<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 333-40067
HUNTSMAN PACKAGING CORPORATION
(Exact name of registrant as specified in its charter)
Utah 87-0496065
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Huntsman Way
Salt Lake City, Utah 84108
(801) 584-5700
(Address of principal executive offices and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. On October 31, 1999, there were
1,000,001 outstanding shares of the registrant's Class A Common Stock, 6,999
outstanding shares of the registrant's Class B Common Stock and 49,511
outstanding shares of the registrant's Class C Common Stock.
================================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,677 $ 19,217
Receivables, net of allowances of $1,610 and $2,570, respectively 116,225 89,381
Inventories 77,177 65,892
Income taxes receivable 3,579 7,365
Deferred income taxes 2,724 3,605
Prepaid expenses and other 3,401 3,063
--------- ---------
Total current assets 216,783 188,523
PLANT AND EQUIPMENT - Net 306,780 300,334
INTANGIBLE ASSETS - Net 214,850 221,290
OTHER ASSETS 23,881 24,125
--------- ---------
TOTAL ASSETS $ 762,294 $ 734,272
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 52,621 $ 43,186
Accrued liabilities 36,299 33,576
Current portion of long-term debt 15,936 11,406
Due to affiliates 4,730 7,000
--------- ---------
Total current liabilities 109,586 95,168
LONG-TERM DEBT - Net of current portion 504,229 513,530
OTHER LIABILITIES 13,843 11,394
DEFERRED INCOME TAXES 46,203 42,423
--------- ---------
Total liabilities 673,861 662,515
--------- ---------
REDEEMABLE COMMON STOCK - Class C nonvoting, no par value;
60,000 shares authorized; 49,511 and 11,700 shares outstanding in 1999 and 1998,
respectively, net of related stockholder notes receivable of $2,749 in 1999 2,472 1,170
STOCKHOLDERS' EQUITY:
Common stock - Class A voting, no par value; 1,200,000 shares authorized,
1,000,001 shares outstanding 63,161 63,161
Common stock - Class B voting, no par value; 10,000 shares authorized,
6,999 shares outstanding 515 515
Retained earnings 27,281 13,731
Stockholder note receivable (434) (434)
Foreign currency translation adjustment (4,562) (6,386)
--------- ---------
Total stockholders' equity 85,961 70,587
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 762,294 $ 734,272
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
2
<PAGE> 3
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SALES - Net $ 200,529 $ 183,633 $ 561,765 $ 481,878
COST OF SALES 161,335 149,912 445,506 399,751
--------- --------- --------- ---------
Gross profit 39,194 33,721 116,259 82,127
--------- --------- --------- ---------
OPERATING EXPENSES:
Administration and other 11,393 12,217 34,502 26,059
Sales and marketing 6,324 6,598 18,811 17,908
Research and development 1,367 865 4,228 2,763
Plant closing costs 2,497 3,996 2,497 3,996
--------- --------- --------- ---------
Total operating expenses 21,581 23,676 60,038 50,726
--------- --------- --------- ---------
OPERATING INCOME 17,613 10,045 56,221 31,401
INTEREST EXPENSE (11,216) (10,666) (32,273) (24,886)
OTHER INCOME (EXPENSE) - Net 514 (1,525) 323 (1,441)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND DISCONTINUED OPERATIONS 6,911 (2,146) 24,271 5,074
INCOME TAX PROVISION 2,790 473 10,721 3,966
--------- --------- --------- ---------
INCOME (LOSS) BEFORE
DISCONTINUED OPERATIONS 4,121 (2,619) 13,550 1,108
INCOME FROM DISCONTINUED
OPERATIONS (net of income taxes) 582
GAIN (LOSS) ON SALE OF
DISCONTINUED OPERATIONS
(net of income taxes) (91) 5,209
--------- --------- --------- ---------
NET INCOME (LOSS) $ 4,121 $ (2,710) $ 13,550 $ 6,899
========= ========= ========= =========
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,550 $ 6,899
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 25,866 20,120
Deferred income taxes 4,661 4,050
Reduction in provision for losses on accounts receivable (960) (951)
Noncash compensation expense 270
Gain on sale of discontinued operations (5,209)
Provision for write-down of long-term assets 1,370 411
Loss on disposal of assets 102 461
Changes in assets and liabilities - net of effects of acquisitions:
Receivables (25,884) 2,262
Inventories (11,285) 13,584
Prepaid expenses and other 643 (1,470)
Other assets 2,206 (7,234)
Trade accounts payable 9,435 (10,388)
Accrued liabilities 1,353 5,872
Due to affiliates (2,270) (8,411)
Income taxes receivable 3,786 (6,772)
Other liabilities 2,449 (1,495)
--------- ---------
Net cash provided by operating activities 25,292 11,729
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 40 32,631
Payments for purchase of Blessings Corporation, net of cash acquired (284,028)
Payments for certain net assets of Ellehammer Industries (7,877)
Capital expenditures for plant and equipment (25,719) (35,419)
--------- ---------
Net cash used in investing activities (25,679) (294,693)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Class C nonvoting common stock 1,032 1,160
Principal payments on borrowings (8,395) (1,171)
Proceeds from issuance of long-term debt 328 285,000
--------- ---------
Net cash provided by (used in) financing activities (7,035) 284,989
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 1,882 1,623
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,540) 3,648
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,217 12,411
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,677 $ 16,059
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 24,263 $ 19,512
========= =========
Income taxes $ (2,906) $ 6,755
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared, without audit, in accordance with generally accepted accounting
principles and pursuant to the rules and regulations of the Securities and
Exchange Commission. The information reflects all normal recurring
adjustments that, in the opinion of management, are necessary for a fair
presentation of the financial position, results of operations and cash
flows of Huntsman Packaging Corporation and its subsidiaries ("Huntsman
Packaging") for the periods indicated. Results of operations for interim
periods are not necessarily indicative of results of operations to be
expected for a full fiscal year.
Certain information in footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles has been condensed or omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. These statements
should be read in conjunction with Huntsman Packaging's Annual Report on
Form 10-K for the year ended December 31, 1998.
