<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------
For the Quarter Ended September 30, 1998 Commission File Number 33-60714
IVEX PACKAGING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 76-0171625
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
100 Tri-State Drive
Lincolnshire, Illinois 60069
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone number, including area code: (847) 945-9100
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
At November 10, 1998, there were 20,931,268 shares of common stock, par
value $0.01 per share, outstanding.
================================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IVEX PACKAGING CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................................... $ 8,743 $ 5,989
Accounts receivable trade, net of allowance....................... 81,953 64,952
Inventories....................................................... 75,946 59,706
Prepaid expenses and other........................................ 7,146 5,759
--------- ----------
Total current assets............................................ 173,788 136,406
--------- ----------
Property, Plant and Equipment:
Buildings and improvements........................................ 62,366 56,336
Machinery and equipment........................................... 313,650 272,602
Construction in progress.......................................... 30,231 9,225
--------- ----------
406,247 338,163
Less - accumulated depreciation................................... (170,351) (149,207)
--------- ----------
235,896 188,956
Land.............................................................. 9,913 9,077
--------- ----------
Total property, plant and equipment............................. 245,809 198,033
--------- ----------
Other Assets:
Goodwill, net of accumulated amortization......................... 80,704 35,278
Deferred income taxes............................................. 18,161 36,647
Management receivable............................................. 12,050 11,135
Miscellaneous..................................................... 13,391 10,224
--------- ----------
Total other assets.............................................. 124,306 93,284
--------- ----------
Total Assets......................................................... $ 543,903 $ 427,723
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current installments of long-term debt............................ $ 25,216 $ 19,744
Accounts payable and accrued invoices............................. 41,278 38,675
Accrued salary and wages.......................................... 13,024 9,114
Self insurance reserves........................................... 6,893 6,799
Accrued rebates and discounts..................................... 6,779 4,596
Accrued interest.................................................. 3,426 4,191
Other accrued expenses............................................ 15,017 11,546
--------- ----------
Total current liabilities....................................... 111,633 94,665
--------- ----------
Long-Term Debt....................................................... 391,904 319,055
--------- ----------
Other Long-Term Liabilities.......................................... 18,432 21,868
--------- ----------
Deferred Income Taxes................................................ 4,157 4,304
--------- ----------
Stockholders' Equity (Deficit):
Common stock, $.01 par value - 45,000,000 shares authorized;
20,931,268 and 20,426,666 shares issued and outstanding at
September 30, 1998 and December 31, 1997 ....................... 209 204
Paid in capital in excess of par value............................ 339,098 328,322
Accumulated deficit............................................... (318,552) (339,836)
Accumulated other comprehensive income (loss)..................... (2,978) (859)
--------- ----------
Total stockholders' equity (deficit)............................ 17,777 (12,169)
--------- ----------
Total Liabilities and Stockholders' Equity (Deficit)................. $ 543,903 $ 427,723
========= ==========
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE> 3
IVEX PACKAGING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales .................................... $ 159,953 $ 137,448 $ 452,740 $ 401,482
Cost of goods sold ........................... 121,963 105,246 345,278 312,919
------------ ------------ ------------ ------------
Gross profit ................................. 37,990 32,202 107,462 88,563
------------ ------------ ------------ ------------
Operating expenses:
Selling ...................................... 8,342 7,404 24,024 20,635
Administrative ............................... 8,830 7,890 27,281 24,126
Amortization of intangibles .................. 644 289 1,497 801
Special charge (benefit) ..................... 53,329 (2,766) 53,329
------------ ------------ ------------ ------------
Total operating expenses ..................... 17,816 68,912 50,036 98,891
------------ ------------ ------------ ------------
Income (loss) from operations ................ 20,174 (36,710) 57,426 (10,328)
Interest expense ............................. 7,782 11,909 21,952 34,714
------------ ------------ ------------ ------------
Income (loss) before income taxes ............ 12,392 (48,619) 35,474 (45,042)
Income tax provision (benefit) ............... 4,853 (30,729) 14,190 (29,839)
------------ ------------ ------------ ------------
Net income (loss) ............................ $ 7,539 $ (17,890) $ 21,284 $ (15,203)
============ ============ ============ ============
Earnings per share:
Basic:
Net income (loss) ...................... $ 0.36 $ (1.72) $ 1.03 $ (1.47)
============ ============ ============ ============
Weighted average shares outstanding .... 20,931,268 10,375,513 20,658,318 10,360,363
============ ============ ============ ============
Diluted:
Net income (loss) ...................... $ 0.36 $ (1.72) $ 1.02 $ (1.47)
============ ============ ============ ============
Weighted average shares outstanding .... 21,094,865 10,375,513 20,875,961 10,360,363
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE> 4
IVEX PACKAGING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Ivex Packaging
Corporation Paid in Accumulated
Common Stock Capital Other
---------------------- In Excess of Accumulated Comprehensive
Shares Amount Par Value Deficit Income (Loss)
---------- --------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996........................ 1,072,246 $ 11 $ 177,375 $ (303,566) $ (1,164)
Issuance of Management shares.................... 218,968 2 33,824
Common stock split............................... 11,175,452 112 (112)
Issuance of common stock......................... 7,960,000 79 117,235
Net loss......................................... (36,270)
Other comprehensive income (foreign currency
translation adjustment)........................ 305
Comprehensive income (loss)......................
