Mod-Pac's earnings rise on folding carton printing
Thursday, November 05, 2009
Press release from the issuing company
BUFFALO, N.Y.-- MOD-PAC CORP., a manufacturer of custom and stock paper board packaging and personalized print products, today reported total revenue of $12.59 million in the third quarter of 2009, which ended October 3, 2009, relatively flat compared with revenue of $12.64 million in the 2008 third quarter. Strong sales growth in the custom folding carton line was offset by reduced sales in the stock packaging and personalized print lines which have been impacted heavily by the weak economy and the elimination of sales to the commercial print market due to the rationalization of the Company's specialty print and direct mail product line in June this year. Excluding last year's specialty print and direct mail sales, total revenue in the recent quarter grew $1.0 million, or 8.8%, as compared with the 2008 third quarter.
Net income for the quarter was $1.01 million, or $0.29 per diluted share compared with net income of $14 thousand, or $0.00 per diluted share, in the third quarter of 2008. Net income increased as a result of improved operating leverage from the rationalization and a $263 thousand fair value adjustment to increase the specialty print and direct mail assets.
Third Quarter 2009 Sales Review: Existing customers drove custom folding carton growth
* Sales of folding cartons, which include custom folding cartons and stock packaging, were up 11.2%, or $1.18 million, to $11.65 million in the 2009 third quarter from $10.47 million in the prior year third quarter. Custom folding carton sales drove the product line increase.
* Custom folding carton sales for the third quarter of 2009 were $9.41 million, up $1.21 million, or 14.8%, from 2008 third quarter sales of $8.19 million. Greater sales from two large existing customers and the addition of one new customer, more than offset reduced sales from customers impacted by the economy and decreased waste sales due to a drop in the recycled paperboard market.
* Stock packaging sales were $2.24 million in the 2009 third quarter, a decline of $39 thousand, or 1.7%, from $2.28 million the prior year period. The stock packaging line has been impacted by economic conditions over the last year.
* Print service sales, which are now solely comprised of personalized print, were down $1.23 million, or 60.7%, to $0.80 million in the 2009 third quarter compared with $2.03 million in the same period in 2008. Of the decline, $1.06 million was related to sales in last year's third quarter for specialty print and direct mail to the commercial market which the Company exited in June of this year. Personalized print sales declined $169 thousand, or 17.5%, to $0.80 million in the current quarter compared with sales of $0.97 million in last year's third quarter. The decrease was primarily due to weakness in economic conditions.
Mr. Daniel G. Keane, President and CEO of MOD-PAC CORP., commented, "Our custom folding carton sales have grown exceptionally well. Many of our customers produce private label products for the consumer staples market. Consumers in this economic environment are highly cost conscious and tend to buy more store brands which drives sales for our customers. Importantly, as our customers are realizing stronger sales, we are also capturing a greater percentage of their business and adding new accounts."
Third Quarter Operating Results: Product line rationalization improved operating leverage
Gross profit for the 2009 third quarter was $2.52 million, or 20.0% of total revenue, compared with gross profit of $1.98 million, or 15.6% of total revenue, in the same period the prior year. The improvement in gross profit and margin was driven by the measurable savings realized from the product line rationalization. Savings were realized through lower depreciation expense and decreased labor and supply costs. Lower freight and utility costs also helped margin improvement. Partially offsetting those gains were generally weaker custom folding carton sales mix and decreased product waste sales due to a drop in the recycled paperboard market.
Selling, general and administrative (SG&A) expense was relatively flat at $1.84 million, or 14.6% of total revenue, in the third quarter of 2009 when compared with $1.85 million, or 14.7% of total revenue, in the same period the prior year. Lower labor costs due to reduced headcount from the product line rationalization combined with decreased professional service fees more than offset increased commission expense.
Mr. David B. Lupp, Chief Operating Officer and Chief Financial Officer commented, "Our strategic decision to rationalize our product lines and refine our focus to our core products is validated by this quarter's strong results. Our concentration is on establishing a solid business model that can succeed in all economic environments. We are generating cash, strengthening our balance sheet, maintaining cost discipline, and driving our value proposition to grow sales."
Other income was $0.4 million in the third quarter of 2009. Included in this balance is a $263 thousand fair value adjustment to increase the balance of assets held for sale associated with the rationalized product line based on bids received in a public auction held in September 2009. These assets had previously been written down in the second quarter of 2009. Also included in other income was a $104 thousand gain on the sale of assets associated with the rationalized product line.
Adjusted earnings before interest, asset impairment, fair value adjustment, taxes, depreciation and amortization, and non-cash option expense (Adjusted EBITDA) was $1.51 million in the third quarter of 2009 compared with $1.04 million in the 2008 third quarter. The Company believes that, when used in conjunction with GAAP measures, Adjusted EBITDA, which is a non-GAAP measure, helps in the understanding of operating performance. (See the reconciliation of Net Income or Loss to Adjusted EBITDA in the attached table.)