2. INVENTORIES
Inventories are valued at the lower of cost (on a first-in, first-out
basis) or market value. Inventories as of September 30, 1999 and December
31, 1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Finished goods $41,531 $37,830
Raw materials 29,537 21,318
Work-in-process 6,109 6,744
------- -------
Total $77,177 $65,892
======= =======
</TABLE>
3. ACQUISITIONS
ELLEHAMMER INDUSTRIES LTD. AND ELLEHAMMER PACKAGING INC. - On March 12,
1998, we acquired certain assets and assumed certain liabilities of
Ellehammer Industries Ltd. and Ellehammer Packaging Inc. (collectively,
the "Ellehammer Acquisition") for cash of approximately $7.9 million. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, results of operations are included in the accompanying
consolidated condensed financial statements from the date of acquisition.
We did not record any goodwill in this acquisition.
BLESSINGS CORPORATION - On May 19, 1998, in accordance with an Agreement
and Plan of Merger dated, April 1, 1998, we acquired Blessings Corporation
("Blessings") by merging our wholly-owned subsidiary, VA Acquisition
Corp., with and into Blessings (the "Blessings Acquisition"). Blessings
then became our wholly-owned subsidiary and Blessings changed its name to
Huntsman Edison Films Corporation. The aggregate purchase price for
Blessings was approximately $270 million (including the assumption of
approximately $57 million of Blessings' existing indebtedness). In
connection with the Blessings Acquisition, we incurred transaction costs
of
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<PAGE> 6
approximately $17 million. The financing for the Blessings Acquisition was
provided under our $510 million Amended and Restated Credit Agreement. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the results of operations are included in the accompanying
consolidated financial statements from the date of acquisition. We
recorded goodwill and intangible assets of approximately $168.8 million in
this acquisition, which are being amortized on a straight-line basis over
10 to 30 years.
The following pro forma information for the nine months ended September
30, 1998 presents our results of operations as if the Blessings
Acquisition had occurred at the beginning of 1998. The results of
operations give effect to certain adjustments, including amortization of
intangible assets, depreciation expense, interest expense on debt
borrowings to fund the acquisition and income taxes. The pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisition been made at
the beginning of the applicable period or of the results which may occur
in the future.
Pro forma results of operations (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
------------------
<S> <C>
Sales - net $ 549,163
Operating income 34,902
Loss before discontinued operations (2,822)
</TABLE>
KCL CORPORATION - On October 18, 1999, subsequent to the end of the third
quarter, we acquired certain assets and assumed certain liabilities of KCL
Corporation and KCL Promotional Packaging Products, Ltd. for cash of
approximately $11.5 million. The acquisition will be accounted for using
the purchase method of accounting.
4. PLANT CLOSING COSTS
During the nine months ended September 30, 1999, we announced our plan to
cease operations at one of our facilities located in Mexico City, Mexico.
Included in 1999 operating expenses is a $2.3 million charge, comprised of
a $1.3 million write-off of impaired goodwill and fixed assets, and a $1.0
million charge for reduction of work force costs associated with the
elimination of 110 full-time equivalent employees. In addition, we
announced our plan to cease the production of one of our product lines at
our Kent, Washington facility. Included in 1999 operating expenses is a
$0.2 million charge for the write-off of impaired fixed assets and for
reduction of work force costs associated with the elimination of 36
full-time equivalent employees.
During 1998, we announced our plan to cease operations at our Clearfield,
Utah facility. Included in 1998 operating expenses is a $4.0 million
charge, comprised of a $0.4 million provision for the write-off of
impaired goodwill, a $0.2 million charge for reduction of work force costs
associated with the elimination of 52 full-time equivalent employees, and
an accrual of $3.4 million for estimated future net lease and other costs
incurred to close the facility.
5. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards requiring that
derivative instruments be recorded in the balance sheet as either an asset
or liability measured at its fair market value, and that changes in the
derivative's fair value
6
<PAGE> 7
be recognized currently in earnings, unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning
after June 15, 2000. We expect that the adoption of this statement will
not have a material effect on our consolidated financial statements.
6. COMPREHENSIVE INCOME
The following table reports comprehensive income for the three and nine
months ended September 30, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
1999 1998 1999 1998
------ ------- ------- -------
<S> <C> <C> <C> <C>
Net income $4,121 $(2,710) $13,550 $ 6,899
Foreign currency translation adjustments 1,364 (146) 1,824 (891)
------ ------- ------- -------
Comprehensive income $5,485 $(2,856) $15,374 $ 6,008
====== ======= ======= =======
</TABLE>
7. OTHER INCOME (EXPENSE)
We hold investments in marketable securities that are designated as
trading securities. For the three and nine months ended September 30,
1999, unrealized losses of approximately $0.1 million and $0.3 million,
respectively, on these investments are included in other income (expense)
- net.
8. OPERATING SEGMENTS
Operating segments are components of our company for which separate
financial information is available that is evaluated regularly by our
chief operating decision maker in deciding how to allocate resources and
in assessing performance. This information is reported on the same basis
that is used internally for evaluating segment performance.
We have three reportable operating segments: design products, industrial
films and specialty films. The design products segment produces printed
rollstock, bags and sheets used to package products in the food and other
industries. The industrial films segment produces stretch films, used for
industrial unitizing and containerization, and PVC films, used to wrap
meat, cheese and produce. The specialty films segment produces converter
films that are sold to other flexible packaging manufacturers for
additional fabrication, barrier films that contain and protect food and
other products, and other films used in the personal care, medical,
agriculture and horticulture industries.
Sales and transfers between our segments are eliminated in consolidation.
We evaluate performance of the operating segments based on profit or loss
before income taxes, not including nonrecurring gains or losses. Our
reportable segments are managed separately with separate management teams,
because each segment has differing products, customer requirements,
technology and marketing strategies.
