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| TIS > SEC Filings for TIS > Form 10-Q on 13-Aug-2009 | All Recent SEC Filings |
13-Aug-2009
Quarterly Report
Forward-Looking Information
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements. These statements
relate to, among other things:
our business strategy;
the market opportunity for our products, including expected demand
for our products;
our estimates regarding our capital requirements; and
any of our other plans, objectives, and intentions contained in this
report that are not historical facts.
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These statements relate to future events or future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements are only predictions.
You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are, in some cases, beyond our control and that could materially affect actual results, levels of activity, performance or achievements. Factors that could materially affect our actual results, levels of activity, performance or achievements include, without limitation, those detailed under the caption "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as filed with the Securities and Exchange Commission, and the following items:
intense competition in our market and aggressive pricing by our competitors could force us to decrease our prices and reduce our profitability;
a substantial percentage of our converted product revenues are attributable to three large customers which may decrease or cease purchases at any time;
significant indebtedness limits our free cash flow and subjects us to restrictive covenants relating to the operation of our business;
the availability of and prices for energy; failure to purchase the contracted quantity of natural gas may result in financial exposure; our exposure to variable interest rates; disruption in our supply or increase in the cost of waste paper; the loss of key personnel; labor interruptions; natural disaster or other disruption to our facility; ability to finance the capital requirements of our business; cost to comply with existing and new laws and regulations; failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud; the parent roll market is a commodity market and subject to fluctuations in demand and pricing; excess supply in the market may reduce our prices; an inability to continue to implement our business strategies; inability to sell the capacity generated from our new converting line; failure to complete our project to add a new converting line |
a significant decline in sales causing us to no longer need the new converting line.
If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. Any forward-looking statement you read in the following Management's Discussion and Analysis of Financial Condition and Results of Operations reflects our current views with respect to future events and is subject to these and other risks, uncertainties, and assumptions relating to our operations, results of operations, growth strategy, and liquidity. We
assume no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise.
Overview
We manufacture bulk tissue paper, known as parent rolls, and convert parent rolls into a full line of tissue products, including paper towels, bathroom tissue and paper napkins for the private label segment of the consumer, or "at home," market. We have focused our product design and manufacturing on the discount retail market, primarily the dollar store retailers, due to their consistent order patterns, limited number of stock keeping units, or SKUs, offered and the growth being experienced in this channel of the retail market. While we have customers located throughout the United States, we distribute most of our products within approximately 900 miles of our northeast Oklahoma facility, which we consider to be our cost-effective shipping area. However, we focus our sales efforts on an area within an approximate 500-mile radius of our northeast Oklahoma facility. Our products are sold primarily under our customers' private labels and, to a lesser extent, under our brand names such as Colortexฎ, Velvetฎ, My Sizeฎ and our environmentally friendly careฎ line. All of our revenue is derived pursuant to truck load purchase orders from our customers. We do not have supply contracts with any of our customers. Revenue is recognized when title passes to the customer. Because our product is a daily consumable item, the order stream from our customer base is fairly consistent with no significant seasonal fluctuations. Changes in the national economy do not materially affect demand for our converted products.
Our profitability depends on several key factors, including:
the market price of our products; the cost of recycled paper used in producing our products; the efficiency of operations in both our paper mill and converting operations; and energy costs. |
The private label segment of the tissue industry is highly competitive, and discount retail customers are extremely price sensitive. As a result, it is difficult to affect price increases. We expect these competitive conditions to continue.
In June 2006, we began operating a new paper machine with an annual capacity of approximately 33,000 tons. As a result, beginning in the third quarter of 2006, we were able to eliminate the requirement to purchase recycled parent rolls on the open market. In the second quarter of 2007, due to the relatively high price of parent rolls, we began running all of our older machines on a full-time basis. The capacity of the new machine, in addition to the capacity of our older machines, increased our total production capacity to approximately 56,000 tons per year. We have been taking limited downtime on some of our older machines in 2009 due to a soft parent roll market, primarily due to a soft market in the away-from-home business, which is where a majority of our parent roll sales occur. Our strategy is to sell all of our parent roll capacity as converted products which generally carry higher margins than parent rolls. We are focusing considerable efforts to improve our converting efficiencies in order to achieve that goal. Parent rolls are a commodity product and thus are subject to market pricing. We plan to continue to sell any excess parent roll capacity on the open market as long as market pricing is profitable.
