<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 June 30, 1999 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 August 11, 1999, there were 20,947,269 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 JUNE 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................................... $ 5,579 $ 7,363
Accounts receivable trade, net of allowance....................... 90,765 76,699
Inventories....................................................... 88,093 77,509
Prepaid expenses and other........................................ 6,069 4,646
------------- ------------
Total current assets............................................ 190,506 166,217
------------- ------------
Property, Plant and Equipment:
Buildings and improvements........................................ 63,208 62,779
Machinery and equipment........................................... 324,802 308,549
Construction in progress.......................................... 36,619 22,705
------------- ------------
424,629 394,033
Less - accumulated depreciation................................... (182,084) (165,207)
------------- ------------
242,545 228,826
Land.............................................................. 12,428 12,538
------------- ------------
Total property, plant and equipment............................. 254,973 241,364
------------- ------------
Other Assets:
Goodwill, net of accumulated amortization......................... 104,096 85,823
Deferred income taxes............................................. 9,862 16,955
Management receivable............................................. 10,452 11,919
Miscellaneous..................................................... 37,168 33,867
------------- ------------
Total other assets.............................................. 161,578 148,564
------------- ------------
Total Assets......................................................... $ 607,057 $ 556,145
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of long-term debt............................ $ 26,358 $ 23,312
Accounts payable and accrued invoices............................. 46,174 36,744
Accrued salary and wages.......................................... 11,104 11,789
Self insurance reserves........................................... 7,174 7,523
Accrued rebates and discounts..................................... 6,555 7,534
Accrued interest.................................................. 4,311 3,279
Other accrued expenses............................................ 14,498 13,959
------------- ------------
Total current liabilities....................................... 116,174 104,140
------------- ------------
Long-Term Debt....................................................... 434,568 409,071
------------- ------------
Other Long-Term Liabilities.......................................... 17,029 17,570
------------- ------------
Deferred Income Taxes................................................ 3,738 3,173
------------- ------------
Stockholders' Equity :
Common stock, $.01 par value - 45,000,000 shares authorized;
20,944,602 and 20,931,268 shares issued and outstanding at
June 30, 1999 and December 31, 1998, respectively .............. 209 209
Paid in capital in excess of par value............................ 339,311 339,098
Accumulated deficit............................................... (297,323) (311,642)
Accumulated other comprehensive income (loss)..................... (6,649) (5,474)
------------- ------------
Total stockholders' equity ..................................... 35,548 22,191
------------- ------------
Total Liabilities and Stockholders' Equity .......................... $ 607,057 $ 556,145
============= ============
</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 Six Months Ended
June 30, June 30,
------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales............................................. $ 160,331 $ 156,619 $ 303,539 $ 292,787
Cost of goods sold.................................... 119,976 118,644 225,992 223,315
----------- ------------ ------------ ------------
Gross profit.......................................... 40,355 37,975 77,547 69,472
----------- ------------ ------------ ------------
Operating expenses:
Selling............................................ 9,740 8,396 19,107 15,682
Administrative..................................... 10,318 7,147 20,856 15,685
Amortization of intangibles........................ 751 537 1,396 853
----------- ------------ ------------ ------------
Total operating expenses.............................. 20,809 16,080 41,359 32,220
----------- ------------ ------------ ------------
Income from operations................................ 19,546 21,895 36,188 37,252
Other income (expense):
Interest expense................................... (7,278) (7,673) (14,528) (14,170)
Income from equity investments..................... 923 1,711
----------- ------------ ------------- ------------
Income before income taxes............................ 13,191 14,222 23,371 23,082
Income tax provision ................................. 5,065 5,792 9,052 9,337
----------- ------------ ------------ ------------
Net income ........................................... $ 8,126 $ 8,430 $ 14,319 $ 13,745
=========== ============ ============ ============
Earnings per share:
Basic:
Net income ..................................... $ 0.39 $ 0.41 $ 0.68 $ 0.67
=========== ============ ============ ============
Weighted average shares outstanding............. 20,936,910 20,617,019 20,935,071 20,521,843
=========== ============ ============ ============
Diluted:
Net income ..................................... $ 0.39 $ 0.40 $ 0.68 $ 0.66
=========== ============ ============ ============
Weighted average shares outstanding............. 21,051,656 20,881,198 21,046,457 20,766,509
=========== ============ ============ ============
</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, 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....................................... 28,194
Other comprehensive loss (foreign currency
translation adjustment)........................ (4,615)
Comprehensive income (loss)......................