7
<PAGE> 8
Segment profit or loss and segment assets as of and for the three months
ended September 30, 1999 and 1998 are presented in the following table (in
thousands):
<TABLE>
<CAPTION>
DESIGN INDUSTRIAL SPECIALTY CORPORATE/
PRODUCTS FILMS FILMS OTHER TOTAL
<S> <C> <C> <C> <C> <C>
1999
Net sales to customers $ 43,534 $ 38,765 $118,230 $200,529
Intersegment sales 2,881 1,425 1,360 $ (5,666)
-------- -------- -------- --------- --------
Total net sales 46,415 40,190 119,590 (5,666) 200,529
Depreciation and
amortization 2,078 1,148 4,764 983 8,973
Interest expense 895 88 3,486 6,747 11,216
Segment profit 1,739 2,893 14,919 (10,143) 9,408
Plant closing costs 2,497 2,497
Segment total assets 160,586 96,343 445,019 60,346 762,294
Capital expenditures 973 1,330 5,416 884 8,603
1998
Net sales to customers $ 40,261 $ 36,213 $107,159 $183,633
Intersegment sales 361 758 769 $ (1,888)
-------- -------- -------- --------- --------
Total net sales 40,622 36,971 107,928 (1,888) 183,633
Depreciation and
amortization 1,500 726 5,290 908 8,424
Interest expense 21 232 8 10,405 10,666
Segment profit 6,504 (196) 12,367 (16,825) 1,850
Plant closing costs (297) 4,293 3,996
Segment total assets 137,575 84,076 444,888 58,637 725,176
Capital expenditures 4,015 1,377 7,084 210 12,686
</TABLE>
8
<PAGE> 9
Segment profit or loss for the nine months ended September 30, 1999 and
1998 are presented in the following table (in thousands):
<TABLE>
<CAPTION>
DESIGN INDUSTRIAL SPECIALTY CORPORATE/
PRODUCTS FILMS FILMS OTHER TOTAL
-------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
1999
Net sales to customers $122,017 $110,046 $329,702 $561,765
Intersegment sales 5,356 2,265 3,918 $(11,539)
-------- -------- -------- -------- --------
Total net sales 127,373 112,311 333,620 (11,539) 561,765
Depreciation and
amortization 5,929 3,417 14,029 2,491 25,866
Interest expense 2,473 262 10,265 19,273 32,273
Segment profit 5,740 11,600 43,093 (33,665) 26,768
Plant closing costs 2,497 2,497
Capital expenditures 4,958 4,724 13,307 2,730 25,719
1998
Net sales to customers $ 96,526 $114,179 $271,173 $481,878
Intersegment sales 1,153 3,359 962 $ (5,474)
-------- -------- -------- -------- --------
Total net sales 97,679 117,538 272,135 (5,474) 481,878
Depreciation and
amortization 3,030 3,450 10,706 2,934 20,120
Interest expense 23 404 32 24,427 24,886
Segment profit 8,996 7,325 30,971 (38,222) 9,070
Plant closing costs (297) 4,293 3,996
Capital expenditures 11,409 4,732 18,204 1,074 35,419
</TABLE>
A reconciliation of the totals reported for the operating segments to our totals
reported in the consolidated condensed financial statements is as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
3 months 9 months 3 months 9 months
------- -------- -------- --------
<S> <C> <C> <C> <C>
PROFIT OR LOSS
Total profit for reportable segments $19,551 $ 60,433 $ 18,675 $ 47,292
Plant closing costs (2,497) (2,497) (3,996) (3,996)
Unallocated amounts:
Corporate expenses (3,396) (14,392) (6,420) (13,795)
Interest expense (6,747) (19,273) (10,405) (24,427)
------- -------- -------- --------
Income before taxes and
discontinued operations $ 6,911 $ 24,271 $ (2,146) $ 5,074
======= ======== ======== ========
1999 1998
---- ----
ASSETS
Total assets for reportable segments $701,948 $666,539
Intangible assets not allocated to segments 16,494 14,898
Other unallocated assets 43,852 43,739
-------- --------
Total consolidated assets $762,294 $725,176
======== ========
</TABLE>
9
<PAGE> 10
9. STOCK SALE AND CANCELLATION OF STOCK OPTIONS
During the nine months ended September 30, 1999, we sold 12,188 shares of
Class C common stock to certain officers of Huntsman Packaging for $100
per share, the estimated fair value of the shares on the date of
purchase. In addition, we redeemed 600 shares of Class C common stock for
$100 per share from one officer.
On February 22, 1999, we entered into Option Cancellation and Restricted
Stock Purchase Agreements with certain officers of Huntsman Packaging
holding options to purchase 26,223 shares of Class C common stock. Under
the agreements, options to purchase an aggregate of 26,223 shares of
Class C common stock were cancelled and 26,223 shares of Class C common
stock ("Restricted Class C Common") were sold to certain option holders
for $100 per share, the estimated fair market value of the shares on the
date of purchase. The purchase price for the shares was paid by delivery
of promissory notes to Huntsman Packaging. After the cancellation, 10,489
options to purchase Class C Common Stock remain outstanding. The 26,223
shares of Restricted Class C Common purchased are subject to repurchase
rights of Huntsman Packaging that will lapse under conditions
substantially the same as the vesting conditions of the canceled options.
The repurchase rights for 13,117 shares of Restricted Class C Common
lapse on a straight-line basis over a five-year period commencing January
1, 1998. The repurchase rights for the remaining 13,116 shares of
Restricted Class C Common lapse over the same five years, subject to
achievement of certain Huntsman Packaging performance criteria, or if the
performance criteria are not met, on December 31, 2007. The shares of
Restricted Class C Common are subject to essentially the same
restrictions and redemption options as the other outstanding Class C
common shares.
Additionally, options to purchase 2,622 shares of Class C common stock
were cancelled during the nine months ended September 30, 1999.
10. REDEEMABLE COMMON STOCK
Redeemable common stock includes Restricted Class C Common and is
presented net of related stockholder notes receivable of $2.7 million.
Included in the stockholder notes receivable is accrued interest on the
notes of $0.1 million. Redeemable common stock also includes accrued
noncash compensation of $0.3 million relating to performance-based stock
options.
11. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS
The following condensed consolidating financial statements present, in
separate columns, financial information for (i) Huntsman Packaging (on a
parent only basis), with its investment in its subsidiaries recorded
under the equity method, (ii) guarantor subsidiaries (as specified in the
Indenture, dated September 30, 1997 (the "Indenture") relating to
Huntsman Packaging's $125 million senior subordinated notes (the
"Notes")) on a combined basis, with any investments in non-guarantor
subsidiaries specified in the Indenture recorded under the equity method,
(iii) direct and indirect non-guarantor subsidiaries on a combined basis,
(iv) the eliminations necessary to arrive at the information for Huntsman
Packaging and its subsidiaries on a consolidated basis, and (v) Huntsman
Packaging on a consolidated basis, in each case as of September 30, 1999
and December 31, 1998 and for the three and nine months ended September
30, 1999 and 1998. The Notes are fully and unconditionally guaranteed on
a joint and several basis by each guarantor subsidiary and each guarantor
subsidiary is wholly-owned, directly or indirectly, by Huntsman
Packaging. There are no contractual restrictions limiting transfers of
cash from guarantor and non-guarantor subsidiaries to Huntsman Packaging.