We currently utilize warehouse space within our converting facility and rent additional space within a third-party warehouse located in Tulsa, Oklahoma to store converted products prior to shipping. We plan to purchase approximately 20 acres of land next to our converting facility and construct a 270,000 square foot warehouse in which we will consolidate all of our converted product storage. We plan to utilize the freed space in our converting facility by purchasing and installing a new converting line. The project cost for the new converting line is expected to be $18.6 million and the project cost for the new warehouse is expected to be $8.4 million. The new converting line project is expected to add up to 4 million annual cases of incremental converted product capacity and broaden our product offering through increased packaging configurations, enhanced graphics and improved embossing. We expect to begin construction of the new warehouse in August 2009 and to be fully operational by June 2010. The new converting line is expected to be in start-up mode by June 2010 and reach full operating speeds by the end of the third quarter.
Our strategy is to expand our position as a low cost provider of private label tissue products to the growing discount retail channel within our geographic area while leveraging our competitive advantages to increase our presence in other retail channels. This will be accomplished through our continued high service levels, increased total manufacturing capacity and expansion of our high perceived value product offering.
With our steady sales growth over the last eleven years, we have strategically expanded capacity to meet demand. We are currently approaching full capacity utilization of our converting operations. We plan to increase our converting capacity by approximately four million cases annually with the installation of a new converting line and construction of a warehouse. This additional capacity will enable us to both increase sales of existing products and to provide the flexibility to manufacture higher tier products for sales to our core customer base and into new retail channels.
We intend to implement this strategy through our key initiatives set forth below:
maintain and strengthen our core customer relationships;
increase our flexibility to meet a wider array of customer needs;
further expand our customer base in other retail channels; and
continue to improve operating efficiencies and to reduce manufacturing costs.
Comparative Three-Month Periods Ended June 30, 2009 and 2008
Net Sales
Three Months Ended June 30,
2009 2008
(in thousands, except average
price per ton and tons)
Converted product net sales $ 22,533 $ 17,380
Parent roll net sales 1,598 4,935
Total net sales $ 24,131 $ 22,315
Total tons shipped 12,297 14,226
Average price per ton $ 1,962 $ 1,569
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Net sales increased 8%, to $24.1 million in the quarter ended June 30, 2009, compared to $22.3 million in the same period of 2008. Net sales figures represent the gross selling price, including freight, less discounts and pricing allowances. Net sales of converted product increased in the quarter ended June 30, 2009 by $5.1 million, or 30% to $22.5 million compared to $17.4 million in the same period last year. Net sales of parent rolls decreased $3.3 million or 68% to $1.6 million in the quarter ended June 30, 2009 compared to $4.9 million in the same period last year. The increase in net sales of converted product is primarily the result of a 19% increase in the net selling price per ton of converted product shipments and a 9% increase in tons of converted product shipped. The increased tonnage shipped is a result of the improved production in our converting plant, which provided additional converted product for sale into the market. Net sales of parent rolls decreased primarily as a result of a 58% decrease in parent roll tonnage shipped, as well as a 22% decrease in the net selling price.
Total shipments in the second quarter of 2009 decreased by 1,929 tons, or 13.6%, to 12,297 tons compared to 14,226 tons in the same period of 2008. This decrease is the result of a 58% decline in parent roll shipments for the second quarter of 2009, primarily due to the continued softness in the away-from-home market for tissue products, which was partially offset by a 9% increase in shipments of converted products. We continue to manage our parent roll inventory by taking downtime on some of our older paper machines. Additionally, the improved converting production cited above resulted in less parent roll tonnage available for sale into the open market. Our overall net selling price per ton increased by 25% in the second quarter of 2009 compared to the prior year quarter due mainly to higher net selling prices for converted products. The increase in net selling price per ton of converted product was primarily the result of price increases and product content changes achieved during 2008 and early 2009 to counteract increased waste paper and energy prices.
Cost of Sales
Three Months Ended June 30,
2009 2008
(in thousands, except
gross profit margin %
and paper cost per ton)
Cost of paper $ 7,895 $ 11,580
Non-paper materials, labor, supplies, etc. 7,574 6,841
Sub-total 15,469 18,421
Depreciation 834 772
Cost of sales $ 16,303 $ 19,193
Gross Profit $ 7,828 $ 3,122
Gross Profit Margin % 32.4 % 14.0 %
Total paper cost per ton consumed $ 642 $ 814
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The major components of cost of sales are the cost of internally produced paper, raw materials, direct labor and benefits, freight costs of products shipped to customers, insurance, repairs and maintenance, energy, utilities and depreciation.
Cost of sales decreased approximately $2.9 million, or 15%, to $16.3 million for the quarter ended June 30,
2009, compared to $19.2 million in the same period of 2008. This decrease in our cost of sales was primarily attributable to lower paper production costs, lower converting direct labor costs and converted product packaging costs which were partially offset by higher converting overhead costs. As a percentage of net sales, cost of sales decreased to 68% in the 2009 quarter from 86% of net sales in the 2008 quarter. Cost of sales as a percentage of net sales for the second quarter of 2009 was favorable to the prior year quarter due to higher converted product net selling prices and lower paper production costs.
