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| TIS > SEC Filings for TIS > Form 10-Q on 4-Nov-2009 | All Recent SEC Filings |
4-Nov-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 two 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. 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.
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. We do not have supply contracts with any of our customers, and all of our revenue is derived pursuant to truck load purchase orders from our customers. Revenue is recognized when title passes to the customer.
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. Our parent rolls are processed into paper towels, bathroom tissue and napkins in our adjacent converting facility. Our ten converting lines have a total annual capacity of approximately 7.5 million cases of finished tissue products. At present, our papermaking capacity exceeds our converting capacity and we sell the resulting surplus parent rolls into the open market. We adjust our paper making production based on our internal converting needs for parent rolls and the open market demand for parent rolls. 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.
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.
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.
With our steady sales growth since our inception in 1998, we have strategically expanded capacity to meet demand. Our latest strategic expansion plan is intended to increase our converting capacity by approximately four million annual cases 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. The total cost of this project is estimated to be approximately $27.1 million.
Construction began on the new 245,000 square foot warehouse, which will be located adjacent to our existing converting facility on land we already own, in early October 2009. The warehouse project is expected to cost approximately $6.8 million with occupancy of the first half of the facility available by May 2010 and complete occupancy by July 2010. Following completion of the warehouse, we will be able to consolidate all of our converted product inventory and shipping into this location and eliminate third-party warehouse storage and shipping costs which will allow us to improve our customer service and logistics performance and reduce operating costs. Additionally, the project will allow us to free up the necessary space in our existing converting facility to house the new converting line. The new converting line, which will be able to produce both kitchen towels and bathroom tissue, will provide higher quality products and broaden our product offering through increased packaging configurations, enhanced graphics and improved embossing. The line has been placed on order and we expect it to be in start-up mode by the end of the second quarter of 2010, with full operating speeds expected to be achieved by the end of the third quarter of 2010. The new converting line is expected to cost approximately $20.3 million. Initial plans to purchase land next to our existing operations and build the warehouse on the acquired land were changed due to the lack of a timely resolution of easement issues. We continue to pursue negotiations on this tract of land for future expansion purposes.
Comparative Three-Month Periods Ended September 30, 2009 and 2008
Net Sales
Three Months Ended September 30,
2009 2008
(in thousands, except average
price per ton and tons)
Converted product net sales $ 22,160 $ 19,300
Parent roll net sales 2,397 4,012
Total net sales $ 24,557 $ 23,312
Total tons shipped 13,755 13,837
Average price per ton $ 1,785 $ 1,685
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Net sales increased 5.3%, to $24.6 million in the quarter ended September 30, 2009, compared to $23.3 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 September 30, 2009 by $2.9 million, or 14.8% to $22.2 million compared to $19.3 million in the same period last year. Net sales of parent rolls decreased $1.6 million or 40.3% to $2.4 million in the quarter ended September 30, 2009 compared to $4.0 million in the same period last year. The increase in net sales of converted product primarily resulted from an 8.5% increase in the net selling price per ton of converted product shipments and a 5.8% increase in tonnage shipped. 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. The increased tonnage shipped was the 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 17.3% decrease in parent roll tonnage shipped, as well as a 40.2% decrease in the net selling price.
Total shipments in the third quarter of 2009 were relatively flat compared to the same period of 2008. The decrease in parent roll shipments in the third quarter of 2009 was primarily due to the continued softness in the away-from-home market for tissue products, which was mostly offset by the increase in shipments of converted products. During the third quarter of 2009, we continued to manage our parent roll inventory by taking downtime on some of our older paper machines. Due to the continued improvement in our converting production and demand for converted product and some strengthening in the parent roll market, we began running all of our paper machines as of September 2009. Additionally, the improved converting production cited above resulted in less parent roll tonnage available for sale into the open market.