The consolidating condensed financial statements are presented herein,
rather than separate financial statements for each of the guarantor
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<PAGE> 11
subsidiaries, because management believes that separate financial
statements relating to the guarantor subsidiaries are not material to
investors.
On January 1, 1999, two of our guarantor subsidiary companies, Huntsman
Deerfield Films Corporation and Huntsman United Films Corporation, were
merged with and into Huntsman Packaging. Accordingly, these former
guarantor subsidiary companies are now included as part of the "Huntsman
Packaging Corporation Parent Only" column for all periods presented.
11
<PAGE> 12
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1999 (IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Huntsman Consolidated
Packaging Combined Combined Huntsman
Corporation Guarantor Non-Guarantor Packaging
(Parent Only) Subsidiaries Subsidiaries Eliminations Corporation
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 812 $ 52 $ 12,813 $ 13,677
Receivables - net 74,955 19,726 21,544 116,225
Inventories 59,420 6,677 11,080 77,177
Income taxes receivable 2,539 195 845 3,579
Deferred income taxes 3,726 329 (1,331) 2,724
Prepaid expenses and other 2,797 293 311 3,401
--------- --------- --------- ---------
Total current assets 144,249 27,272 45,262 216,783
PLANT AND EQUIPMENT - Net 182,178 73,313 51,289 306,780
INTANGIBLE ASSETS - Net 53,281 142,966 18,603 214,850
INVESTMENT IN SUBSIDIARIES 55,324 $(55,324)
OTHER ASSETS 17,513 144 6,224 23,881
--------- --------- --------- -------- ---------
TOTAL ASSETS $ 452,545 $ 243,695 $ 121,378 $(55,324) $ 762,294
========= ========= ========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 34,023 $ 8,260 $ 10,338 $ 52,621
Accrued liabilities 27,448 1,808 7,043 36,299
Current portion of long-term debt 12,561 3,375 15,936
Due to (from) affiliates (28,988) 23,551 10,167 4,730
--------- --------- --------- ---------
Total current liabilities 45,044 33,619 30,923 109,586
LONG-TERM DEBT - Net of current portion 276,949 184,000 43,280 504,229
OTHER LIABILITIES 9,453 2,875 1,515 13,843
DEFERRED INCOME TAXES 32,666 11,725 1,812 46,203
--------- --------- --------- ---------
Total liabilities 364,112 232,219 77,530 673,861
--------- --------- --------- ---------
REDEEMABLE COMMON STOCK 2,472 2,472
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock 63,676 6,357 29,241 $(35,598) 63,676
Retained earnings 27,281 5,130 17,612 (22,742) 27,281
Stockholder note receivable (434) (434)
Foreign currency translation adjustment (4,562) (11) (3,005) 3,016 (4,562)
--------- --------- --------- -------- ---------
Total stockholders' equity 85,961 11,476 43,848 (55,324) 85,961
--------- --------- --------- -------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 452,545 $ 243,695 $ 121,378 $(55,324) $ 762,294
========= ========= ========= ======== =========
</TABLE>
12
<PAGE> 13
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1998 (IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
HUNTSMAN CONSOLIDATED
PACKAGING HUNTSMAN
CORPORATION COMBINED COMBINED PACKAGING
(PARENT ONLY) GUARANTORS NON-GUARANTORS ELIMINATIONS CORPORATION
------------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,381 $ 525 $ 11,311 $ 19,217
Receivables 59,667 13,650 16,064 89,381
Inventories 50,243 5,994 9,655 65,892
Income taxes receivable 4,230 1,868 1,267 7,365
Deferred income taxes 4,059 803 (1,257) 3,605
Prepaid expenses and other 2,090 680 293 3,063
-------- -------- -------- --------
Total current assets 127,670 23,520 37,333 188,523
PLANT AND EQUIPMENT - Net 173,850 73,589 52,895 300,334
INTANGIBLE ASSETS - Net 55,142 147,140 19,008 221,290
INVESTMENT IN SUBSIDIARIES 42,959 $(42,959)
OTHER ASSETS 17,582 143 6,400 24,125
-------- -------- -------- -------- --------
TOTAL ASSETS $417,203 $244,392 $115,636 $(42,959) $734,272
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 26,698 $ 6,760 $ 9,728 $ 43,186
Accrued liabilities 25,064 2,401 6,111 33,576
Current portion of long-term debt 8,875 2,531 11,406
Due to (from) affiliates (21,224) 18,111 10,113 7,000
--------- -------- -------- --------
Total current liabilities 39,413 27,272 28,483 95,168
LONG-TERM DEBT - Net of current portion 273,519 194,200 45,811 513,530
OTHER LIABILITIES 6,740 3,171 1,483 11,394
DEFERRED INCOME TAXES 25,774 13,658 2,991 42,423
-------- -------- -------- --------
Total liabilities 345,446 238,301 78,768 662,515
-------- -------- -------- --------
REDEEMABLE COMMON STOCK 1,170 1,170
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 63,676 6,357 29,241 $(35,598) 63,676
Retained earnings 13,731 (255) 12,641 (12,386) 13,731
Shareholder note receivable (434) (434)
Foreign currency translation adjustments (6,386) (11) (5,014) 5,025 (6,386)
-------- -------- --------- -------- ---------
Total stockholders' equity 70,587 6,091 36,868 (42,959) 70,587
-------- -------- -------- --------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $417,203 $244,392 $115,636 $(42,959) $734,272
======== ======== ======== ========= ========
</TABLE>
13
<PAGE> 14
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Huntsman Consolidated
Packaging Combined Combined Huntsman
Corporation Guarantor Non-Guarantor Packaging
(Parent Only) Subsidiaries Subsidiaries Eliminations Corporation
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
SALES - Net $ 136,714 $ 38,169 $ 31,312 $(5,666) $ 200,529
COST OF SALES 115,376 27,007 24,618 (5,666) 161,335
--------- -------- -------- ------- ---------
Gross profit 21,338 11,162 6,694 39,194
OPERATING EXPENSES 13,193 3,265 5,123 21,581
--------- -------- -------- ---------
OPERATING INCOME 8,145 7,897 1,571 17,613
INTEREST EXPENSE (6,780) (3,480) (956) (11,216)
EQUITY IN EARNINGS OF SUBSIDIARIES 2,724 (2,724)
OTHER INCOME 122 392 514
--------- -------- -------- ---------
INCOME BEFORE INCOME TAXES 4,211 4,417 1,007 (2,724) 6,911
INCOME TAX PROVISION 90 2,345 355 2,790
--------- -------- -------- ------- ---------
NET INCOME $ 4,121 $ 2,072 $ 652 $(2,724) $ 4,121
========= ======== ======== ======= =========
</TABLE>
14
<PAGE> 15
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Huntsman Consolidated
Packaging Combined Combined Huntsman
Corporation Guarantor Non-Guarantor Packaging
(Parent Only) Subsidiaries Subsidiaries Eliminations Corporation