---------- ----- ---------- ----------- --------
Balance at December 31, 1997........................ 20,426,666 204 328,322 (339,836) (859)
Issuance of common stock......................... 500,000 5 10,702
Exercise of common stock options................. 4,602 74
Net income....................................... 21,284
Other comprehensive loss (foreign currency
translation adjustment)........................ (2,119)
Comprehensive income (loss)......................
---------- ----- ---------- ---------- --------
Balance at September 30, 1998....................... 20,931,268 $ 209 $ 339,098 $ (318,552) $ (2,978)
========== ===== ========== ========== ========
<CAPTION>
Stockholders'
Equity Comprehensive
(Deficit) Income (Loss)
------------ -------------
<S> <C> <C>
Balance at December 31, 1996........................ $ (127,344)
Issuance of Management shares.................... 33,826
Common stock split...............................
Issuance of common stock......................... 117,314
Net loss......................................... (36,270) $ (36,270)
Other comprehensive income (foreign currency
translation adjustment)........................ 305 305
------------
Comprehensive income (loss)...................... $ (35,965)
----------- ============
Balance at December 31, 1997........................ (12,169)
Issuance of common stock......................... 10,707
Exercise of common stock options................. 74
Net income....................................... 21,284 $ 21,284
Other comprehensive loss (foreign currency
translation adjustment)........................ (2,119) (2,119)
------------
Comprehensive income (loss)...................... $ 19,165
----------- ============
Balance at September 30, 1998....................... $ 17,777
===========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE> 5
IVEX PACKAGING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income(loss)................................................................. $ 21,284 $ (15,203)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation of properties................................................. 24,139 19,689
Amortization of intangibles and debt issue costs........................... 2,063 1,921
Non-cash interest.......................................................... 10,658
Non-cash management compensation charge.................................... 53,329
Deferred income taxes...................................................... 10,433 (31,724)
---------- ----------
57,919 38,670
Change in operating assets and liabilities:
Accounts receivable......................................................... (11,797) (12,394)
Inventories................................................................. (8,256) (4,135)
Prepaid expenses and other assets........................................... (1,059) (1,323)
Accounts payable............................................................ (3,296) (5,770)
Accrued expenses and other liabilities...................................... (2,936) 3,481
---------- ----------
Net cash from operating activities............................................ 30,575 18,529
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of stock................................................. 10,707
Payment of debt................................................................. (30,742) (3,750)
Proceeds from revolving credit facility......................................... 91,000 48,300
Issuance of management loans.................................................... (3,682)
Repayment of management loans................................................... 2,726
Payment of debt issue costs..................................................... (805) (327)
Other, net...................................................................... (789) (451)
---------- ----------
Net cash from financing activities............................................ 68,415 43,772
---------- ----------
Cash flows from investing activities:
Purchase of property, plant and equipment....................................... (28,996) (17,984)
Acquisitions.................................................................... (67,625) (38,661)
Other, net...................................................................... 385 (646)
---------- ----------
Net cash used by investing activities......................................... (96,236) (57,291)
---------- ----------
Net increase in cash and cash equivalents.......................................... 2,754 5,010
Cash and cash equivalents at beginning of period................................... 5,989 2,822
---------- ----------
Cash and cash equivalents at end of period......................................... $ 8,743 $ 7,832
========== ==========
Supplemental cash flow disclosures: Cash paid during the period for:
Interest...................................................................... $ 22,912 $ 17,952
Income taxes.................................................................. 3,241 937
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE> 6
IVEX PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTE 1 - ACCOUNTING AND REPORTING POLICIES
In the opinion of management, the information in the accompanying
unaudited financial statements reflects all adjustments necessary for a fair
statement of results for the interim periods. These interim financial statements
should be read in conjunction with the financial statements and the notes
thereto included in the Annual Report on Form 10-K for the year ended December
31, 1997 (the "Form 10-K") of Ivex Packaging Corporation ("Ivex" or the
"Company"). IPC, Inc. ("IPC") is the only direct subsidiary of Ivex and is
wholly owned.
The Company's accounting and reporting policies are summarized in Note 2
to the consolidated financial statements of the Ivex Form 10-K.
