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Orchids Paper 2Q Profits Slip on Pricing, Costs

July 28, 2010 - Orchids Paper Products Company today reported net income for the three months ended June 30, 2010, of $2.2 million, or $0.28 per diluted share, compared with $3.8 million or $0.55 per diluted share, in the same period in 2009. The earnings per share calculations for the respective 2010 periods reflect the effects of our follow-on offering of 862,500 shares in the third quarter of 2009.

THREE-MONTH PERIOD ENDED JUNE 30, 2010

Net sales in the quarter ended June 30, 2010 were a record $24.7 million, an increase of $554,000 or 2%, compared to $24.1 million in the same period of 2009. Net sales of converted product were $20.2 million in the 2010 quarter, a decrease of $2.3 million or 10%, compared to the same quarter in the prior year. Net sales of parent rolls were $4.5 million in the second quarter of 2010, an increase of $2.9 million, compared to $1.6 million in parent roll sales in the same quarter in the prior year.

The decrease in converted product sales resulted from a 5% decline in both tonnage shipped and net selling prices. Converting product shipments were negatively effected by continued aggressive pricing by branded producers. The reduction in the net selling price per ton was primarily due to a change in product mix. Net sales of parent rolls were positively affected by a 145% increase in parent roll tonnage shipped and a 15% increase in the net selling price.

Earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter ended June 30, 2010 was $4.4 million, a decrease of $2.2 million or 33%, compared to $6.6 million for the same period in the prior year. As a percent of net sales, EBITDA was 17.8% in the 2010 quarter compared with 27.3% in the 2009 quarter.

Gross profit for the second quarter of 2010 was $5.1 million, a decrease of $2.7 million or 35%, when compared with a gross profit of $7.8 million in the comparable prior year quarter. Gross profit as a percent of net sales was 20.6% in the second quarter of 2010 compared to 32.4% for the same period in 2009. As a percent of net sales, gross profit decreased primarily due to higher waste paper prices, lower shipment volumes of converted products and its resultant effect to increase per case converting production costs, a higher percentage of parent roll sales and higher depreciation expense.

Cost of waste paper in the second quarter of 2010 was 69% higher than the cost in the same quarter of 2009, resulting in increased cost of sales of approximately $2.1 million. Waste paper costs moderated in the second quarter of 2010 following a nine-month increase beginning in July 2009. Unit production costs in the converting facility in the second quarter of 2010 were unfavorable to those experienced in the prior year quarter primarily due to lower period-over-period production.

Parent roll tonnage shipments increased in the quarter due to increased availability of parent rolls caused by the lower requirements in our converting operations and a stronger parent roll market that allowed profitable shipments to outside customers. As a result, parent roll sales increased as a percent of overall sales, which had a negative effect on overall gross profit because parent roll sales generally provide a lower gross profit than converted product sales.

In the second quarter of 2010, selling, general and administrative expenses totaled $1.8 million, $246,000 less than the $2.1 million incurred in the same period of 2009. Reduced accruals under the incentive bonus program and lower stock option expense were the primary reasons for the period-over-period decrease. As a percent of net sales, selling, general and administrative expenses decreased to 7.5% for the quarter ended June 30, 2010, compared to 8.6% for the prior year quarter.

Interest expense for the second quarter of 2010 totaled $211,000 compared to interest expense of $135,000 in the same period in 2009. The increase was primarily due to higher interest rates and higher borrowing levels. Interest rates increased primarily due to the implementation of an interest rate floor following an amendment of the Company's credit agreement in July 2009. Borrowing levels increased due to borrowings under construction loans for the waste water treatment plant expansion in 2009 and the new warehouse project in 2010.

As of June 30, 2010, the full year effective tax rate is estimated to be 28.8%. The estimated effective tax rate for the current year includes the effects of the expiration of the Federal Indian Employment Credit, accelerated depreciation on former Indian lands in Oklahoma and bonus depreciation, all of which expired as of the end of 2009.

Orchids Paper Products Company is an integrated manufacturer of tissue paper products serving the private label consumer market. The Company produces a broad range of tissue products, including paper towels, bathroom tissue and paper napkins.

SOURCE: Orchids Paper Products Company




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