares,
75,000 shares were repurchased for $2.0 million during
the last several days of December and were subsequently settled
and retired in January 2011. All of the remaining repurchased
shares were retired prior to December 31, 2010. As of
December 31, 2010, $24.1 million of the
$150.0 million authorization remained available for
repurchase of the Companys common stock.
The following table summarizes the Companys stock
repurchases in the fourth quarter of 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
of Shares that
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
may yet be
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Part of Publicity
|
|
|
Purchased Under
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced
|
|
|
the Plan or
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Plans or Programs
|
|
|
Program
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
October 1, 2010 to October 31, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
36,755
|
|
November 1, 2010 to November 30, 2010
|
|
|
330,000
|
|
|
|
25.01
|
|
|
|
330,000
|
|
|
|
28,503
|
|
December 1, 2010 to December 31, 2010
|
|
|
166,000
|
|
|
|
26.38
|
|
|
|
166,000
|
|
|
|
24,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
496,000
|
|
|
$
|
25.47
|
|
|
|
496,000
|
|
|
$
|
24,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the 496,000 shares purchased during the fourth quarter of
2010, 75,000 shares settled in January 2011.
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 five publicly-traded
companies, which are International Paper Company, Smurfit-Stone
Container Corporation, Temple Inland Inc., Rock-Tenn Company and
Boise Inc.; and an Old Peer Group of three publicly-traded
companies, which are International Paper Company, Smurfit-Stone
Container Corporation and Temple Inland Inc. Peer Group members
Rock-Tenn Company and Boise Inc. were added to the New Peer
Group because they are primarily domestic integrated paper and
packaging companies who, similar to PCA, produce and sell
containerboard and corrugated products and report results to the
public. In addition, these two companies are included in the
competitive group for executive compensation purposes in
PCAs Proxy Statement. Smurfit-Stone Container Corporation
has been included in both peer groups since July 2010, when the
company emerged from bankruptcy as a new company. 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, 2005
through December 31, 2010. 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 Corporation 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 12/31/05 in stock or index, including
reinvestment of dividends. |
Fiscal year ending December 31.
Copyright©
2010 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Total Return
|
|
|
12/05
|
|
12/06
|
|
12/07
|
|
12/08
|
|
12/09
|
|
12/10
|
|
Packaging Corporation of America
|
|
|
100.00
|
|
|
|
100.73
|
|
|
|
133.83
|
|
|
|
67.94
|
|
|
|
120.52
|
|
|
|
138.73
|
|
S&P 500
|
|
|
100.00
|
|
|
|
115.80
|
|
|
|
122.16
|
|
|
|
76.96
|
|
|
|
97.33
|
|
|
|
111.99
|
|
S&P Midcap 400
|
|
|
100.00
|
|
|
|
110.32
|
|
|
|
119.12
|
|
|
|
75.96
|
|
|
|
104.36
|
|
|
|
132.16
|
|
Old Peer Group
|
|
|
100.00
|
|
|
|
104.64
|
|
|
|
106.83
|
|
|
|
38.62
|
|
|
|
99.00
|
|
|
|
102.33
|
|
New Peer Group
|
|
|
100.00
|
|
|
|
106.86
|
|
|
|
108.73
|
|
|
|
44.30
|
|
|
|
106.72
|
|
|
|
112.55
|
|
15
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.
|
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,435,606
|
|
|
$
|
2,147,589
|
|
|
$
|
2,360,493
|
|
|
$
|
2,316,006
|
|
|
$
|
2,187,046
|
|
Net income
|
|
|
205,435
|
|
|
|
265,895
|
|
|
|
135,609
|
|
|
|
170,066
|
|
|
|
125,032
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
|
|
|
2.02
|
|
|
|
2.62
|
|
|
|
1.32
|
|
|
|
1.63
|
|
|
|
1.21
|
|
diluted
|
|
|
2.00
|
|
|
|
2.60
|
|
|
|
1.31
|
|
|
|
1.61
|
|
|
|
1.20
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
|
|
|
101,678
|
|
|
|
101,577
|
|
|
|
102,753
|
|
|
|
104,483
|
|
|
|
103,599
|
|
diluted
|
|
|
102,608
|
|
|
|
102,358
|
|
|
|
103,593
|
|
|
|
105,459
|
|
|
|
104,485
|
|
Cash dividends declared per common share
|
|
|
0.60
|
|
|
|
0.60
|
|
|
|
1.20
|
|
|
|
1.05
|
|
|
|
1.00
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,224,274
|
|
|
$
|
2,152,840
|
|
|
$
|
1,939,741
|
|
|
$
|
2,035,857
|
|
|
$
|
1,986,976
|
|
Total debt obligations(1)
|
|
|
680,601
|
|
|
|
680,878
|
|
|
|
681,135
|
|
|
|
677,248
|
|
|
|
686,917
|
|
Stockholders equity
|
|
|
1,009,001
|
|
|
|
898,845
|
|
|
|
683,949
|
|
|
|
760,861
|
|
|
|
691,771
|
|
|
|
|
(1) |
|
Total 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 have multi-color printing capabilities to make
high-impact graphics boxes and displays that offer our customers
more attractive packaging.
16
In analyzing our operating performance, we focus on the
following factors that affect our business and are important to
consider when reviewing our financial and operating results:
|
|
|
|
|
containerboard and corrugated products demand;
|
|
|
|
corrugated products and containerboard pricing and mix;
|
|
|
|
cost trends and volatility for our major costs, including wood
and recycled fiber, purchased fuels, electricity, labor and
fringe benefits and transportation costs; and
|
|
|
|
cash flow from operations and capital expenditures.
|
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 market for containerboard and corrugated products is
generally subject to changes in the U.S. economy.
Throughout 2010, the U.S. economy steadily improved after
the effects of the severe downturn which occurred in the fourth
quarter of 2008 and continued into 2009. Industry-wide
corrugated products shipments increased 3.5% in 2010 compared to
2009 and containerboard production was 7.1% higher than in 2009
supported, in part, by strong export demand which, in 2010, was
8.2% above 2009 levels. PCA also experienced continued
improvement in demand, and for the year, our corrugated products
shipments were up 7.2% compared to 2009, returning to
pre-economic downturn levels, and containerboard production
increased from 2,258,000 tons to 2,443,000 tons, or up 8.2%. PCA
mills ran at almost 100% of capacity and essentially equaled
their previous record for annual production. Industry
containerboard inventories at the end of December 2010 were
2.3 million tons, more than 150,000 tons below the ten year
average for year-ending levels.
Prices for containerboard and corrugated products were higher
during 2010 compared to 2009, with industry published prices for
containerboard increasing twice during the year, up $50 per ton
in January 2010 and up an additional $60 per ton in April 2010.
Increased pricing and improved demand favorably impacted
PCAs 2010 earnings and were only partially offset by
higher fiber, transportation, labor and other input costs.
Published recycled fiber costs in 2010 more than doubled, on
average, up 122% compared to 2009. At the end of 2010, published
recycled fiber prices were up an additional $30 per ton above
the 2010 average price. Wood fiber costs in 2010 were higher
than they were in 2009, on average, up 7%, compared to the prior
year. Early in 2010, poor weather conditions in the
U.S. South made it difficult to access wood fiber, driving
wood costs to higher levels. As the year progressed, more normal
weather patterns prevailed and wood costs in the fourth quarter
of 2010 decreased to below fourth quarter 2009 levels.
Transportation costs increased 6% from prior year levels as
diesel prices increased during the year. Labor related costs
increased reflecting annual merit increases and increased
incentives associated with the companys year over year
increase in our earnings. Our costs for purchased fuels and
electricity averaged approximately 4% lower for the full year
2010 compared to 2009; however, they did increase during the
second half of the year as the strengthening U.S. economy
drove higher energy costs.
As disclosed in Note 16 to the consolidated financial
statements, PCA is a producer of black liquor, which is
considered an alternative fuel when mixed with diesel, making
the black liquor an alternative fuel eligible for a $0.50 per
gallon refundable alternative fuel mixture tax credit through
December 31, 2009. In a Chief Counsels Office of the
Internal Revenue Service Memorandum AM2010-002 dated
June 28, 2010, the IRS concluded that black liquor also
qualifies for the taxable cellulosic biofuel producer credit of
$1.01 per gallon of biofuel produced in 2009. PCA received the
required cellulosic biofuel producer registration code on
September 13, 2010. In a Chief Counsels Office of the
Internal Revenue Service Memorandum AM2010-004 dated
October 5, 2010, the IRS concluded that a black liquor
producer may claim the alternative fuel mixture credit and the
cellulosic biofuel producer credit in the same taxable year for
different volumes of black liquor (the same gallon of fuel
cannot receive both credits, but different gallons of fuel can
be claimed as either the alternative fuel mixture credit or the
cellulosic biofuel producer credit).
Prior to the IRSs memorandum and guidance regarding the
cellulosic biofuel producer credits and PCAs registration
as a cellulosic biofuel producer, PCA had recorded all tax
credits resulting from black liquor
17
production before December 31, 2009 as alternative fuel mixture
tax credits, resulting in $171.3 million in income in 2009 and
an additional $9.2 million in the first quarter of 2010. Based
upon both the IRS memoranda and the 2010 guidance regarding the
cellulosic biofuel producer credit, PCA analyzed the additional
potential benefits from claiming the cellulosic biofuel producer
credit for 2009 instead of the alternative fuel mixture credit,
or claiming a combination of the two credits for 2009. For the
gallons of alternative fuels produced in 2009, PCA claimed about
two-thirds of the gallons as cellulosic biofuel producer credits
and about one-third of the gallons as alternative fuel mixture
credits. This resulted in additional net income of
$47.7 million in 2010 and a reserve for uncertain tax
positions of $102.0 million. This reserve relates to
uncertainty concerning our proprietary biofuel process at our
Filer City corrugating medium mill. Because the Filer City mill
process is unique and IRS guidelines do not specifically address
the process, uncertainty exists. As of December 31, 2010,
including the $102.0 million recorded as an uncertain tax
position under ASC 740, Income Taxes, PCA has
as much as $206.1 million of tax credits to be used to
offset future cash tax payments. The cellulosic biofuel producer
credit is a taxable credit. However, the laws governing the
taxability of the alternative fuel mixture credit are not
completely defined. The IRS has not issued definitive guidance
regarding such taxability. PCA believes that the manner in which
the credit was claimed will not subject it to federal or state
income taxes on such benefits. If it is determined that any of
the credits are subject to taxation, PCA will be required to pay
those taxes and take a corresponding charge to its net income.
See Note 16 to the consolidated financial statements
included in this report for a description of the alternative
fuel mixture tax credits and the cellulosic biofuel producer
credit.
Excluding the impact of the tax credits described above and
asset disposal charges relating to our major energy projects at
our linerboard mills and other assets no longer in service and
facility closure costs, we earned net income of
$166.3 million ($1.62 per diluted share) for the full year
of 2010 compared with $95.9 million ($0.94 per diluted
share) for the comparable period in 2009. Management uses these
measures to focus on PCAs on-going operations and assess
our operating performance and believes that it is useful to
investors because it enables them to perform meaningful
comparisons of past and present operating results.
Reconciliations to the most comparable measure reported in
accordance with GAAP are included elsewhere in Item 7 under
Reconciliations of Non-GAAP Financial Measures to
Reported Amounts.
In the first quarter of 2011 our Counce and Valdosta linerboard
mills will be shut down for approximately one week for their
normal maintenance outages. The Valdosta shutdown will continue
into April making that mills total shutdown 11 days.
The maintenance downtime in the first quarter will result in
lower production and increased costs. Higher fiber costs, as
well as increased energy costs associated with colder weather, a
higher effective tax rate and higher timing-related benefit
costs are also expected in the first quarter. Considering all
these items, we estimate our first quarter earnings before any
special items will be lower than our fourth quarter earnings
before special items of $53 million, which excludes net
income of $5 million from cellulosic biofuel tax credits
and a charge of $3 million after tax from asset disposals
related to the energy optimization projects and assets no longer
in service.
