Why did profitability decline in 2005 even though sales grew?

The filing states that sales rose on higher prices and volumes, but costs increased more: transportation costs rose $21.1 million, energy $20.5 million, wood fiber $10.4 million, and annual wage increases $13.8 million. Gross profit as a percentage of net sales fell to 15.4% from 15.8%. Income from Southern Timber Venture dividends also dropped to $14.0 million from $27.8 million.

How much cash did the company return to shareholders in 2005?

The company paid $96.9 million in common stock dividends during 2005 and repurchased 4,500,000 shares from PCA Holdings LLC for $93.1 million in December 2005. The repurchase was made at $20.69 per share, the net price received by the selling stockholder in the secondary offering.

What capital spending does management expect for 2006?

The company currently expects capital expenditures of $95.0 million to $105.0 million in 2006, to be used primarily for maintenance capital, cost reduction, business growth and environmental compliance. Capital commitments outstanding at December 31, 2005 were $33.1 million.

Who controls the company and what could that mean for other shareholders?

PCA Holdings LLC, an entity controlled by Madison Dearborn Partners, held 21.0% of outstanding shares as of February 17, 2006. Two Madison Dearborn representatives are among the seven directors. The filing notes that these interests could conflict with those of other stockholders, and that future sales of PCA Holdings shares could adversely affect the stock price.

How leveraged is the company and what debt restrictions apply?

Total debt was $695.2 million at December 31, 2005, against shareholders' equity of $681.4 million. Approximately 79% of debt bore fixed interest rates. Covenants under the senior credit facility, receivables facility and notes restrict liens, asset sales, sale-leaseback transactions and affiliate transactions, and require minimum net worth, maximum leverage and minimum EBITDA to interest ratios. The company was in compliance at year-end.

PKG 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 21, 2006. Cited figures are marked; the original filing is the authoritative source.

Packaging Corporation of America reported net sales of $1.99 billion^a for 2005, up $103.6 million, or 5.5%, from 2004, driven mainly by higher corrugated products sales prices and volumes.

Corrugated volume rose 4.2% to 31.2 billion square feet. Profitability declined: income before interest and taxes fell $24.4 million^b, or 17.3%, to $116.1 million, and net income dropped to $52.6 million ($0.49 per diluted share) from $68.7 million ($0.64). The filing attributes the margin pressure to higher transportation, energy, wood fiber, wage and benefit costs, and notes that income from Southern Timber Venture dividends was $14.0 million in 2005 versus $27.8 million in 2004.

Cash generation remained solid, with net cash from operating activities of $242.7 million^c. Financing outflows of $181.9 million were driven by the December 2005 repurchase of 4,500,000 shares from PCA Holdings LLC for $93.1 million and higher dividends. The company raised its quarterly dividend to $0.25 per share in 2005 from $0.15, totaling $1.00 per share for the year.

Shareholders' equity declined to $681.4 million^d from $817.6 million, and total debt was $695.2 million at year-end. Management expects 2006 capital expenditures of $95.0 million to $105.0 million. Ownership and governance remain concentrated.

PCA Holdings LLC, controlled by Madison Dearborn Partners, sold 17,825,000 shares in a December 2005 secondary offering at $21.50 per share and held 21.0% of outstanding shares as of February 17, 2006. Two Madison Dearborn representatives sit on the seven-member board. The filing reports that the company is in material compliance with environmental regulations and has $5.5 million in environmental reserves.

02—Key points

Key Highlights

Net sales of $1,993.7 million in 2005, up $103.6 million, or 5.5%, from $1,890.1 million in 2004.
Net income of $52.6 million, or $0.49 per diluted share, compared with $68.7 million, or $0.64 per diluted share, in 2004.
Income before interest and taxes fell $24.4 million, or 17.3%, to $116.1 million, as cost increases in transportation, energy, wood fiber and wages were largely offset by higher prices and volume.
Corrugated products volume increased 4.2% to 31.2 billion square feet; containerboard sales to external customers fell 12.2% to 417,000 tons.
Net cash provided by operating activities was $242.7 million, and net cash used for financing activities was $181.9 million, including a $93.1 million share repurchase.
Annual dividends declared rose to $1.00 per share from $0.60, after the quarterly dividend was raised to $0.25 in January 2005.
Largest shareholder PCA Holdings LLC, controlled by Madison Dearborn Partners, held 21.0% of common stock as of February 17, 2006, after a December 2005 secondary offering.

03—Questions

Frequently Asked Questions

Why did profitability decline in 2005 even though sales grew?
The filing states that sales rose on higher prices and volumes, but costs increased more: transportation costs rose $21.1 million, energy $20.5 million, wood fiber $10.4 million, and annual wage increases $13.8 million. Gross profit as a percentage of net sales fell to 15.4% from 15.8%. Income from Southern Timber Venture dividends also dropped to $14.0 million from $27.8 million.
How much cash did the company return to shareholders in 2005?
The company paid $96.9 million in common stock dividends during 2005 and repurchased 4,500,000 shares from PCA Holdings LLC for $93.1 million in December 2005. The repurchase was made at $20.69 per share, the net price received by the selling stockholder in the secondary offering.
What capital spending does management expect for 2006?
The company currently expects capital expenditures of $95.0 million to $105.0 million in 2006, to be used primarily for maintenance capital, cost reduction, business growth and environmental compliance. Capital commitments outstanding at December 31, 2005 were $33.1 million.
Who controls the company and what could that mean for other shareholders?
PCA Holdings LLC, an entity controlled by Madison Dearborn Partners, held 21.0% of outstanding shares as of February 17, 2006. Two Madison Dearborn representatives are among the seven directors. The filing notes that these interests could conflict with those of other stockholders, and that future sales of PCA Holdings shares could adversely affect the stock price.
How leveraged is the company and what debt restrictions apply?
Total debt was $695.2 million at December 31, 2005, against shareholders' equity of $681.4 million. Approximately 79% of debt bore fixed interest rates. Covenants under the senior credit facility, receivables facility and notes restrict liens, asset sales, sale-leaseback transactions and affiliate transactions, and require minimum net worth, maximum leverage and minimum EBITDA to interest ratios. The company was in compliance at year-end.

04—Continue

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