Appleton Reports Full Year 2011 Results

March 5, 2012 - Appleton's 2011 net sales of $857.3 million increased 0.9% compared to 2010 net sales of $849.9 million. The positive impact of price increases initiated in response to escalating raw material costs, as well as Encapsys growth, offset the impact of lower shipment volumes in the paper business.

Appleton reported 2011 operating income of $36.1 million compared to $37.0 million during 2010. Current year operating income includes a $3.1 million charge for a litigation settlement while 2010 operating income included an environmental expense insurance recovery of $8.9 million. Excluding these items, year-over-year operating income is up $11.1 million. The improvement in 2011 reflects favorable price and mix and reduced manufacturing costs, which offset raw materials inflation, lower shipment volumes and demand- related production curtailments.

Mark Richards, Appleton's chairman, president and chief executive officer, said the Company's performance in 2011 met four performance objectives: 1) improve profitability; 2) reduce working capital and generate cash; 3) reduce debt; 4) and improve liquidity. He said Appleton's improved profitability and earnings were achieved through improved manufacturing performance, increased efficiencies, and consistent financial discipline. The Company saw a $17.2 million year over year operating income improvement in its thermal papers segment, which more than offset the decline in carbonless papers.

Appleton reduced working capital by $23 million and generated $69 million of cash from operations. Improvements to earnings, working capital and cash flow helped Appleton meet two key financial objectives; reduce debt and improve liquidity. The Company reduced net debt by over $50 million during 2011 including the $18 million scheduled repayment of the remaining 8.125% Senior Notes in June. Appleton had approximately $71 million of available liquidity at the end of 2011, an increase of $25 million over the course of the year.

Richards said that fourth quarter 2011 market conditions proved to be as challenging as the Company had forecast. To match supply with demand, Appleton reduced paper production and inventory through a combination of machine slowdowns and temporary curtailments, especially at the West Carrollton mill. Those moves lowered fourth quarter earnings by $4.8 million, yet enabled Appleton to meet market needs while achieving financial objectives.

"The strong results we achieved in 2011 point to our ability to manage the needs of a mature business like carbonless while supporting our expanding segments like thermal and Encapsys," Richards said.

Carbonless Papers
Fourth quarter 2011 net sales were $106.7 million which was 2.5% lower than prior year. Carbonless papers net sales for 2011 were $453.0 million which was 5.4% lower than prior year. The impact of lower shipment volumes was partially offset by favorable pricing resulting from various price increases initiated since 2010 in response to rapidly rising raw material costs.

Fourth quarter 2011 operating income was $2.3 million compared to $6.8 million in the prior year quarter. Carbonless papers 2011 operating income of $23.7 million decreased $6.8 million during 2011. Operating income was lower due to costs associated with mill curtailments taken to match customer demand and reduce working capital. Margins also continue to be negatively impacted by ongoing inflation in raw material and utilities pricing.

Thermal Papers
Fourth quarter 2011 net sales were $92.7 million which was 8.6% higher than prior year. Thermal papers net sales for 2011 were $370.8 million which was 8.5% higher than 2010 net sales. Shipment volume was about 1% higher than last year. Improved pricing and product mix also contributed to the increase in net sales.

Fourth quarter 2011 operating income was $3.7 million compared to $0.4 million in the prior year quarter. Thermal papers 2011 operating income of $15.0 compared to a 2010 operating loss of $2.3 million. Improved pricing and product mix, as well as volume growth, more than offset increases in raw material costs.

Encapsys
As anticipated, fourth quarter 2011 net sales and operating income were both down from prior year. However, Encapsys total year 2011 net sales were $54.7 million which was 4.8% higher than 2010 net sales. Current year operating income of $11.4 million compared to 2010 operating income of $10.1 million. These increases were the result of increased shipment volumes of approximately 7%. Fourth quarter and full-year 2011 results for Encapsys include costs of $1.5 million for strategic consulting.

Other (Unallocated)
Other (unallocated) includes unallocated corporate expenses. Fourth quarter 2011 costs increased $0.5 million. Total year 2011 costs increased $13.0 million from total year 2010. The current year includes a $3.1 million charge for a litigation settlement while the prior year included an environmental expense insurance recovery of $8.9 million.

Balance Sheet
At the end of 2011, the Company held cash balances totaling $7.2 million compared to cash balances of $3.8 million at year-end 2010. During 2011, the Company generated $68.7 million of cash from operations including a $23.4 million decrease in working capital. Appleton invested $15.8 million for capital projects, contributed $18.0 million to the pension fund and used $52.8 million of cash for debt reduction and other financing activities. During the year, Appleton received a $23.2 million net recovery from litigation initiated in 2007. The proceeds were used to pay down debt. At December 31, 2011, total debt decreased to $511.8 million compared to $558.8 million at year-end 2010. At year-end 2011, the Company had approximately $71 million of liquidity.

Outlook
On February 23, 2012, Appleton and Domtar Corporation announced a tentative agreement in which Domtar would supply Appleton with most of the uncoated base paper the Company needs to produce its thermal, carbonless, and other specialty paper products. The historic 15-year supply agreement would provide Appleton with reliable access to competitively-priced, high-quality base paper for all its paper segments and reduce the Company's exposure to unpredictable market costs for pulp and waste paper. Appleton would become more competitive with integrated paper companies. The proposed agreement would also enable Appleton to place greater focus on its core capabilities of coating formulations and applications.

The proposed supply agreement would result in a reduction of approximately 330 jobs at the West Carrollton paper mill. Appleton plans to continue thermal paper coating at the site, employing approximately 100 employees. Carbonless paper coating currently conducted at West Carrollton would be shifted to the Company's converting plant in Appleton, Wisconsin. The agreement is pending discussions with representatives of West Carrollton's Local 266 of the United Steelworkers.

"The proposed agreement affords Appleton a compelling opportunity to improve earnings, reduce working capital and increase cash flows." Richards said. He added that the cash freed up from reduced working capital investment is expected to pay for most of the anticipated shutdown costs associated with the West Carrollton papermaking operation. Should the agreement move forward, a non-cash write down of assets of approximately $80 million to $90 million would occur in the first quarter of 2012. Upon completion of the union discussions, paper sourcing from Domtar would begin to ramp up with most of the transition completed by fourth quarter of 2012.

Richards said increased demand for Appleton's market-leading thermal products and continued decline in demand for carbonless paper are expected to cause shipment volumes in the first quarter of 2012 to be flat compared to first quarter 2011. Encapsys volumes are expected to be negatively affected by customers' tighter inventory control and a lingering softness in worldwide demand for their products. Appleton expects the cost of raw materials it buys, especially chemicals and recycled fiber, will continue to rise during first quarter 2012. The Company will continue its intense focus on reducing waste, improving operational performance, increasing cash flow, and driving innovation.

Appleton produces carbonless papers, thermal papers and Encapsys products. The company is headquartered in Appleton, Wisconsin and has manufacturing operations in Wisconsin, Ohio, and Pennsylvania. It employs approximately 1,800 people and is 100% employee-owned.

SOURCE: Appleton