18
Results
of Operations
Year
Ended December 31, 2010 Compared to Year Ended
December 31, 2009
The historical results of operations of PCA for the years ended
December 31, 2010 and 2009 are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
Net sales
|
|
$
|
2,435.6
|
|
|
$
|
2,147.6
|
|
|
$
|
288.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
185.4
|
|
|
$
|
352.5
|
|
|
$
|
(167.1
|
)
|
Interest expense, net
|
|
|
(32.3
|
)
|
|
|
(35.5
|
)
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
153.1
|
|
|
|
317.0
|
|
|
|
(163.9
|
)
|
Benefit (provision) for income taxes
|
|
|
52.3
|
|
|
|
(51.1
|
)
|
|
|
103.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
205.4
|
|
|
$
|
265.9
|
|
|
$
|
(60.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
Net sales increased by $288.0 million, or 13.4%, for the
year ended December 31, 2010 from the year ended
December 31, 2009. Net sales increased primarily as a
result of increased sales volumes of corrugated products and
containerboard ($176.7 million) and higher sales prices of
corrugated products and containerboard ($111.3 million).
Total corrugated products volume sold increased 7.2% to
31.0 billion square feet in 2010 compared to
28.9 billion square feet in 2009. On a comparable
shipment-per-workday
basis, corrugated products sales volume increased 6.8% in 2010
from 2009.
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 increase, on a total shipments basis, was due
to the fact that 2010 had one more workday (251 days),
those days not falling on a weekend or holiday, than 2009
(250 days). Containerboard sales volume to external
domestic and export customers increased 17.6% to 507,000 tons
for the year ended December 31, 2010 from 431,000 tons in
2009.
Income
from Operations
Income from operations decreased by $167.1 million, or
47.4%, for the year ended December 31, 2010 compared to
2009. As noted in Note 16 to the consolidated financial
statements, PCA received the cellulosic biofuel producer
registration in September 2010. As a result, our 2010 income
from operations was reduced primarily due to reversing a portion
of our 2009 alternative fuel mixture credits out of income from
operations ($96.0 million) in order to claim cellulosic
biofuel credits which were recorded in the provision for income
taxes ($135.5 million) in 2010. In addition, income from
operations included alternative fuel mixture credits in the
amounts of $168.4 million and $9.2 million,
respectively, in 2009 and 2010. Excluding the impact of tax
credits, energy project related asset disposals
($6.2 million in 2010 and $2.0 million in 2009), 2010
charges for two plant closings ($4.2 million) and the 2010
write-off of paper machine assets at the Tomahawk, Wisconsin
medium mill ($2.8 million), income from operations
increased $99.4 million for full year 2010. This increase
was primarily attributable to increased sales prices of
corrugated products and containerboard ($111.3 million),
higher sales volume ($58.4 million) partially offset by
increased costs for fiber ($47.8 million), transportation
($10.6 million), labor and fringe benefits
($7.8 million) and maintenance and building repairs
($7.3 million).
Gross profit increased $105.6 million, or 24.8%, for the
year ended December 31, 2010 from the year ended
December 31, 2009. Gross profit as a percentage of net
sales increased from 19.9% of net sales in the year ended
December 31, 2009 to 21.9% of net sales in the year ended
December 31, 2010 primarily due to the increases of sales
prices and volume described previously.
19
Selling and administrative expenses increased $9.0 million,
or 5.2% for the year ended December 31, 2010 from the year
ended December 31, 2009, primarily as a result of increased
salary expense ($6.1 million) including annual merit
increases, incentive compensation, and temporary labor, labor
related benefits ($1.0 million), travel and meeting costs
($1.1 million) and broker commissions ($0.7 million).
Corporate overhead for the year ended December 31, 2010
increased $3.5 million, or 6.4%, from the year ended
December 31, 2009. The increase was primarily attributable
to increased salary and fringe benefit expenses
($2.3 million) and costs for professional services
regarding legal, tax and audit matters ($1.2 million).
Other expense, net, increased $5.4 million, or 37.4% for
the year ended December 31, 2010 compared to the year ended
December 31, 2009. The increase was primarily due to
closure costs at two facilities ($4.2 million) and costs
related to the write-off of paper machine assets at Tomahawk
($2.8 million), partially offset by reduced expenses
related to legal claims ($1.5 million).
Interest
Expense, Net and Income Taxes
Net interest expense decreased by $3.2 million, or 9.0%,
for the year ended December 31, 2010 compared to the year
ended December 31, 2009, primarily as a result of higher
capitalized interest ($3.9 million) related to the Counce
and Valdosta major energy optimization projects during the year
ended December 31, 2010 compared to the same period in 2009.
Due to the impact of recording the fuel tax credits, PCAs
effective tax rate was (-34.2%) for the year ended
December 31, 2010 and 16.1% for the year ended
December 31, 2009. Excluding the impact of the fuel tax
credits, the effective tax rate would have been 34.5% for the
year ended December 31, 2010 and 36.3% for the same period
in 2009. The effective tax rate varies from the
U.S. federal statutory tax rate of 35.0% principally due to
the impact of the fuel tax credits, state and local income taxes
and the domestic manufacturers deduction. PCA recorded a
material change in its uncertain tax positions under
ASC 740, Income Taxes, of $102.0 million
in the fourth quarter of 2010 due to the amendment of the 2009
federal income tax return to claim gallons of alternative fuel
produced at the Filer City, Michigan mill. Due to the
proprietary nature of the biofuel process at the Filer City
mill, uncertainty as to total fuel gallons qualifying for the
credit exists, which caused the additional reserve. The Company
expects the IRS to review the cellulosic biofuel producer tax
credits claimed in the 2009 federal income tax return. Pending
the timing and the outcome of the IRS review, which is not
determinable at this time, the reserve for uncertain tax
positions could change significantly.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
The historical results of operations of PCA for the years ended
December 31, 2009 and 2008 are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
Net sales
|
|
$
|
2,147.6
|
|
|
$
|
2,360.5
|
|
|
$
|
(212.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
352.5
|
|
|
$
|
241.8
|
|
|
$
|
110.7
|
|
Interest expense, net
|
|
|
(35.5
|
)
|
|
|
(31.7
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
317.0
|
|
|
|
210.1
|
|
|
|
106.9
|
|
Provision for income taxes
|
|
|
(51.1
|
)
|
|
|
(74.5
|
)
|
|
|
23.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
265.9
|
|
|
$
|
135.6
|
|
|
$
|
130.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Net
Sales
Net sales decreased by $212.9 million, or 9.0%, for the
year ended December 31, 2009 from the year ended
December 31, 2008. Net sales decreased primarily due to the
impact of lower sales volume ($145.5 million) and decreased
sales prices of corrugated products and containerboard
($67.4 million).
Total corrugated products volume sold decreased 4.6% to
28.9 billion square feet in 2009 compared to
30.3 billion square feet in 2008. On a comparable
shipment-per-workday
basis, corrugated products sales volume decreased 3.8% in 2009
from 2008.
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 total shipments basis, was due
to the fact that 2009 had two fewer workdays (250 days),
those days not falling on a weekend or holiday, than 2008
(252 days). Containerboard sales volume to external
domestic and export customers decreased 9.9% to 431,000 tons for
the year ended December 31, 2009 from 478,000 tons in 2008.
Outside sales of both corrugated products and containerboard
began 2009 with significantly lower volumes compared to 2008 and
steadily improved throughout the year.
Income
from Operations
Income from operations increased by $110.7 million, or
45.8%, for the year ended December 31, 2009 compared to
2008 primarily attributable to the alternative fuel mixture tax
credit of $168.4 million described in Note 16 to the
consolidated financial statements. Excluding the alternative
fuel mixture tax credit and asset disposal charges of
$2.0 million, income from operations decreased
$57.8 million for full year 2009, which was primarily
attributable to decreased sales prices of corrugated products
and containerboard ($67.4 million), lower sales volume
($52.5 million) and increased labor and fringe benefit
costs ($8.0 million), partially offset by decreased costs
of energy ($24.5 million), transportation
($23.7 million), recycled fiber ($18.9 million) and
wood fiber costs ($3.5 million).
Gross profit decreased $64.8 million, or 13.2%, for the
year ended December 31, 2009 from the year ended
December 31, 2008. Gross profit as a percentage of net
sales decreased from 20.8% of net sales in the year ended
December 31, 2008 to 19.9% of net sales in the year ended
December 31, 2009 primarily due to the decreases of sales
prices and volume described previously.
Selling and administrative expenses were essentially unchanged,
up 0.1%, for the year ended December 31, 2009 from the year
ended December 31, 2008.
Corporate overhead for the year ended December 31, 2009
decreased $6.5 million, or 10.6%, from the year ended
December 31, 2008. The decrease was primarily attributable
to lower salary and fringe benefit expenses ($5.9 million)
and other items which were individually insignificant.
Other expense, net, decreased $0.7 million, or 4.7% for the
year ended December 31, 2009 compared to the year ended
December 31, 2008. The decrease was primarily due to lower
legal related costs ($1.6 million), partially offset by
increased fixed asset disposal costs ($0.8 million).
Interest
Expense, Net and Income Taxes
Interest expense, net of interest income, increased by
$3.8 million, or 12.0%, for the year ended
December 31, 2009 compared to the year ended
December 31, 2008, due to lower interest rates on
investments, which reduced interest income by $5.0 million
in 2009 compared to 2008.
PCAs total effective tax rate was 16.1% for the year ended
December 31, 2009 and 35.5% for the year ended
December 31, 2008. Excluding the impact of fuel tax
credits, the effective tax rate would have been 36.3% in 2009.
The effective tax rate varies from the U.S. federal
statutory tax rate of 35.0% principally due to the impact of the
alternative fuel mixture tax credit (in 2009), state and local
income taxes and the domestic manufacturers deduction. PCA
had no material changes to its uncertain tax positions under
ASC 740, Income Taxes, in 2009.
21
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Net cash provided by (used for):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
349.9
|
|
|
$
|
306.1
|
|
|
$
|
269.3
|
|
Investing activities
|
|
|
(321.3
|
)
|
|
|
(119.3
|
)
|
|
|
(134.5
|
)
|
Financing activities
|
|
|
(92.8
|
)
|
|
|
(75.5
|
)
|
|
|
(213.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
$
|
(64.2
|
)
|
|
$
|
111.3
|
|
|
$
|
(78.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Net cash provided by operating activities for the year ended
December 31, 2010 was $349.9 million compared to
$306.1 million for the year ended December 31, 2009,
an increase of $43.8 million, or 14.3%. Net income,
excluding the income from the tax credits (described in
Note 16 to the financial statements included in this
report) of $47.7 million in 2010 and $171.3 million in
2009, was $157.7 million and $94.6 million,
respectively, for 2010 and 2009, an increase of
$63.1 million that increased net cash provided by operating
activities. Additionally, more alternative fuel mixture and
cellulosic biofuel producer tax credits ($24.2 million)
were used to reduce federal tax payments during 2010 compared to
2009. During 2010, PCAs cash taxes paid for both federal
and state income taxes were $19.1 million. This was
partially offset by higher requirements for operating assets and
liabilities ($51.6 million) driven by higher accounts
receivable levels in 2010 as a result of both higher 2010 sales
volumes and pricing. Cash requirements for operating activities
are subject to PCAs operating needs, the timing of
collection of receivables and payments of payables and expenses,
and seasonal fluctuations in the our operations.
Net cash provided by operating activities increased
$36.8 million, or 13.7%, to $306.1 million for the
year ended December 31, 2009 compared to the year ended
December 31, 2008. Net income, excluding income from
alternative fuel mixture tax credits (described in Note 16
to the financial statements included in this report), was
$94.6 million for 2009 compared to $135.6 million for
2008, a decrease of $41.0 million that reduced net cash
provided by operating activities by the same amount. This
decrease, however, was more than offset by reduced operating
cash requirements, including a $48.4 million net reduction
in federal tax payments after applying alternative fuel mixture
tax credits. During 2009, PCAs cash taxes paid for both
federal and state income taxes were $22.3 million.
Additionally, requirements for operating assets and liabilities
were lower by $33.9 million in 2009 compared to 2008,
driven for the most part by receivables and payables levels,
both of which were impacted by the economic downturn. This was
partially offset by higher pension contributions in 2009.
Investing
Activities
Net cash used for investing activities for the year ended
December 31, 2010 increased $202.0 million, or 169.3%,
to $321.3 million, compared to the year ended
December 31, 2009. The increase was primarily related to
higher additions to property, plant and equipment of
$206.0 million, which included $175.9 million for the
major energy optimization projects at our linerboard mills,
during the year ended December 31, 2010 compared to the
same period in 2009. Partially offsetting this increase was a
$3.1 million acquisition completed during the third quarter
of 2009 as described in Note 18 to the financial statements.
