2005 Annual Report

PCA2005AR_cover_Final_rev_3_2 4/5/06 11:07 AM Page 1 PACKAGING CORPORATION OF AMERICA 2005 Annual Report 1900 West Field Court, Lake Forest, IL 60045 Toll Free: (800) 456-4725 For Investor Relations: (877) 454-2509 www.packagingcorp.com © 2006 Packaging Corporation of America. All rights reserved. PCA2005AR_cover_Final_rev_3_2 4/5/06 11:07 AM Page 2 Company Overview 1 To Our Shareholders — Letter From the CEO 2 Management’s Discussion of Financial Responsibility 4 2005 Form 10-K — Operations & Locations 5 Board of Directors & Officers 6 Shareholder Information Inside Back Cover Shareholder Information Strategy Operational Excellence Annual Meeting We are specialists in containerboard and corrugated products. The annual meeting of shareholders will be held at 8:30 a.m., CDT, on May 10, 2006, Our success is driven by our ability to continue to improve our at the Company’s offices located at 1900 West Field Court, Lake Forest, IL 60045. expertise and capability in every operational aspect of our business. Shareholder Services Growth To transfer securities, change address or replace lost certificates, please contact: Our goal is to continue to grow our corrugated products volume and Packaging Corporation of America Shareholder Services increase the level of vertical integration with our containerboard c/o Computershare Trust Company N.A., P.O. Box 43069, Providence, RI 02940-3069 mills. This will be accomplished through internal growth as well Toll Free: (877) 282-1168 Outside North America: (816) 843-4299 as by the strategic acquisition of corrugated products plants. Stock Exchange Information Shareholder Value Packaging Corporation of America’s common stock is listed on the New York Stock Exchange We plan to capitalize on our strategic and financial flexibility to under the symbol PKG. PCA became a public company on January 28, 2000. create and return value to our shareholders. Certifications On June 2, 2005, the Company filed with the New York Stock Exchange (the “NYSE”) the Annual CEO Certification regarding the Company’s compliance with the NYSE’s Corporate Governance listing standards as required by Section 303A.12(a) of the New York Stock Exchange Listed Commitments Company Manual. In addition, the Company has filed as exhibits to its Annual Report on Form 10-K for the year ended December 31, 2005, the applicable certifications of its Chief Executive Officer and its Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002, To Customers regarding the quality of the Company’s public disclosures. Provide the best value and be easy to do business with. Website To Shareholders www.packagingcorp.com Corporate news releases, Forms 10-K and 10-Q, annual reports and a variety of additional Ensure that everything we do revolves around the concept information of potential interest to investors are available through the Company’s website. of creating shareholder value. Requests for Information To Employees Additional information is available without charge. For additional copies of annual reports, Provide a safe and challenging work environment where Forms 10-K and 10-Q or other financial information, please contact: people can make the difference. Investor Relations, Packaging Corporation of America, 1900 West Field Court, Lake Forest, IL 60045 Toll Free: (877) 454-2509 Design: Carioti Santos Design, Chicago PCA2005AR_body_FINAL_3_8_06_FINAL 4/5/06 3:46 PM Page 1 Company Overview PCA is focused on a single line of business, containerboard and corrugated packaging products. We are the sixth largest manufacturer of containerboard and corrugated packaging products in the United States based on production capacity, as reported in Company press releases and SEC filings. We produced about 2.3 million tons of containerboard in 2005 and shipped about 31.2 billion square feet (BSF) of corrugated products, resulting in net sales of $2.0 billion. PCA manufactures a broad range of linerboard and corrugating medium at our four containerboard mills. We produce a wide variety of corrugated packaging products at our 68 corrugated products plants, including: — Conventional shipping containers used to protect and transport manufactured goods. — Multi-color boxes and displays with strong visual appeal used to merchandise the product in retail locations. — Special design/application meat and produce boxes used in the food and agriculture industry. PCA is highly integrated, converting approximately 82% of the containerboard it produces into finished corrugated containers for sale to a broad base of both local and national customers. Corporate headquarters are located in Lake Forest, Illinois, a suburb approximately 30 miles north of downtown Chicago. PCA’s common stock is listed on the New York Stock Exchange under the ticker symbol PKG. Mills Corrugated Plants Sheet /Specialty Plants Headquarters 1 