--------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
SALES - Net $ 123,779 $ 35,207 $ 26,535 $ (1,888) $ 183,633
COST OF SALES 102,327 28,972 20,501 (1,888) 149,912
--------- -------- -------- -------- ---------
Gross profit 21,452 6,235 6,034 33,721
OPERATING EXPENSES 19,135 2,311 2,230 23,676
--------- -------- -------- ---------
OPERATING INCOME 2,317 3,924 3,804 10,045
INTEREST EXPENSE (5,406) (4,422) (838) (10,666)
EQUITY IN EARNINGS OF SUBSIDIARIES (211) 211
OTHER EXPENSE (100) (7) (1,418) (1,525)
--------- -------- -------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND DISCONTINUED OPERATIONS (3,400) (505) 1,548 211 (2,146)
INCOME TAX PROVISION (BENEFIT) (781) 116 1,138 473
--------- -------- -------- -------- ---------
INCOME (LOSS) BEFORE
DISCONTINUED OPERATIONS (2,619) (621) 410 211 (2,619)
LOSS ON SALE OF DISCONTINUED
OPERATIONS (net of income taxes) (91) (91)
--------- -------- -------- -------- ---------
NET INCOME (LOSS) $ (2,710) $ (621) $ 410 $ 211 $ (2,710)
========= ======== ======== ======== =========
</TABLE>
15
<PAGE> 16
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Huntsman Consolidated
Packaging Combined Combined Huntsman
Corporation Guarantor Non-Guarantor Packaging
(Parent Only) Subsidiaries Subsidiaries Eliminations Corporation
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
SALES - Net $ 382,863 $ 104,151 $ 86,290 $(11,539) $ 561,765
COST OF SALES 316,822 73,432 66,791 (11,539) 445,506
--------- --------- -------- -------- ---------
Gross profit 66,041 30,719 19,499 116,259
OPERATING EXPENSES 41,533 8,634 9,871 60,038
--------- --------- -------- ---------
OPERATING INCOME 24,508 22,085 9,628 56,221
INTEREST EXPENSE (19,319) (10,245) (2,709) (32,273)
EQUITY IN EARNINGS OF SUBSIDIARIES 10,356 (10,356)
OTHER INCOME (EXPENSE) (308) 5 626 323
--------- --------- -------- -------- ---------
INCOME BEFORE INCOME TAXES 15,237 11,845 7,545 (10,356) 24,271
INCOME TAX PROVISION 1,687 6,460 2,574 10,721
--------- --------- -------- -------- ---------
NET INCOME $ 13,550 $ 5,385 $ 4,971 $(10,356) $ 13,550
========= ========= ======== ======== =========
</TABLE>
16
<PAGE> 17
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Huntsman Consolidated
Packaging Combined Combined Huntsman
Corporation Guarantor Non-Guarantor Packaging
(Parent Only) Subsidiaries Subsidiaries Eliminations Corporation
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
SALES - Net $ 373,590 $ 51,035 $ 62,727 $(5,474) $ 481,878
COST OF SALES 312,637 42,188 50,400 (5,474) 399,751
--------- -------- -------- ------- ---------
Gross profit 60,953 8,847 12,327 82,127
OPERATING EXPENSES 42,222 3,342 5,162 50,726
--------- -------- -------- ---------
OPERATING INCOME 18,731 5,505 7,165 31,401
INTEREST EXPENSE (17,224) (6,437) (1,225) (24,886)
EQUITY IN EARNINGS OF SUBSIDIARIES 931 (931)
OTHER INCOME (EXPENSE) 228 7 (1,676) (1,441)
--------- -------- -------- ------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND DISCONTINUED OPERATIONS 2,666 (925) 4,264 (931) 5,074
INCOME TAX PROVISION 976 359 2,631 3,966
--------- -------- -------- ------- ---------
INCOME (LOSS) BEFORE
DISCONTINUED OPERATIONS 1,690 (1,284) 1,633 (931) 1,108
INCOME FROM DISCONTINUED
OPERATIONS (net of income taxes) 582 582
GAIN ON SALE OF DISCONTINUED
OPERATIONS (net of income taxes) 5,209 5,209
--------- -------- -------- ------- ---------
NET INCOME (LOSS) $ 6,899 $ (1,284) $ 2,215 $ (931) $ 6,899
========= ======== ======== ======= =========
</TABLE>
17
<PAGE> 18
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Huntsman Consolidated
Packaging Combined Combined Huntsman
Corporation Guarantor Non-Guarantor Packaging
(Parent Only) Subsidiaries Subsidiaries Eliminations Corporation
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES $ 6,718 $ 14,741 $ 3,833 $ 25,292
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 32 8 40
Capital expenditures for plant and equipment (17,955) (5,014) (2,750) (25,719)
-------- -------- -------- --------
Net cash used in investing activities (17,923) (5,014) (2,742) (25,679)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,032 1,032
Proceeds from issuance (payments) of long-term
debt 3,820 (10,200) (1,687) (8,067)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities 4,852 (10,200) (1,687) (7,035)
-------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS (216) 2,098 1,882
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (6,569) (473) 1,502 (5,540)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,381 525 11,311 19,217
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 812 $ 52 $ 12,813 $ 13,677
======== ======== ======== ========
</TABLE>
18
<PAGE> 19
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Huntsman Consolidated
Packaging Combined Combined Huntsman
Corporation Guarantor Non-Guarantor Packaging
(Parent Only) Subsidiaries Subsidiaries Eliminations Corporation
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES $ 3,968 $ 3,706 $ 4,055 $ 11,729
--------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 32,631 32,631
Payments for purchase of Blessings
Corporation, net of cash acquired (285,699) 99 1,572 (284,028)
Payments for certain net assets of Ellehammer
Industries (7,877) (7,877)
Capital expenditures for plant and equipment (27,226) (2,521) (5,672) (35,419)
--------- -------- -------- ---------
Net cash used in investing activities (288,171) (2,422) (4,100) (294,693)
--------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,160 1,160
Principal payments on borrowings (1,171) (1,171)
Proceeds from issuance of long-term debt 285,000 285,000
--------- -------- -------- ---------
Net cash provided by financing activities 284,989 284,989
--------- -------- -------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS 1,031 (14) 606 1,623
--------- -------- -------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 1,817 1,270 561 3,648
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,206 19 11,186 12,411
--------- -------- -------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,023 $ 1,289 $ 11,747 $ 16,059
========= ======== ======== =========
</TABLE>
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this section is to discuss and analyze our consolidated
financial condition, liquidity and capital resources and results of operations.