Net cash used for investing activities decreased
$15.2 million, or 11.3%, to $119.3 million for the
year ended December 31, 2009 compared to the year ended
December 31, 2008. The decrease was due to lower additions
to property, plant and equipment of $18.8 million in 2009
compared to 2008, which was partially offset by a
$3.1 million acquisition completed during the third quarter
of 2009.
As of December 31, 2010, PCA had commitments for general
purpose capital expenditures of $143.3 million for 2011,
including $109.2 million for the major energy projects at
its Counce and Valdosta mills. PCA believes that
cash-on-hand
combined with cash flow from operations will be sufficient to
fund these commitments.
22
Financing
Activities
Net cash used for financing activities totaled
$92.8 million for the year ended December 31, 2010, a
difference of $17.3 million, or 22.9%, compared to the same
period in 2009. The difference was primarily attributable to
repurchases of PCA common stock of $38.9 million during
2010, partially offset by lower common stock dividends paid of
$15.1 million and higher proceeds from the exercise of
stock options of $6.5 million during 2010 compared to 2009.
Net cash used for financing activities totaled
$75.5 million for the year ended December 31, 2009, a
decrease of $138.0 million, or 64.7%, compared to the same
period in 2008. The difference was primarily attributable to
lower debt payments of $169.7 million in 2009, partially
offset by $145.2 million in net proceeds received from
PCAs notes offering in 2008 described below. Additionally,
PCA made no common stock repurchases in 2009 compared to
$65.7 million in repurchases of PCA common stock during
2008, and lower common stock dividends of $76.9 million
paid in 2009 compared to $125.1 million paid in 2008.
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.
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. The facility, which
PCA plans on renewing, is scheduled to terminate on
March 1, 2011. As of December 31, 2010,
$109.0 million was outstanding. The highest outstanding
principal balance under the receivables credit facility during
fiscal 2010 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.
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.
Off-Balance
Sheet Arrangements
The Company does not have any off-balance sheet arrangements as
of December 31, 2010 that would require disclosure under
SEC FR-67, Disclosure in Managements Discussion and
Analysis About Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations.
23
Contractual
Obligations
The following table summarizes PCAs contractual
obligations at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
39,085
|
|
|
|
2,202
|
|
|
|
4,404
|
|
|
|
4,404
|
|
|
|
28,075
|
|
Operating leases
|
|
|
117,615
|
|
|
|
28,613
|
|
|
|
42,295
|
|
|
|
16,526
|
|
|
|
30,181
|
|
Capital commitments
|
|
|
143,309
|
|
|
|
143,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase commitments
|
|
|
38,309
|
|
|
|
7,387
|
|
|
|
4,937
|
|
|
|
2,972
|
|
|
|
23,013
|
|
Letters of credit
|
|
|
18,832
|
|
|
|
18,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension contributions
|
|
|
22,100
|
|
|
|
22,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
1,038,250
|
|
|
$
|
331,443
|
|
|
$
|
51,636
|
|
|
$
|
423,902
|
|
|
$
|
231,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table excludes unamortized debt discount of
$0.9 million at December 31, 2010 and interest
payments on debt outstanding. Based on interest rates in effect
and long-term debt balances outstanding as of December 31,
2010, projected contractual interest payments would be
approximately $34.5 million in 2011 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,
2010. See Notes 8 and 13 to the audited consolidated
financial statements for additional information. PCA currently
does not have any projections for future pension contributions
beyond 2011. See Note 6 to the audited consolidated
financial statements for additional information.
As of December 31, 2010, the Companys expected
payment for significant contractual obligations excludes
$7.6 million of obligations for uncertain tax positions
because the Company cannot make a reasonably reliable estimate
of the period of cash settlement for such liability. See
Note 15 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, 2010, PCA
had $172.2 million in unused borrowing capacity under its
existing credit facilities, net of the impact on this borrowing
capacity of $18.8 million of outstanding letters of credit.
Currently, PCAs primary uses of cash are for operations,
capital expenditures, debt service and declared common stock
dividends, which it expects to be able to fund from these
sources.
24
The following table provides the outstanding balances and the
weighted average interest rates as of December 31, 2010 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
|
|
2010
|
|
|
Interest Rate
|
|
|
Payments
|
|
|
|
(Dollars in thousands)
|
|
|
Revolving Credit Facility
|
|
$
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Receivables Credit Facility
|
|
|
109,000
|
|
|
|
1.56
|
%
|
|
$
|
1,700
|
|
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
|
|
|
|
5.23
|
%
|
|
$
|
34,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table excludes unamortized debt discount of
$0.9 million at December 31, 2010. It also excludes
from the projected annual cash interest payments, the non-cash
income from the annual amortization of the $22.8 million
received in July 2003 and the non-cash expense from the annual
amortization of the $4.4 million paid in March 2008 to
settle the treasury locks related to the
53/4% senior
notes due 2013 and 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, PCA must maintain minimum net worth and maximum
debt to total capitalization and minimum interest coverage
ratios under the revolving credit facility. A failure to comply
with the restrictions contained in the revolving credit facility
could lead to an event of default, which could result in an
acceleration of any outstanding indebtedness
and/or
prohibit PCA from drawing on the revolving credit facility. Such
an acceleration may also constitute an event of default under
the senior notes indentures and the receivables credit facility.
At December 31, 2010, PCA was in compliance with these
covenants.
PCA currently expects to incur capital expenditures of
$255.0 million in 2011, including $115.0 million for
major energy optimization projects at its Counce and Valdosta
mills and $40.0 million for strategic projects in the box
plants. The remaining $100.0 million in 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, 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.
25
Environmental
Matters
PCA is subject to, and must comply with, a variety of federal,
state and local environmental laws, particularly those relating
to air and water quality, waste disposal and the cleanup of
contaminated soil and groundwater. The most significant of these
laws affecting the Company are:
|
|
|
|
|
Resource Conservation and Recovery Act (RCRA);
|
|
|
|
Clean Water Act (CWA);
|
|
|
|
Clean Air Act (CAA);
|
|
|
|
The Emergency Planning and Community
Right-to-Know-Act
(EPCRA);
|
|
|
|
Toxic Substance Control Act (TSCA); and
|
|
|
|
Safe Drinking Water Act (SDWA).
|
PCA believes that it is currently in material compliance with
these and all applicable environmental rules and regulations.
Because environmental regulations are constantly evolving, the
Company has incurred, and will continue to incur, costs to
maintain compliance with these and other environmental laws. The
Company works diligently to anticipate and budget for the impact
of applicable environmental regulations, and does not currently
expect that future environmental compliance obligations will
materially affect its business or financial condition. For the
years ended December 31, 2010, 2009 and 2008, we spent
approximately $24.6 million, $26.4 million and $23.5
million, respectively, to comply with the requirements of these
and other environmental laws. Additionally, total capital costs
for environmental matters were $1.1 million,
$0.4 million and $3.5 million for 2010, 2009 and 2008,
respectively, and the Company currently estimates 2011
environmental capital expenditures will be $3.3 million.
As is the case with any industrial operation, PCA has, in the
past, incurred costs associated with the remediation of soil or
groundwater contamination, as required by the federal
Comprehensive Environmental Response, Compensation and Liability
Act, commonly known as the federal Superfund law,
and analogous state laws. Cleanup requirements arise with
respect to properties the Company currently owns or operates,
former facilities and off-site facilities where the Company has
disposed of hazardous substances. As part of 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
pre-closing off-site waste disposal. Pactiv 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, PCA could
receive notifications of cleanup liability in the future and
this liability could be material. From 1994 through 2010,
remediation costs at PCAs mills and corrugated plants
totaled approximately $3.2 million. As of December 31,
2010, PCA maintained an environmental reserve of
$9.7 million relating to
on-site
landfills and surface impoundments as well as ongoing and
anticipated remedial projects. As of this filing, the Company
believes that it is not reasonably possible that future
environmental expenditures above the $9.7 million accrued
as of December 31, 2010 will have a material impact on its
financial condition, results of operations and cash flows.
While legislation regarding the regulation of greenhouse gas
emissions has been proposed at the federal level, it is
uncertain whether such legislation will be passed and, if so,
what the breadth and scope of such legislation will be. The
result of the regulation of greenhouse gas emissions could be an
increase in our future environmental compliance costs, through
caps, taxes or additional capital expenditures to modify
facilities, which may be material. However, climate change
legislation and the resulting future energy policy could also
provide us with opportunities if the use of renewable energy is
encouraged. We currently generate a significant portion of our
power requirements for our mills using bark, black liquor and
biomass as fuel, which are derived from renewable resources. Our
energy optimization projects at the Counce and Valdosta
linerboard
26
mills are expected to nearly eliminate the use of fossil fuels
at those facilities by the end of 2011, while providing more
efficient power generation at those facilities. While we believe
we are well-positioned to take advantage of any renewable energy
incentives, it is uncertain what the ultimate costs and
opportunities of any climate change legislation will be and how
our business and industry will be affected.
Critical
Accounting Policies
Managements discussion and analysis of PCAs
financial condition and results of operations are based upon the
Companys consolidated financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On an ongoing
basis, PCA evaluates its estimates, including those related to
bad debts, inventories, goodwill and intangible assets, pensions
and other postretirement benefits, income taxes, environmental
liabilities, stock based compensation, and contingencies and
litigation. PCA bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
PCA believes the following critical accounting policies affect
its more significant judgments and estimates used in the
preparation of its consolidated financial statements. For a
further discussion on the application of these and other
accounting policies, see Note 2 to its consolidated
financial statements included elsewhere in this report.
Accounts
Receivable Allowance for Doubtful Accounts and
Customer Deductions
PCA evaluates the collectibility of its accounts receivable
based upon a combination of factors. In circumstances where the
Company is aware of a specific customers inability to meet
its financial obligations (e.g., bankruptcy filings, substantial
downgrading of credit sources), PCA records a specific reserve
for bad debts against amounts due to reduce the net recorded
receivable to the amount the Company reasonably believes will be
collected. For all other customers, the Company recognizes
reserves for bad debts based on its historical collection
experience. If the Companys 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), PCAs estimates
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 PCAs experience, customer returns, allowances and
earned discounts have averaged 1.0% of its gross selling price.
Accordingly, the Company reserves 1.0% of its open customer
accounts receivable balance for these items.
As of December 31, 2010, the balance in the allowance for
doubtful accounts reserve was $2.5 million, compared to
$3.9 million at December 31, 2009. The change of
balance in the allowance for doubtful accounts resulted in
income of $0.9 million in 2010, compared to expense of
$1.5 million in 2009. The decrease in bad debt expense of
$2.4 million was primarily due to a $1.0 million
reduction in the allowance for doubtful accounts reserve to
reflect the actual average losses over the past three years and
a $0.9 million decrease in expense related to customers who
had filed for bankruptcy. For the year ended December 31,
2009, bad debt expense was $1.5 million compared to
$4.2 million in 2008. The decrease in bad debt expense of
$2.7 million was primarily attributable to a
$1.4 million decrease in expense related to customers who
had filed for bankruptcy and a recovery of $1.4 million
from one customer that had previously filed for bankruptcy.
Inventories
PCA records its inventories at the lower of cost or market and
includes 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
27
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 65% and 62%
of inventories at current cost at December 31, 2010 and
2009, 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 Accounting Standards
Codification (ASC) 715,
Compensation Retirement 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 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 PCA based upon annual reviews.
For postretirement health care plan accounting, PCA reviews
external data and its 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 ASC 410, Asset Retirement and
Environmental 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, the Companys estimates may change.
PCA believes that any additional costs identified as further
information becomes available would not have a material effect
on its 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.
28
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, 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 ASC 718, Compensation
Stock Compensation. 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 ASC 718, and (b) compensation costs
for all share-based payments granted subsequent to
January 1, 2006. The grant date fair value is estimated in
accordance with the provisions of ASC 718.
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 ASC 740,
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, 2010 reflect
the likely outcome of known tax contingencies as of such date in
accordance with uncertain tax positions under ASC 740.
|
29
Reconciliations
of Non-GAAP Financial Measures to Reported
Amounts
Operating income, net income and diluted earnings per share
excluding special items are non-GAAP financial measures.