PCA2005AR_body_FINAL_3_8_06_FINAL 4/5/06 11:14 AM Page 2 To Our Shareholders Paul T. Stecko Chairman and Chief Executive Officer Natural Gas as a Percentage of Total Mill Purchased Fuels % Use(1) Avg. Price / MMBTU(2) 40% $15.00 30% $10.00 20% $5.00 10% 0% $0.00 2000 2001 2002 2003 2004 2005 Dec. 2005 (1) PCA Actual Consumption (2) Delivered NYMEX Pipeline Price PCA’s purchased fuel mix in our mills, which is comprised of about 80% coal and bark and together cost about proved to be a difficult and challenging $2 per million BTUs in 2005, puts us in a rather unique 2005 year before closing on a rather positive note. and advantageous position within our industry. So, while Industry corrugated products shipments were down 0.8% higher oil and natural gas costs did reduce our profitability for the first three quarters of the year before rebounding in 2005, it did so to a much smaller extent than for strongly in the fourth quarter with shipments up 5.0%. virtually all of our competitors. For the full year, industry shipments were up 0.6%, compared to an increase of 3.2% in 2004. Despite PCA’s net income for 2005 was $53 million, or $0.49 containerboard inventories remaining at lower than per share, compared to $69 million, or $0.64 per historic levels, industry publications reported container- share, in 2004. Net income for 2005 included income board price reductions of $55 per ton over the spring and of $7 million, or $0.06 per share, from a dividend paid summer months. These price reductions coupled with to PCA by Southern Timber Venture (STV), a timberland 1 all-time high costs for both energy and transportation joint venture in which PCA holds a 31 ⁄3% ownership reduced profitability for PCA and the industry. interest, and also included an after-tax charge of $1.6 million for the shutdown of a corrugated products On the positive side, industry demand and pricing began plant and other severance charges. Net income for 2004 to improve during the fourth quarter, and containerboard included income of $17 million, or $0.16 per share, from capacity reductions totaling about 1.5 million tons were a dividend paid by STV. announced in 2005 by various producers. Even more noteworthy, industry containerboard inventories plunged Excluding these special items, adjusted net income for during the second half of the year and ended December 2005 was $47 million, or $0.44 per share, compared to at 2.265 million tons, the lowest year-end inventory level $52 million, or $0.48 per share, in 2004. Full year sales since 1994. were $2.0 billion, compared to $1.9 billion in 2004. Higher transportation cost was the biggest single factor With both natural gas and oil reaching record price levels that contributed to reduced earnings. Year over year, during the year, PCA’s fuel flexibility provided significant transportation costs were up $21 million pre-tax, or about cost advantages that allowed us to distinguish ourselves $0.12 per share. As a comparison, energy costs, for the among industry competitors. Natural gas, for example, reasons noted earlier, were up only $9 million pre-tax, rose in price from about $6 per million BTUs at the or $0.05 per share. beginning of the year and reached a high of over $15 per million BTUs during the fourth quarter. As shown Cash generated during 2005 totaled $266 million, which in the chart, PCA’s use of natural gas has been reduced included $243 million from operations and $23 million dramatically over time, falling to an all-time low from other sources, primarily STV dividends. Cash uses consumption level of only 2.3% of purchased fuels in were $125 million for capital expenditures, $97 million December 2005. This would compare to much higher for common stock dividends and $49 million for acquisi- consumption by all of our major competitors. tions. These uses totaled $271 million. An additional 2 PCA2005AR_body_FINAL_3_8_06_FINAL 4/5/06 11:15 AM Page 3 $93 million of cash was used in December 2005 for shares and acquire and retire 4.5 million shares at common stock repurchases, and PCA ended the year what we consider an attractive price. And we’re pleased with $113 million cash-on-hand and $695 million of that Madison Dearborn has still retained a sizeable long-term debt. investment in PCA and representation on our Board of Directors, as we hold them in high regard both as PCA continued to make considerable progress in building investors and advisors. a strong and growing customer base, even in the face of less than robust industry demand for most of the year. On January 19, 2005, PCA increased its quarterly Our corrugated products volume was up 4.6% in 2005 dividend to an annual rate of $1.00 per share. At (3.4% excluding acquisitions) compared to industry PCA’s end-of-year closing price of $22.95 per share, volume which was up only 0.6% per workday.

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