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Mod-Pac Corp. reports 4th consecutive quarter of positive net income for 2nd quarter in 2010

Thursday, August 05, 2010

Press release from the issuing company

Buffalo, N.Y., - MOD-PAC CORP., a manufacturer of custom and stock paper board packaging and provider of personalized print products, today reported total revenue of $11.52 million in the second quarter of 2010, which ended July 3, 2010, up 2.7% from total revenue of $11.21 million in the 2009 second quarter. In June of 2009, MOD-PAC exited the commercial print market and rationalized the Company's specialty print and direct mail product line. Excluding the $0.75 million in specialty print and direct mail sales from the prior year period, total revenue grew $1.06 million, or 10.1% year-over-year. Driving the revenue growth was increased sales to the Company's existing folding carton customers.

Net income for the second quarter was $46 thousand, or $0.01 per diluted share compared with net loss of $3.72 million, or $1.09 per diluted share, in the second quarter of 2009. The increase in net income was a result of the rationalization which eliminated an unprofitable product line and other productivity and cost reduction measures that were implemented throughout 2009. The second quarter of 2009 was negatively impacted by $2.4 million in one-time charges related to the product line rationalization and a mark-to-market adjustment for a facility since sold. Excluding those charges, second quarter net loss would have been $1.31 million, or $0.39 per diluted share. (See reconciliation of GAAP net income (loss) and earnings (loss) per share to adjusted net income (loss) and earnings (loss) per share in the attached table.)

Mr. Daniel G. Keane, President and CEO of MOD-PAC CORP., commented, "Our second quarter results reflect the continued success we are having in growing our custom folding carton business, as well as the operational improvements we have put in place, including the strategic decision to rationalize our specialty print and direct mail product line."

Custom Folding Cartons, MOD-PAC's leading product line, has double digit growth in quarter

- Sales of folding cartons, which include custom folding cartons and stock packaging, were up 11.2%, or $1.06 million, to $10.53 million in the 2010 second quarter from $9.46 million in the prior year second quarter driven by growth in custom folding carton sales.
- Custom folding carton sales in the second quarter of 2010 were $9.04 million, up $1.05 million, or 13.1% from $7.99 million in the second quarter of 2009. Sales growth was the result of increased volume from existing customers.
- Stock packaging sales increased 1.2% to $1.49 million in the 2009 second quarter.
- Print services sales, which are now comprised solely of personalized print, were $0.86 million in the second quarter of 2010, down 46.7% from $1.61 million in the second quarter of 2009. The 2009 second quarter had $0.75 million in sales related to the specialty print and direct mail product line.

Margin expansion reflects effectiveness of restructuring
Gross profit increased 332% to $1.97 million in the second quarter of 2010, compared with $0.46 million in the prior year period. Gross margin expanded to 17.1% in the second quarter of 2010, compared with 4.1% in the second quarter of 2009. The improvement in gross profit and margin was largely driven by the savings realized from the product line rationalization as the Company realized lower depreciation expense and decreased labor, supply and maintenance costs. Also contributing to the expansion were improvements in productivity, product mix, lower utility costs, and recovery in the recycling market. Gross margin improved from 14.9% in the trailing first quarter despite lower sales as additional cost savings measures and productivity enhancements were implemented.

Mr. David B. Lupp, Chief Operating Officer and Chief Financial Officer commented, "Our product line rationalization was successful in making us a leaner, more efficient organization, but just as important, allowed us to refine our focus and inject resources into our remaining core product lines. Given the second quarter is traditionally our weakest quarter, I was particularly pleased with our results in the quarter, which is a true testament to the success we've had at aligning our cost structure with our current level of sales."

Second quarter 2010 selling, general & administrative expense (SG&A) was $1.88 million down 4.1% from $1.96 million in the 2009 second quarter. The decrease was due to staff reductions from the product line rationalization, cost discipline and lower bad debt, partially offset by higher professional service fees and stock option expense. As a percent of total revenue, SG&A declined to 16.3% from 17.5%.

Adjusted earnings before interest, asset impairment, taxes, depreciation and amortization, and non-cash option expense (Adjusted EBITDA) was $0.94 million in the second quarter of 2010 compared with negative $0.44 million in the 2009 second quarter and $0.91 in the trailing first quarter. Included in the prior year quarter was an asset impairment charge of $2.18 million. 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 (loss) to Adjusted EBITDA in the attached table.)

The Company's effective tax rate for the second quarter of 2010 was 8.0% as a result of federal and state minimum taxes. The Company has approximately $0.49 million in net operating loss carry forwards that can be applied to future income.

First Half 2010 Review
Total revenue for the first half of 2010 was $23.54 million, consistent with the first half of 2009 despite the $1.52 million in sales related to the rationalized product line in last year's first half. Excluding that, total revenue for the first half of 2010 was up 6.9% over the corresponding period of 2009 reflecting improved folding carton sales.

Custom folding carton sales were up $1.24 million, or 7.5% to $17.72 million for the 2010 six-month period compared with $16.48 million in the first half of 2009, while stock packaging sales increased 9.5%, or $0.35 million, to $3.99 million. Personalized print sales were down $74 thousand, or 4.5%, to $1.56 million reflecting the weakness in the economy.

Gross profit and margin doubled in the first half of 2010, to $3.77 million and 16.0%, respectively, on flat sales primarily reflecting the rationalization and other productivity enhancements.

SG&A expense was $3.66 million, or 15.5% of total revenue, in the first six months of 2010 compared with $3.96 million, or 16.8% of total revenue, in the first six months of 2009. The lower SG&A for the period was due to similar reasons as in the second quarter.

Adjusted EBITDA for the first six months of 2009 was $1.84 million compared with negative $33 thousand for the same period in 2009. (See the Reconciliation of Net Income (loss) to Adjusted EBITDA in the attached table.)

Liquidity
Cash and cash equivalents were $2.87 million at July 3, 2010 compared with $3.11 million at April 3, 2010 and a 2009 year-end balance of $3.78 million. The decrease through the first six months of 2010 was primarily the result of capital expenditures, increased working capital requirements and reduction in long-term debt that was partially offset by proceeds from the sale of equipment.

Capital expenditures in the second quarter and first half of 2010 were $0.70 million and $1.0 million, respectively, compared with $0.35 million and $0.70 million in the corresponding periods of the prior year. System investments and custom folding carton equipment made up the bulk of the first half of 2010 expenditures. Fiscal year 2010 capital expenditures are expected to be between $1.6 million to $1.8 million.

Mr. Lupp added, "Our capital investments in our custom folding carton product line will support continued growth and provide the quality product and timely deliveries our customers have come to expect from us."

Depreciation and amortization for the first six months of 2010 was $1.37 million compared with $1.87 million during the prior year period. The decline was a result of the product line rationalization, as most assets associated with that line were sold in the latter part of fiscal 2009.

On June 9, 2010, MOD-PAC completed an agreement for a new $3.0 million, three-year revolving credit facility with Manufacturers and Traders Trust Company. The new facility replaced the Company's $5.0 million line of credit, which expired in March 2010. At the end of the second quarter, only $0.2 million of the line of credit was in use through standby letters of credit. MOD-PAC believes its cash on hand and the cash it generates from operations will be sufficient for its working capital and capital spending requirements throughout 2010.

There were no shares repurchased by the Company in the second quarter of 2010. MOD-PAC has authorization to repurchase 75,885 shares.

 

 

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