------------ ----- ---------- ----------- -----------
Balance at December 31, 1998........................ 20,931,268 209 339,098 (311,642) (5,474)
Exercise of common stock options................. 13,334 213
Net income....................................... 14,319
Other comprehensive loss ........................ (1,175)
Comprehensive income (loss)......................
------------ ----- ---------- ----------- -----------
Balance at June 30, 1999............................ 20,944,602 $ 209 $ 339,311 $ (297,323) $ (6,649)
============ ===== ========== =========== ===========
<CAPTION>
Stockholders'
Equity Comprehensive
(Deficit) Income (Loss)
--------- -------------
<S> <C> <C>
Balance at December 31, 1997........................ $ (12,169)
Issuance of common stock......................... 10,707
Exercise of common stock options................. 74
Net income....................................... 28,194 $ 28,194
Other comprehensive loss (foreign currency
translation adjustment)........................ (4,615) (4,615)
-----------
Comprehensive income (loss)...................... $ 23,579
----------- ===========
Balance at December 31, 1998........................ 22,191
Exercise of common stock options................. 213
Net income....................................... 14,319 $ 14,319
Other comprehensive loss ........................ (1,175) (1,175)
-----------
Comprehensive income (loss)...................... $ 13,144
----------- ===========
Balance at June 30, 1999............................ $ 35,548
===========
</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>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................................... $ 14,319 $ 13,745
Adjustments to reconcile net income to net cash from operating activities:
Depreciation of properties.................................................. 17,642 15,546
Amortization of intangibles and debt issue costs............................ 1,829 1,216
Non-cash income from equity investments..................................... (1,711)
Non-cash interest income.................................................... (750)
Deferred income taxes....................................................... 7,093 6,384
---------- ----------
38,422 36,891
Change in operating assets and liabilities:
Accounts receivable......................................................... (10,601) (9,633)
Inventories................................................................. (6,542) (4,830)
Prepaid expenses and other assets........................................... (1,268) (207)
Accounts payable............................................................ 3,947 (7,193)
Accrued expenses and other liabilities...................................... (4,972) (3,977)
---------- ----------
Net cash from operating activities............................................ 18,986 11,051
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of stock................................................. 10,707
Payment of debt................................................................. (11,206) (26,617)
Proceeds from revolving credit facility......................................... 39,200 89,400
Issuance of management loans.................................................... (3,682)
Repayment of management loans................................................... 1,467 2,726
Other, net...................................................................... (543) (709)
---------- ----------
Net cash from financing activities............................................ 28,918 71,825
---------- ----------
Cash flows from investing activities:
Purchase of property, plant and equipment....................................... (24,429) (15,937)
Acquisitions.................................................................... (22,458) (67,625)
Other, net...................................................................... (2,801) 102
---------- ----------
Net cash used by investing activities......................................... (49,688) (83,460)
---------- ----------
Net decrease in cash and cash equivalents.......................................... (1,784) (584)
Cash and cash equivalents at beginning of period................................... 7,363 5,989
---------- ----------
Cash and cash equivalents at end of period......................................... $ 5,579 $ 5,405
========== ==========
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest...................................................................... $ 13,813 $ 14,762
Income taxes.................................................................. 4,346 2,330
</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, 1998 (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 June 30, 1999 and December 31, 1998 consist of
the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Accounts receivable................................... $ 94,107 $ 79,566
Less - Allowance for doubtful accounts................ (3,342) (2,867)
--------- ----------
$ 90,765 $ 76,699
========= ==========
</TABLE>
Inventories
Inventories at June 30, 1999 and December 31, 1998 consist of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Raw materials......................................... $ 38,988 $ 34,136
Finished goods........................................ 49,105 43,373
--------- ----------
$ 88,093 $ 77,509
========= ==========
</TABLE>
NOTE 2 - LONG TERM DEBT
At June 30, 1999 and December 31, 1998, the long-term debt of the
Company was as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Senior credit facility....................................... $ 419,375 $ 390,925
Industrial revenue bonds..................................... 39,629 39,667
Other ....................................................... 1,922 1,791
---------- ---------
Total debt outstanding................................. 460,926 432,383
Less - Current installments of long-term debt................ (26,358) (23,312)
---------- ---------
Long-term debt......................................... $ 434,568 $ 409,071
========== =========
</TABLE>
6
<PAGE> 7
IVEX PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 - REPORTING SEGMENTS
During 1999, Ivex realigned its operating segments in connection with
the formation of the Technical Packaging Group which is comprised of the
industrial packaging and medical & electronic product groups. The Company is
divided into the Consumer Packaging and Technical Packaging operating segments
based on the end use of the packaging product. All historical information has
been restated to reflect the realignment.