Cost of Sales
Three Months Ended September 30,
2009 2008
(in thousands, except
gross profit margin %
and paper cost per ton)
Cost of paper $ 9,329 $ 11,056
Non-paper materials, labor, supplies, etc. 6,796 7,679
Sub-total 16,125 18,735
Depreciation 1,003 783
Cost of sales $ 17,128 $ 19,518
Gross Profit $ 7,429 $ 3,794
Gross Profit Margin % 30.3 % 16.3 %
Total paper cost per ton consumed $ 678 $ 799
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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 $2.4 million, or 12.2%, to $17.1 million for the quarter ended September 30, 2009, compared to $19.5 million in the same period of 2008. This decrease in our cost of sales was primarily attributable to lower cost of paper production, converting direct labor and converted product packaging which were partially offset by higher converting overhead costs. As a percentage of net sales, cost of sales decreased to 69.8% in the 2009 quarter from 83.7% of net sales in the 2008 quarter. Cost of sales as a percentage of net sales for the third quarter of 2009 was favorable to the prior year quarter primarily due to higher converted product net selling prices and lower paper production costs.
Our overall cost of paper in the third quarter of 2009 was $678 per ton, a decrease of $121 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. Our cost of waste paper in the third quarter of 2009 decreased approximately 32% compared to our costs in the prior year quarter. As a result, our cost of waste paper consumed decreased approximately $1.6 million in the third quarter of 2009 compared to the third quarter of 2008. The rates we paid for natural gas decreased approximately 25% in the third quarter of 2009 compared to the same period in 2008, which reduced our costs by approximately $288,000. Compared to the second quarter of 2009, our cost of waste paper increased in the third quarter of 2009 by approximately $600,000 or 21%. Prior to the third quarter, waste paper prices decreased significantly from December 2008 through the beginning of the second quarter of 2009 following a rapid increase from late 2007 through the end of the third quarter of 2008.
Converting direct labor costs decreased in the 2009 quarter compared to the 2008 quarter by approximately 17.3% 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 $435,000. Due to favorable market conditions and negotiations of supply agreements, we were able to lower costs for our packaging materials which contributed $340,000 to our gross profit for the quarter. Converting overhead costs increased in the 2009 quarter compared to the 2008 quarter by approximately $133,000, which was primarily due to a $269,000 increase in the cost of outside warehousing, a $220,000 increase in overhead labor and $220,000 in higher depreciation expense primarily due to the $4.7 million converting automation project being placed in service in 2009. These costs were offset by a $285,000 decrease in maintenance and repair costs as well as the non-recurrence of $274,000 expenditure for a productivity consultant used in the 2008 quarter. 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 third quarter of 2009. Overhead labor increased primarily due to additions to our converting management team. Maintenance and repair costs in the third quarter 2008 were higher than normal due to a program initiated during that quarter to improve productivity.
Gross Profit
Gross profit in the quarter ended September 30, 2009, increased $3.6 million, or 95.7%, to $7.4 million compared to $3.8 million in the same period last year. Gross profit as a percentage of net sales in the 2009 quarter was 30.2% compared to 16.3% in the 2008 quarter. The gross profit increase was primarily the result of lower waste paper prices, increased converted product net sales prices, an increase in converted product tonnage shipped, lower
natural gas costs 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 September 30,
2009 2008
(In thousands, except
SG&A as a % of net sales)
Commission expense $ 329 $ 260
Other SG&A expenses 1,443 1,291
Selling, General & Adm exp $ 1,772 $ 1,551
SG&A as a % of net sales 7.2 % 6.7 %
Operating income $ 5,657 $ 2,243
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Selling, general and administrative expenses include salaries, commissions to brokers and other miscellaneous expenses. Selling, general and administrative expenses increased $221,000, or 14.2%, to $1.8 million in the quarter ended September 30, 2009 compared to $1.6 million in the comparable 2008 period. The increase was primarily due to increased accruals under our incentive bonus plan, higher legal and professional fees and increased commission expense related to our increased converted product sales.
