What drove the improvement in PCA's 2006 earnings?

Management attributed the improvement primarily to increased product pricing for containerboard and corrugated products, reflecting the full realization of previously announced price increases, along with an improvement in product and customer sales mix. Sales volumes were 0.8% above the prior year's record on a per-workday basis. These gains were partly offset by higher transportation, labor and benefit, and energy costs.

How much did PCA spend on capital expenditures and what does it expect for 2007?

Additions to property, plant and equipment were $88.2 million in 2006, compared with $125.3 million in 2005. PCA expects 2007 capital expenditures of $110.0 million to $120.0 million, used primarily for maintenance capital, cost reduction, business growth and environmental compliance. Commitments for general purpose capital expenditures were $48.5 million at December 31, 2006.

What are the main risks to PCA's business according to the filing?

The filing cites the commodity nature of containerboard and intense competition, which can pressure prices. PCA owns no timberlands, so it depends on external wood fiber and may face higher costs than competitors that own timberland. Recycled fiber and purchased energy costs are volatile and could raise manufacturing costs. Covenants in its senior credit facility, receivables facility and note indenture also limit operating flexibility, including the ability to incur liens and merge or sell substantially all assets.

What is PCA's debt structure and how is it managed?

Total debt was $686.9 million at December 31, 2006, including $400.0 million of 5.75% ten-year notes due 2013, $150.0 million of 4.38% five-year notes due 2008, a $30.0 million term loan, and $109.0 million outstanding under a $150.0 million receivables credit facility. The company has a $100.0 million senior revolving credit facility, of which $19.4 million was used for letters of credit. Approximately 80% of its debt carried fixed rates, and the company was not a party to any derivative instruments at year-end.

Did PCA pay dividends to shareholders in 2006?

Yes. PCA declared dividends of $0.25 per share each quarter, totaling $1.00 per share in 2006, the same as in 2005. Dividends paid in cash flow were $105.1 million in 2006. The company states it expects to pay regular cash dividends, though future payments depend on earnings, capital requirements and financial condition.

PKG 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 1, 2007. Cited figures are marked; the original filing is the authoritative source.

Packaging Corporation of America (PCA), the sixth largest producer of containerboard and corrugated products in the United States based on production capacity, reported net sales of $2.19 billion^a and net income of $125.0 million for fiscal 2006, compared with $1.99 billion and $52.6 million in 2005.

Income from operations rose to $225.9 million^b from $116.1 million, driven primarily by higher sales prices and volumes for corrugated products and containerboard and an improved sales mix. Gross profit as a percentage of net sales increased from 15.4% to 20.3%. Diluted earnings per share were $1.20, versus $0.49 in 2005.

The 2005 results included $14.0 million^c of net dividends from Southern Timber Venture, LLC, and PCA received no STV dividends in 2006. Cash flow and balance sheet data show operating cash flow of $246.6 million, capital spending of $88.2 million in additions to property, plant and equipment, and cash and equivalents of $161.8 million at year-end. Total debt was $686.9 million, and the company paid $1.00 per share in dividends declared for both 2006 and 2005.

The company expects 2007 capital expenditures of $110.0 million to $120.0 million^d and expects first-quarter 2007 earnings to be lower than fourth-quarter 2006 earnings because of planned mill maintenance outages at the Counce and Valdosta linerboard mills. Management also noted higher transportation, energy, labor, and benefit costs during the year, and recycled fiber costs ended 2006 about 20% above year-end 2005 levels.

Key risks disclosed include the commodity nature of containerboard and the resulting pricing pressure, reliance on external wood fiber since PCA owns no timberlands, rising recycled fiber and purchased energy costs, and covenant restrictions under its senior credit facility, receivables facility, and note indenture. Ernst & Young LLP issued an unqualified opinion on both the financial statements and internal control over financial reporting as of December 31, 2006.

02—Key points

Key Highlights

Net sales rose to $2,187.0 million in 2006 from $1,993.7 million in 2005, with the increase attributed mainly to higher sales prices and volumes of corrugated products and containerboard.
Income from operations more than doubled to $225.9 million from $116.1 million, and net income rose to $125.0 million from $52.6 million.
Diluted earnings per share were $1.20 in 2006 versus $0.49 in 2005, with 2005 including $14.0 million of net STV timberland dividends that were not received in 2006.
Gross profit as a percentage of net sales increased from 15.4% to 20.3%, primarily due to increased sales prices.
Operating cash flow was $246.6 million in 2006, and year-end cash and cash equivalents were $161.8 million.
Total debt was $686.9 million at year-end, with 2007 capital expenditures expected at $110.0 million to $120.0 million.
Management expects first-quarter 2007 earnings to be lower than fourth-quarter 2006 earnings due to planned mill maintenance outages at the Counce and Valdosta linerboard mills.

03—Questions

Frequently Asked Questions

What drove the improvement in PCA's 2006 earnings?
Management attributed the improvement primarily to increased product pricing for containerboard and corrugated products, reflecting the full realization of previously announced price increases, along with an improvement in product and customer sales mix. Sales volumes were 0.8% above the prior year's record on a per-workday basis. These gains were partly offset by higher transportation, labor and benefit, and energy costs.
How much did PCA spend on capital expenditures and what does it expect for 2007?
Additions to property, plant and equipment were $88.2 million in 2006, compared with $125.3 million in 2005. PCA expects 2007 capital expenditures of $110.0 million to $120.0 million, used primarily for maintenance capital, cost reduction, business growth and environmental compliance. Commitments for general purpose capital expenditures were $48.5 million at December 31, 2006.
What are the main risks to PCA's business according to the filing?
The filing cites the commodity nature of containerboard and intense competition, which can pressure prices. PCA owns no timberlands, so it depends on external wood fiber and may face higher costs than competitors that own timberland. Recycled fiber and purchased energy costs are volatile and could raise manufacturing costs. Covenants in its senior credit facility, receivables facility and note indenture also limit operating flexibility, including the ability to incur liens and merge or sell substantially all assets.
What is PCA's debt structure and how is it managed?
Total debt was $686.9 million at December 31, 2006, including $400.0 million of 5.75% ten-year notes due 2013, $150.0 million of 4.38% five-year notes due 2008, a $30.0 million term loan, and $109.0 million outstanding under a $150.0 million receivables credit facility. The company has a $100.0 million senior revolving credit facility, of which $19.4 million was used for letters of credit. Approximately 80% of its debt carried fixed rates, and the company was not a party to any derivative instruments at year-end.
Did PCA pay dividends to shareholders in 2006?
Yes. PCA declared dividends of $0.25 per share each quarter, totaling $1.00 per share in 2006, the same as in 2005. Dividends paid in cash flow were $105.1 million in 2006. The company states it expects to pay regular cash dividends, though future payments depend on earnings, capital requirements and financial condition.

04—Continue

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