Accounts Receivable
Accounts receivable at September 30, 1998 and December 31, 1997 consist of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Accounts receivable................................... $ 85,082 $ 67,496
Less - Allowance for doubtful accounts................ (3,129) (2,544)
--------- ----------
$ 81,953 $ 64,952
========= ==========
</TABLE>
Inventories
Inventories at September 30, 1998 and December 31, 1997 consist of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw materials......................................... $ 33,658 $ 32,200
Finished goods........................................ 42,288 27,506
--------- ----------
$ 75,946 $ 59,706
========= ==========
</TABLE>
NOTE 2 - LONG TERM DEBT
At September 30, 1998 and December 31, 1997, the long-term debt of the
Company was as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Senior credit facility ........................... $ 375,500 $ 296,875
Industrial revenue bonds ......................... 39,686 39,736
Other ............................................ 1,934 2,188
--------- ---------
Total debt outstanding ..................... 417,120 338,799
Less - Current installments of long-term debt .... (25,216) (19,744)
--------- ---------
Long-term debt ............................. $ 391,904 $ 319,055
========= =========
</TABLE>
On August 19, 1998, the Company amended the Senior Credit Facility of
IPC (the "Credit Facility") to increase the revolving credit portion to $265,000
from $175,000, among other things.
6
<PAGE> 7
IVEX PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3 - COMPREHENSIVE INCOME
During the quarter ended March 31, 1998, the Company adopted SFAS 130,
"Reporting Comprehensive Income," which requires the Company to disclose, in
financial statement format, all non-owner changes in equity. As of the quarter
ended September 30, 1998, all such changes in equity resulted from changes in
foreign currency translation adjustments.
NOTE 4 - SECONDARY OFFERING
On May 27, 1998, Ivex completed a secondary offering (the "Secondary
Offering") of 4,000,000 shares of common stock of the Company. In the Secondary
Offering, the Company sold to the underwriters 500,000 previously unissued
shares of common stock at an offering price of $24.00 per share yielding net
proceeds of $10,707. Other selling stockholders, including members of Ivex
management (the "Management Stockholders"), sold 3,500,000 previously issued and
outstanding shares of common stock owned by them. The Company did not receive
any of the proceeds from the sale of shares of common stock by such selling
stockholders. The proceeds of the Secondary Offering were used to pay down
borrowings under the Company's revolving credit facility.
NOTE 5 - ULTRA PAC ACQUISITION
On April 23, 1998, Ivex acquired all of the common stock of Ultra Pac,
Inc. ("Ultra Pac"), a Rogers, Minnesota based specialty packaging company, for
$67,625. In addition, Ivex assumed approximately $18,700 of Ultra Pac
indebtedness and paid fees associated with the transaction of approximately
$2,500. Ultra Pac is a leading North American producer of PET food packaging
that designs and manufacturers plastic containers and packaging for the food
industry, including supermarkets, distributors of food packaging, wholesale
bakeries, produce growers, delicatessens, food processors and foodservice
companies.
The Ultra Pac acquisition was financed through revolving credit
borrowings under the Company's senior credit facility. The acquisition was
accounted for as a purchase; accordingly, the purchase price was allocated to
the specific assets acquired and liabilities assumed based upon their fair value
at the date of acquisition. The Company's consolidated financial statements for
1998 include the results of operations and cash flows of Ultra Pac from the
purchase date.
NOTE 6 - SPECIAL CHARGE (BENEFIT):
In conjunction with the sale of their stock in the Secondary Offering,
the Management Stockholders repaid a portion of their loans from the Company
(the "Management Loans") aggregating $2,726. The Management Loans were made to
senior management during the fourth quarter of 1997 and the first quarter of
1998 pursuant to a stock option plan (the "IPC Option Plan") to enable them to
pay their individual income taxes in connection with the conversion of options
granted under the IPC Option Plan (the "IPC Options"). In addition, during the
fourth quarter of 1997, the Company recorded an accrual for future Company
payments to senior management of an amount which (after taxes) enabled such
management to pay interest on the Management Loans. As a result of the loan
repayment by the Management Stockholders, the Company's accrual for such future
Company payments was reduced by $2,766 during the second quarter of 1998.
During the third quarter of 1997, the Company recorded a nonrecurring
non-cash compensation charge of $53,329 in connection with the Company's
conversion, pursuant to the IPC Option Plan, of the IPC Options into 2,114,133
newly issued shares of the Company's common stock and newly issued stock options
exercisable for 817,067 shares of the Company's common stock. The nonrecurring
compensation charge consists of (i) a non-cash compensation charge of $33,826
associated with the conversion of the IPC Options into shares of the Company's
common stock and (ii) a non-cash compensation charge of $19,503 associated with
the accrual of future Company
7
<PAGE> 8
IVEX PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
payments to senior management of an amount which (after taxes) will enable such
management to pay interest on the Management Loans. The Management Loans bear
interest at the minimum applicable federal rate at the date of funding
(approximately 6.7%) and are secured only by the newly issued shares of stock
exchanged for the IPC options and are nonrecourse to any other personal assets.
NOTE 7 - INCOME TAXES
During the third quarter of 1997, the Company determined it was more
likely than not that a portion of the future tax benefits arising from its net
operating loss carryforwards would be realized in future years due to Ivex's
continued improvement in earnings and the probability of future taxable income.
As a result, in accordance with SFAS No. 109, the Company recognized a
nonrecurring income tax benefit of approximately $13,200 by releasing a portion
of the valuation allowance.