This analysis should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998
10-K"). This section contains certain forward-looking statements that involve
risks and uncertainties, including statements regarding our plans, objectives,
goals, strategies and financial performance. Our actual results could differ
materially from the results anticipated in these forward-looking statements as a
result of factors set forth under "Cautionary Statement for Forward-Looking
Information" below and elsewhere in this report.
GENERAL
Huntsman Packaging Corporation derives its revenues, earnings and cash
flows from the sale of film and flexible packaging products throughout the
world. Huntsman Packaging manufactures these products at its facilities located
in North America, Europe and Australia. Our sales have grown primarily as a
result of strategic acquisitions made over the past several years, increased
levels of production at acquired facilities and the overall growth in the market
for film and flexible packaging products. Our most recent acquisitions include
the 1998 acquisitions of Ellehammer Industries, Ltd. and Ellehammer Packaging
Inc. (collectively, the "Ellehammer Acquisition") and Blessings Corporation (the
"Blessings Acquisition").
In order to further benefit from these recent acquisitions, we ceased
operations at certain less efficient manufacturing facilities and relocated
equipment to more efficient facilities. In addition, we sold certain assets and
restructured and consolidated our operations and administrative functions. As a
result of these activities, we increased manufacturing efficiencies and product
quality, reduced costs, and increased operating profitability. As described in
the 1998 10-K, we also undertook certain significant divestitures during 1998.
RESULTS OF OPERATIONS
The following table sets forth net sales and expenses, and such amounts
as a percentage of net sales, for the three and nine month periods ended
September 30, 1999 and 1998 (dollars in millions).
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
% of % of % of % of
$ Sales $ Sales $ Sales $ Sales
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales - net $200.5 100.0% $183.6 100.0% $561.8 100.0% $481.9 100.0%
Cost of sales 161.3 80.4 149.9 81.6 445.5 79.3 399.8 83.0
------ ----- ------ ----- ------ ----- ------ -----
Gross profit 39.2 19.6 33.7 18.4 116.3 20.7 82.1 17.0
Total operating expenses 21.6 10.8 23.7 12.9 60.1 10.7 50.7 10.5
------ ----- ------ ----- ------ ----- ------ -----
Operating income $ 17.6 8.8% $ 10.0 5.5% $ 56.2 10.0% $ 31.4 6.5%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
20
<PAGE> 21
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Net Sales
Net sales increased by $16.9 million, or 9.2%, from $183.6 million, for
the third quarter of 1998, to $200.5 million, for the three months ended
September 30, 1999. The increase was due primarily to increased sales volumes
and increased average selling prices. As compared to the third quarter of 1998,
we realized a 5.2% increase in sales volumes in the third quarter of 1999. All
three of our operating segments experienced increased sales volumes, led by our
design products operating segment with a 10.4% increase in sales volumes and our
specialty films operating segment with a 9.1% increase in sales volumes. Our
average selling prices experienced an overall increase of 3.1% in the third
quarter of 1999 as compared to the third quarter of 1998. As with sales volumes,
we realized selling price increases across all of our operating segments. Our
third quarter 1999 increase in average selling prices was 9.6%, 5.8% and 4.2% in
our design products, industrial films and specialty films operating segments,
respectively. This increase in average selling prices was due primarily to
increased resin prices, as compared to 1998. In the markets we serve, the
average selling price of our products generally increases or decreases as the
price of resins, our primary raw material, increases or decreases.
Gross Profit
Gross profit increased by $5.5 million, or 16.3%, from $33.7 million,
for the third quarter of 1998, to $39.2 million, for the three months ended
September 30, 1999. The increase related almost entirely to our specialty films
operating segment and resulted from specialty films' increased sales volume,
improved product mix and improved manufacturing performance. The design products
and industrial films operating segments' gross profit remained essentially
unchanged in the third quarter of 1999, as compared to 1998. Although these two
operating segments increased sales volumes and improved manufacturing
performance during the third quarter of 1999, those improvements were offset by
raw material prices that increased at a faster rate than our selling prices.
Total Operating Expenses
Total operating expenses decreased by $2.1 million, or 8.9%, from $23.7
million, for the third quarter of 1998, to $21.6 million, for the three months
ended September 30, 1999. The decrease was due primarily to lower plant closing
costs in the third quarter of 1999 as compared to 1998. Excluding plant closing
costs, operating expenses decreased by $0.6 million or 3.0% for the same period.
Operating Income
Operating income increased by $7.6 million, or 76.0%, from $10.0
million, for the third quarter of 1998, to $17.6 million, for the three months
ended September 30, 1999, as a result of the factors discussed above.
Interest Expense
Interest expense increased by $0.5 million, or 4.7%, from $10.7
million, for the three months ended September 30, 1998, to $11.2 million, for
the three months ended September 30, 1999. Interest expense increased due to
increased average interest rates on our bank debt. The increased interest rates
were offset partially by lower overall long-term debt in 1999 as compared to
1998.