Reconciliations of operating income excluding special items to
the most comparable measure reported in accordance with GAAP for
the years ended December 31, 2010 and 2009 are presented below.
Reconciliations of net income and diluted earnings per share
excluding special items to the most comparable measure reported
in accordance with GAAP for the three months ended
December 31, 2010 and for the years ended December 31,
2010 and 2009 are presented below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2010
|
|
|
|
Net Income
|
|
|
Diluted EPS
|
|
|
|
(In thousands except per share amounts)
|
|
|
As reported in accordance with GAAP
|
|
$
|
54,891
|
|
|
$
|
0.54
|
|
Special items:
|
|
|
|
|
|
|
|
|
Alternative energy tax credits
|
|
|
(5,032
|
)
|
|
|
(0.05
|
)
|
Asset disposal and facilities closure charges
|
|
|
3,173
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Total special items
|
|
|
(1,859
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
Excluding special items
|
|
$
|
53,032
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Income from
|
|
|
|
|
|
|
|
|
Income from
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
Net Income
|
|
|
Diluted EPS
|
|
|
Operations
|
|
|
Net Income
|
|
|
Diluted EPS
|
|
|
|
(In thousands except per share amounts)
|
|
|
As reported in accordance with GAAP
|
|
$
|
185,382
|
|
|
$
|
205,435
|
|
|
$
|
2.00
|
|
|
$
|
352,454
|
|
|
$
|
265,895
|
|
|
$
|
2.60
|
|
Special items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative energy tax credits
|
|
|
86,804
|
|
|
|
(47,697
|
)
|
|
|
(0.46
|
)
|
|
|
(168,437
|
)
|
|
|
(171,271
|
)
|
|
|
(1.67
|
)
|
Asset disposal and facilities closure charges
|
|
|
13,213
|
|
|
|
8,557
|
|
|
|
0.08
|
|
|
|
1,952
|
|
|
|
1,240
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total special items
|
|
|
100,017
|
|
|
|
(39,140
|
)
|
|
|
(0.38
|
)
|
|
|
(166,485
|
)
|
|
|
(170,031
|
)
|
|
|
(1.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding special items
|
|
$
|
285,399
|
|
|
$
|
166,295
|
|
|
$
|
1.62
|
|
|
$
|
185,969
|
|
|
$
|
95,864
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. For a discussion of
derivatives and hedging activities, see Note 9 to
PCAs consolidated financial statement included elsewhere
in the report.
The interest rates on approximately 84% of PCAs debt are
fixed. A one percent increase in interest rates related to
variable rate debt would have resulted in an increase in
interest expense and a corresponding decrease in income before
taxes of $1.1 million annually. In the event of a change in
interest rates, management could take actions to mitigate its
exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects,
the sensitivity analysis assumes no changes in PCAs
financial structure.
|
|
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.
30
|
|
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, 2010. The evaluation of PCAs disclosure
controls and procedures included a review of the controls
objectives and design, PCAs implementation of the controls
and the effect of the controls on the information generated for
use in this report. Based on this evaluation, PCAs Chief
Executive Officer and Chief Financial Officer concluded that
PCAs disclosure controls and procedures were effective at
the reasonable assurance level as of December 31, 2010.
During the quarter ended December 31, 2010, there were no
changes in internal controls over financial reporting that have
materially affected, or are reasonably likely to materially
affect, PCAs internal control over financial reporting.
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, 2010, 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, 2010, based on the specified criteria.
31
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 22, 2011, the compensation committee of
PCAs board of directors awarded each of Mark W.
Kowlzan, Chief Executive Officer, and Thomas A. Hassfurther,
Executive Vice President, Corrugated Products,
100,000 shares of restricted stock. Subject to continued
employment, one-third of the shares will vest on each of the
first three anniversary dates of the date of the award. Under
the terms of the restricted stock award agreement, the form of
which is filed herewith as Exhibit 10.22, each of
Mr. Kowlzan and Mr. Hassfurther agreed to customary
confidentiality, non-competition and non-solicitation covenants,
which will expire no later than the third anniversary of the
date of the award. The foregoing summary is qualified in its
entirety by reference to the entire text of such exhibit.
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.
The following information required by this Item 10 will be
included in PCAs Proxy Statement for the 2011 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 Election of
Directors Nominating and Governance Committee,
Other Information Recommendations for
Board Nominated Director Nominees, and
Other Information Procedures for Nominating
Directors or Bringing Business Before the 2012 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, Executive Officer and Director
Compensation (including all subcaptions and tables
thereunder) and Board Committees Compensation
Committee and is incorporated herein by reference.
32
|
|
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, 2010 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
|
|
|
1,568,384
|
|
|
$
|
21.38
|
|
|
|
1,460,469
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,568,384
|
|
|
$
|
21.38
|
|
|
|
1,460,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Excludes securities reflected in the first column, Number
of securities to be issued upon exercise of outstanding options
and rights. Does not include 1,478,000 shares of unvested
restricted stock granted pursuant to our Amended and Restated
1999
Long-Term
Equity Incentive Plan. |
|
|
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.
|
|
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, 2010, 2009 and 2008 is
included in this report.
Schedule Of Valuation And Qualifying Accounts Disclosure
Schedule II Packaging Corporation of
America Valuation and Qualifying Accounts.
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning of
|
|
|
Charged to
|
|
|
|
|
|
End of
|
|
Description
|
|
Year
|
|
|
Expenses
|
|
|
Deductions
|
|
|
Year
|
|
|
|
(Dollars in thousands)
|
|
|
Year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from assets accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
3,909
|
|
|
$
|
(937
|
)
|
|
$
|
(479
|
)(1)
|
|
$
|
2,493
|
|
Reserve for customer deductions
|
|
|
2,439
|
|
|
|
27,007
|
|
|
|
(26,526
|
)(2)
|
|
|
2,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,348
|
|
|
$
|
26,070
|
|
|
$
|
(27,005
|
)
|
|
$
|
5,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from assets accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
4,355
|
|
|
$
|
1,506
|
|
|
$
|
(1,952
|
)(1)
|
|
$
|
3,909
|
|
Reserve for customer deductions
|
|
|
2,507
|
|
|
|
22,683
|
|
|
|
(22,751
|
)(2)
|
|
|
2,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,862
|
|
|
$
|
24,189
|
|
|
$
|
(24,703
|
)
|
|
$
|
6,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
|
|
|
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
Exhibit 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.)
|
34
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
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 Quarterly Report on
Form 10-Q
for the period ended September 30, 2010, 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 10.2 to PCAs Quarterly Report on
Form 10-Q
for the period ended September 30, 2010, File
No. 1-15399.)
|
|
10
|
.3
|
|
Amendment No. 1 to Amended and Restated Credit and Security
Agreement, dated as of April 14, 2009, 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 16, 2009, File
No. 1-15399.)
|
|
10
|
.4
|
|
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
|
.5
|
|
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
|
.6
|
|
Not used.
|
|
10
|
.7
|
|
Not used.
|
|
10
|
.8
|
|
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.)*
|
|
10
|
.9
|
|
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
|
.10
|
|
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, File
No. 1-15399.)*
|
|
10
|
.11
|
|
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
|
.12
|
|
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
|
.13
|
|
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
|
.14
|
|
Not used.
|
|
10
|
.15
|
|
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.)*
|
35
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.16
|
|
Packaging Corporation of America Deferred Compensation Plan,
effective as of January 1, 2009. (Incorporated herein by
reference to Exhibit 10.15 to PCAs Annual Report on
Form 10-K
for the year ended December 31, 2008, File
No. 1-15399.)*
|
|
10
|
.17
|
|
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
|
.18
|
|
First Amendment of Packaging Corporation of America Supplemental
Executive Retirement Plan, effective as of January 1, 2008.
(Incorporated herein by reference to Exhibit 10.17 to
PCAs Annual Report on
Form 10-K
for the year ended December 31, 2008, file
No. 1-15399.)*
|
|
10
|
.19
|
|
Amended and Restated 1999 Long-Term Equity Incentive Plan,
effective as of May 27, 2009. (Incorporated herein by
reference to Appendix A to PCAs Definitive Proxy
Statement on Schedule 14A, filed with the Commission on
April 21, 2009, File No 1-15399.)*
|
|
10
|
.20
|
|
PCA Performance Incentive Plan, effective as of May 11,
2010. (Incorporated herein by reference to Appendix A to
PCAs Definitive Proxy Statement on Schedule 14A, filed
with the Commission on March 30, 2010, File No. 1-15399.)*
|
|
10
|
.21
|
|
Employment Agreement, dated June 28, 2010, between
Packaging Corporation of America and Paul T. Stecko.
(Incorporated herein by reference to Exhibit 10.1 to the
Current Report on
Form 8-K,
dated June 29, 2010, File
No. 1-15399.)*
|
|
10
|
.22
|
|
Form of Restricted Stock Award Agreement for February 22,
2011 Retention Awards to Mark W. Kowlzan and Thomas A.
Hassfurther*
|
|
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.
|
|
101
|
|
|
The following financial information from Packaging Corporation
of Americas Annual Report on
Form 10-K
for the year ended December 31, 2010, formatted in XBRL
(eXtensible Business Reporting Language): (i) Consolidated
Balance Sheets at December 31, 2010 and 2009,
(ii) Consolidated Statements of Income for the years ended
December 31, 2010, 2009 and 2008, (iii) Consolidated
Statements of Changes in Stockholders Equity for the years
ended December 31, 2010, 2009 and 2008,
(iv) Consolidated Statements of Cash Flows for the years
ended December 31, 2010, 2009 and 2008, (v) the Notes
to Consolidated Financial Statements, tagged as blocks of text
and (vi) Financial Statement
Schedule-Valuation
and Qualifying Accounts.
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
|
|
|
Filed herewith. |
36
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 22, 2011.
Packaging Corporation of America
Name: Mark W. Kowlzan
|
|
|
|
Title:
|
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 22, 2011.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Mark
W. Kowlzan
Mark
W. Kowlzan
|
|
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
/s/ Richard
B. West
Richard
B. West
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
*
Paul
T. Stecko
|
|
Executive Chairman
|
|
|
|
*
Cheryl
K. Beebe
|
|
Director
|
|
|
|
*
Henry
F. Frigon
|
|
Director
|
|
|
|
*
Hasan
Jameel
|
|
Director
|
|
|
|
*
Samuel
M. Mencoff
|
|
Director
|
|
|
|
*
Roger
B. Porter
|
|
Director
|
|
|
|
*
Thomas
S. Souleles
|
|
Director
|
|
|
|
*
James
D. Woodrum
|
|
Director
|
|
|
|
*By: /s/
Richard B. West
Richard
B. West
(Attorney-In-Fact)
|
|
|
37
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, 2010 and 2009, 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, 2010. 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, 2010 and 2009, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2010, 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 consolidated financial statements,
total comprehensive income for the years ended December 31, 2009
and 2008 included within the statement of changes in
stockholders equity have been restated.
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, 2010, 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 22,
2011 expressed an unqualified opinion thereon.
Chicago, Illinois
February 22, 2011
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, 2010,
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, 2010, 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, 2010 and 2009, 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, 2010, and our report dated
February 22, 2011, expressed an unqualified opinion thereon.