Our overall cost of paper in the second quarter of 2009 was $642 per ton, a decrease of $172 per ton compared to the same period in 2008. Paper production costs decreased primarily due to lower waste paper prices and, to a lesser extent, lower natural gas prices. The prices we paid for waste paper in the second quarter of 2009 decreased approximately 49% compared to the prices paid in the prior year quarter. As a result, our cost of waste paper consumed decreased approximately $2.6 million in 2009 compared to the second quarter of 2008. Natural gas costs decreased approximately 30% or $380,000 in the second quarter of 2009 compared to the same period in 2008, mainly driven by reduced rates.
Converting direct labor costs decreased in the 2009 quarter compared to the 2008 quarter by approximately 23% on a per unit basis due to both reduced headcount resulting from our automation project completed in the first quarter of 2009 and higher productivity. The lower labor costs improved our gross profit margin by approximately $600,000. Due to favorable market conditions, we were able to negotiate lower costs for our packaging materials. Converting overhead costs increased in the 2009 quarter over the 2008 quarter by approximately $880,000, primarily due to an increase of $235,000 in cost of outside warehousing, a $191,000 increase in overhead labor, $189,000 in relocation and recruitment costs and a $150,000 increase in our maintenance and repair costs. The year over year increase in outside warehousing expense is due to increased storage space requirements resulting from a higher level of converted product production and shipments experienced in the second quarter of 2009. Overhead labor increased primarily due to additions to our management team. The level of maintenance and repair costs experienced in the second quarter of 2009 is expected to continue into the future.
Gross Profit
Gross profit in the quarter ended June 30, 2009, increased $4.7 million, or 151%, to $7.8 million compared to $3.1 million in the same period last year. Gross profit as a percentage of net sales in the 2009 quarter was 32% compared to 14% in the 2008 quarter. The gross profit increase was the result of lower waste paper prices, increased converted product net sales prices, an increase in converted product tonnage shipped and lower converting direct labor costs. As a result of the increased converting production, more tonnage was consumed in our converting operation rather than being sold as parent rolls, which positively affected our gross profit because sales of converted products typically carry a higher margin than sales of parent rolls.
Selling, General and Administrative Expenses
Three Months Ended June 30,
2009 2008
(In thousands, except
SG&A as a % of net sales)
Commission expense $ 346 $ 251
Other S,G&A expenses 1,741 1,240
Selling, General & Adm exp $ 2,087 $ 1,491
SG&A as a % of net sales 8.6 % 6.7 %
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Selling, general and administrative expenses include salaries, commissions to brokers and other miscellaneous expenses. Selling, general and administrative expenses increased $596,000, or 40%, to $2.1 million in the quarter ended June 30, 2009 compared to $1.5 million in the comparable 2008 period. The increase was primarily due to higher stock option expense, increased accruals under our incentive bonus plan, increased commission expense related to our increased converted product sales, and costs associated with additions to our senior management team. Stock option expense increased primarily due to the effect the year-over-year increase in the price of our common stock had on the Black-Scholes calculation of the expense related to stock options granted to our board of directors. As a percentage of net sales, selling, general and administrative expenses increased to 8.6% in the second quarter of 2009 compared to 6.7% in the same period of 2008.
Operating Income
As a result of the foregoing factors, operating income for the quarters ended June 30, 2009 increased $4.1 million from the same period in 2008.
Interest Expense and Other Income
Three Months Ended June 30,
2009 2008
(In thousands)
Interest expense $ 135 $ 320
Other income $ (1 ) $ (5 )
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Interest expense includes interest on all debt and amortization of deferred debt issuance costs. Interest expense decreased $185,000 to $135,000 in the quarter ended June 30, 2009, compared to $320,000 in the quarter ended June 30, 2008. Lower LIBOR interest rates, lower margins over LIBOR, reflecting our improved financial performance, and, to a lesser extent, the effect of lower borrowings, were the primary reasons for the decrease in interest expense.
Income Before Income Taxes
As a result of the foregoing factors, income before income taxes increased $4.3 million to $5.6 million in the quarter ended June 30, 2009, compared to $1.3 million in the same period in 2008.
Income Tax Provision
As of June 30, 2009, we estimate our full-year effective income tax rate to be 34.6%. Because the first quarter of 2009 was recorded at a higher rate, our effective income tax rate for the quarter ended June 30, 2009 was 32.7%. Our rate is lower than the statutory rate because of the Oklahoma Investment Tax Credits associated with capital equipment investments and the utilization of Federal Indian Employment credits. The Oklahoma Investment Tax Credits offset our Oklahoma state tax liability. As of June 30, 2008, our annual effective income tax rate was 33%.