21
<PAGE> 22
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Net Sales
Net sales increased by $79.9 million, or 16.6%, from $481.9 million,
for the first nine months of 1998, to $561.8 million, for the nine months ended
September 30, 1999. The increase was primarily due to the Blessings Acquisition
in May 1998. Operations acquired as part of the Blessings Acquisition are
included in our specialty films and design products operating segments. The
facilities acquired as part of the Blessings Acquisition accounted for aggregate
increased net sales of approximately $75.9 million in 1999. Excluding the sales
increases resulting from the Blessings Acquisition, sales volumes increased
slightly in the first nine months of 1999 compared to the same period in 1998,
and our mix of products sold improved. However, these improvements were offset
partially by slightly lower average selling prices in the first three quarters
of 1999 as compared to 1998.
Gross Profit
Gross profit increased by $34.2 million, or 41.7%, from $82.1 million,
for the first nine months of 1998, to $116.3 million, for the nine months ended
September 30, 1999. The increase was due primarily to increased sales volume
resulting from the Blessings Acquisition in May 1998. Excluding the effects of
the Blessings Acquisition, gross profit increased due to the realized benefits
from our recent consolidation of manufacturing facilities, by improved
manufacturing performance, and by increased sales volumes.
Total Operating Expenses
Total operating expenses increased by $9.4 million, or 18.5%, from
$50.7 million, for the first nine months of 1998, to $60.1 million, for the nine
months ended September 30, 1999. The increase was due primarily to additional
goodwill amortization and operating expenses resulting from the Blessings
Acquisition. The increased goodwill amortization represented approximately 43%
of the total increase in operating expenses.
Operating Income
Operating income increased by $24.8 million, or 79.0%, from $31.4
million, for the first nine months of 1998, to $56.2 million, for the nine
months ended September 30, 1999, as a result of the factors discussed above.
Interest Expense
Interest expense increased by $7.4 million, or 29.7%, from $24.9
million, for the nine months ended September 30, 1998, to $32.3 million for the
nine months ended September 30, 1999. Interest expense increased because we
incurred significant additional long-term debt to fund the May 1998 Blessings
Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, we issued $125 million of 9.125% unsecured senior
subordinated notes due October 1, 2007 (the "Notes") and entered into a $225
million credit facility with The Chase Manhattan Bank ("Chase") and certain
financial institutions party thereto (the "Credit Agreement").
On May 14, 1998, the Credit Agreement was amended and restated as a
$510 million facility (the "Amended Credit Agreement"). The Amended Credit
Agreement provides for the continuation of a previous term loan (the "Original
Term Loan") in the principal amount of $75 million, maturing on September 30,
2005; a Tranche A Term Loan (the "Tranche A Term Loan") in the principal amount
of
22
<PAGE> 23
$140 million, maturing on September 30, 2005; a Tranche B Term Loan (the
"Tranche B Term Loan") in the principal amount of $100 million, maturing on June
30, 2006; and a term loan (the "Mexico Term Loan") to ASPEN Industrial, S.A.,
our wholly-owned Mexican subsidiary, in the principal amount of $45 million,
maturing on September 30, 2005. The Amended Credit Agreement also provides for a
$150 million revolving loan facility (the "Revolver") maturing on September 30,
2004. The Original Term Loan, the Tranche A Term Loan and the Mexico Term Loan
amortize at an increasing rate on a quarterly basis. The Tranche A Term Loan and
the Mexico Term Loan began amortizing on December 31, 1998 and the Original Term
Loan begins amortizing on December 31, 2001. The Tranche B Term Loan amortizes
at the rate of $1 million per year, beginning September 30, 1998, with an
aggregate of $93 million due in the last four quarterly installments. The term
loans described above are required to be prepaid with the proceeds of certain
asset sales, with 50% of the proceeds of the sale of certain of our equity
securities, and with the proceeds of certain debt offerings.
Loans under the Amended Credit Agreement bear interest, at the election
of the Company, at either (i) zero to 0.75%, depending on certain of our
financial ratios, plus the higher of (a) Chase's prime rate, (b) the federal
funds rate plus 1/2% or (c) Chase's base CD rate plus 1%, or (ii) the London
Interbank Offered Rate plus 1.00% to 2.00%, also depending on certain of our
financial ratios.
Our obligations under the Amended Credit Agreement are guaranteed by
substantially all of our domestic subsidiaries and secured by substantially all
of our domestic assets. The Amended Credit Agreement is also secured by a pledge
of 65% of the capital stock of each of our foreign subsidiaries. See Note 11 to
the Consolidated Condensed Financial Statements included in this report.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $25.3 million for the
nine months ended September 30, 1999, an increase of $13.6 million from the same
period in 1998. The increase resulted primarily from increased net income,
increases in accounts payable, decreases in income taxes receivable, and
increased non-cash items. These positive cash flow changes were partially offset
by increases in inventories and receivables. The increase in inventories and
trade accounts payable is due primarily to significant increases in resin prices
and the stockpiling of resin inventory to reduce the impact of announced future
resin price increases. The increase in trade accounts receivable is primarily
due to increased sales volumes.
Net Cash Used in Investing Activities
Net cash used in investing activities was $25.7 million for the nine
months ended September 30, 1999, compared to $294.7 million for the same period
in 1998. Net cash used in investing activities was higher in 1998 due to the
acquisitions of Ellehammer and Blessings. Capital expenditures totaled $25.7
million for the nine months ended September 30, 1999 and $35.4 million for the
same period in 1998. Capital expenditures during 1999 were primarily for major
expansion projects in our printed products and barrier films product lines,
upgrading and installation of equipment relocated from recently-closed
manufacturing facilities and several new and carryover maintenance projects
throughout our company. We expect capital expenditures to remain approximately
at current levels in future periods.
Net Cash Provided by Financing Activities
Net cash provided (used) by financing activities was $(7.0) million for
the nine months ended September 30, 1999, compared to $285.0 million for the
same period in 1998. The activity in 1998 was higher due to the proceeds from
the Amended Credit Agreement. The 1999 net cash used by financing activities
resulted primarily from payments on our revolving credit facilities.
23
<PAGE> 24
Liquidity
As of September 30, 1999, Huntsman Packaging had $107.2 million of net
working capital and approximately $110 million of available borrowings under the
Amended Credit Agreement, approximately $2.3 million of which was issued as
letters of credit. As of September 30, 1999, the debt under the Amended Credit
Agreement bore interest at a weighted average rate of 7.8%.
