Appvion Reports Improved Second Quarter Operating Income
Aug. 6, 2013 --
- Operating income was $20.4 million; up nearly 9% on an adjusted basis compared to second quarter 2012
- Net sales of $201.5 million down nearly 6%, including a 4% decrease resulting from discontinued sales to non-strategic international markets
- Net sales of thermal papers up over 5%; shipments up over 7%
- External net sales of Encapsys® up nearly 5%; external shipments flat
- Net sales of carbonless papers down 17%, including a 8% decrease resulting from discontinued sales to non-strategic international markets; shipments down 21%
- Voluntary refinancing extends debt maturities, reduces interest costs and increases financial flexibility and liquidity options
Appvion's second quarter 2013 net sales of $201.5 million decreased 5.8% compared to second quarter 2012 net sales of $213.9 million. Those results included a 4.2% decrease resulting from discontinued sales of carbonless paper into certain non-strategic international markets. Second quarter 2013 sales of thermal papers were 5.3% higher than the previous year quarter while external Encapsys sales improved by 4.9%.
Appvion reported second quarter 2013 operating income of $20.4 million compared to an operating loss of $30.6 million during second quarter 2012. Second quarter 2012 results included $42.9 million of expense related to ceasing papermaking operations at the West Carrollton, Ohio, facility and transitioning to Domtar base paper. In addition, second quarter 2012 spending included $6.5 million of costs associated with the business combination transaction that was discontinued.
Appvion's net sales for the first six months of 2013 were $412.3 million compared to net sales of $433.5 million during the first half of 2012. Appvion reported operating income of $38.3 million for the first six months of 2013 compared to an operating loss of $80.5 million for the same period last year.
Excluding one-time items, current year adjusted operating income of $40.7 million was $9.2 million higher than adjusted operating income reported for the first half of 2012. Prior year results included $105.1 million associated with ceasing papermaking operations and the base paper transition. In addition, first half 2012 results included $6.9 million of transaction costs discussed above.
Appvion continues to deliver improvements to adjusted operating income
Mark Richards, Appvion's chairman, president and chief executive officer, said the Company improved adjusted operating income by nearly 9% in second quarter and approximately 29% in first half 2013, respectively, compared to the same periods in 2012, despite soft economic conditions and the Company's less than optimal manufacturing performance.
"We overcame market and operational challenges to deliver improvements to adjusted operating income as we have in each of the past five quarters," said Richards.
Carbonless papers sales dropped 17% in second quarter 2013 and 19% in first half 2013 compared to the same periods in 2012. Richards noted the Company's voluntary exit from the non-strategic international markets accounted for approximately half of the decline in carbonless sales for second quarter and first half 2013 compared to the same periods in 2012. Adjusted operating income for carbonless declined over 3% compared to second quarter 2012, but rose approximately 24% in first half 2013 compared to the same prior year period.
Thermal papers net sales were up more than 5% compared to the same period in 2012. Thermal papers sales volume rose over 7%. Adjusted operating income rose approximately 1 % compared to second quarter 2012 despite the negative impact of temporary operational inefficiencies, and grew more than 13% compared to first half 2012.
Net sales were flat and shipment volumes were nearly 3% lower for the Company's Encapsys division compared to second quarter 2012 as the nearly 5% increase in sales to external customers was offset by lower internal sales to the carbonless business segment. Encapsys operating income rose nearly 11% compared to second quarter 2012 and approximately 32% in first half 2013 compared to the same period in 2012.
Second quarter 2013 net sales of $88.3 million were down 17.0%, compared to second quarter 2012, on lower shipment volumes of approximately 21%. Lower shipment volumes included a 12% decrease resulting from discontinued sales of carbonless papers into certain non-strategic international markets.
During the first six months of 2013, carbonless net sales totaled $178.0 million, a decrease of 19.0 % from the prior year. Year-to-date shipment volumes were approximately 24% lower than last year. Approximately half of this decrease related to the decision not to sell carbonless papers into certain non-strategic international markets. During the first half of the current year, the impact of lower volumes was partially offset by the benefit realized from favorable pricing.
The current quarter benefit realized from favorable product mix nearly offset the impact of lower shipment volumes. Current quarter results also reflect the cost of the annual maintenance shutdown of paper mill in Roaring Spring, Pennsylvania. The $4 million cost associated with the 2013 shutdown exceeded those for 2012 by $0.4 million. First half 2013 adjusted operating income benefited from improved price and mix more than offsetting the negative impact of lower shipment volumes.