Chicago, Illinois
February 22, 2011
F-3
Packaging
Corporation of America
As
of December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
196,556
|
|
|
$
|
260,727
|
|
Accounts receivable, net of allowance for doubtful accounts and
customer deductions of $5,413 and $6,348 as of December 31,
2010 and 2009, respectively
|
|
|
293,159
|
|
|
|
243,403
|
|
Inventories
|
|
|
241,142
|
|
|
|
213,396
|
|
Alternative fuel mixture tax credits receivable
|
|
|
|
|
|
|
127,811
|
|
Federal and state income taxes receivable
|
|
|
|
|
|
|
4,707
|
|
Prepaid expenses and other current assets
|
|
|
16,952
|
|
|
|
13,045
|
|
Deferred income taxes
|
|
|
50,232
|
|
|
|
22,125
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
798,041
|
|
|
|
885,214
|
|
Property, plant and equipment, net
|
|
|
1,337,986
|
|
|
|
1,182,504
|
|
Goodwill
|
|
|
38,854
|
|
|
|
38,854
|
|
Other intangible assets, net
|
|
|
10,975
|
|
|
|
11,790
|
|
Other long-term assets
|
|
|
38,418
|
|
|
|
34,478
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,224,274
|
|
|
$
|
2,152,840
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term debt and current maturities of long-term debt
|
|
$
|
109,000
|
|
|
$
|
109,000
|
|
Capital lease obligations
|
|
|
670
|
|
|
|
626
|
|
Accounts payable
|
|
|
154,130
|
|
|
|
126,813
|
|
Dividends payable
|
|
|
15,351
|
|
|
|
15,451
|
|
Accrued interest
|
|
|
12,598
|
|
|
|
12,644
|
|
Federal and state income taxes payable
|
|
|
2,601
|
|
|
|
|
|
Accrued liabilities
|
|
|
111,208
|
|
|
|
106,423
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
405,558
|
|
|
|
370,957
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
549,099
|
|
|
|
548,749
|
|
Capital lease obligations
|
|
|
21,832
|
|
|
|
22,503
|
|
Deferred income taxes
|
|
|
9,190
|
|
|
|
205,227
|
|
Pension and postretirement benefit plans
|
|
|
97,914
|
|
|
|
78,859
|
|
Cellulosic biofuel tax reserve
|
|
|
102,051
|
|
|
|
|
|
Other long-term liabilities
|
|
|
29,629
|
|
|
|
27,700
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
809,715
|
|
|
|
883,038
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock (par value $0.01 per share, 300,000,000 shares
authorized, 102,308,231 and 103,018,358 shares issued as of
December 31, 2010 and 2009, respectively)
|
|
|
1,023
|
|
|
|
1,030
|
|
Additional paid in capital
|
|
|
362,248
|
|
|
|
387,496
|
|
Retained earnings
|
|
|
690,111
|
|
|
|
546,355
|
|
Accumulated other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on treasury locks, net
|
|
|
2,164
|
|
|
|
4,512
|
|
Unrealized loss on foreign exchange contracts
|
|
|
(607
|
)
|
|
|
|
|
Unfunded employee benefit obligations
|
|
|
(45,938
|
)
|
|
|
(40,548
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss
|
|
|
(44,381
|
)
|
|
|
(36,036
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,009,001
|
|
|
|
898,845
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,224,274
|
|
|
$
|
2,152,840
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
Packaging
Corporation of America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
2,435,606
|
|
|
$
|
2,147,589
|
|
|
$
|
2,360,493
|
|
Cost of sales
|
|
|
(1,903,406
|
)
|
|
|
(1,721,012
|
)
|
|
|
(1,869,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
532,200
|
|
|
|
426,577
|
|
|
|
491,358
|
|
Selling and administrative expenses
|
|
|
(182,489
|
)
|
|
|
(173,445
|
)
|
|
|
(173,257
|
)
|
Corporate overhead
|
|
|
(58,100
|
)
|
|
|
(54,580
|
)
|
|
|
(61,030
|
)
|
Alternative fuel mixture tax credits
|
|
|
(86,265
|
)
|
|
|
168,437
|
|
|
|
|
|
Other expense, net
|
|
|
(19,964
|
)
|
|
|
(14,535
|
)
|
|
|
(15,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
185,382
|
|
|
|
352,454
|
|
|
|
241,812
|
|
Interest expense, net
|
|
|
(32,278
|
)
|
|
|
(35,483
|
)
|
|
|
(31,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
153,104
|
|
|
|
316,971
|
|
|
|
210,143
|
|
Benefit (provision) for income taxes
|
|
|
52,331
|
|
|
|
(51,076
|
)
|
|
|
(74,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
205,435
|
|
|
$
|
265,895
|
|
|
$
|
135,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
101,678
|
|
|
|
101,577
|
|
|
|
102,753
|
|
Diluted
|
|
|
102,608
|
|
|
|
102,358
|
|
|
|
103,593
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.02
|
|
|
$
|
2.62
|
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.00
|
|
|
$
|
2.60
|
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.60
|
|
|
$
|
0.60
|
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
Packaging
Corporation of America
For
the Period January 1, 2008 through December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
Balance at January 1, 2008
|
|
|
105,018,679
|
|
|
$
|
1,050
|
|
|
$
|
432,916
|
|
|
$
|
334,060
|
|
|
$
|
(7,165
|
)
|
|
$
|
760,861
|
|
Common stock repurchases and retirements
|
|
|
(3,142,600
|
)
|
|
|
(31
|
)
|
|
|
(65,635
|
)
|
|
|
|
|
|
|
|
|
|
|
(65,666
|
)
|
Common stock dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(124,219
|
)
|
|
|
|
|
|
|
(124,219
|
)
|
Restricted stock grants and cancellations
|
|
|
369,560
|
|
|
|
4
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
(80
|
)
|
Exercise of stock options
|
|
|
152,313
|
|
|
|
1
|
|
|
|
3,212
|
|
|
|
|
|
|
|
|
|
|
|
3,213
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
8,695
|
|
|
|
|
|
|
|
|
|
|
|
8,695
|
|
Effects of changing the pension and postretirement benefit plans
measurement date pursuant to
ASC 715-20-65:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,609
|
|
|
|
|
|
|
|
135,609
|
|
Amortization of treasury locks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,407
|
)
|
|
|
(2,407
|
)
|
Settlement of treasury lock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,386
|
)
|
|
|
(4,386
|
)
|
Amortization of unfunded employee benefit obligations, net of
tax of $1.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,975
|
|
|
|
1,975
|
|
Unfunded employee benefit obligations, net of tax of
$17.0 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,765
|
)
|
|
|
(26,765
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (restated, see Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
102,397,952
|
|
|
|
1,024
|
|
|
|
379,104
|
|
|
|
342,072
|
|
|
|
(38,251
|
)
|
|
|
683,949
|
|
Common stock dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,612
|
)
|
|
|
|
|
|
|
(61,612
|
)
|
Restricted stock grants and cancellations
|
|
|
434,605
|
|
|
|
4
|
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
(218
|
)
|
Exercise of stock options
|
|
|
185,801
|
|
|
|
2
|
|
|
|
2,243
|
|
|
|
|
|
|
|
|
|
|
|
2,245
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
6,371
|
|
|
|
|
|
|
|
|
|
|
|
6,371
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265,895
|
|
|
|
|
|
|
|
265,895
|
|
Amortization of treasury locks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,846
|
)
|
|
|
(1,846
|
)
|
Amortization of unfunded employee benefit obligations, net of
tax of $2.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,304
|
|
|
|
3,304
|
|
Unfunded employee benefit obligations, net of tax of
$0.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
757
|
|
|
|
757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (restated, see Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
268,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
103,018,358
|
|
|
|
1,030
|
|
|
|
387,496
|
|
|
|
546,355
|
|
|
|
(36,036
|
)
|
|
|
898,845
|
|
Common stock repurchases and retirements
|
|
|
(1,665,392
|
)
|
|
|
(17
|
)
|
|
|
(38,884
|
)
|
|
|
|
|
|
|
|
|
|
|
(38,901
|
)
|
Common stock dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,679
|
)
|
|
|
|
|
|
|
(61,679
|
)
|
Restricted stock grants and cancellations
|
|
|
560,845
|
|
|
|
6
|
|
|
|
507
|
|
|
|
|
|
|
|
|
|
|
|
513
|
|
Exercise of stock options
|
|
|
394,420
|
|
|
|
4
|
|
|
|
8,033
|
|
|
|
|
|
|
|
|
|
|
|
8,037
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
7,006
|
|
|
|
|
|
|
|
|
|
|
|
7,006
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(1,910
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,910
|
)
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
205,435
|
|
|
|
|
|
|
|
205,435
|
|
Amortization of treasury locks, net of tax of $0.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,309
|
)
|
|
|
(1,309
|
)
|
Unrealized losses on treasury locks, net of tax of
$1.9 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,039
|
)
|
|
|
(1,039
|
)
|
Unrealized losses on foreign currency exchange contracts, net of
tax of $0.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(607
|
)
|
|
|
(607
|
)
|
Amortization of unfunded employee benefit obligations, net of
tax of $2.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,583
|
|
|
|
3,583
|
|
Unfunded employee benefit obligations, net of tax of
$5.7 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,973
|
)
|
|
|
(8,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
102,308,231
|
|
|
$
|
1,023
|
|
|
$
|
362,248
|
|
|
$
|
690,111
|
|
|
$
|
(44,381
|
)
|
|
$
|
1,009,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
Packaging
Corporation of America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
205,435
|
|
|
$
|
265,895
|
|
|
$
|
135,609
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
156,298
|
|
|
|
151,217
|
|
|
|
147,769
|
|
Amortization of financing costs
|
|
|
648
|
|
|
|
772
|
|
|
|
685
|
|
Amortization of net gain on treasury lock
|
|
|
(1,846
|
)
|
|
|
(1,846
|
)
|
|
|
(2,407
|
)
|
Share-based compensation expense
|
|
|
7,006
|
|
|
|
7,261
|
|
|
|
8,695
|
|
Deferred income tax provision
|
|
|
(120,579
|
)
|
|
|
(13,819
|
)
|
|
|
(10,814
|
)
|
Loss on disposals of property, plant and equipment
|
|
|
8,865
|
|
|
|
6,605
|
|
|
|
5,825
|
|
Alternative fuel mixture tax credits receivable
|
|
|
127,811
|
|
|
|
(127,811
|
)
|
|
|
|
|
Changes in operating assets and liabilities (net of effects of
acquisitions):
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(50,256
|
)
|
|
|
13,602
|
|
|
|
21,023
|
|
Inventories
|
|
|
(28,352
|
)
|
|
|
(5,498
|
)
|
|
|
(2,598
|
)
|
Prepaid expenses and other current assets
|
|
|
(3,956
|
)
|
|
|
(9,458
|
)
|
|
|
(8
|
)
|
Increase (decrease) in liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
25,367
|
|
|
|
22,475
|
|
|
|
(31,133
|
)
|
Accrued liabilities
|
|
|
11,254
|
|
|
|
4,764
|
|
|
|
(9,855
|
)
|
Other, net
|
|
|
12,225
|
|
|
|
(8,028
|
)
|
|
|
6,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
349,920
|
|
|
|
306,131
|
|
|
|
269,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(320,200
|
)
|
|
|
(114,197
|
)
|
|
|
(132,972
|
)
|
Additions to other long term assets
|
|
|
(2,627
|
)
|
|
|
(2,105
|
)
|
|
|
(3,267
|
)
|
Acquisition of business, net of cash acquired
|
|
|
|
|
|
|
(3,136
|
)
|
|
|
|
|
Proceeds from disposals of property, plant and equipment
|
|
|
1,513
|
|
|
|
114
|
|
|
|
1,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(321,314
|
)
|
|
|
(119,324
|
)
|
|
|
(134,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
|
|
|
|
|
|
|
|
149,939
|
|
Payments on long-term debt
|
|
|
(626
|
)
|
|
|
(606
|
)
|
|
|
(170,320
|
)
|
Financing costs paid
|
|
|
|
|
|
|
|
|
|
|
(1,176
|
)
|
Settlement of treasury lock
|
|
|
|
|
|
|
|
|
|
|
(4,386
|
)
|
Common stock dividends paid
|
|
|
(61,798
|
)
|
|
|
(76,898
|
)
|
|
|
(125,057
|
)
|
Repurchases of common stock
|
|
|
(38,901
|
)
|
|
|
|
|
|
|
(65,666
|
)
|
Proceeds from exercise of stock options
|
|
|
7,496
|
|
|
|
1,615
|
|
|
|
2,410
|
|
Excess tax benefits from share-based awards
|
|
|
1,052
|
|
|
|
412
|
|
|
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(92,777
|
)
|
|
|
(75,477
|
)
|
|
|
(213,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(64,171
|
)
|
|
|
111,330
|
|
|
|
(78,746
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
260,727
|
|
|
|
149,397
|
|
|
|
228,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
196,556
|
|
|
$
|
260,727
|
|
|
$
|
149,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-7
Packaging
Corporation of America
December 31,
2010
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 88,000 acres of timberland
as of December 31, 2010. The Mills transfer the majority of
their containerboard produced to PCAs corrugated products
plants.