NOTE 8 - SUBSEQUENT EVENT
On October 2, 1998, Ivex acquired the Wakefield, Massachusetts
operating unit of Bleyer Industries, Inc., headquartered in Valley Stream, New
York for $17,250. The acquired business manufactures fluted cups and pads for
the baking and candy industries and has annual sales of approximately $14,000.
The acquisition was financed through revolving credit borrowings under the
Company's senior credit facility and will be recorded using the purchase method
of accounting.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
References to the Company or Ivex herein reflect the consolidated results of
Ivex Packaging Corporation.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net Sales
The Company's net sales increased by 16.4% during the third quarter of
1998 over the Company's net sales during the corresponding period in 1997. The
increase primarily resulted from the second quarter 1998 acquisition of Ultra
Pac, increased unit sales volume and selling price of extruded sheet and film,
and increased sales of converted plastic and paper products for food
applications. The increase was partially offset by decreased Industrial
Packaging sales. The following table sets forth information with respect to net
sales of the Company's product groups for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------
(dollars in thousands)
% of % of
1998 Net Sales 1997 Net Sales
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Consumer Packaging............................ $ 102,983 64.4 $ 76,716 55.8
Industrial Packaging.......................... 56,970 35.6 60,732 44.2
----------- ----- ----------- -----
Total................................... $ 159,953 100.0 $ 137,448 100.0
=========== ===== =========== =====
</TABLE>
Consumer Packaging net sales increased by 34.2% during the third quarter
of 1998 from the corresponding period in 1997. The increase primarily results
from incremental sales associated with Ultra Pac and increased unit sales volume
and selling price of extruded sheet and film. Sales of converted plastic and
paper products for food applications, excluding the sales relating to Ultra Pac,
increased approximately 9% during the third quarter of 1998 compared to the
corresponding period in the prior year.
Industrial Packaging net sales decreased by 6.2% during the third
quarter of 1998 from the corresponding period in 1997, primarily due to
decreased unit volume of the Company's protective packaging and surface
protection products. Additionally, the decrease is due to slightly decreased
unit volume and selling price of recycled and specialty paper.
Gross Profit
The Company's gross profit increased 18.0% during the third quarter of
1998 compared to the corresponding period in the prior year primarily as a
result of the increased sales volume, the incremental effects from Ultra Pac and
reduced raw material costs in all businesses. Gross profit margin increased to
23.8% during the third quarter of 1998 compared to 23.4% during the third
quarter of 1997. The increase in gross profit margin primarily resulted from the
reduced raw material costs in all businesses and improved absorption, resulting
from the increased extruded sheet and film sales, in the Consumer Packaging
product group.
Operating Expenses
Selling and administrative expenses increased 12.3% during the third
quarter of 1998 primarily as a result of the Ultra Pac acquisition. As a
percentage of net sales, selling and administrative expenses decreased to 10.7%
during the third quarter of 1998 compared to 11.1% during the same period in the
prior year primarily because of the increased sales in the Company's Consumer
Packaging products group and reduced incentive compensation.
9
<PAGE> 10
Amortization of intangibles increased 122.8% during the third quarter of
1998 compared to the same period in 1997 primarily as a result of increased
goodwill and non-compete agreement amortization associated with the Ultra Pac
acquisition.
Special Charge
During the third quarter of 1997, the Company recorded a nonrecurring
non-cash compensation charge of $53.3 million in connection with the Company's
conversion, pursuant to the IPC Option Plan, of the IPC Options into 2,114,133
newly issued shares of the Company's common stock and newly issued stock options
exercisable for 817,067 shares of the Company's common stock. The nonrecurring
compensation charge consists of (i) a non-cash compensation charge of $33.8
million associated with the conversion of the IPC Options into shares of the
Company's common stock and (ii) a non-cash compensation charge of $19.5 million
associated with the accrual of future Company payments to senior management of
an amount which (after taxes) will enable such management to pay interest on the
Management Loans. The Management Loans bear interest at the minimum applicable
federal rate at the date of funding (approximately 6.7%) and are secured only by
the newly issued shares of stock exchanged for the IPC options and are
nonrecourse to any other personal assets.
Income from Operations
Income from operations and operating margin were $20.2 million and
12.6%, respectively, during the third quarter of 1998 compared to a loss from
operations of $36.7 million during the third quarter of 1997. The loss from
operations in 1997 is due to the special charge of $53.3 million. Without this
special charge, operating income and margin would have been $16.6 million and
12.1%, respectively, during the third quarter of 1997. The increase in operating
income was primarily the result of the Ultra Pac acquisition and increased
income from operations from the Company's extruded sheet and film business and
the Canadian converted plastic products business. The increase in operating
margin was primarily the result of the improved unit volume and decreased raw
material costs of the Company's extruded sheet and film and converted plastic
and paper products for food applications.
Interest Expense
Interest expense during the third quarter of 1998 was $7.8 million
compared to $11.9 million during the same period in 1997. The decrease is
primarily due to lower interest rates resulting from the Company's fourth
quarter 1997 initial public offering and debt refinancing.
