Appvion Reports Second Quarter 2014 Results
Aug. 4, 2014 -
- Net sales of $207.9 million up 3.2% compared to second quarter 2013
- Net sales for EncapsysŪ up 4.6%; net sales to external customers up 11.9% with shipments down approximately 5%
- Net sales of thermal papers up 5.8%; shipments up approximately 11%
- Net sales of carbonless papers down 0.8%; shipments flat
- Operating income of $10.7 million was down $9.7 million
Appvion's second quarter 2014 net sales of $207.9 million increased 3.2% compared to second quarter 2013. Encapsys net sales increased $0.6 million, or 4.6%, while sales to external customers rose 11.9% despite a volume decrease of approximately 5%. Thermal papers net sales of $110.9 million were $6.1 million higher than second quarter 2013 on a volume increase of approximately 11%. Carbonless papers net sales of $87.6 million were 0.8% lower than prior year, while shipment volumes remained flat.
Appvion reported second quarter 2014 operating income of $10.7 million compared to $20.4 million during second quarter 2013. The positive impact of increased revenue, resulting from higher shipment volumes, was offset by unfavorable product pricing and mix, increased manufacturing costs and higher selling, general and administrative (SG&A) expenses, including increased compensation and benefit costs, as well as increased legal expenses.
Appvion's net sales for the first six months of 2014 were $411.7 million compared to $412.3 million during the first half of 2013. Appvion reported operating income of $25.2 million for the first six months of 2014 compared to operating income of $38.3 million for the same period last year. The business challenges experienced during the current quarter, as discussed above, were also present throughout the first half of the year. Prior year results included $2.0 million of Domtar base paper transition costs and $0.3 million of start-up costs for thermal assets.
Higher sales and shipment volume offset by manufacturing costs and lower selling prices
Mark Richards, Appvion's chairman, president and chief executive officer, said Encapsys sales to external customers grew almost 12%, compared to second quarter 2013, while volume was approximately 5% lower. Those results reflect the ongoing shift to production of more complex products offset by the impact of expected lower order volume from Encapsys' largest customer at the end of its fiscal year.
Thermal papers sales grew nearly 6% compared to second quarter 2013 and were the highest quarterly results in more than a year. Thermal papers sales continued sequential quarterly growth that has averaged more than 6% over the past two quarters. Thermal papers volume increased approximately 11% as volume for tag, label and entertainment products grew more than 14% while shipments for receipt paper increased more than 7%.
Volume for the Company's carbonless segment remained relatively stable for the sixth consecutive quarter. Volume for second quarter 2014 benefited from increased sales of specialty papers; however, revenue and profitability for the segment were negatively affected by lower average selling prices and margins for those products.
Richards said total company revenue increased as higher overall shipment volumes more than offset unfavorable pricing primarily for thermal receipt paper. "Second quarter prices for thermal receipt paper compare unfavorably to the historically high prices we saw in second quarter 2013. However, we have seen relatively stable prices since the beginning of 2014," Richards stated. He added that Appvion's second quarter 2014 operating income was lower than the prior year as a result of higher manufacturing costs of nearly $7 million in the current period associated with performance problems with base paper from suppliers other than Domtar, as well as higher spending for employee pension and benefit costs and other manufacturing expenses.
Second quarter 2014 net sales of $13.6 million were 4.6% higher than second quarter 2013 net sales. Sales to external customers were 11.9% higher despite decreased shipment volumes of approximately 5%. Year-to-date net sales of $28.1 million were 7.7% higher than the same period last year. External net sales were 16.6% higher on flat shipment volumes. Second quarter 2014 operating income of $3.1 million was slightly lower than second quarter last year due to increased SG&A expense supporting future growth. First half 2014 operating income of $7.1 million was 6.0% higher than first half 2013 and included $5.9 million of operating income from external sales compared to $5.3 million in the same period last year. Improved product mix offset higher manufacturing costs, as well as increased SG&A expense in support of future growth.
Current quarter thermal papers net sales of $110.9 million increased 5.8% compared to prior year net sales of $104.8 million. Shipment volumes were approximately 11% higher than second quarter 2013. Tag, label, and entertainment volume increased more than 14% and shipments of receipt paper were more than 7% higher compared to second quarter 2013. Current quarter operating income was $6.6 million compared to $12.1 million in 2013 primarily due to lower pricing for receipt paper and increased manufacturing costs. Year-to-date net sales of $216.4 million were slightly lower than the same period last year, while operating income of $10.4 million declined 43.8%. Higher manufacturing costs, increased legal fees to defend anti-dumping claims, as well as a decline in pricing for receipt paper due to increased foreign competition, negatively impacted current year financial results of the business.
Second quarter 2014 carbonless net sales totaled $87.6 million, a decrease of 0.8% from second quarter 2013. Flat shipment volumes included improved sales of specialty products, while revenue was negatively impacted by unfavorable sales mix. Operating income for the quarter was $4.8 million compared to $8.9 million in second quarter 2013 as unfavorable product mix and increased manufacturing costs impacted results. Year-to-date net sales of $175.6 million were 1.3% lower than the same period last year, while operating income of $14.0 million declined 28.9% as a result of unfavorable pricing and sales mix as well as increased manufacturing costs.
Other (unallocated) includes unallocated corporate expenses. Second quarter 2014 expenses of $3.3 million increased $0.2 million from that of 2013 largely due to increased legal fees. Year-to-date 2014 expense was $5.1 million compared to $5.2 million for the first six months of 2013.
At the end of second quarter 2014, the Company held cash balances of $4.8 million compared to cash balances of $1.8 million at year-end 2013. During June 2014, Appvion entered into an accounts receivable securitization program with a commitment size of $30.0 million. This contributed to a decrease in working capital of $22.9 million. During the first half of 2014, the Company contributed $12.3 million to the pension fund and invested $10.5 million in capital projects. Net debt was $588.2 million compared to $595.3 million at year-end 2013.
Richards said the Company expects strong sales and earnings growth from Encapsys as the segment benefits from sales of new products introduced to new customers, as well as growth from its current customer base. The Company is also investing in additional staff and equipment to support growth beyond 2014, including geographical expansion and additional new product launches. Preliminary work on microencapsulation capacity expansion projects will continue in the third quarter.
Prices for thermal receipt paper will continue to compare unfavorably to the higher prices of 2013. The Company expects thermal receipt paper prices will reflect continuing competitive pressure during the rest of the year. The Company projects continued strong volume and sales growth for its thermal tag, label and entertainment products. The Company has made progress in resolving the issues that have reduced yields and increased manufacturing costs and expects improvement in third quarter manufacturing performance.
Richards said he expects the Company's carbonless segment to produce volume and sales growth as it benefits from sales of an expanding portfolio of specialty paper products. Appvion will also continue to drive earnings improvements for its carbonless papers segment through increased average prices, aggressive cost management and improved manufacturing operations, offset somewhat by a less favorable product mix.
Richards noted that the recent additions of Kevin Gilligan to lead the paper division, and Ethan Haas to direct the carbonless and specialty papers business, will provide additional focus, experience and urgency to achieving improved manufacturing performance. Both Gilligan and Haas bring extensive leadership experience in driving organizational and operational improvements.
The Company's efforts to reduce working capital by $10-$15 million in 2014 are ahead of schedule and target as a result of the accounts receivable securitization program Appvion entered into earlier this year.
Appvion, headquartered in Appleton, Wisconsin, produces thermal, carbonless and security papers and Encapsys products. The company has manufacturing operations in Wisconsin, Ohio and Pennsylvania, employs approximately 1,700 people and is 100 percent employee-owned. To learn more, please visit: www.appvion.com.