PCAs corrugated manufacturing operations consist of 67
plants, with 39 operating as combining operations, or corrugated
plants, and 28 as sheet plants; a technical and development
center; six 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, 2010, PCA had approximately
8,100 employees. Approximately 2,500 of these employees
were salaried and approximately 5,600 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 (88% of mill hourly
workforce) were extended five years. With this extension, the
USW contracts at the Companys mills are currently set to
expire between September 2013 and June 2015. Agreements with
other union mill employees (12% of mill hourly workforce) expire
between June 2012 and October 2014. Based on an agreement
reached with the USW in April 2009, the labor agreement at 25
corrugated plants covering USW represented employees was
extended up to five years. Contracts for unionized corrugated
products plant employees expire between March 2011 and
October 2015. 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,
2010
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
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 the Company), 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, 2010 and 2009, the allowance for doubtful
accounts was $2.5 million and $3.9 million,
respectively. The reserve for customer deductions of
$2.9 million and $2.4 million at December 31,
2010 and 2009, respectively, are also included as a reduction of
the accounts receivable balance.
Inventories
With the exception of inventories at PCAs Chicago
corrugated products plants, which were acquired in 2004 and
2009, raw materials, work in process and finished goods are
valued using the
last-in,
first-out (LIFO) cost method. Inventories at the
Chicago plants 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 $199.5 million and $169.2 million,
respectively, as of December 31, 2010 and 2009, compared to
total inventory values (before the LIFO inventory reserve) of
$309.2 million and $275.9 million for the same
respective periods.
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
126,401
|
|
|
$
|
101,429
|
|
Work in process
|
|
|
6,395
|
|
|
|
6,600
|
|
Finished goods
|
|
|
73,710
|
|
|
|
66,994
|
|
Supplies and materials
|
|
|
102,720
|
|
|
|
100,919
|
|
|
|
|
|
|
|
|
|
|
Inventories at FIFO or average cost
|
|
|
309,226
|
|
|
|
275,942
|
|
Excess of FIFO or average cost over LIFO cost
|
|
|
(68,084
|
)
|
|
|
(62,546
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
241,142
|
|
|
$
|
213,396
|
|
|
|
|
|
|
|
|
|
|
F-9
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
Property,
Plant and Equipment
Property, plant and equipment are recorded at cost, and consist
of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Land and land improvements
|
|
$
|
98,197
|
|
|
$
|
98,066
|
|
Buildings
|
|
|
350,301
|
|
|
|
341,344
|
|
Machinery and equipment
|
|
|
2,753,258
|
|
|
|
2,665,876
|
|
Construction in progress
|
|
|
212,931
|
|
|
|
53,006
|
|
Other
|
|
|
24,834
|
|
|
|
25,322
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost
|
|
|
3,439,521
|
|
|
|
3,183,614
|
|
Less accumulated depreciation
|
|
|
(2,101,535
|
)
|
|
|
(2,001,110
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
1,337,986
|
|
|
$
|
1,182,504
|
|
|
|
|
|
|
|
|
|
|
The amount of interest capitalized related to construction in
progress was $4.8 million, $0.9 million and
$1.3 million for the years ended December 31, 2010,
2009 and 2008, 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
|
|
|
|
|
Period of the lease or
|
|
Leasehold improvements
|
|
|
useful life, if shorter
|
|
The amount of depreciation expense was $154.0 million,
$148.2 million and $143.3 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
Expenditures for repairs and maintenance are expensed as
incurred.
Pursuant to the terms of an industrial revenue bond, title to
certain property, plant and equipment was transferred to a
municipal development authority in order to receive a property
tax abatement. The title of these assets will revert back to PCA
upon retirement or cancellation of the bond. The assets are
included in the consolidated balance sheet under the caption
Property, plant and equipment, net as all risks and
rewards remain with the Company.
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.
F-10
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
Goodwill, which amounted to $38.9 million as of both
December 31, 2010 and 2009, is not being amortized but is
subject to an annual impairment test in accordance with
Accounting Standards Codification (ASC) 350,
Intangibles Goodwill and Other. The
Company performs the impairment test 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 concluded that no impairment of goodwill existed at the
time of the annual impairment tests in 2010, 2009 and 2008.
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
$1.3 million and $1.8 million as of December 31,
2010 and 2009, respectively.
PCA leases the cutting rights to approximately 88,000 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 $24.5 million and
$22.9 million as of December 31, 2010 and 2009,
respectively. The amount of depletion expense was
$0.5 million, $1.2 million and $1.4 million for
the years ended December 31, 2010, 2009 and 2008,
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
$1.5 million as of both December 31, 2010 and 2009,
respectively. Software amortization expense was
$0.6 million, $0.5 million and $0.3 million for
the years ended December 31, 2010, 2009 and 2008,
respectively.
Impairment
of Long-Lived Assets
Long-lived assets other than goodwill are reviewed for
impairment in accordance with provisions of ASC 360,
Property, Plant and Equipment. 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 2010, 2009 and
2008.
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.
F-11
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
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.
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 ASC 410, Asset Retirement and
Environmental 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.
Fair
Value of Financial Instruments
PCA measures the fair value of its financial instruments in
accordance with ASC 820, Fair Value Measurements and
Disclosures. The guidance defines fair value as the price
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants.
It is determined based on assumptions that market participants
would use in pricing an asset or liability. As a basis for
considering such assumptions, ASC 820 establishes the
following hierarchy that prioritizes the inputs to valuation
methodologies used to measure fair value:
Level 1 Valuations based on quoted prices for
identical assets and liabilities in active markets.
Level 2 Valuations based on observable inputs
other than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets and liabilities in
markets that are not active, or other inputs that are observable
or can be corroborated by observable market data.
Level 3 Valuations based on unobservable inputs
in which there is little or no market data, which require the
reporting entity to develop its own assumptions.
The Company measures the fair value of money market funds based
on quoted prices in active markets for identical assets or
liabilities. See Note 6 for information about PCAs
pension plans assets measured at fair value and
Note 11 for information about PCAs assets and
liabilities measured at fair value.
F-12
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
Planned
Major Maintenance Activities
The Company accounts for its planned major maintenance
activities in accordance with ASC 360, Property,
Plant, and Equipment, 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 $10.9 million,
$9.4 million and $8.3 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
Interest
Expense, Net
Interest expense, net, includes interest income of
$0.04 million, $0.1 million and $5.2 million for
the years ended December 31, 2010, 2009 and 2008,
respectively, and amortization of the net gain on treasury lock
settlements in July 2003 and March 2008 of $1.8 million for
both 2010 and 2009 and $2.4 million in 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 revenue is 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
ASC 815, Derivatives and Hedging. The guidance
requires the Company to recognize derivative instruments as
either assets or liabilities in the balance sheet at fair value.
The accounting for changes in the fair value of a derivative
depends on the intended use and designation of the derivative
instrument. For a derivative designated as a fair value hedge,
the gain or loss
F-13
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
on the derivative is recognized in earnings in the period of
change in fair value together with the offsetting gain or loss
on the hedged item. For a derivative instrument designated as a
cash flow hedge, the effective portion of the derivatives
gain or loss is initially reported as a component of accumulated
other comprehensive income (loss) (OCI) and is
subsequently recognized in earnings when the hedged exposure
affects earnings. The ineffective portion of the gain or loss is
recognized in earnings.
Recent
Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU)
2010-28,
Intangibles Goodwill and Other (Topic
350) When to Perform Step 2 of the Goodwill
Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts. This ASU modifies Step 1 of the goodwill
impairment test for reporting units with zero or negative
carrying amounts. For such reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it
is more likely than not that a goodwill impairment exists. ASU
2010-28 is
effective for fiscal years, and interim periods within those
years, beginning after December 15, 2010. Early adoption is
not permitted. The Company does not expect the adoption of this
guidance to have any impact on its financial position, results
of operations or cash flows.
In January 2010, the FASB issued ASU
2010-06,
Fair Value Measurements and Disclosures (Topic
820) Improving Disclosures about Fair Value
Measurements. This ASU requires some new disclosures and
clarifies some existing disclosure requirements about fair value
measurement as set forth in Accounting Standards Codification
(ASC) 820. ASU
2010-06
amends ASC 820 to now require: (1) a reporting entity
should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers; and
(2) in the reconciliation for fair value measurements using
significant unobservable inputs, a reporting entity should
present separately information about purchases, sales,
issuances, and settlements. In addition, ASU
2010-06
clarifies the requirements of existing disclosures. ASU
2010-06 is
effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward
of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those
fiscal years. The Company adopted this guidance on
January 1, 2010. See Note 11 for additional
information.
In December 2009, the FASB issued ASU
2009-16,
Transfers and Servicing (Topic 860) Accounting
for Transfers of Financial Assets, which formally codifies
FASB Statement No. 166, Accounting for Transfers of
Financial Assets, into the FASB Accounting Standards
Codification. ASU
2009-16
revises the provisions of former FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, and will require more
information about transfers of financial assets, including
securitization transactions, and where entities have continuing
exposure to the risks related to transferred financial assets.
ASU 2009-16
is effective at the start of a reporting entitys first
fiscal year beginning after November 15, 2009. Early
application is not permitted. The Company adopted this guidance
on January 1, 2010. See Note 8 for additional
information.
F-14
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
The following table sets forth the computation of basic and
diluted income per common share for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
205,435
|
|
|
$
|
265,895
|
|
|
$
|
135,609
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common shares outstanding
|
|
|
101,678
|
|
|
|
101,577
|
|
|
|
102,753
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
238
|
|
|
|
74
|
|
|
|
317
|
|
Unvested restricted stock
|
|
|
692
|
|
|
|
707
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common shares outstanding
|
|
|
102,608
|
|
|
|
102,358
|
|
|
|
103,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
2.02
|
|
|
$
|
2.62
|
|
|
$
|
1.32
|
|
Diluted income per common share
|
|
$
|
2.00
|
|
|
$
|
2.60
|
|
|
$
|
1.31
|
|
Options to purchase 0.6 million shares, 1.8 million
shares, and 0.7 million shares at December 31, 2010,
2009, and 2008, respectively, were not included in the
computation of diluted common shares outstanding as their
exercise price exceeded the average market price of the
Companys common stock for the respective reporting period.
|
|
4.
|
STOCK-BASED
COMPENSATION
|
In October 1999, the Company adopted a long-term equity
incentive plan, which provides for grants of stock options,
stock appreciation rights, restricted stock and performance
awards to directors, officers and employees of PCA, as well as
others who engage in services for PCA. Option awards granted to
directors, officers and employees have contractual lives of
seven or ten years. Options granted to officers and employees
vest ratably over a three-year period, and options granted to
directors vest immediately. Restricted stock awards granted to
employees vest at the end of a four-year period, and restricted
stock awards granted to directors vest at the end of a six-month
period. The plan, which will terminate on October 19, 2014,
provides for the issuance of up to 8,550,000 shares of
common stock over the life of the plan. As of December 31,
2010, options and restricted stock for 7,089,531 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.
F-15
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
Compensation expense for both stock options, which were fully
vested at June 30, 2010, and restricted stock recognized in
the consolidated statements of income for the years ended
December 31, 2010, 2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Stock options
|
|
$
|
226
|
|
|
$
|
720
|
|
|
$
|
1,457
|
|
Restricted stock
|
|
|
6,780
|
|
|
|
6,541
|
|
|
|
7,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on income before income taxes
|
|
|
7,006
|
|
|
|
7,261
|
|
|
|
8,695
|
|
Income tax benefit
|
|
|
(2,721
|
)
|
|
|
(2,827
|
)
|
|
|
(3,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on net income
|
|
$
|
4,285
|
|
|
$
|
4,434
|
|
|
$
|
5,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses the Black-Scholes-Merton option-pricing model
to estimate the fair value of each option grant as of the date
of grant. Expected volatilities are based on historical
volatility of the Companys common stock. The expected life
of the option is estimated using historical data pertaining to
option exercises and employee terminations. Separate groups of
employees that have similar historical exercise behavior are
considered separately for estimating the expected life. The
risk-free interest rate is based on U.S. Treasury yields in
effect at the time of grant. The fair value of restricted stock
is determined based on the closing price of the Companys
common stock on the grant date. There were no option grants in
2010, 2009 or 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, 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
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(185,801
|
)
|
|
|
8.69
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(67,930
|
)
|
|
|
19.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
1,973,301
|
|
|
|
20.92
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(394,420
|
)
|
|
|
19.01
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(10,497
|
)
|
|
|
24.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2010
|
|
|
1,568,384
|
|
|
$
|
21.38
|
|
|
|
2.4
|
|
|
$
|
6,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the years
ended December 31, 2010, 2009, and 2008 was
$2.4 million, $1.7 million, and $1.4 million,
respectively. As of December 31, 2010, there is no
unrecognized compensation cost related to stock option awards
granted under the Companys equity incentive plan as all
outstanding awards have vested.