Operating Income
As a result of the foregoing factors, operating income for the quarter ended September 30, 2009 increased $3.4 million to $5.7 million, compared to $2.2 million in the same period in 2008.
Interest Expense and Other Income
Three Months Ended September 30,
2009 2008
(In thousands)
Interest expense $ 174 $ 310
Other income $ (5 ) $ (3 )
Income before income taxes $ 5,488 $ 1,936
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Interest expense includes interest on all debt and amortization of deferred debt issuance costs. Interest expense decreased $136,000 to $174,000 in the quarter ended September 30, 2009, compared to $310,000 in the quarter ended September 30, 2008. Lower LIBOR interest rates and lower margins over LIBOR, reflecting our improved financial performance, 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 $3.6 million to $5.5 million in the quarter ended September 30, 2009, compared to $1.9 million in the same period in 2008.
Income Tax Provision
As of September 30, 2009, we estimate our full-year effective income tax rate to
be 33.2%. This is lower than our estimate as of the end of June 30, 2009 of
34.6%, due to the utilization of IRC Section 199 manufacturing deduction for
which we are now eligible due to the depletion of our Federal Net Operating
Losses. As a result, our effective tax rate for the quarter ended September 30,
2009 was 30.5%. Our full-year estimated rate is lower than the statutory rate
because of the Oklahoma Investment Tax Credits associated with capital equipment
investments, the utilization of Federal Indian Employment credits and the
Section 199 manufacturing deduction. The Oklahoma Investment Tax Credits offset
our Oklahoma state tax liability. As of September 30, 2008, our annual
effective income tax rate was 30%.
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 Nine-Month Periods Ended September 30, 2009 and 2008
Net Sales
Nine Months Ended September 30,
2009 2008
(in thousands, except
price per ton and tons)
Converted product net sales $ 65,750 $ 53,798
Parent roll net sales 6,578 12,104
Total net sales $ 72,328 $ 65,902
Total tons shipped 38,481 41,025
Average price per ton $ 1,880 $ 1,606
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Net sales increased 9.8% to $72.3 million in the nine months ended September 30, 2009, compared to $65.9 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 nine months ended September 30, 2009, by $12.0 million, or 22.2%, to $65.8 million compared to $53.8 million in the same period last year. Net sales of parent rolls decreased $5.5 million, or 45.7%, to $6.6 million in the nine months ended September 30, 2009 compared to $12.1 million in the same period last year. The overall increase in net sales is primarily the result of a 16.9% increase in the net selling price per ton of converted product shipments and a 4.6% increase in tons of converted product shipped which was partially offset by a 33.1% decrease in parent roll tonnage shipped and an 18.7% decrease in parent roll net selling price per ton.
Total shipments in the nine-month period of 2009 decreased by 2,544 tons, or 6.2%, to 38,481 tons compared to 41,025 tons in the same period of 2008, primarily due to a 33.1% decrease in parent roll shipments. Our overall net selling price per ton increased by 17.0% in the first nine 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.
Cost of Sales
Nine Months Ended September 30,
2009 2008
(in thousands, except
gross profit margin %
and paper cost per ton)
Cost of paper $ 25,763 $ 33,240
Non-paper materials, labor, supplies, etc. 22,235 20,747
Sub-total $ 47,998 $ 53,987
Depreciation 2,641 2,310
Cost of sales $ 50,639 $ 56,297
Gross Profit $ 21,689 $ 9,605
Gross Profit Margin % 30.0 % 14.6 %
Total paper cost per ton consumed $ 669 $ 810
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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 $5.7 million, or 10.1%, to $50.6 million for the nine months ended September 30, 2009, compared to $56.3 million in the same period of 2008. As a percentage of net sales, cost of sales decreased to 70.0% of net sales in the nine-month period ended September 30, 2009 from 85.4% of net sales in the nine-month period ended September 30, 2008. The decrease in cost of sales as a percentage of net sales in the nine months ended September 30, 2009, was primarily attributed to lower paper production costs, higher
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