Why did PCA's earnings decline sharply in 2002?

Net income fell to $48.2 million from $106.4 million, mainly because lower sales prices for corrugated products and containerboard reduced operating income by $97.8 million. Higher recycled fiber costs, higher medical costs and increased depreciation also weighed on results, though increased corrugated volume partly offset these effects.

How is PCA's debt structure and liquidity position?

Total debt was $742.2 million at December 31, 2002, including $550.0 million of 9 5/8% senior subordinated notes due 2009, $113.0 million under the receivables credit facility and $79.0 million of term loans. No amounts were outstanding under the senior revolving credit facility, and the company reported $187.0 million of unused borrowing capacity.

Does PCA pay dividends, and is it buying back stock?

PCA has never paid dividends on its common stock and has no current plans to do so, and its debt agreements restrict dividend payments. The company repurchased 1,887,700 shares for $33.0 million in 2002 under a $100.0 million repurchase program announced in May 2001, with cumulative repurchases of 4,210,900 shares for $71.3 million.

What are the main legal and labor risks disclosed?

PCA is a defendant in a Sherman Act class action alleging a linerboard supply conspiracy from 1993 to 1995, with trial set for April 2004. Management believes the claims have no merit and does not expect a material adverse effect. The Valdosta mill's union contract expires in September 2003, and management says it is currently negotiating to renew or extend expiring contracts.

What capital spending and environmental costs does PCA expect?

PCA estimates 2003 capital expenditures of approximately $115.0 million for maintenance, cost reduction, business growth and environmental compliance. It expects about $14.4 million in Cluster Rule compliance spending from 2003 to 2005, and it estimates 2003 environmental capital expenditures of $14.7 million, including $4.4 million for Cluster Rule requirements.

PKG 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 19, 2003. Cited figures are marked; the original filing is the authoritative source.

Packaging Corporation of America (PCA) reported 2002 net sales of $1.74 billion^a, down from $1.79 billion in 2001, as lower sales prices for corrugated products and containerboard more than offset higher corrugated volume.

Operating income fell to $145.3 million^b from $249.5 million, and net income declined to $48.2 million, or $0.45 diluted earnings per share, from $106.4 million, or $0.98 in 2001. The company cited a $97.8 million operating income reduction from lower sales prices, along with higher recycled fiber costs, higher medical costs and increased depreciation. Operating cash flow decreased to $240.0 million from $314.3 million, and total debt was $742.2 million at year-end, down from $795.2 million.

Management reported $187.0 million^c of unused borrowing capacity and expects 2003 capital expenditures of approximately $115.0 million. Total debt included $550.0 million of 9 5/8% senior subordinated notes due 2009, and the company repurchased 1,887,700 shares in 2002 for $33.0 million under its $100.0 million program. PCA has never paid dividends.

The filing also highlights litigation risk: a Sherman Act class action over alleged linerboard price-fixing is set for trial in April 2004, which management believes lacks merit and expects will not have a material adverse effect. The company also faces a Valdosta, Georgia labor contract expiring in September 2003, and it expects environmental Cluster Rule compliance spending of about $14.4 million^d from 2003 through 2005.

02—Key points

Key Highlights

Net sales were $1.74 billion in 2002, down 3.0% from $1.79 billion in 2001, as corrugated products volume rose 3.5% to 27.5 billion square feet.
Operating income fell 41.8% to $145.3 million, with lower sales prices reducing operating income by $97.8 million.
Net income was $48.2 million, or $0.45 per diluted share, compared with $106.4 million, or $0.98 per diluted share, in 2001.
Operating cash flow declined to $240.0 million from $314.3 million, and total debt decreased to $742.2 million from $795.2 million.
Liquidity included $187.0 million of unused borrowing capacity at year-end, and 2003 capital expenditures are estimated at $115.0 million.
The company repurchased 1,887,700 shares for $33.0 million in 2002 under its $100.0 million program, and it has never paid common dividends.
A linerboard antitrust class action is set for trial in April 2004, and management believes the allegations have no merit.

03—Questions

Frequently Asked Questions

Why did PCA's earnings decline sharply in 2002?
Net income fell to $48.2 million from $106.4 million, mainly because lower sales prices for corrugated products and containerboard reduced operating income by $97.8 million. Higher recycled fiber costs, higher medical costs and increased depreciation also weighed on results, though increased corrugated volume partly offset these effects.
How is PCA's debt structure and liquidity position?
Total debt was $742.2 million at December 31, 2002, including $550.0 million of 9 5/8% senior subordinated notes due 2009, $113.0 million under the receivables credit facility and $79.0 million of term loans. No amounts were outstanding under the senior revolving credit facility, and the company reported $187.0 million of unused borrowing capacity.
Does PCA pay dividends, and is it buying back stock?
PCA has never paid dividends on its common stock and has no current plans to do so, and its debt agreements restrict dividend payments. The company repurchased 1,887,700 shares for $33.0 million in 2002 under a $100.0 million repurchase program announced in May 2001, with cumulative repurchases of 4,210,900 shares for $71.3 million.
What are the main legal and labor risks disclosed?
PCA is a defendant in a Sherman Act class action alleging a linerboard supply conspiracy from 1993 to 1995, with trial set for April 2004. Management believes the claims have no merit and does not expect a material adverse effect. The Valdosta mill's union contract expires in September 2003, and management says it is currently negotiating to renew or extend expiring contracts.
What capital spending and environmental costs does PCA expect?
PCA estimates 2003 capital expenditures of approximately $115.0 million for maintenance, cost reduction, business growth and environmental compliance. It expects about $14.4 million in Cluster Rule compliance spending from 2003 to 2005, and it estimates 2003 environmental capital expenditures of $14.7 million, including $4.4 million for Cluster Rule requirements.

04—Continue

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