As of September 30, 1999, we had $13.7 million in cash and cash
equivalents, including $12.8 million held by our foreign subsidiaries. The
effective tax rate of repatriating this money and future foreign earnings to the
United States varies from approximately 40% to 65%, depending on various U.S.
and foreign tax factors, including each foreign subsidiary's country of
incorporation. High effective repatriation tax rates may limit our ability to
access cash and cash equivalents generated by our foreign operations for use in
our United States operations, including to pay principal, premium, if any, and
interest on the Notes and the Amended Credit Agreement. For the nine months
ended September 30, 1999, our foreign operations generated net income from
continuing operations of approximately $5.3 million.
We expect that cash flows from operating activities and available
borrowings under the Amended Credit Agreement will provide sufficient working
capital to operate our business, to make expected capital expenditures and to
meet foreseeable liquidity requirements. If we were to engage in a significant
acquisition transaction, however, it may be necessary for us to restructure our
existing credit facilities.
YEAR 2000 COMPLIANCE
We have performed an analysis of both our computer systems and our
production and distribution activities and have implemented procedures to
address year 2000 issues. As of November 1, 1999, we have completed modifying
our computer systems and application programs for year 2000 compliance. As of
September 30, 1999, we had spent approximately $4.5 million on computer systems
and application programs upgrades necessary to become year 2000 compliant. In
addition to addressing year 2000 issues, these computer systems and program
upgrades will significantly enhance our information systems. We will fund these
upgrades through operating cash flows. Any costs for new systems will be
expensed or capitalized and amortized over the system's useful life, as
appropriate. We have a year 2000 third-party compliance policy in place to
identify and resolve potential third-party year 2000 problems. Although we are
working cooperatively with third parties upon whom we rely for raw materials,
utilities, transportation and other products and services, we cannot give any
assurance that the systems of other parties will be year 2000 compliant on a
timely basis. In the most reasonably likely worst-case scenario involving the
failure of our systems and applications or those operated by others, our
business, financial condition and results of operations would be materially
adversely affected. However, an estimate of the dollar amount of such an adverse
effect cannot be practically determined at this time.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Certain information set forth in this report contains "forward-looking
statements" within the meaning of federal securities laws. Forward-looking
statements include statements concerning our plans, objectives, goals,
strategies, future events, future revenues or performance, capital expenditures,
financing needs, plans or intentions relating to acquisitions and other
information that is not historical information. When used in this report, the
words "estimates," "expects," "anticipates," "forecasts," "plans," "intends,"
"believes" and variations of such words or similar expressions are intended to
identify forward-looking statements. We may also make additional forward-looking
statements from time to time. All such subsequent forward-looking statements,
whether written or oral, by or on behalf of Huntsman Packaging, are also
expressly qualified by these cautionary statements.
24
<PAGE> 25
All forward-looking statements, including without limitation,
management's examination of historical operating trends, are based upon our
current expectations and various assumptions. Our expectations, beliefs and
projections are expressed in good faith and we believe there is a reasonable
basis for them. But, there can be no assurance that management's expectations,
beliefs and projections will result or be achieved. All forward-looking
statements apply only as of the date made. We undertake no obligation to
publicly update or revise forward-looking statements which may be made to
reflect events or circumstances after the date made or to reflect the occurrence
of unanticipated events.
There are a number of risks and uncertainties that could cause our
actual results to differ materially from the forward-looking statements
contained in or contemplated by this report. These risks include, but are not
limited to, Huntsman Packaging's high degree of leverage and its ability to
service indebtedness, restrictions under the Huntsman Packaging's credit
facilities, fluctuations in the price of resins (our primary raw materials) and
the availability of resin supplies, competition, customer relationships, risks
associated with acquisitions and risks associated with international operations.
These risks and certain other uncertainties are discussed in more detail in the
1998 10-K. There may also be other factors, including those discussed elsewhere
in this report, that may cause our actual results to differ materially from the
forward-looking statements. Any forward-looking statements should be considered
in light of these factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various interest rate and resin price risks that
arise in the normal course of business. We finance our operations with
borrowings comprised primarily of variable rate indebtedness. Our raw material
costs are comprised primarily of resins. Significant increases in interest rates
or the price of resins could adversely affect our operating margins, results of
operations and ability to service our indebtedness.
We enter into interest rate collar and swap agreements to manage
interest rate market risks and commodity collar agreements to manage resin
market risks. As of September 30, 1999, we had one interest rate collar
agreement and two commodity collar agreements in place. The estimated fair
market value of the interest rate collar was approximately $100,000 and the
estimated aggregate fair market value of the two commodity collars was $300,000.
We have performed a sensitivity analysis assuming a hypothetical 10% adverse
movement in interest rates and commodity prices applied to the agreements
described above. The analysis indicated that such market movements would not
have a material effect on our consolidated financial position, results of
operations or cash flows. Factors that could impact the effectiveness of our
hedging programs include the volatility of interest rates and commodity markets
and the availability of hedging instruments in the future.
25
<PAGE> 26
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report.
27 Financial Data Schedule
(b) No report on Form 8-K was filed during the quarter for which
this report is filed.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUNTSMAN PACKAGING CORPORATION
/s/ SCOTT K. SORENSEN
-------------------------------------------
SCOTT K. SORENSEN
Executive Vice President and
Chief Financial Officer, Treasurer
(Authorized Signatory and
Principal Financial and Accounting Officer)
Date: November 15, 1999
27
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibits
<S> <C>
27 Financial Data Schedule.
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE
ACCOMPANYING FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,677
<SECURITIES> 0
<RECEIVABLES> 117,835
<ALLOWANCES> 1,610
<INVENTORY> 77,177
<CURRENT-ASSETS> 216,783
<PP&E> 377,184
<DEPRECIATION> 70,404
<TOTAL-ASSETS> 762,294
<CURRENT-LIABILITIES> 109,586
<BONDS> 125,000
0
0
<COMMON> 63,676
<OTHER-SE> 22,285
<TOTAL-LIABILITY-AND-EQUITY> 762,294
<SALES> 561,765
<TOTAL-REVENUES> 561,765
<CGS> 445,506
<TOTAL-COSTS> 505,544
<OTHER-EXPENSES> (323)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,273
<INCOME-PRETAX> 24,271
<INCOME-TAX> 10,721
<INCOME-CONTINUING> 13,550
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,550
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
