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Orchids Paper Posts 2nd Quarter Loss on Flat Sales

July 28, 2006 (Press Release) - Orchids Paper Products Company today reported net sales in the second quarter of 2006 of $13,675,000, level with $13,681,000 of net sales reported for the second quarter of 2005. Slightly lower shipment levels were offset by higher net selling prices. For the six months ended June 30, 2006, net sales totaled $27,774,000, an increase of $1,551,000, or 6% over the prior year period. Higher net selling prices and increased shipment levels resulted in the higher net sales.

Net loss for the second quarter was $293,000, or $.05 per share, a decrease of $407,000 when compared with net income of $114,000, or $.04 per diluted share, in the same period of 2005. The net loss for the six months ended June 30, 2006, was $111,000, or $.02 per share, compared with net income of $459,000 or $0.15 per diluted share in the same period in 2005.

The Company completed a three-for-two split of its common stock on July 21, 2006. All common and per share amounts have been restated to reflect the three-for-two split.

Gross profit for the 2006 quarter was $1,006,000, a decrease of 49% when compared with a gross profit of $1,981,000 in the prior year quarter. A higher cost of internally produced parent rolls and, to a lesser extent, a higher quantity of purchased parent rolls consumed, higher packaging costs and higher converting labor costs were the main reasons for the decline in gross profit. The cost of internally produced parent rolls increased primarily due to higher waste paper costs, which were the result of mix and yield issues associated with the start-up phase of the new paper machine, and higher direct labor costs. Gross profit for the six months ended June 30, 2006 was $2,569,000, a decrease of $1,229,000, or 32%, compared to the same period in 2005. The reasons for the decrease in gross profit for the year-to-date period are the higher cost of internally produced parent rolls, higher usage of purchased parent rolls, higher packaging costs and higher converting labor costs.

Selling, general and administrative expenses in the second quarter of 2006 totaled $1,281,000, an increase of $73,000, or 6%, when compared with selling, general and administrative expenses of $1,208,000 in the second quarter of 2005. Increased spending due to public company costs were largely offset by lower stock-based compensation expense and broker commissions. For the six months ended June 30, 2006, selling, general and administrative expenses totaled $2,529,000, an increase of $362,000, or 17%, when compared to six months ended June 30, 2005. The increase is primarily comprised of expenses related to being a public company and higher packaging related artwork expenses being partially offset by lower stock-based compensation expense. The Company's initial public offering was completed in July 2005, and, as such, no public company expenses were incurred in either the three-month or six-month periods ended June 30, 2005.

Interest expense for the second quarter of 2006 totaled $243,000, net of capitalized interest on the new paper machine project of $511,000, compared to interest expense of $373,000 in the same period in 2005. No interest was capitalized in the second quarter of 2005. For the six months ended June 30, 2006, interest expense totaled $290,000, net of capitalized interest of $992,000, a decrease of $453,000 compared to $743,000 of interest expense in the same period in 2005.

The Company's new paper machine began production in early June. Production from the new paper machine to date has met the Company's projected start-up curve. As a result of the increased overall paper production, the Company has not purchased any recycled parent rolls since late in the month of June. The total cost of the project is estimated at $33.0 million, excluding capitalized interest of $1.4 million. Cumulative spending on the project totaled $31.2 million, excluding capitalized interest of $1.4 million, at June 30, 2006. The $31.2 million of project expenditures were funded using all of the $15.0 million in net proceeds from the initial public offering on July 14, 2005, borrowings of $13.3 million under the construction loan facility, borrowings under our revolving credit line and available cash. Remaining project costs of approximately $1.8 million are expected to be funded using the construction loan facility, which is capped at $15.0 million, and to the extent necessary, cash from operations.

About Orchids Paper Products Company
Orchids Paper Products Company is an integrated manufacturer of tissue paper products serving the private label consumer market. The Company produces a full line of tissue products, including paper towels, bathroom tissue and paper napkins. From its operations in Pryor, Oklahoma, Orchids Paper Products Company uses recycled waste paper to produce finished tissue products which it provides to retail chains throughout the central United States.

SOURCE: Orchids Paper Products Company




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