The reconciliation of the operating segment information to the Company's
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net Sales:
Consumer Packaging............... $ 98,232 $ 90,014 $ 186,695 $ 156,860
Technical Packaging.............. 62,099 66,605 116,844 135,927
------------- ------------- ------------ -------------
Total................ $ 160,331 $ 156,619 $ 303,539 $ 292,787
============= ============= ============ =============
Income Before Income Taxes:
EBITDA:
Consumer Packaging....... $ 21,707 $ 20,870 $ 41,671 $ 34,338
Technical Packaging...... 9,487 9,688 17,778 20,470
Corporate Expense........ (1,875) (2,250) (4,223) (3,923)
------------- ------------- ------------ -------------
Total......... 29,319 28,308 55,226 50,885
Depreciation expense............. (9,022) (8,642) (17,642) (15,546)
Amortization expense............. (751) (537) (1,396) (853)
Special benefit.................. 2,766 2,766
Income from equity investments... 923 1,711
Interest expense................. (7,278) (7,673) (14,528) (14,170)
------------- ------------- ------------ -------------
Income before income taxes $ 13,191 $ 14,222 $ 23,371 $ 23,082
============= ============= ============ =============
Purchase of Property, Plant and Equipment:
Consumer Packaging............... $ 8,945 $ 5,354 $ 15,701 $ 8,789
Technical Packaging.............. 2,783 3,873 7,927 6,506
Corporate........................ 446 58 801 642
------------- ------------- ------------ -------------
Total......... $ 12,174 $ 9,285 $ 24,429 $ 15,937
============= ============= ============ =============
JUNE 30,
-------------------------------
Total Assets: 1999 1998
------------- -------------
Consumer Packaging .............. $ 372,262 $ 312,202
Technical Packaging ............. 198,269 163,556
Corporate 36,526 57,196
------------- -------------
Total............. $ 607,057 $ 532,954
============= =============
</TABLE>
7
<PAGE> 8
IVEX PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONSOLIDATED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 - ACQUISITIONS
On April 20, 1999, Ivex acquired the electronics packaging business of
Pactuco, Inc. ("Pactuco"), headquartered in Lompoc, California for a $21,000
initial payment and payments of $1,000 per year for the next five years. Based
on the operating results of the business, the purchase price could be increased
by as much as $3,000 per year over the next three years. With manufacturing
operations in California, Malaysia and Hong Kong, this business provides
technical packaging solutions for the computer and electronics industries and
has annual sales of $35,000. The acquisition was financed through revolving
credit borrowings under the Senior Credit Facility, as hereinafter defined, and
was recorded using the purchase method of accounting.
On July 30, 1999, Ivex acquired all of the outstanding stock of F.T.S.
Holdings B.V. ("Folietechniek") headquartered in Raamsdonksveer, Netherlands.
Folietechniek is a manufacturer of extruded plastic products and has annual
sales of approximately $13,000. The acquisition was financed through revolving
credit borrowings under the Senior Credit Facility, as hereinafter defined, and
will be recorded using the purchase method of accounting.
NOTE 5 - SECONDARY OFFERING AND SPECIAL BENEFIT
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.