F-16
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
A summary of the Companys restricted stock activity
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
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
|
|
|
1,235,505
|
|
|
$
|
24,718
|
|
|
|
1,038,270
|
|
|
$
|
23,023
|
|
|
|
764,705
|
|
|
$
|
17,490
|
|
Granted
|
|
|
573,440
|
|
|
|
12,693
|
|
|
|
444,985
|
|
|
|
6,995
|
|
|
|
374,455
|
|
|
|
7,947
|
|
Vested
|
|
|
(318,350
|
)
|
|
|
(6,563
|
)
|
|
|
(237,370
|
)
|
|
|
(5,079
|
)
|
|
|
(95,995
|
)
|
|
|
(2,304
|
)
|
Cancellations
|
|
|
(12,595
|
)
|
|
|
(248
|
)
|
|
|
(10,380
|
)
|
|
|
(221
|
)
|
|
|
(4,895
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock at December 31
|
|
|
1,478,000
|
|
|
$
|
30,600
|
|
|
|
1,235,505
|
|
|
$
|
24,718
|
|
|
|
1,038,270
|
|
|
$
|
23,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, there was $15.3 million 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 2.8 years.
The components of accrued liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Bonuses and incentives and related payroll taxes
|
|
$
|
34,929
|
|
|
$
|
30,189
|
|
Customer volume discounts and rebates
|
|
|
17,631
|
|
|
|
18,367
|
|
Medical insurance and workers compensation
|
|
|
16,242
|
|
|
|
17,779
|
|
Vacation and holiday pay
|
|
|
16,012
|
|
|
|
15,379
|
|
Franchise, property, sales and use taxes
|
|
|
8,615
|
|
|
|
9,002
|
|
Current portion of pension and postretirement benefits
|
|
|
5,253
|
|
|
|
4,448
|
|
Payroll and payroll taxes
|
|
|
5,138
|
|
|
|
4,495
|
|
Other
|
|
|
7,388
|
|
|
|
6,764
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
111,208
|
|
|
$
|
106,423
|
|
|
|
|
|
|
|
|
|
|
|
|
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
F-17
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
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 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.
PCA previously maintained a separate SERP for its former CEO and
current Executive Chairman which was paid out and terminated on
March 15, 2009. The terminated plan was replaced by a lower
cost deferred compensation benefit plan.
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.
F-18
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
The following tables provide information related to the
Companys pension and postretirement benefit plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
|
$
|
203,292
|
|
|
$
|
178,455
|
|
|
$
|
129,913
|
|
|
$
|
20,080
|
|
|
$
|
17,300
|
|
|
$
|
13,342
|
|
Service cost(1)
|
|
|
18,315
|
|
|
|
17,955
|
|
|
|
22,224
|
|
|
|
1,399
|
|
|
|
1,341
|
|
|
|
1,334
|
|
Interest cost(1)
|
|
|
12,091
|
|
|
|
10,208
|
|
|
|
9,785
|
|
|
|
1,130
|
|
|
|
1,022
|
|
|
|
985
|
|
Plan amendments
|
|
|
837
|
|
|
|
7,168
|
|
|
|
14,570
|
|
|
|
|
|
|
|
|
|
|
|
616
|
|
Actuarial loss (gain)
|
|
|
15,153
|
|
|
|
701
|
|
|
|
3,442
|
|
|
|
1,931
|
|
|
|
987
|
|
|
|
1,877
|
|
Participant contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
838
|
|
|
|
656
|
|
|
|
575
|
|
Benefits paid
|
|
|
(2,703
|
)
|
|
|
(11,195
|
)
|
|
|
(1,479
|
)
|
|
|
(2,163
|
)
|
|
|
(1,226
|
)
|
|
|
(1,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at plan year end
|
|
$
|
246,985
|
|
|
$
|
203,292
|
|
|
$
|
178,455
|
|
|
$
|
23,215
|
|
|
$
|
20,080
|
|
|
$
|
17,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation portion of above
|
|
$
|
214,676
|
|
|
$
|
171,384
|
|
|
$
|
143,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Fair Value of Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at fair value at beginning of period
|
|
$
|
140,065
|
|
|
$
|
97,248
|
|
|
$
|
87,321
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
14,457
|
|
|
|
18,590
|
|
|
|
(16,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company contributions
|
|
|
15,214
|
|
|
|
35,422
|
|
|
|
27,522
|
|
|
|
1,325
|
|
|
|
570
|
|
|
|
854
|
|
Participant contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
838
|
|
|
|
656
|
|
|
|
575
|
|
Benefits paid
|
|
|
(2,703
|
)
|
|
|
(11,195
|
)
|
|
|
(1,479
|
)
|
|
|
(2,163
|
)
|
|
|
(1,226
|
)
|
|
|
(1,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at plan year end
|
|
$
|
167,033
|
|
|
$
|
140,065
|
|
|
$
|
97,248
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Service cost and interest cost for 2008 include amounts for the
period October 1 December 31, 2007. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Development of Net Amount Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation in excess of plan assets at December 31
|
|
$
|
(79,952
|
)
|
|
$
|
(63,227
|
)
|
|
$
|
(23,215
|
)
|
|
$
|
(20,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in Statement of Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
(4,107
|
)
|
|
$
|
(3,586
|
)
|
|
$
|
(1,146
|
)
|
|
$
|
(862
|
)
|
Noncurrent liabilities
|
|
|
(75,845
|
)
|
|
|
(59,641
|
)
|
|
|
(22,069
|
)
|
|
|
(19,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit recognized at December 31
|
|
$
|
(79,952
|
)
|
|
$
|
(63,227
|
)
|
|
$
|
(23,215
|
)
|
|
$
|
(20,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in Accumulated Other Comprehensive Income
(Loss), Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
25,957
|
|
|
$
|
28,897
|
|
|
$
|
(734
|
)
|
|
$
|
(988
|
)
|
Actuarial loss
|
|
|
15,714
|
|
|
|
8,608
|
|
|
|
5,001
|
|
|
|
4,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,671
|
|
|
$
|
37,505
|
|
|
$
|
4,267
|
|
|
$
|
3,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2009 and 2008 prior year presentation of total comprehensive
income incorrectly omitted the change in unfunded employee
benefit obligations of $0.8 million and $26.8 million,
respectively. The Company restated the previously reported total
comprehensive income herein to correct for this error. The
correction has no impact on the consolidated balance sheets,
statements of income or total stockholders equity
previously reported.
F-19
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost for benefits earned during the year
|
|
$
|
18,315
|
|
|
$
|
17,955
|
|
|
$
|
17,779
|
|
|
$
|
1,399
|
|
|
$
|
1,341
|
|
|
$
|
1,067
|
|
Interest cost on accumulated benefit obligation
|
|
|
12,091
|
|
|
|
10,208
|
|
|
|
7,828
|
|
|
|
1,130
|
|
|
|
1,022
|
|
|
|
788
|
|
Expected return on plan assets
|
|
|
(11,207
|
)
|
|
|
(8,573
|
)
|
|
|
(8,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amortization of unrecognized amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
5,685
|
|
|
|
4,903
|
|
|
|
3,326
|
|
|
|
(416
|
)
|
|
|
(416
|
)
|
|
|
(472
|
)
|
Actuarial loss
|
|
|
247
|
|
|
|
803
|
|
|
|
3,676
|
|
|
|
342
|
|
|
|
328
|
|
|
|
233
|
|
Other
|
|
|
|
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
25,131
|
|
|
$
|
25,170
|
|
|
$
|
24,031
|
|
|
$
|
2,455
|
|
|
$
|
2,275
|
|
|
$
|
1,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2011, the Company expects
to recognize in net periodic benefit cost $5.8 million
($3.5 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 $0.4 million
($0.3 million net of tax) of actuarial loss for both the
pension and postretirement plans, which is included in
accumulated other comprehensive income (loss) at
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Weighted-Average Assumptions Used to Determine Benefit
Obligations at December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.50
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
5.25
|
%
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
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
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
Expected return on plan assets
|
|
|
7.75
|
%
|
|
|
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
|
|
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
F-20
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
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.
The Company assumed health care cost trend rates for its
postretirement benefits plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Health care cost trend rate assumed for next year
|
|
|
7.50
|
%
|
|
|
7.50
|
%
|
|
|
7.50
|
%
|
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
A one-percentage point change in assumed health care cost trend
rates would have the following effects on the 2010
postretirement benefit obligation and the 2010 net post
retirement benefit cost:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage
|
|
1-Percentage
|
|
|
Point Increase
|
|
Point Decrease
|
|
|
(In thousands)
|
|
Effect on postretirement benefit obligation
|
|
$
|
681
|
|
|
$
|
(606
|
)
|
Effect on net postretirement benefit cost
|
|
|
69
|
|
|
|
(60
|
)
|
PCA has retained the services of a professional advisor to
oversee 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. Pension
plans assets were invested in the following classes of
securities at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
of Fair Value
|
|
|
|
2010
|
|
|
2009
|
|
|
Equity securities
|
|
|
39
|
%
|
|
|
39
|
%
|
Debt securities
|
|
|
60
|
%
|
|
|
60
|
%
|
Other
|
|
|
1
|
%
|
|
|
1
|
%
|
F-21
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
The fair values of PCAs pension plans assets at
December 31, 2010 and 2009, measured on a recurring basis,
by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010
|
|
|
|
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for identical
|
|
|
Observable
|
|
|
Unobservable
|
|
Asset Category
|
|
Total
|
|
|
Assets (Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
|
|
(In thousands)
|
|
|
Short-term investments
|
|
$
|
1,320
|
|
|
$
|
|
|
|
$
|
1,320
|
|
|
$
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large value
|
|
|
10,594
|
|
|
|
10,594
|
|
|
|
|
|
|
|
|
|
U.S. large growth
|
|
|
8,519
|
|
|
|
8,519
|
|
|
|
|
|
|
|
|
|
U.S. mid-cap value
|
|
|
1,871
|
|
|
|
1,871
|
|
|
|
|
|
|
|
|
|
U.S. mid-cap growth
|
|
|
3,486
|
|
|
|
3,486
|
|
|
|
|
|
|
|
|
|
U.S. small blend
|
|
|
3,394
|
|
|
|
|
|
|
|
3,394
|
|
|
|
|
|
Foreign large blend
|
|
|
26,616
|
|
|
|
26,616
|
|
|
|
|
|
|
|
|
|
Diversified emerging markets
|
|
|
5,219
|
|
|
|
5,219
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
5,095
|
|
|
|
5,095
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government bonds
|
|
|
21,088
|
|
|
|
|
|
|
|
21,088
|
|
|
|
|
|
Corporate bonds
|
|
|
79,831
|
|
|
|
33,240
|
|
|
|
46,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
167,033
|
|
|
$
|
94,640
|
|
|
$
|
72,393
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009
|
|
|
|
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for identical
|
|
|
Observable
|
|
|
Unobservable
|
|
Asset Category
|
|
Total
|
|
|
Assets (Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
|
|
(In thousands)
|
|
|
Short-term investments
|
|
$
|
1,212
|
|
|
$
|
|
|
|
$
|
1,212
|
|
|
$
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large value
|
|
|
8,573
|
|
|
|
8,573
|
|
|
|
|
|
|
|
|
|
U.S. large growth
|
|
|
7,287
|
|
|
|
7,287
|
|
|
|
|
|
|
|
|
|
U.S. mid-cap value
|
|
|
2,948
|
|
|
|
2,948
|
|
|
|
|
|
|
|
|
|
U.S. mid-cap growth
|
|
|
2,994
|
|
|
|
2,994
|
|
|
|
|
|
|
|
|
|
U.S. small blend
|
|
|
1,519
|
|
|
|
|
|
|
|
1,519
|
|
|
|
|
|
Foreign large blend
|
|
|
21,310
|
|
|
|
21,310
|
|
|
|
|
|
|
|
|
|
Diversified emerging markets
|
|
|
5,854
|
|
|
|
5,854
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
4,416
|
|
|
|
4,416
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government bonds
|
|
|
12,761
|
|
|
|
|
|
|
|
12,761
|
|
|
|
|
|
Corporate bonds
|
|
|
71,191
|
|
|
|
41,161
|
|
|
|
30,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
140,065
|
|
|
$
|
94,543
|
|
|
$
|
45,522
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
F-22
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
required minimum amounts. PCA currently expects to make pension
contributions of $22.1 million and record pension plan
expense of $25.9 million in 2011.