We have extinguished our Federal Net Operating Losses and, as a result have paid approximately $1.7 million in quarterly estimated tax payments in 2009. No current taxes are owed to state taxing authorities because of the Oklahoma Investment Tax Credit carryforwards.
Comparative Six-Month Periods Ended June 30, 2009 and 2008
Net Sales
Six Months Ended June 30,
2009 2008
(in thousands, except
price per ton and tons)
Converted product net sales $ 43,591 $ 34,498
Parent roll net sales 4,180 8,092
Total net sales $ 47,771 $ 42,590
Total tons shipped 24,726 27,188
Average price per ton $ 1,932 $ 1,566
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Net sales increased 12% to $47.8 million in the six months ended June 30, 2009, compared to $42.6 million in the same period of 2008. Net sales figures represent gross selling price, including freight, less discounts and pricing allowances. Net sales of converted product increased for the six months ended June 30, 2009, by $9.1 million, or 26% to $43.6 million compared to $34.5 million in the same period last year. Net sales of parent rolls decreased $3.9 million or 48% to $4.2 million in the six months ended June 30, 2009 compared to $8.1 million in the same period last year. The overall increase in net sales is primarily the result of a 22% increase in the net selling price per ton of converted product shipments and a 16% increase in tons of converted product shipped which was partially offset by a 41% decrease in parent roll
tonnage shipped and a 13% decrease in parent roll net selling price per ton.
Total shipments in the six-month period of 2009 decreased by 2,462 tons, or 9%, to 24,726 tons compared to 27,188 tons in the same period of 2008, primarily due to a 41% decrease in parent roll shipments. Our overall net selling price per ton increased by 23% in the first six months of 2009 compared to the comparable prior year period. This increase was attributable to higher prices for converted products, primarily due to product content reduction actions taken during the last twelve months to counteract increased raw material and energy costs.
Cost of Sales
Six Months Ended June 30,
2009 2008
(in thousands, except
gross profit margin %
and paper cost per ton)
Cost of paper $ 16,434 $ 22,133
Non-paper materials, labor, supplies, etc. 15,439 13,120
Sub-total 31,873 35,253
Depreciation 1,638 1,526
Cost of sales $ 33,511 $ 36,779
Gross Profit $ 14,260 $ 5,811
Gross Profit Margin % 29.9 % 13.6 %
Total paper cost per ton consumed $ 664 $ 809
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The major components of cost of sales are the cost of internally produced paper, raw materials, direct labor and benefits, freight costs of products shipped to customers, insurance, repairs and maintenance, energy, utilities and depreciation.
Cost of sales decreased approximately $3.3 million, or 9%, to $33.5 million for the six months ended June 30, 2009, compared to $36.8 million in the same period of 2008. As a percentage of net sales, cost of sales decreased to 70.1% of net sales in the six-month period ended June 30, 2009 from 86.4% of net sales in the six-month period ended June 30, 2008. The decrease in cost of sales as a percentage of net sales in the six months ended June 30, 2009, was primarily attributed to lower paper production costs, higher converted product selling prices per ton, and lower converting direct labor costs which were somewhat offset by higher converting overhead costs.
In the six months ended June 30, 2009, our overall cost of paper was $664 per ton, a decrease of $145 per ton when compared to the same period in 2008. Our cost per ton decreased primarily due to decreased waste paper prices and, to a lesser extent, decreased prices of natural gas. Average waste paper prices have decreased approximately 40%, which reduced our cost of waste paper consumed by $4.1 million in the first six months of 2009 compared to the same period of 2008. Natural gas prices decreased 27% in the 2009 period compared to the same period in 2008, resulting in decreased cost of approximately $728,000.
Direct labor costs in the first six months of 2009 were lower than the same period in 2008 by 25% on a per unit basis for the same reasons cited for the three-month comparison. This had a favorable effect of approximately $1.3 million on our gross profit margin. Converting overhead expenses for the six months ended June 30, 2009, were higher than the same period of 2008, primarily due to increased maintenance and repair costs of approximately $457,000, increased utilization of outside warehousing resulting in increased costs of approximately $428,000, and higher costs associated with additions to our management team of approximately $294,000.
Gross Profit
Gross profit in the six months ended June 30, 2009, increased $8.5 million, or 145 %, to $14.3 million compared to $5.8 million in the same period last year. Gross profit as a percentage of net sales in the six-month period ended June 30, 2009, was 29.9% compared to 13.6% in the same period in 2008. The effect of lower paper production costs, particularly as a result of lower waste paper . . .
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