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.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion addresses the consolidated financial statements of the
Company. The Company owns 100% of the common stock of IPC. The Company is a
holding company with no operations of its own and IPC has no contractual
obligations to distribute funds to the Company. References to the Company or
Ivex herein reflect the consolidated results of Ivex Packaging Corporation.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Net Sales
The Company's net sales increased by 2.4% during the second quarter of
1999 over the Company's net sales during the corresponding period in 1998. The
increase primarily resulted from increased sales of converted plastic and paper
products for food, medical and electronics applications. The strongest growth in
net sales resulted from the Company's facilities outside of the United States
and Canada. The increase in sales was also due to the second quarter 1998
acquisition of Ultra Pac, Inc. ("Ultra Pac"), the fourth quarter 1998
acquisition of the paper packaging business of Bleyer Industries, Inc. ("Bleyer
Paper") and the second quarter 1999 acquisition of Pactuco as substantially
offset by the fourth quarter 1998 disposition of the Company's Detroit paper
mill ("Detroit"). See additional discussion in "Operating Segments".
Gross Profit
The increase in the Company's gross profit for the second quarter of
1999 compared to the corresponding period in the prior year is primarily the
result of the Ultra Pac, Bleyer Paper and Pactuco acquisitions, partially offset
by the disposition of Detroit. Gross profit margin increased to 25.2% during the
second quarter of 1999 compared to 24.2% during the second quarter of 1998. The
increase in gross profit margin primarily resulted from a shift in product mix
due to the addition of higher gross profit margin Ultra Pac, Bleyer Paper and
Pactuco products and the elimination of lower gross profit margin Detroit
products.
Operating Expenses
Selling and administrative expenses (excluding the special benefit in
1998 discussed below), increased 9.6% during the second quarter of 1999
primarily as a result of the Ultra Pac, Bleyer Paper and Pactuco acquisitions
and increased sales and management resources for most businesses. The increase
was partially offset by decreased incentive compensation expense. As a
percentage of net sales, selling and administrative expenses (excluding the
special benefit in 1998 discussed below) increased to 12.5% during the second
quarter of 1999 compared to 11.7% during the same period in the prior year. This
increase is primarily due to the elimination of Detroit with lower operating
expenses as a percentage of net sales.
Amortization of intangibles increased 39.9% during the second quarter of
1999 compared to the same period in 1998 primarily as a result of increased
goodwill and non-compete agreement amortization associated with the Ultra Pac
acquisition.
Administrative expense for the quarter ended June 30, 1998 includes a
special benefit of $2.8 million. 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
9
<PAGE> 10
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.
Income from Operations
Income from operations and operating margin were $19.5 million and
12.2%, respectively, during the second quarter of 1999 compared to income from
operations of $21.9 million and 14.0%, respectively, during the second quarter
of 1998. Excluding the special benefit recognized during the second quarter of
1998, income from operations and operating margin were $19.1 million and 12.2%,
respectively. The increase in operating income is primarily the result of the
recent acquisitions.
Interest Expense
Interest expense during the second quarter of 1999 was $7.3 million
compared to $7.7 million during the same period in 1998. The decrease in
interest expense primarily results from decreased interest rates on borrowings
and increased interest income, partially offset by greater aggregate
indebtedness.
Income from Equity Investments
Income from equity investments primarily results from the Company's
equity interest in the net income of Packaging Holdings, LLC. The Company
acquired its equity interest in Packaging Holdings, LLC during the fourth
quarter of 1998 in exchange for the assets of Detroit.
Income Taxes
The Company's effective tax rate for the second quarter of 1999
approximated 39% compared with 41% for the second quarter of 1998. The decrease
in effective tax rate reflects a lower aggregate effective rate for foreign
operations.
Net Income
Net income decreased to $8.1 million during the second quarter of 1999
compared to net income of $8.4 million in the prior year. The decrease is
primarily the result of the special benefit recorded during the quarter ended
June 30, 1998.
Earnings Per Share
Diluted earnings per share decreased to $0.39 during the second quarter
of 1999 compared to earnings per share of $0.40 during the second of 1998. The
decrease is primarily the result of the special benefit recorded during the
quarter ended June 30, 1998.