The following are estimated benefit payments to be paid to
current plan participants by year:
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
(In thousands)
|
|
|
2011
|
|
$
|
4,107
|
|
|
$
|
1,146
|
|
2012
|
|
|
5,406
|
|
|
|
1,113
|
|
2013
|
|
|
6,787
|
|
|
|
1,232
|
|
2014
|
|
|
8,236
|
|
|
|
1,378
|
|
2015
|
|
|
9,801
|
|
|
|
1,535
|
|
2016 2020
|
|
|
75,123
|
|
|
|
9,804
|
|
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 $9.6 million,
$9.4 million and $9.4 million during the years ended
December 31, 2010, 2009 and 2008, 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 $3.1 million, $2.8 million and
$2.5 million for this retirement contribution during the
years ended December 31, 2010, 2009 and 2008, respectively.
|
|
7.
|
OTHER
INTANGIBLE ASSETS
|
The components of other intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
As of December 31, 2010
|
|
|
As of December 31, 2009
|
|
|
|
Remaining
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
|
|
|
(In thousands)
|
|
|
Customer lists and relations
|
|
|
31.6 years
|
|
|
$
|
17,441
|
|
|
$
|
6,466
|
|
|
$
|
17,441
|
|
|
$
|
5,651
|
|
Covenants not to compete
|
|
|
|
|
|
|
2,292
|
|
|
|
2,292
|
|
|
|
2,292
|
|
|
|
2,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
|
|
|
$
|
19,733
|
|
|
$
|
8,758
|
|
|
$
|
19,733
|
|
|
$
|
7,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of amortization expense was $0.8 million,
$0.9 million, and $1.1 million for the years ended
December 31, 2010, 2009 and 2008, respectively. Estimated
amortization of intangible assets over the next five years is
expected to approximate $0.6 million (2011),
$0.5 million (2012), $0.4 million (2013),
$0.3 million (2014) and $0.3 million (2015).
F-23
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
A summary of debt is set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Receivables credit facility, effective interest rate of 1.56%
and 1.97% as of December 31, 2010 and 2009, respectively,
due March 1, 2011
|
|
$
|
109,000
|
|
|
$
|
109,000
|
|
Senior notes, net of discount of $857 and $1,200 as of
December 31, 2010 and 2009, respectively, interest at 5.75%
payable semi-annually, due August 1, 2013
|
|
|
399,143
|
|
|
|
398,800
|
|
Senior notes, net of discount of $44 and $51 as of
December 31, 2010 and 2009, respectively, interest at 6.50%
payable semi-annually, due March 15, 2018
|
|
|
149,956
|
|
|
|
149,949
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
658,099
|
|
|
|
657,749
|
|
Less current portion
|
|
|
109,000
|
|
|
|
109,000
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
549,099
|
|
|
$
|
548,749
|
|
|
|
|
|
|
|
|
|
|
On July 21, 2003, PCA closed its offering and private
placement of $150.0 million of 4.375% senior notes
which were due 2008 and $400.0 million of 5.75% senior
notes due 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
4.375% 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 $18.8 million of outstanding letters of
credit under this facility, resulting in $131.2 million in
unused borrowing capacity as of December 31, 2010.
On April 14, 2010, the Company extended its
receivables-backed credit facility through March 1, 2011.
The Company had $41.0 million in additional borrowing
capacity available under this facility as of December 31,
2010.
The instruments governing PCAs indebtedness contain
financial and other 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 minimum net worth and maximum debt to
total capitalization and minimum interest coverage ratios. 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 senior credit facility.
Such an acceleration may also constitute an event of default
under the senior notes indenture and the receivables credit
facility. At December 31, 2010, the Company was in
compliance with these covenants.
F-24
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
Additional information regarding PCAs variable rate debt
is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Reference Interest Rate
|
|
|
Applicable Margin
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Receivables credit facility
|
|
|
0.26
|
%
|
|
|
0.27
|
%
|
|
|
1.30
|
%
|
|
|
1.70
|
%
|
As of December 31, 2010, annual principal maturities for
debt, excluding unamortized debt discount, are:
$109.0 million (2011), $400.0 million (2013) and
$150.0 million (2018).
Interest payments in connection with the Companys debt
obligations for the years ended December 31, 2010, 2009 and
2008, amounted to $35.3 million, $35.7 million, and
$38.9 million, respectively.
PCA has an on-balance sheet securitization program for its trade
accounts receivable that is accounted for as a secured borrowing
under ASC 860, Transfers and Servicing. To
effectuate this program, the Company formed a wholly owned
limited purpose subsidiary, Packaging Credit Company, LLC
(PCC), which in turn formed a wholly owned,
bankruptcy-remote, special-purpose subsidiary, Packaging
Receivables Company, LLC (PRC), for the purpose of
acquiring receivables from PCC. Both of these entities are
included in the consolidated financial statements of the
Company. Under this program, PCC purchases on an ongoing basis
substantially all of the receivables of the Company and sells
such receivables to PRC. PRC and lenders established a
$150.0 million receivables-backed revolving credit facility
(Receivables Credit Facility) through which PRC
obtains funds to purchase receivables from PCC. The receivables
purchased by PRC are solely the property of PRC. In the event of
liquidation of PRC, the creditors of PRC would be entitled to
satisfy their claims from PRCs assets prior to any
distribution to PCC or the Company. Credit available under the
receivables credit facility is on a borrowing-base formula. As a
result, the full amount of the facility may not be available at
all times. At December 31, 2010, $109.0 million was
outstanding and included in Short term debt
and current maturities of long term debt on
the consolidated balance sheet. Substantially all accounts
receivable at December 31, 2010 have been sold to PRC and
are included in Accounts receivable, net of allowance for
doubtful accounts and customer deductions on the
consolidated balance sheet. The highest outstanding principal
balance under the receivables credit facility during 2010 was
$109.0 million.
A summary of the Companys drawings under credit
facilities, including the impact of $18.8 million of
outstanding letters of credit, as of December 31, 2010
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
Utilized
|
|
|
Available
|
|
|
|
(In thousands)
|
|
|
Receivables credit facility
|
|
$
|
150,000
|
|
|
$
|
109,000
|
|
|
$
|
41,000
|
|
Senior revolving credit facility
|
|
|
150,000
|
|
|
|
18,832
|
|
|
|
131,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
300,000
|
|
|
$
|
127,832
|
|
|
$
|
172,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCA is required to pay commitment fees on the unused portions of
the credit facilities. The Companys outstanding letters of
credit of $18.8 million at December 31, 2010 are for
workers compensation.
|
|
9.
|
DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES
|
Hedging
Strategy
PCA is exposed to certain risks relating to its ongoing
operations. When appropriate, the Company uses derivatives as a
risk management tool to mitigate the potential impact of certain
market risks. The primary risks managed by using derivative
financial instruments are interest rate and foreign currency
exchange rate risks. PCA does not enter into derivative
financial instruments for trading or speculative purposes.
F-25
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
Interest
Rate Risk
The Company has historically used treasury lock derivative
instruments to manage interest costs and the risk associated
with changing interest rates. On June 12, 2003 and
January 17, 2008, in connection with contemplated issuances
of ten-year debt securities, PCA entered into interest rate
protection agreements with counterparties to protect against
increases in the ten-year U.S. Treasury Note rate. These
treasury rates served as references in determining the interest
rates applicable to the debt securities the Company issued in
July 2003 and March 2008, respectively. As a result of
changes in the interest rates on those treasury securities
between the time PCA entered into the agreements and the time
PCA priced and issued the debt securities, the Company:
(1) received a payment of $22.8 million from the
counterparty upon settlement of the 2003 interest rate
protection agreement on July 21, 2003; and (2) made a
payment of $4.4 million to the counterparty upon settlement
of the 2008 interest rate protection agreement on March 25,
2008. The Company recorded the settlements in accumulated other
comprehensive income (loss), which are amortized over the terms
of the respective notes.
On May 25, 2010, in connection with a contemplated issuance
of ten-year debt securities to eventually refinance PCAs
currently outstanding $400.0 million of senior notes that
mature in 2013, PCA entered into interest rate protection
agreements with counterparties to protect against increases in
the ten-year U.S. Treasury Note rate. The treasury rate
will serve as a reference in determining the interest rate
applicable to the new debt securities the Company expects to
issue in the future. The interest rate protection agreements
were properly documented and designated as cash flow hedges at
inception. At December 31, 2010, the Company had a notional
value of $400.0 million in interest rate protection
agreements outstanding that are expected to settle by the end of
2012.
Foreign
Currency Exchange Rate Risk
In connection with the energy optimization project at its
Valdosta, Georgia mill and Counce, Tennessee mill, the Company
entered into foreign currency forward contracts on July 27,
2010 and September 30, 2010 to hedge its exposure to
forecasted purchases of machinery and equipment denominated in
foreign currencies. The foreign currency forward contracts were
properly documented and designated as cash flow hedges at
inception. At December 31, 2010, the Company had a notional
value of $4.5 million in foreign currency exchange
contracts outstanding that are expected to settle by the end of
the third quarter 2011.
Counterparty
Credit Risk
The Company is exposed to credit risk in the event of
non-performance by counterparties to these derivative financial
instruments. The amount of counterparty credit exposure is the
unrealized gains, if any, on such derivative contracts. To
minimize credit risk, the Company only enters into these types
of transactions with investment grade counterparties. On a
quarterly basis, the Company evaluates each hedges net
position relative to the counterpartys ability to cover
its position. Although no assurances can be given, the Company
does not expect any of the counterparties to these derivative
financial instruments to fail to meet its obligations.
Derivative
Instruments
The fair value of the Companys treasury locks at
December 31, 2010 was $0.8 million, which is included
in Other long-term assets on the Companys
consolidated balance sheet at December 31, 2010. The fair
value of the foreign currency forward contracts was nominal at
December 31, 2010.
F-26
Packaging
Corporation of America
Notes to
Consolidated Financial Statements (Continued)
December 31,
2010
The impact of derivative instruments on the consolidated
statements of income and OCI is as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount of Net Gain (Loss) Recognized in OCI (Effective
Portion) December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Treasury locks, net of tax
|
|
$
|
2,164
|
|
|
$
|
4,512
|
|
Foreign currency exchange contracts, net of tax
|
|
|
(607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,557
|
|
|
$
|
4,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Reclassified
|
|
|
from Accumulated OCI into Income
|
|
|
(Effective Portion)
|
|
|
Year Ended December 31,
|
Location
|
|
2010
|
|
2009
|
|
2008
|
|
Interest expense, net
|
|
$
|
1,846
|
|
|
$
|
1,846
|
|
|
$
|
2,407
|
|
The amount of gain recognized from accumulated OCI into income
is associated with settlements of treasury locks in 2003 and
2008. The net amount of settlement gains or losses on derivative
instruments included in accumulated OCI to be realized during
the next 12 months is a net gain of $1.8 million
($1.1 million after tax) at December 31, 2010. Mark to
market gains and losses on derivative instruments included in
accumulated OCI will be reclassified into earnings in the same
periods during which the hedged transactions affect earnings.
There were no ineffective portions of these contracts during the
period.
|
|
10.
|
FINANCIAL
INSTRUMENTS
|
The carrying and estimated fair values of PCAs financial
instruments at December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
|
(In thousands)
|
|
Cash and cash equivalents
|
|
$
|
196,556
|
|
|
$
|
196,556
|
|
|
$
|
260,727
|
|
|
$
|
260,727
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.75% senior notes
|
|
|
(399,143
|
)
|
|
|
(430,464
|
)
|
|
|
(398,800
|
)
|
|
|
(427,000
|
)
|
6.50% senior notes
|
|
|
(149,956
|
)
|
|
|
(158,800
|
)
|
|
|
(149,949
|
)
|
|
|
(163,500
|
)
|
Receivables credit facility
|
|
|
(109,000
|
)
|
|
|
(109,000
|
)
|
|
|
(109,000
|
)
|
|
|
(109,000
|
)
|
Capital lease obligation
|
|
|
(22,502
|
|