Appleton Reports Third Quarter 2011 Results

Nov. 7, 2011 - Appleton today reported third quarter 2011 results:

  • Net sales improved 1% compared to third quarter 2010
  • Net sales of thermal papers up over 9%; shipments up over 1%
  • Net sales of EncapsysŪ up 2%; shipments up approximately 3%
  • Net sales of carbonless papers down nearly 6%
  • Operating income down $1.9 million due to mill maintenance shutdown
  • Generated $47 million of cash from operations
  • Reduced net debt to its lowest level since 2007

Appleton's third quarter 2011 net sales of $217.1 million increased 1.0% compared to third quarter 2010. Net sales for Encapsys, the company's microencapsulation business, were slightly higher than last year on a 3% increase in volume. In the paper business, favorable pricing and mix offset a 5% decrease in volume. Meanwhile, Appleton used $23.2 million from a litigation settlement to reduce net debt to its lowest level since 2007.

Appleton's third quarter 2011 operating income was $11.2 million compared to operating income of $13.1 million during third quarter 2010. Third quarter 2011 operating income was reduced by $2.1 million of expense associated with a biennial maintenance shutdown at the West Carrollton, Ohio paper mill. The thermal papers segment increased its contribution to operating income by $2.6 million during the period. Encapsys contributed a $0.6 million increase, while operating income for the carbonless papers segment decreased by $4.2 million compared to third quarter 2010.

Appleton's net sales for the first nine months of 2011 were $651.7 million; an increase of 0.9% compared to the first nine months of 2010. Year-to-date, 2011 operating income increased to $32.2 million compared to operating income of $28.3 million for the same period last year. Operating income for the first nine months of 2011 includes $2.1 million of expense associated with the biennial shutdown at West Carrollton and a $3.1 million charge for a litigation settlement while operating income for the first nine months of 2010 included an environmental expense insurance recovery of $8.2 million. Excluding these items, year-over-year operating income is up $17.3 million.

Despite volume shortfalls in the paper business and higher prices for raw materials, Appleton achieved improved results due to better product pricing and mix as well as cost reduction efforts.

Delivered earnings consistent with expectations

Mark Richards, Appleton's chairman, president and chief executive officer, said the Company had a solid third quarter. "In spite of raw material inflation, we delivered double digit EBITDA margins for the fifth consecutive quarter, which was consistent with our expectations, Richards said.

Richards said he is especially encouraged by the performance of the thermal paper business which grew sales over 9% and operating income more than doubled compared to third quarter 2010. "That performance reflects our strategy to grow through innovation while improving profitability," Richards said.

Noting that the Encapsys microencapsulation business delivered steady growth with sales up 2% compared to third quarter 2011 and year-to-date sales are up 17%, Richards stated, "We continue to make good progress in managing and marketing our microencapsulation expertise and our open innovation approach. We are encouraged by the product development work we are conducting with current and potential partners. Those efforts confirm the broadening appeal of our technology, experience and market approach."

Carbonless Papers

Third quarter 2011 net sales of $110.4 million were 5.7% lower than third quarter 2010. Shipment volume was about 10% lower than the same period last year. The negative impact of lower shipment volume was partially offset by price increases initiated since 2010 in response to rapidly rising raw materials costs. Net sales for the first nine months of 2011 were $346.4 million, which were 6.3% lower than the first nine months of 2010. Shipment volume was approximately 11% lower than last year.

Third quarter 2011 operating income was $6.4 million compared to $10.6 million in third quarter 2010. Operating income for the first nine months of 2011 was $21.4 million compared to $23.7 million in the first nine months of 2010. Financial results were negatively impacted by lower shipment volume, raw material inflation, and the biennial maintenance shutdown at West Carrollton.

Thermal Papers

Third quarter 2011 net sales of $97.4 million were 9.4% higher than third quarter 2010. Shipment volume was about 1% higher than the same period last year. For the first nine months of 2011, net sales were $278.1 million, which was 8.5% higher than the first nine months of 2010. Improved pricing and product mix also contributed to increased net sales.

Third quarter 2011 operating income increased by $2.6 million, to $4.1 million, when compared to third quarter 2010. Operating income for the first nine months of 2011 was $11.3 million, an increase of $13.9 million when compared to the first nine months of 2010. Raw material inflation and the biennial maintenance shutdown of the West Carrollton mill negatively impacted financial results. However, these items were more than offset by the increase in net sales and improved product mix.

Encapsys

Third quarter 2011 net sales of $14.4 million were 2.0% higher than third quarter 2010. Third quarter 2011 volume was approximately 3% higher than the prior year quarter. During the first nine months of 2011, Encapsys net sales totaled $43.9 million which was 17.1%, higher than the same period of 2010. Current year volume was approximately 20% higher than the same period last year.

The increase in shipment volume and lower SG&A expense contributed to a $0.6 million increase in current quarter operating income compared to the prior year quarter. Year-to-date 2011 operating income was $10.7 million compared to $6.1 million for the first nine months of 2010.

Other (Unallocated)

Other (unallocated) includes unallocated corporate expense. Third quarter 2011 unallocated corporate expense increased $0.7 million, from third quarter 2010, largely due to recording expense associated with various state and local tax assessments received during the quarter. Year-to-date 2011 expense was $12.5 million higher than 2010 due to the recording of a $3.1 million litigation settlement during 2011, while 2010 included an $8.2 million Fox River insurance recovery.

Balance Sheet

At the end of third quarter 2011, the Company held cash balances totaling $11.7 million compared to cash balances of $3.8 million at year-end 2010. During the first nine months of 2011, the Company generated $70.1 million of cash from operations including a $33.7 million decrease in working capital. Appleton invested $10.6 million for capital projects, contributed $18.0 million to the pension fund and used $55.0 million of cash for debt reduction and other financing activities. During September, Appleton received a $23.2 million net recovery from litigation initiated in 2007. The proceeds were used to pay down debt. At October 2, 2011, total debt decreased to $511.8 million compared to $558.8 million at year-end 2010. At the end of the quarter, the Company had approximately $87 million of liquidity.

Outlook

Richards said he expects the fourth quarter to be challenging. Encapsys volumes are expected to be lower than third quarter 2011 and fourth quarter 2010 as customers lower inventories and manage through softer demand for their products.

Appleton will continue to be challenged by higher chemical costs that will more than offset expected price improvements for pulp.

Demand for the Company's carbonless paper products is projected to be soft, while thermal volumes are expected to continue to improve as the Company grows market share domestically and abroad.

To match supply with demand, Appleton is reducing paper production and inventory through a combination of machine slowdowns and temporary curtailments. The Company expects reducing production will lower its fourth quarter earnings by $4 million to $5 million compared to fourth quarter 2010.

"Despite the hurdles we face due to short-term market conditions, we are confident about the future," Richards said. "We remain intensely focused on our customers and our markets. Appleton will continue to win and grow our market leadership positions by passionately serving our customers, innovating in the market, and continuously improving all we do."

Appleton creates product solutions through its development and use of coating formulations, coating applications and Encapsys microencapsulation technology. The Company produces carbonless papers, thermal papers and Encapsys products. Appleton, headquartered in Appleton, Wisconsin, has manufacturing operations in Wisconsin, Ohio and Pennsylvania, employs approximately 1,900 people and is 100 percent employee-owned.

SOURCE: Appleton