10
<PAGE> 11
OPERATING SEGMENTS
Net Sales
The following table sets forth information with respect to net sales of
the Company's operating segments for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------
(dollars in thousands)
% of % of
1999 Net Sales 1998 Net Sales
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Consumer Packaging ............................ $ 98,232 61.3 $ 90,014 57.5
Technical Packaging ........................... 62,099 38.7 66,605 42.5
---------- ---------- ----------- ----------
Total .................................... $ 160,331 100.0 $ 156,619 100.0
========== ========== =========== ==========
</TABLE>
Consumer Packaging net sales increased by 9.1% during the second quarter
of 1999 from the corresponding period in 1998. The increase primarily results
from incremental sales associated with the Ultra Pac and Bleyer Paper
acquisitions and increased sales of converted plastic and paper products for
food applications. During the second quarter of 1999, sales of converted plastic
and paper products in the U.S. (excluding the sales relating to Ultra Pac and
Bleyer Paper) increased approximately 3.6% while such sales outside of the U.S.
(Europe, Canada and Mexico) increased approximately 20.4% compared to the second
quarter of 1998. The largest increases in sales outside of the U.S. occurred in
the United Kingdom and Continental Europe.
Technical Packaging net sales decreased by 6.8% during the second
quarter of 1999 from the corresponding period in 1998, primarily due to the
disposition of Detroit partially offset by increased sales of plastic products
for medical and electronics applications. Additionally, the Company continues to
experience significant unit volume decreases in its coated and laminated
products as a result of the declining markets for these products. Increased
sales unit volume was offset by decreased selling prices for the Company's
surface protection, protective packaging and manufactured paper products during
the second quarter of 1999 compared to the second quarter of 1998.
EBITDA
EBITDA includes income from operations adjusted to exclude depreciation
and amortization expenses, and special charges (benefit). The Company believes
that EBITDA provides additional information for determining its ability to meet
future debt service requirements. However, 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 EBITDA of the
Company's operating segments for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------
(dollars in thousands)
% of % of
1999 Net Sales 1998 Net Sales
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Consumer Packaging ............................ $ 21,707 22.1 $ 20,870 23.2
Technical Packaging ........................... 9,487 15.3 9,688 14.5
Corporate Expense.............................. (1,875) (2,250)
---------- ---------- ----------- ----------
Total .................................... $ 29,319 18.3 $ 28,308 18.1
========== ========== =========== ==========
</TABLE>
11
<PAGE> 12
The Company's EBITDA increased 3.6% from $28.3 million to $29.3 million
and EBITDA margin increased from 18.1% to 18.3% during the second quarter of
1999 compared to the same period in 1998. The 4.0%, or $0.8 million, increase in
Consumer Packaging's EBITDA in the current quarter is primarily attributable to
the incremental EBITDA from Ultra Pac and Bleyer Paper. The decrease in
Technical Packaging's EBITDA of 2.1%, or $ 0.2 million is primarily due to the
disposition of Detroit. The decrease in Corporate expense is primarily the
result of reduced incentive compensation expense offset by an increase in human
resources required as a result of the Company's growth.
RESULTS OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net Sales
The Company's net sales increased by 3.7% during the first six months of
1999 over the Company's net sales during the corresponding period in 1998. The
increase primarily resulted from increased unit sales volume of extruded sheet
and film and increased sales of converted plastic and paper products for food,
medical and electronics applications. The increase in sales also was due to the
Ultra Pac, Bleyer Paper and Pactuco acquisitions as substantially offset by the
fourth quarter 1998 disposition of Detroit. See additional discussion in
"Operating Segments".
Gross Profit
The Company's gross profit increased 11.6% during the first six months
of 1999 compared to the corresponding period in the prior year primarily as a
result of the incremental effects from the Ultra Pac, Bleyer Paper and Pactuco
acquisitions partially offset by the disposition of Detroit. Gross profit margin
increased to 25.5% during the first six months of 1999 compared to 23.7% during
the first six months of 1998. The increase in gross profit margin primarily
resulted from the reduced raw material costs in most businesses and a shift in
product mix due to the addition of higher gross profit margin Ultra Pac, Bleyer
Paper and Pactuco products and the elimination of lower gross profit margin
Detroit products.
Operating Expenses
Selling and administrative expenses (excluding the special benefit in
1998 discussed below) increased 17.1% during the first six months of 1999
primarily as a result of the Ultra Pac, Bleyer Paper and Pactuco acquisitions.
As a percentage of net sales, selling and administrative expenses (excluding the
special benefit in 1998 discussed below) increased to 13.2% during the first six
months of 1999 compared to 11.7% during the same period in the prior year. This
increase is primarily because of the addition of Ultra Pac and Pactuco with
higher selling expenses as a percentage of net sales and the elimination of
Detroit with lower operating expenses as a percentage of net sales.
