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Appleton reports Q1 2010 results

Press release from the issuing company

Appleton's first quarter 2010 net sales of $232.2 million increased 9.2 percent compared to first quarter 2009 net sales of $212.6 million. Appleton's first quarter 2010 net loss of $7.4 million compared to net income of $1.2 million in first quarter 2009. 

First quarter 2010 results include an $8.2 million environmental expense recovery as a result of an insurance settlement, a $5.5 million increase in interest expense and a $5.5 million debt extinguishment expense resulting from the voluntary refinancing of the Company's debt. First quarter 2009 results included $5.4 million of debt extinguishment gain as a result of making market purchases of senior subordinated notes at a price significantly less than face value.

"Our strong sales resulted from improved market demand for our products and increased market share, especially in the carbonless and thermal paper segments," said Mark Richards, Appleton's chairman, president and chief executive officer. "The excellent response to the launch of our new Superior carbonless sheet product, as well as increased international demand, helped drive up carbonless sales over 3 percent.  Sales of our thermal paper grew by 23 percent on shipment volume that increased 36 percent. Those results reflect significant share gains for both our point-of-sale and high value-added grades." He added that sales for the Performance Packaging Division, when adjusted for the December sale of C&H Packaging, increased $3.6 million compared to first quarter 2009.

Richards said the Encapsys business unit, which is now reported as a separate segment, continues to grow.  Encapsys applies Appleton's extensive knowledge of the microencapsulation process in creative and collaborative ways to develop and deliver better products to customers. "We are excited about the opportunities to explore new markets and develop relationships beyond the paper industry where we can leverage this core competency. Our goal is to be the partner of choice for technology collaborations related to microencapsulation," Richards said.

The positive impact that the Company's strong sales and shipment volumes had on earnings was offset by unfavorable product pricing and mix, as well as higher than expected raw material costs, especially for pulp and energy. Expenses associated with the Company's debt refinancing, also reduced earnings for the quarter. "We are being very aggressive in our efforts to control costs and spending and improve operating efficiencies to soften the impact of raw material inflation," Richards stated.

Technical Papers
Technical Papers first quarter 2010 net sales of $204.8 million were $19.3 million, or 10.4 percent, higher than first quarter 2009 due to a nearly 20 percent increase in shipment volumes. Carbonless net sales increased $4.1 million, or 3.4 percent, compared to first quarter 2009, primarily due to the launch of the Company's new Superior carbonless sheet product, as well as increased international demand. Net sales of thermal papers increased $15.2 million, or 23.4 percent, compared to the prior year quarter, due to increased shipment volumes of approximately 36 percent.

Technical Papers first quarter 2010 operating income of $6.2 million decreased $1.8 million from that of first quarter 2009 due to unfavorable price and mix (-$18.1 million), inflation of raw materials and utilities pricing (-$2.4 million) and higher distribution costs (-$0.6 million) offset by reduced manufacturing costs (+$9.1 million), reductions in mill curtailments to match customer demand  (+$3.8 million), overall higher shipment volumes (+$3.5 million) and reduced start-up costs of the thermal coater at the West Carrollton, Ohio paper mill (+$2.9 million).

Encapsys first quarter 2010 net sales of $11.5 million were $2.2 million, or 24.5 percent, higher than first quarter 2009. First quarter 2010 volumes were nearly 43 percent higher than the prior year quarter. This increase in sales contributed an increase in operating income of $1.2 million.

Performance Packaging
Performance Packaging first quarter 2010 net sales of $22.2 million were $1.8 million, or 7.5 percent, lower than first quarter 2009. Compared to first quarter 2009, segment net sales declined due to the December 2009 sale of C&H Packaging Company, Inc.  The remaining Packaging business actually reported a $3.6 million increase in first quarter 2010 net sales on a volume increase of nearly 14%. First quarter 2010 operating income, for the remaining business, increased $1.3 million from first quarter 2009.

Other (Unallocated)
Other (unallocated) includes costs associated with new business development activities and unallocated corporate expenses. Current quarter costs decreased $7.3 million from first quarter 2009 due to the recording of the $8.2 million Fox River insurance recovery.

Debt Refinancing
On February 8, 2010, Appleton completed a voluntary refinancing of its debt. The refinancing included the sale of $305.0 million of 10.5% senior secured first lien notes due June 2015 and a new five-year, asset-backed $100 million revolving credit facility. Proceeds from the sale of the senior secured notes, less expenses and discounts, were $292.2 million. Initial borrowing on the new revolver totaled $20.6 million. A majority of the proceeds from this refinancing transaction were used to repay, and thus terminate, the senior secured credit facilities which included senior secured variable rate notes payable of $211.2 million, plus interest, and the old revolving credit facility of $97.1 million, plus interest. Remaining proceeds were used to pay related expenses totaling $10.6 million. Debt extinguishment expenses of $5.5 million were charged against the quarter's results resulting from the write-off of previously capitalized deferred debt issuance costs. 

Balance Sheet
At the end of first quarter 2010, the Company had cash totaling $3.2 million. This compared to cash of $10.0 million at year-end 2009. During first quarter 2010, the Company used $25.2 million of cash in operations largely as the result of a $27.7 million increase in working capital. Higher net sales caused an increase in accounts receivable and preparation for planned mill outages contributed to higher inventory levels. Prior to the February 2010 refinancing, Appleton had borrowed an additional net $8.9 million on the old revolving line of credit. Subsequent to the February refinancing, a net $17.9 million was borrowed using the new revolving line of credit. Appleton invested $2.4 million on capital projects and used $6.8 million of cash for other financing activities, including mandatory repayments of debt.

Richards said the Company expects that raw material cost inflation will continue to place pressure on earnings, especially in the second quarter. The Company also plans to conduct scheduled maintenance work, in the second quarter, which will interrupt production at some of its facilities.

Richards said the Company will continue to seek ways to reduce operating costs and drive continued growth of sales and market share. The Company has successfully implemented price increases across all its paper products; however, the Company does not expect to see a significant benefit from these increases until the second half of the year due to pricing agreements already in place with many of its customers.

"Demand for our products is returning and we are encouraged by the signs of a broader economic recovery. Those improvements may not be as consistent or timely as we would like, but there are indications that the worst of the recession is behind us," Richards said. He added that the strength, breadth and brand value of Appleton's paper product lines have the Company well-positioned to serve its core markets as market demand continues to improve. Appleton is especially optimistic about continued sales growth of its thermal paper products that leverage the capabilities of the Company's new coater.

"Inflation will pose some near-term challenges for us, but our strategies, discipline and market leadership positions will serve us well as the year progresses," said Richards.