Current quarter net sales increased 5.3%, compared to the prior year quarter, driven by increased shipment volumes of over 7%. Second quarter 2013 shipment volumes of thermal receipt paper were approximately 8% higher than the prior year. Tag, label and entertainment (TLE) product shipments increased nearly 7% over the prior year.
Year-over-year, adjusted operating income was also favorably impacted by volume increases which more than offset the impact of temporary negative manufacturing operations resulting primarily from continuing base paper transition challenges.
Second quarter 2013 net sales of $13.0 million were flat when compared to second quarter 2012. Current quarter external net sales were 4.9% higher based on improved mix. Year-to-date 2013, net sales of $26.1 million were flat compared to the same period last year. External net sales were 11.0% higher on increased external shipment volumes of nearly 9%. Operating income from external sales of $2.6 million in second quarter and $5.3 million in first half 2013 increased 15.3% in second quarter and 54.4% in first half 2013 compared to the same periods in 2012.
Other (unallocated) includes unallocated corporate expenses. Second quarter 2013 unallocated corporate expenses totaled $3.1 million compared to the second quarter 2012 total of $11.0 million, which included $6.5 million of costs associated with the business combination transaction that was discontinued. First half 2013 unallocated corporate expenses decreased by $8.0 million compared to first half 2012 which included $6.9 million of transaction costs.
On June 28, 2013, Appvion completed a voluntary refinancing of a portion of its debt to extend debt maturities, reduce interest costs and increase financial flexibility and liquidity options. The refinancing included the execution of a new credit agreement providing for a $100 million revolving line of credit due June 2018 and a $335 million first lien term loan due June 2019. Proceeds from the first lien term loan, less expenses and discounts, were $326.3 million. These proceeds were used to redeem $300.7 million of the 10.5% senior secured first lien notes due June 2015, pay $1.1 million of interest due on the notes, pay $18.1 million of note premiums and costs associated with the note redemption, repay $6.0 million of the old revolver and pay $0.4 million of interest and fees due on the old revolver. As a result of the voluntary refinancing, the Company recorded $24.8 million of debt extinguishment expense.
At the end of second quarter 2013, the Company held cash balances of $6.6 million compared to cash balances of $1.9 million at year-end 2012. Working capital increased by $28.1 million, primarily due to a decrease in accounts payable and other accrued liabilities of $18.6 million and an increase in inventories of $8.9 million. During first half 2013, the Company invested $10.5 million in capital projects compared to $4.4 million invested during the first half of 2012. Net debt was $573.4 million, up $59.7 million from year-end 2012, as significant cash payments including $29.1 million of debt interest, $23.9 million of refinancing costs, $9.1 million of net common stock redemptions and $8.8 million of pension contributions were made during the first six months of the year. The Company had approximately $56 million of liquidity at the end of the current quarter.
Richards said the Company expects continued growth in sales and operating income from the thermal papers segment. Demand for thermal receipt paper has not changed significantly despite the recent withdrawal of a competitor in the U.S. market. Increased competition from international thermal paper producers and a competitor's release of inventory prior to its exit from the U.S. market have kept demand for Appvion thermal receipt paper consistent with historical growth.
Richards said the Company has completed the full-year cycle following its decision to exit certain non-strategic international markets. While the Company's carbonless paper sales are expected to decline, the rate of that decline is more likely to reflect historical market trends of 7% to 10%. Appvion will continue to drive for earnings improvements in its carbonless paper segment through improved product mix, increased average prices and aggressive cost management.
The outlook for Encapsys remains unchanged from previous guidance with sales and earnings expected to be essentially flat in 2013, compared to 2012, as the Company prepares for expected growth in 2014 and beyond due to geographical expansion and new product launches. Preliminary work on a microencapsulation capacity expansion in Europe will begin in the third quarter. Encapsys recently introduced two of its own branded products. EnLighten™ Engineered Pigment is an encapsulated pigment designed for the pulp and paper, paints and coatings and other industrial segments. EnFinit™ Never Release Microcapsules are unbreakable capsules designed for use in building and construction applications. The Company began making commercial shipments of EnFinit in July.
Appvion creates product solutions through its development and use of coating formulations, coating applications and Encapsys microencapsulation technology. The Company produces thermal, carbonless and security papers and Encapsys products. Appvion, headquartered in Appleton, Wisconsin, has manufacturing operations in Wisconsin, Ohio and Pennsylvania, employs approximately 1,700 people and is 100 percent employee-owned. For more information, visit www.appvion.com.