Income Taxes
The Company's effective tax rate for the third quarter of 1998
approximated 40% reflecting an effective federal tax provision of 35% and an
effective state tax provision (net of federal benefit) approximating 5%. During
the third quarter of 1997, the Company determined it was more likely than not
that a portion of the future tax benefits arising from its net operating loss
carryforwards would be realized in future years due to Ivex's continued
improvement in earnings and the probability of future taxable income. As a
result, in accordance with SFAS No. 109, the Company recognized a nonrecurring
income tax benefit of approximately $13.2 million by releasing a portion of the
valuation allowance.
10
<PAGE> 11
Net Income
Net income increased to $7.5 million during the third quarter of 1998
compared to a net loss of $17.9 million in the prior year. The increase in net
income is the result of the improved income from operations and decreased
interest expense.
Earnings Per Share
Diluted earnings per share increased to $0.36 during the third quarter
of 1998 compared to a loss per share of $1.72 during the third quarter of 1997.
The increase is the result of the increased net income partially offset by a
greater number of shares outstanding associated with the Company's fourth
quarter 1997 initial public offering.
Adjusted EBITDA
Adjusted EBITDA includes income from operations adjusted to exclude
depreciation and amortization expenses, and special charges (benefit). The
Company believes that Adjusted EBITDA provides additional information for
determining its ability to meet future debt service requirements. However,
Adjusted EBITDA is not a defined term under Generally Accepted Accounting
Principles ("GAAP") and is not indicative of operating income or cash flow from
operations as determined under GAAP.
The following table sets forth information with respect to Adjusted
EBITDA of the Company's product groups for the periods presented.
<TABLE>
<CAPTION>
Three Months Ended September 30,
(dollars in thousands)
------------------------------------------------
% of % of
1998 Net Sales 1997 Net Sales
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Consumer Packaging............................ $ 21,589 21.0 $ 15,357 20.0
Industrial Packaging.......................... 9,783 17.2 10,074 16.6
Corporate Expense............................. (1,961) - (1,612) -
--------- ---- --------- ----
Total................................... $ 29,411 18.4 $ 23,819 17.3
========= ==== ========= ====
</TABLE>
The Company's Adjusted EBITDA increased 23.5% from $23.8 million to
$29.4 million and Adjusted EBITDA margin increased from 17.3% to 18.4% during
the third quarter of 1998 compared to the same period in 1997. The 40.6%, or
$6.2 million, increase in Consumer Packaging's Adjusted EBITDA in the current
quarter is primarily attributable to the incremental Adjusted EBITDA from Ultra
Pac, increased sales volume and reduced raw material costs. The decrease in
Industrial Packaging's Adjusted EBITDA of 2.9%, or $291,000, is primarily due to
decreased net sales.
11
<PAGE> 12
RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net Sales
The Company's net sales increased by 12.8% during the nine months ended
September 30, 1998 over the Company's net sales during the corresponding period
in 1997 primarily as a result of incremental sales volume associated with the
Ultra Pac acquisition and the Company's 1997 acquisitions (including M&R
Plastics, Inc., Avpex International, Inc. and Crystal Thermoplastics, Inc.) and
increased volume of extruded sheet and film. The following table sets forth
information with respect to net sales of the Company's product groups for the
periods presented:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------
(dollars in thousands)
% of % of
1998 Net Sales 1997 Net Sales
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Consumer Packaging............................ $ 280,033 61.9 $ 222,372 55.4
Industrial Packaging.......................... 172,707 38.1 179,110 44.6
--------- ----- --------- -----
Total................................... $ 452,740 100.0 $ 401,482 100.0
========= ===== ========= =====
</TABLE>
Consumer Packaging net sales increased by 25.9% during the nine months
ended September 30, 1998 from the corresponding period in 1997 primarily due to
incremental sales volume associated with the recently completed acquisitions,
increased unit sales volume of extruded sheet and film and increased sales of
converted plastic and paper products. Sales of converted plastic and paper
products for food applications, excluding the sales relating to the newly
acquired facilities, increased 6% during the nine months ended September 30,
1998 over the corresponding period in 1997.
Industrial Packaging net sales decreased by 3.6% during the nine months
ended September 30, 1998 from the corresponding period in 1997, primarily due to
decreased unit volume of the Company's surface protection products, protective
masking products and recycled and specialty papers.
Gross Profit
The Company's gross profit increased 21.3% during the nine months ended
September 30, 1998 compared to the corresponding period in the prior year
primarily as a result of the incremental effects from the newly acquired
facilities, the increased sales volume, reduced raw material costs in all
businesses and improved absorption in the Consumer Packaging product group.
Gross profit margin was 23.7% and 22.1% during the nine months ended September
30, 1998 and 1997, respectively. The increased gross profit margin is primarily
the result of the reduced raw material costs in all businesses and the improved
absorption, resulting from the increased sales in the Consumer Packaging product
group.
Operating Expenses
Selling and administrative expenses increased 14.6% during the nine
months ended September 30, 1998 primarily as a result of the recently completed
acquisitions. As a percentage of net sales, selling and administrative expenses
increased to 11.3% during the nine months ended September 30, 1998 compared to
11.1% during the same period in the prior year primarily due to the higher
selling and administrative expenses associated with the recent acquisitions and
lower net sales in the Industrial Packaging product group.
