01—Abstract
Summary
Summary of the 10-K filed March 10, 2000. Cited figures are marked; the original filing is the authoritative source.
Packaging Corporation of America (PCA) filed its annual report for the fiscal year ended December 31, 1999, following its April 12, 1999 acquisition of the containerboard and corrugated products business of Pactiv Corporation (formerly Tenneco Packaging Inc.) for $2.2 billiona.
The transaction was financed with a $1.46 billionb senior credit facility, $550 million of 9 5/8% senior subordinated notes, $100 million of 12 3/8% senior exchangeable preferred stock, and a $236.5 million cash equity investment by PCA Holdings, an entity controlled by Madison Dearborn Partners. PCA reported 1999 net sales of $1.7 billion on a pro forma basis, producing 2.2 million tons of containerboard and shipping about 27 billion square feet of corrugated products. For the period from April 12 to December 31, 1999, PCA reported net sales of $1,262.3 million, operating income of $192.2 million, interest expense of $107.6 million and net income of $40.5 million.
The company's average linerboard price rose about 25% during 1999, and the filing notes that industry oversupply could return. The company completed its initial public offering on February 2, 2000, selling 11,250,000 new shares at $12.00c per share and using about $124.4 million of net proceeds to redeem its senior exchangeable preferred stock on March 3, 2000. PCA sold about 405,000 acres of timberland in the fourth quarter of 1999 for total proceeds of $263 million, which were used to pay down debt.
Term loans were reduced through voluntary prepayments totaling approximately $431.0 milliond during May through December 1999. At year end, PCA reported total assets of $2.15 billion, long-term debt of $1.33 billion and stockholders' equity of $416.7 million. The filing highlights high leverage and risks.
PCA substantially increased its indebtedness in connection with the transactions, and management states that the debt service obligations could have material consequences for securityholders. The company does not expect to pay dividends and is restricted by its debt agreements. PCA also faces environmental Cluster Rule compliance spending of about $47.9 million from 2000 to 2005, and a Sherman Act class action regarding linerboard pricing that management believes lacks merit.
02—Key points
Key Highlights
- Acquired Pactiv's containerboard and corrugated products business on April 12, 1999 for $2.2 billion, funded by $1.46 billion in senior credit facility borrowings, $550 million of senior subordinated notes and $100 million of exchangeable preferred stock.
- Operates as the sixth largest U.S. containerboard and corrugated products producer by production capacity, with 1999 net sales of $1.7 billion and 2.2 million tons of containerboard produced.
- Completed its IPO on February 2, 2000 at $12.00 per share, selling 11,250,000 new shares, and redeemed its 12 3/8% senior exchangeable preferred stock for about $124.4 million on March 3, 2000.
- Average linerboard prices increased approximately 25% during 1999 as several major producers announced curtailments and mill shutdowns representing nearly 2 million tons of North American capacity.
- Sold about 405,000 acres of timberland in the fourth quarter of 1999 for $263 million, proceeds used to reduce debt; term loans carried a weighted average LIBOR of 5.9% at year end.
- Carried $1.33 billion of long-term debt at December 31, 1999, and management states that its debt service obligations could have material consequences for securityholders.
- Does not plan to pay common stock dividends and is restricted by its debt agreements; environmental Cluster Rule compliance spending is projected at about $47.9 million from 2000 to 2005.
03—Questions
Frequently Asked Questions
How much debt does Packaging Corporation of America carry, and what are the terms?
At December 31, 1999, PCA had long-term debt of $1,329.2 million. This consisted of $779.0 million of senior credit facility term loans, $550 million of 9.625% senior subordinated notes due 2009 and $1.0 million of other debt. Term Loans A, B and C carried interest rates of 8.7036%, 9.2035% and 9.4536%, respectively. The revolving credit facility, reduced to $150.0 million in December 1999, had no borrowings outstanding.
Will PCA pay dividends to shareholders?
No. PCA has never paid dividends on its common stock and has no current plans to do so. Its debt agreements prohibit or restrict dividend payments, and Delaware law limits dividends to available capital surplus or net profits.
What happened to the company's stock offering and preferred stock?
PCA completed its initial public offering on February 2, 2000, listing on the New York Stock Exchange under the symbol PKG. PCA sold 11,250,000 new shares at $12.00 per share and used about $124.4 million of net proceeds to redeem all outstanding 12 3/8% senior exchangeable preferred stock on March 3, 2000. Pactiv Corporation sold 35,000,000 of its shares in the offering.
What are the main risks disclosed in the filing?
The filing cites substantial indebtedness and highly leveraged operations that could limit corporate and operating activities, and covenants restricting additional debt, dividends, asset sales and mergers. Containerboard prices are cyclical, and industry oversupply could return. Environmental Cluster Rule compliance will require spending, and a Sherman Act class action over linerboard pricing has been filed. Management believes the lawsuit has no merit and should not have a material adverse effect.
How did the company's operating performance look in 1999?
For the pro forma year ended December 31, 1999, net sales rose $124.4 million, or 7.9%, from 1998, driven by higher volumes and prices. Corrugated products volume increased 7.1%, and containerboard volume to external customers rose 8.5%. Operating income increased $87.1 million, or 73.2%, excluding certain gains and charges. For the April 12 to December 31, 1999 period, PCA reported net income of $40.5 million.
04—Continue