As required by generally accepted accounting principles, in the second quarter of 2009 the Company recorded a full valuation allowance on its net deferred tax asset due to the uncertainty with respect to utilizing it in the future based on a past trend of operating losses. As a result, the effective tax rate for the third quarter of 2009 was 0% compared with an effective tax rate of 74.1% in the third quarter of 2008.
Liquidity: Cash from asset and insurance policy sales used to pay down $1.7 million on line
Cash and cash equivalents were $0.32 million at October 3, 2009, an increase compared with $0.17 million at July 4, 2009 and $0.20 million at December 31, 2008. MOD-PAC generated $1.0 million in cash from operations during the quarter from higher net income and non-cash depreciation and amortization expense, partially offset by increased working capital requirements. Also, in the third quarter of 2009, the Company surrendered life insurance policies and received the cash surrender value of $0.86 million and sold assets associated with its rationalized product line for net proceeds of $0.2 million. Proceeds were used to pay down debt and to increase cash on hand.
Capital expenditures in the third quarter of 2009 were $0.14 million compared with $0.34 million in the same period last year. Equipment upgrades made up the bulk of the third quarter 2009 expenditures. Capital expenditures were $0.8 million in the first nine months of 2009 compared with $1.6 million in the same period last year. Capital expenditures are expected to be approximately $1.0 million in fiscal year 2009. Depreciation and amortization was $2.5 million in the first nine months of 2009 compared with $2.9 million for the first nine months of 2008. Lower depreciation reflects a reduced asset base from the write-down of assets associated with the rationalized product line in the second quarter of 2009.
MOD-PAC has access to a $5.0 million committed line of credit with a commercial bank, which expires in March 2010. The line of credit balance at October 3, 2009, was $0.6 million, down $1.7 million from $2.3 million at July 4, 2009, and down $0.4 million from $1.0 million at December 31, 2008. An additional $0.2 million of the line of credit was in use through standby letters of credit. The Company believes that cash and cash equivalents and net cash provided by operations and its available line are sufficient to meet requirements in 2009 and beyond.
On October 9, 2009, MOD-PAC entered into a contract to sell its Blasdell, NY facility. The sale is subject to various terms and conditions and there is no assurance that the facility will be sold. The net proceeds of the sale are expected to approximate the carrying value of the property at October 3, 2009.
There were no shares repurchased by the Company in the first nine months of 2009. MOD-PAC has authorization to repurchase 75,885 shares.
Nine-Month Review: 16.7% growth in custom folding carton sales more than offsets other product line declines
Net sales for the nine months of 2009 were up 2.3% to $35.7 million compared with $34.9 million in the first nine months of 2008. New customer accounts and business expansion from several existing customers drove the 16.7% year-to-date growth in custom folding carton sales to $25.9 million, compared with $22.2 million in the corresponding period in 2008. Stock packaging sales were down 7.9% to $5.9 million for the first nine months of 2009, while personalized print sales declined 22.5% to $2.4 million over the same time period. Both product lines were negatively affected by reduced demand due to economic conditions. For the nine-month period last year, there was $3.2 million in specialty print and direct mail sales compared with the $1.5 million in the first half of this year while the Company still had the full product line. Excluding this product line from both years, total sales were $34.2 million for the nine-month period in 2009 up 7.8% compared with $31.7 million for the same period last year.
Gross profit for the first nine months of 2009 was $4.4 million, or 12.2% of total revenue, down from gross profit of $4.6 million, or 13.0% of total revenue, in the same period the prior year. The decline was driven by generally weaker sales mix, decreased waste sales due to a drop in the recycled paperboard market, and increased labor and repairs expense, partially offset by lower depreciation expense.
SG&A expense decreased 3.3% to $5.8 million, or 16.1% of total revenue, in the first nine months of 2009 compared with $6.0 million, or 17.0% of total revenue, in the first nine months of 2008. Lower professional service costs as a result of cost reduction initiatives implemented in 2008 contributed to the reduction in year-over-year expenses.
Included in the first nine months of 2009, was $2.2 million of expense that was associated with the write-down of impaired assets in the second quarter of 2009 due to the Company's rationalization of the specialty print and direct mail product line.
Other income was $0.4 million in the first nine months of 2009, compared with $93 thousand in the same period the prior year. Included in the 2009 year-to-date balance is the previously noted adjustment to increase assets held for sale to fair value and the gain on the sale of assets associated with the rationalized product line.
For the nine-month period, Adjusted EBITDA was $1.5 million in 2009 compared with $1.8 million in 2008. (See the reconciliation of Net Income or Loss to Adjusted EBITDA in the attached table.)