Amortization of intangibles increased 63.7% during the first six months
of 1999 compared to the same period in 1998 as a result of increased goodwill
and non-compete agreement amortization associated with the Ultra Pac and Bleyer
Paper acquisitions.
Administrative expense for the six months ended June 30, 1998 includes a
special benefit of $2.8 million. 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 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.
12
<PAGE> 13
Income from Operations
Income from operations and operating margin were $36.2 million and
11.9%, respectively, during the first six months of 1999 compared to income from
operations and operating margin of $37.3 million and 12.7%, respectively, during
the first six months of 1998. Excluding the special benefit, income from
operations and operating margin were $34.5 million and 11.8%, respectively,
during the six months ended June 30, 1998. The increase in operating income and
margin was primarily the result of the Ultra Pac, Bleyer Paper and Pactuco
acquisitions and decreased raw material costs for most businesses.
Interest Expense
Interest expense during the first six months of 1999 was $14.5 million
compared to $14.2 million during the same period in 1998. The increase is
primarily due to greater indebtedness partially offset by decreased interest
rates on borrowings and increased interest income. The greater indebtedness
primarily results from the Ultra Pac, Bleyer Paper and Pactuco acquisitions and
increased working capital.
Income from Equity Investments
Income from equity investments primarily results from the Company's
equity interest in the net income of Packaging Holdings, LLC. The Company
acquired its equity interest in Packaging Holdings, LLC during the fourth
quarter of 1998 in exchange for the assets of Detroit.
Income Taxes
The Company's effective tax rate for the first six months of 1999
approximated 39% compared with 40% for the first six months of 1998. The
decrease in effective tax rate reflects a lower aggregate effective rate for
foreign operations.
Net Income
Net income increased to $14.3 million during the first six months of
1999 compared to net income of $13.7 million in the prior year. The increase in
net income is primarily the result of the improved income from operations and
the income from equity investments.
Earnings Per Share
Diluted earnings pre share increased to $0.68 during the first six
months of 1999 compared to earnings per share of $0.66 during the first six
months of 1998. The increase is the result of the increased net income.
13
<PAGE> 14
OPERATING SEGMENTS
Net Sales
The following table sets forth information with respect to net sales of
the Company's operating segments for the periods presented:
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------
(dollars in thousands)
% of % of
1999 Net Sales 1998 Net Sales
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Consumer Packaging ............................ $ 186,695 61.5 $ 156,860 53.6
Technical Packaging ........................... 116,844 38.5 135,927 46.4
---------- ---------- ----------- ----------
Total .................................... $ 303,539 100.0 $ 292,787 100.0
========== ========== =========== ==========
</TABLE>
Consumer Packaging net sales increased by 19.0% during the first six
months of 1999 from the corresponding period in 1998. The increase primarily
results from incremental sales associated with the Ultra Pac and Bleyer Paper
acquisitions and increased sales of converted plastic and paper products for
food applications. During the first six months of 1999, sales of converted
plastic and paper products in the U.S. (excluding the sales relating to Ultra
Pac and Bleyer Paper) increased approximately 5.6% while such sales outside of
the U.S. (Europe, Canada and Mexico) increased 21.3% compared to the first six
months of 1998. The largest increase in sales outside of the U.S. occurred in
the United Kingdom and Continental Europe.
Technical Packaging net sales decreased by 14.0% during the first six
months of 1999 from the corresponding period in 1998, primarily due to the
disposition of Detroit. Additionally, the Company continues to experience
significant unit volume decreases in its coated and laminated products as a
result of the declining markets for these products. Increased sales unit volume
was offset by decreased selling prices for the Company's surface protection,
protective packaging and manufactured paper products during the first six months
of 1999 compared to 1998.