Amortization of intangibles increased 86.9% during the nine months ended
September 30, 1998 compared to the same period in 1997 as a result of increased
goodwill and non-compete agreement amortization associated with the recently
completed acquisitions.
12
<PAGE> 13
Special Charge (Benefit)
In conjunction with the sale of their stock, the Management Stockholders
repaid loans from the Company aggregating $2.7 million. Such loans were made to
senior management during the fourth quarter of 1997 and the first quarter of
1998 pursuant to the IPC Option Plan to enable them to pay their individual
income taxes in connection with the conversion of options granted under the IPC
Option Plan. Further, the Company recorded an accrual for future Company
payments to senior management of an amount which (after taxes) enabled such
management to pay interest on the loans. As a result of the loan repayment by
the Management Stockholders, the Company's accrual for such future Company
payments was reduced by $2.8 million during the second quarter of 1998.
During the third quarter of 1997, the Company recorded a nonrecurring
non-cash compensation charge of $53.3 million in connection with the Company's
conversion, pursuant to the IPC Option Plan, of the IPC Options into 2,114,133
newly issued shares of the Company's common stock and newly issued stock options
exercisable for 817,067 shares of the Company's common stock. The nonrecurring
compensation charge consists of (i) a non-cash compensation charge of $33.8
million associated with the conversion of the IPC Options into shares of the
Company's common stock and (ii) a non-cash compensation charge of $19.5 million
associated with the accrual of future Company payments to senior management of
an amount which (after taxes) will enable such management to pay interest on the
Management Loans. The Management Loans bear interest at the minimum applicable
federal rate at the date of funding (approximately 6.7%) and are secured only by
the newly issued shares of stock exchanged for the IPC options and are
nonrecourse to any other personal assets.
Income from Operations
Income from operations was $57.4 million during the nine months ended
September 30, 1998 compared to loss from operations of $10.3 million during the
nine months ended September 30, 1997. The increase in income from operations is
primarily a result of the special benefit recorded in 1998 and the special
charge recorded in 1997. Excluding the special benefit, income from operations
and operating margin were $54.7 million and 12.1%, respectively, during the nine
months ended September 30, 1998. Excluding the special charge, income from
operations and operating margin were $43.0 million and 10.7%, respectively,
during the nine months ended September 30, 1997. The increase in income from
operations results primarily from the recently completed acquisitions and
increased volume of extruded sheet and film during the nine months ended
September 30, 1998. The increase in operating margin is primarily due to the
improved gross profit margin and the special benefit.
Interest Expense
Interest expense during the nine months ended September 30, 1998 was
$22.0 million compared to $34.7 million during the same period in 1997. The
decrease is the result of lower outstanding indebtedness and lower interest
rates associated with the Company's fourth quarter 1997 initial public offering
and debt refinancing.
Net Income
Net income was $21.3 million during the nine months ended September 30,
1998 compared to net loss of $15.2 million in the prior year. The increase in
net income during the first nine months of 1998 is primarily due to the
increased income from operations and decreased interest expense.
13
<PAGE> 14
Earnings Per Share
Diluted earnings per share increased to $1.02 during the nine months
ended September 30, 1998 compared to loss per share of $1.47 during the nine
months ended September 30, 1997. The increase is the result of the increased net
income partially offset by a greater number of shares outstanding associated
with the Company's fourth quarter 1997 initial public offering.
Adjusted EBITDA
Adjusted EBITDA includes income from operations adjusted to exclude
depreciation and amortization expenses and special charges (benefit). The
Company believes that Adjusted EBITDA provides additional information for
determining its ability to meet future debt service requirements. However,
Adjusted EBITDA is not a defined term under GAAP and is not indicative of
operating income or cash flow from operations as determined under GAAP.
The following table sets forth information with respect to Adjusted
EBITDA of the Company's product groups for the periods presented.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------
(dollars in thousands)
% of % of
1998 Net Sales 1997 Net Sales
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Consumer Packaging............................ $ 57,776 20.6 $ 40,013 18.0
Industrial Packaging.......................... 28,404 16.4 28,273 15.8
Corporate Expense............................. (5,884) - (4,795) -
--------- ---- --------- ----
Total................................... $ 80,296 17.7 $ 63,491 15.8
========= ==== ========= ====
</TABLE>
The Company's Adjusted EBITDA increased 26.5% from $63.5 million to
$80.3 million and Adjusted EBITDA margin increased from 15.8% to 17.7% during
the nine months ended September 30, 1998 compared to the same period in 1997.
The 44.4%, or $17.8 million, increase in Consumer Packaging Adjusted EBITDA is
primarily attributable to the incremental Adjusted EBITDA from the recently
completed acquisitions and to the increased sales of extruded sheet and film and
converted plastic and paper products. Consumer Packaging's increased Adjusted
EBITDA was partially offset by the decreased profitability of the Company's
polymerization operations. Industrial Packaging's Adjusted EBITDA was consistent
with the prior year primarily due to improved gross profit associated with
reduced raw material costs offset by lower unit sales volume. The increase in
Corporate expense is primarily due to increased incentive compensation and
public company expenses.
