Business News

Orchids Paper Products Company Reports Third Quarter Results

Thursday 28. October 2010 - Orchids Paper Products Company (NYSE Amex: TIS) today reported net income for the three months ended September 30, 2010, of $1.4 million, or $0.18 per diluted share, compared with $3.8 million or $0.52 per diluted share, in the same period in 2009. For the first nine months of 2010, net income was $5.0 million, or $0.64 per diluted share compared with net income of $10.4 million, or $1.49 per diluted share, reported for the first nine months of 2009.

Three-month period ended September 30, 2010

Net sales in the quarter ended September 30, 2010 were $24.5 million, which were flat compared to the net sales of $24.6 million in the same period of 2009. Net sales of converted product were $19.7 million in the 2010 quarter, a decrease of $2.5 million or 11%, compared to the same quarter in the prior year. Net sales of parent rolls were $4.9 million in the third quarter of 2010, an increase of $2.5 million, or 103%, compared to $2.4 million in parent roll sales in the same quarter in the prior year. The decrease in converted product sales resulted from a decline in tonnage shipped. Net sales of parent rolls were positively affected by a 67% increase in parent roll tonnage shipped, primarily due to excess paper making capacity resulting from lower requirements from our converting operation, and a 22% increase in the net selling price.

Earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter ended September 30, 2010 was $4.1 million, a decrease of $2.6 million or 38%, compared to $6.7 million for the same period in the prior year. As a percent of net sales, EBITDA was 16.7% in the 2010 quarter compared with 27.1% in the 2009 quarter.

Gross profit for the quarter ended September 30, 2010 was $4.0 million, a decrease of $3.4 million or 46%, when compared with a gross profit of $7.4 million in the comparable prior year quarter. Gross profit as a percent of net sales was 16.4% in the third quarter of 2010 compared to 30.3% for the same period in 2009. As a percent of net sales, gross profit decreased primarily due to higher waste paper prices, lower shipment volumes of converted products which also caused an increase in per case converting production costs, a higher percentage of parent roll sales and higher depreciation expense. Cost of waste paper in the third quarter of 2010 was 38% higher than the cost in the same quarter of 2009, resulting in increased cost of sales of approximately $1.5 million. Unit production costs in the converting facility in the third quarter of 2010 were unfavorable to those experienced in the prior year quarter primarily due to lower period-over-period production. Parent roll tonnage shipments increased in the quarter due to increased availability of parent rolls caused by the lower requirements in converting operations and a stronger parent roll market that allowed profitable shipments to outside customers. As a result, parent roll sales increased as a percent of overall sales, which had a negative effect on overall gross profit because parent roll sales generally provide a lower gross profit margin than converted product sales.

In the third quarter of 2010, selling, general and administrative expenses totaled $1.6 million, which were $123,000, or 7%, less than the $1.8 million incurred in the same period of 2009. Reduced accruals under the incentive bonus program was the primary reason for the period-over-period decrease. As a percent of net sales, selling, general and administrative expenses decreased to 6.7% for the quarter ended September 30, 2010, compared to 7.2% for the prior year quarter.

Interest expense for the third quarter of 2010 totaled $249,000 compared to interest expense of $174,000 in the same period in 2009. The increase was primarily due to higher interest rates and increased borrowing levels due to borrowings under construction loans for a waste water treatment plant expansion and a new warehouse project.

As of September 30, 2010, the full year effective tax rate is estimated to be 30.1%. The estimated effective tax rate for the current year includes the effects of the expiration of the Federal Indian Employment Credit and accelerated depreciation on former Indian lands in Oklahoma, both of which expired as of the end of 2009.

Nine-month period ended September 30, 2010

Net sales decreased $2.1 million, to $70.2 million in the nine months ended September 30, 2010 compared to $72.3 million in the same period of 2009. A decrease in net sales of converted product of $8.3 million or 13% to $57.5 million was partially offset by an increase in net sales of parent rolls of $6.2 million or 94% to $12.8 million. Net sales of converted product decreased due to an 8% decrease in the volume of tonnage shipped and a 5% decrease in net selling prices. The reduction in net selling prices was primarily product mix related. Net sales of parent rolls increased due to an 83% increase in tonnage shipped, primarily due to excess paper making capacity resulting from lower requirements of our converting operation, and a 6% increase in net selling prices.

EBITDA for the nine months ended September 30, 2010 decreased to $11.8 million or 37% compared to the $18.7 of EBITDA reported for the first nine months of 2009. As a percent of net sales, EBITDA was 16.7% in the 2010 period, compared to 25.8% in the same period of 2009.

Gross profit for the nine months ended September 30, 2010 was $13.0 million, a decrease of $8.7 million or 40% compared to gross profit of $21.7 million in the same period of 2009. As a percent of net sales, gross profit was 18.5% in the 2010 period compared to 30.0% in the same period of 2009. As a percent of net sales, gross profit decreased primarily due to higher waste paper costs, lower converted product shipment volumes which also caused an increase in converted product production costs, a higher percentage of parent roll sales and higher depreciation. Cost of waste paper for the first nine months of 2010 was 48% higher than the cost in the same period of 2009, resulting in increased cost of sales of approximately $5.0 million.

Selling, general and administrative expenses in the nine months ended September 30, 2010 totaled $5.2 million, a decrease of $464,000, or 8%, compared to $5.7 million in the same period of 2009. Reduced accruals under the Company’s incentive bonus plan due to lower earnings, reduced legal and professional fees, and reduced stock option expense, primarily due to the lower stock price were the primary factors of the decrease. As a percent of net sales, selling, general and administrative expenses were 7.4% for the nine months ended September 30, 2010 compared to 7.9% for the same period in 2009.

Interest expense for the nine-month period ended September 30, 2010 totaled $675,000 compared to interest expense of $468,000 in the same period of 2009. Increased borrowings primarily due to borrowings to finance the previously discussed capital expenditures and higher interest rates were the reason for the increase.

Mr. Robert Snyder, President and Chief Executive Officer, stated, “In this period of economic uncertainty and competitive market conditions, our core converted product business was stable during the third quarter compared to the second quarter of this year. In addition, the price of waste paper, our major cost component, was relatively flat on a sequential quarter basis. Our new converting line is up and running and we completed our new warehouse, allowing us to eliminate the costs of external warehousing. An increasingly competitive market faces us as we continue our efforts to build our core converted product business and gain new business into the higher quality, mid-tier market.”