EBITDA
EBITDA includes income from operations adjusted to exclude depreciation
and amortization expenses, and special charges (benefit). The Company believes
that EBITDA provides additional information for determining its ability to meet
future debt service requirements. However, 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 EBITDA of the
Company's product groups for the periods presented:
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------
(dollars in thousands)
% of % of
1999 Net Sales 1998 Net Sales
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Consumer Packaging ............................ $ 41,671 22.3 $ 34,338 21.9
Technical Packaging ........................... 17,778 15.2 20,470 15.1
Corporate Expense.............................. (4,223) (3,923)
---------- ---------- ----------- ----------
Total .................................... $ 55,226 18.2 $ 50,885 17.4
========== ========== =========== ==========
</TABLE>
The Company's EBITDA increased 8.5% from $50.9 million to $55.2 million
and EBITDA margin increased from 17.4% to 18.2% during the first six months of
1999 compared to the same period in 1998. The 21.4%, or $7.3 million, increase
in Consumer Packaging's EBITDA is primarily attributable to the incremental
EBITDA from Ultra
14
<PAGE> 15
Pac and Bleyer Paper, increased sales volume and reduced raw material costs. The
decrease in Technical Packaging's EBITDA of 13.2%, or $2.7 million is primarily
due to the disposition of Detroit and decreased sales in the first quarter of
1999 for the Company's protective packaging and surface protection product
lines. The increase in Corporate expenses is primarily the result of an increase
in human resources required as a result of the Company's growth partially offset
by reduced incentive compensation expense.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash and cash equivalents of $5.6
million and availability under the revolving credit portion of its Senior Credit
Facility (the "Senior Credit Facility") was $68.2 million. The Company's working
capital at June 30, 1999 was $74.3 million.
The Company's primary short-term and long-term operating cash
requirements 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 Senior Credit
Facility to fund the Company's principal short-term and long-term cash
requirements.
The Senior 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 $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 Senior 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 June 30, 1999, such rate was LIBOR plus 1.125%. The Term B Loan bears
interest at rates up to LIBOR plus 2.0% or the Adjusted Base Rate plus 1.0%. As
of June 30, 1999, such rate for the Term B Loan was 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 Senior
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 Senior Credit Facility in all material respects.
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 Senior Credit Facility provide credit enhancement for IPC's industrial
revenue bonds.
In order to reduce the impact of changes in interest rates on its
variable rate debt, the Company entered into interest rate derivative
instruments discussed in "Quantitative and Qualitative Disclosures About Market
Risk".
The Company made capital expenditures of $24.4 million and $15.9 million
in the six months ended June 30, 1999 and 1998, respectively. At June 30, 1999,
the Company has a significant number of capital projects ongoing in all major
business groups. Capital spending for 1999 is expected to range from $45.0
million to $48.0 million.
On April 20, 1999, Ivex acquired the electronics packaging business of
Pactuco, Inc., headquartered in Lompoc, California for a $21.0 million initial
payment and payments of $1.0 million per year for the next five years. Based on
the operating results of the business, the purchase price could be increased by
as much as $3.0 million per year over the next three years. With manufacturing
operations in California, Malaysia and Hong Kong, this business provides
technical packaging for the computer and electronics industries and has annual
sales of $35.0 million. The acquisition
15
<PAGE> 16
was financed through revolving credit borrowings under the Senior Credit
Facility and was recorded using the purchase method of accounting.
On July 30, 1999, Ivex acquired all of the outstanding stock of
Folietechniek headquartered in Raamsdonksveer, Netherlands. Folietechniek is a
manufacturer of extruded plastic products and has annual sales of approximately
$13.0 million. The acquisition was financed through revolving credit borrowings
under the Senior Credit Facility and will be recorded using the purchase method
of accounting.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued FAS 133, "Accounting for Derivatives and
Similar Financial Instruments and Hedging Activities," which requires all
derivatives to be measured at fair value and recognized in the statement of
financial position as assets or liabilities. In addition, all hedges fall into
one of two categories - fair value and cash flow hedges - which determines
whether changes in fair value of the hedge are recorded in net income or in
other comprehensive income. The statement is effective for fiscal years
beginning after June 15, 2000. The Company is currently evaluating the impact of
the adoption of FAS 133 on the Company's financial position and results of
operations.
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 June 1999, 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 September 1999, allowing substantial
time for further testing, verification and the final completion of less
important systems by fourth quarter 1999. Contingency plans are being 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. 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
remedy their own Year 2000 compliance issues. The Company expects to complete
its evaluation by September 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, although there can be no
assurances that this will be the case.