LIQUIDITY AND CAPITAL RESOURCES
On August 19, 1998, the Company amended the Credit Facility to increase
the revolving credit portion to $265.0 million from $175.0 million, among other
things. At September 30, 1998, the Company had cash and cash equivalents of $8.7
million and availability under the revolving credit portion of the Credit
Facility was $127.4 million. The Company's working capital at September 30, 1998
was $62.2 million.
The primary short-term and long-term operating cash requirements for the
Company are for debt service, working capital, acquisitions and capital
expenditures. The Company expects to rely on cash generated from operations
supplemented by revolving credit facility borrowings under the Credit Facility
to fund the Company's principal short-term and long-term cash requirements.
14
<PAGE> 15
The Credit Facility is comprised of a $150.0 million Term A Loan, a
$150.0 million Term B Loan and a $265.0 million revolving credit facility (up to
$65.0 million of which may be in the form of letters of credit). The Term A Loan
is required to be repaid in quarterly payments totaling $3.75 million in 1997,
$16.25 million in 1998, $21.25 million in 1999, $25.0 million in 2000, $26.25
million in 2001, $31.25 million in 2002 and $26.25 million in 2003 and the Term
B Loan is required to be repaid in quarterly payments totaling $1.5 million per
annum through September 30, 2003 and four installments of $35.25 million on
December 31, 2003, March 31, 2004, June 30, 2004 and September 30, 2004. The
interest rate of the Credit Facility can be, at the election of IPC, based upon
LIBOR or the Adjusted Base Rate, as defined therein, and is subject to certain
performance pricing adjustments. The Term A Loan and loans under the revolving
credit facility bear interest at rates up to LIBOR plus 1.625% or the Adjusted
Base Rate plus 0.625%. As of September 30, 1998, such rate for the Term A Loan
is LIBOR plus 1.125%. The Term B Loan bears interest at rates up to LIBOR plus
2.00% or the Adjusted Base Rate plus 1.0%. As of September 30, 1998, such rate
for the Term B Loan is LIBOR plus 1.75%. Borrowings are secured by substantially
all the assets of the Company and its subsidiaries. The revolving credit
facility and Term A Loan will terminate on September 30, 2003 and the Term B
Loan will terminate on September 30, 2004. Under the Credit Facility, IPC is
required to maintain certain financial ratios and levels of net worth and future
indebtedness and dividends are restricted, among other things. The Company
believes it is currently in compliance with the terms and conditions of the
Credit Facility in all material respects.
The Company has entered into interest rate swap agreements with a group
of banks having notional amounts totaling $160.0 million and various maturity
dates through November 5, 2002. These agreements effectively fix a portion of
the Company's LIBOR base rate at rates from 5.33% to 6.12% during this period.
The Company entered into no cost interest rate collar agreements with a group of
banks having notional amounts totaling $100.0 million through November 5, 2002.
These collar agreements effectively fix the LIBOR base rate at a maximum of
7.00% and allow for the Company to pay the market LIBOR from a floor of 5.55% to
the maximum rate. If LIBOR falls below 5.55%, the Company is required to pay the
floor rate of 5.55%. The Company entered into no cost interest rate collar
agreements with a group of banks having notional amounts totaling $60.0 million
through November 5, 2001. These collar agreements effectively fix the LIBOR base
rate at a maximum of 5.31% and allow for the Company to pay the market LIBOR
from a floor of 4.47% to the maximum rate. If LIBOR falls below 4.47%, the
Company is required to pay the floor rate of 4.47%. Income or expense related to
settlements under these agreements are recorded as adjustments to interest
expense in the Company's financial statements.
IPC's industrial revenue bonds require monthly interest payments and are
due in varying amounts and dates through 2009. Certain letters of credit under
the Credit Facility provide credit enhancement for IPC's industrial revenue
bonds.
On May 27, 1998, Ivex completed the Secondary Offering. In the Secondary
Offering, the Company sold to the underwriters 500,000 previously unissued
shares of common stock at an offering price of $24.00 per share yielding net
proceeds of $10.7 million. Other selling stockholders, including Management
Stockholders, sold 3,500,000 previously issued and outstanding shares of common
stock owned by them. The Company did not receive any of the proceeds from the
sale of shares of common stock by such selling stockholders. The proceeds of the
Secondary Offering were used to pay down borrowings under the Company's
revolving credit facility.
The Company made capital expenditures of $29.0 million and $18.0 million
in the nine months ended September 30, 1998 and 1997, respectively. At September
30, 1998, the Company has a significant number of capital projects ongoing in
all major business groups. Capital spending for 1998 is expected to approximate
$36.0 million to $40.0 million. In future periods, capital spending is expected
to approximate depreciation expense.
On April 23, 1998, Ivex acquired all of the common stock of Ultra Pac,
Inc for $67.6 million. In addition, Ivex assumed approximately $18.7 million of
Ultra Pac indebtedness and paid fees associated with the transaction of
approximately $2.5 million. On October 2, 1998, Ivex acquired the Wakefield,
Massachusetts operating unit of Bleyer
15
<PAGE> 16
Industries, Inc., headquartered in Valley Stream, New York for $17.3 million.
The acquired business manufactures fluted cups and pads for the baking and candy
industries and has annual sales of approximately $14.0 million. The acquisitions
were financed through revolving credit borrowings under the Company's senior
credit facility.
YEAR 2000
The Year 2000 issue refers to computer equipment which uses two digits
rather than four to define a given year and which therefore might read a date
using "00" as the year 1900 rather than the year 2000. As the Year 2000
approaches, such systems may be unable to process certain date based
information. This could result in system failure or miscalculations causing
disruptions of operations and the inability to engage in normal business
activities.
The Company initiated a company-wide program to prepare its computer
systems and applications for the year 2000. The initial focus of the Company's
compliance contained the following steps: assessment of the issue; planning the
conversion; plan implementation; and testing. Those systems determined to be at
risk were prioritized and plans were put in place to upgrade systems by
remediation, replacements or outsourcing. Through September 1998, the assessment
and planning phases have been completed for all systems. A majority of the
Company's facilities has already implemented or is in the process of
implementing one information technology system (the "IT system"). The
implementation of the IT system began in the mid-1990's as a strategic effort to
upgrade the Company's computer systems. Based on vendor representation and
in-house testing, the Company believes the IT system is Year 2000 compliant. All
facilities that are not implementing the IT system have information technology
systems that are believed to be Year 2000 compliant, based on vendor
representation and in-house testing. The Company's objective is to become Year
2000 compliant with all mission critical activities and systems by June 1999,
allowing substantial time for further testing, verification and the final
completion of less important systems by fourth quarter 1999. Contingency plans
will be developed in 1999.
In addition to the information technology system review noted above, the
Company has initiated processes to review and to modify where appropriate, other
areas impacted by Year 2000. These areas include, but are not limited to,
personal computer hardware and software, remote location access to information
technology systems, facility management and certain non-information technology
issues, such as the extent to which embedded chips are used in machinery and
equipment used in operations. The Company has completed assessments in all of
the above areas except the personal computer hardware and software which is
expected to be completed by the fourth quarter of 1998. In relation to the
Company's vendors, the Company is in the process of communicating with its
significant vendors to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 compliance
issues. The Company expects to complete its evaluation by the first quarter of
1999. The Company cannot guarantee that the failure of another company to be
converted will not have an effect on the Company. However, the Company believes
that any noncompliance by its vendors will not result in a material adverse
effect on the Company.
The Company has determined that it has no exposure to contingencies
related to the Year 2000 issue for products it has sold.
The Company expects to incur internal and external expenses related to
its remediation of the Year 2000 issue. Testing and remediation efforts are
expected to cost approximately $180,000, of which $60,000 has already been
incurred. These costs will be treated as period costs and expensed as incurred.
Although no assurances can be given as to the Company's compliance,
particularly as it relates to third-parties, based upon the progress to date,
the Company does not expect that either future costs of modifications or the
consequences of any unsuccessful modifications will have a material adverse
effect on the Company's financial position or results of operations.
Accordingly, the Company feels that the most reasonably likely worst case Year
2000 scenario would not have a material adverse effect on the Company's
financial position or results of operations.
16
<PAGE> 17
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources and -
Year 2000" constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the Company's actual performance, highly
leveraged financial condition and readiness for the Year 2000 issue (see "--
Liquidity and Capital Resources and - Year 2000" above).
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time Ivex and its subsidiaries are involved in various
litigation matters arising in the ordinary course of business. Ivex believes
that none of the matters in which Ivex or its subsidiaries are currently
involved, either individually or in the aggregate, is material to Ivex or IPC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None.
SIGNATURE
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.
IVEX PACKAGING CORPORATION
By: /s/ Frank V. Tannura
-------------------------------
Frank V. Tannura
Vice President and
Principal Financial Officer
November 10, 1998
(Date)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,743
<SECURITIES> 0
<RECEIVABLES> 85,082
<ALLOWANCES> 3,129
<INVENTORY> 75,946
<CURRENT-ASSETS> 173,788
<PP&E> 416,160
<DEPRECIATION> 170,351
<TOTAL-ASSETS> 543,903
<CURRENT-LIABILITIES> 111,633
<BONDS> 391,904
0
0
<COMMON> 209
<OTHER-SE> 17,568
<TOTAL-LIABILITY-AND-EQUITY> 543,903
<SALES> 452,740
<TOTAL-REVENUES> 452,740
<CGS> 345,278
<TOTAL-COSTS> 345,278
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,952
<INCOME-PRETAX> 35,474
<INCOME-TAX> 14,190
<INCOME-CONTINUING> 21,284
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,284
<EPS-PRIMARY> $1.03
<EPS-DILUTED> $1.02
</TABLE>