16
<PAGE> 17
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 remedy of the Year 2000 issue. Testing and remedy efforts are expected to
cost approximately $180,000, of which $130,000 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, although there can be no assurances
that this will be the case.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange
The Company uses primarily foreign exchange forward contracts to hedge
its exposure from adverse changes in foreign exchange rates. A 10% unfavorable
movement in the foreign exchange rates would not expose the Company to material
losses in earnings or cash flows.
Interest Rates
The Company uses interest rate swaps and collars to modify its exposure
to interest rate movements and to reduce borrowing costs. The Company's net
exposure interest rate risk consists of floating rate debt instruments that are
benchmarked to LIBOR. As of June 30, 1999, the Company had $320.0 million
notional value of interest rate derivatives outstanding (described below). A 10%
unfavorable movement in LIBOR rates would not expose the Company to material
losses of earnings or cash flows.
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 the Company's
LIBOR base rate for $160.0 million of the Company's indebtedness at rates from
5.33% to 6.12% during this period. The Company has 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 for $100.0 million of the Company's indebtedness 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 has also entered into no
cost interest rate collar agreements with a group of banks having notional
amounts totaling $60.0 million of the Company's indebtedness through November 5,
2001 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 is recorded as adjustments to interest
expense in the Company's financial statements. The fair market value of the
Company's derivative instruments outlined above approximates a gain of $1.4
million as of June 30, 1999 and is based upon the amount at which it could be
settled with a third party, although the Company has no current intention to
trade any of these instruments and plans to hold them as hedges for the Senior
Credit Facility.
17
<PAGE> 18
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, - Year
2000 and - Quantitative and Qualitative Disclosures About Market Risk"
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).
18
<PAGE> 19
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 11, 1999, the Corporation held its 1999 annual meeting of
stockholders, at which the stockholders elected two Class II directors for a
three-year term, approved the adoption of the Corporation's 1999 Stock Option
Plan for Non-Employee Directors and ratified the appointment of
PricewaterhouseCoopers LLP as the Corporation's independent accountants for
1999.
The following Class I and Class III directors, whose terms expire at the
annual meeting in 2000 and 2001, respectively, continued in office following the
1999 annual meeting:
Class I: Glenn R. August and Frank V. Tannura
Class III: George V. Bayly and Anthony P. Scotto
A total of 18,491,171 shares of common stock were voted in person or by
proxy at the annual meeting, representing approximately 88% of the voting power
of the Corporation entitled to vote at such meeting. Each share of common stock
was entitled to one vote on each matter before the meeting. The votes cast on
the matters before the meeting, including the broker non-votes, where
applicable, were as follows:
Nominees for Election Number of Votes
to Board of Directors: In Favor Withheld
William J. White 16,106,747 2,384,424
R. James Comeaux 16,106,747 2,384,424
Approval of 1999 Stock For 17,155,321
Option Plan for Non- Against 1,286,859
Employee Directors Abstentions 48,991
Ratification of For 18,488,672
PricewaterhouseCoopers LLP Against 1,437
as independent accountants Abstentions 1,062
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Number Description
10.15 1999 Stock Option Plan for Non-Employee Directors. (incorporated by
reference to Exhibit A of the Corporation's Proxy Statement for the
annual meeting held on May 11, 1999, File No. 33-60714).
(b) 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: __________________________
Frank V. Tannura
Executive Vice President and
Principal Financial Officer
August 11, 1999
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF JUNE 30, 1999 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,579
<SECURITIES> 0
<RECEIVABLES> 94,107
<ALLOWANCES> 3,342
<INVENTORY> 88,093
<CURRENT-ASSETS> 190,506
<PP&E> 437,057
<DEPRECIATION> 182,084
<TOTAL-ASSETS> 607,057
<CURRENT-LIABILITIES> 116,174
<BONDS> 434,568
0
0
<COMMON> 209
<OTHER-SE> 35,339
<TOTAL-LIABILITY-AND-EQUITY> 607,057
<SALES> 303,539
<TOTAL-REVENUES> 303,539
<CGS> 225,992
<TOTAL-COSTS> 225,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,528
<INCOME-PRETAX> 23,371
<INCOME-TAX> 9,052
<INCOME-CONTINUING> 14,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,319
<EPS-BASIC> 0.68
<EPS-DILUTED> 0.68
</TABLE>
