Appleton swings to Q3 loss of US$2.1M from net earnings of US$18M in year-ago period, reports net sales down 2.9% to US$210.7M; results include charges related to withdrawal from pension plan, ceasing of papermaking operations in West Carrollton, Ohio

Sandy Yang

APPLETON, Wisconsin , November 5, 2012 (press release) – Adjusted operating income up $10.9 million or 97%

Net sales were down approximately 3% compared to third quarter 2011, but up approximately 2% adjusting for discontinued carbonless papers sales to non-strategic international markets

Net sales of thermal papers up over 9%; shipments up more than 7%

Appleton's third quarter 2012 net sales of $210.7 million decreased 2.9% compared to third quarter 2011. Adjusting for the Company's decision to discontinue the sale of carbonless papers into certain non-strategic international markets, third quarter 2012 net sales were up 1.8%. The Company's strong revenue growth from thermal papers of 9.3% helped to partially offset the sales decreases in carbonless papers and Encapsys.

Appleton reported a third quarter 2012 operating income of $11.9 million compared to operating income of $11.2 million during third quarter 2011. Excluding certain items, third quarter 2012 adjusted operating income was $22.1 million, $10.9 million higher than adjusted operating income reported for third quarter 2011.Operating income for third quarter 2012 was reduced by a $7.0 million settlement charge relating to the withdrawal from the multi-employer pension plan as negotiated by Appleton participants during recently-concluded labor contract negotiations. The Company also recorded $5.1 million of costs related to ceasing papermaking operations at the West Carrollton, Ohio mill and transitioning to base paper produced by Domtar. Also during the quarter, a $2.2 million environmental expense insurance recovery was recorded.

Appleton's net sales for the first nine months of 2012 were $644.3 million, 1.1% lower than the first nine months 2011. Adjusting for the Company's decision to discontinue the sale of carbonless papers into certain non-strategic international markets, sales for this period were up 1.6%. Appleton reported an operating loss of $70.3 million for the first nine months of 2012 compared to operating income of $32.2 million for the same period last year. Excluding certain items, current year adjusted operating income was $51.9 million, $16.6 million higher than adjusted operating income reported for the same period 2011. On a year-to-date basis, costs related to ceasing papermaking operations at West Carrollton and transitioning to Domtar base paper were $110.2 million. Current year results also included $7.2 million of business combination transaction costs, the $7.0 million multi-employer pension plan settlement charge and the $2.2 million environmental expense insurance recovery. First nine months 2011 operating income included a $3.1 million charge for a litigation settlement.

Strong quarter and nine-month performances
Mark Richards, Appleton's chairman, president and chief executive officer, said strong sales and earnings growth from the thermal papers segment, combined with the savings delivered by the strategic supply agreement with Domtar, helped Appleton to improve adjusted operating income by nearly $11 million during third quarter 2012 and more than $16 million for the first nine months of 2012, compared to the same periods in 2011.

Richards said the Company's third quarter performance built on the momentum of the second quarter's solid results. "We continue to execute our plan by delivering strong and consistent product quality, service and value to our customers, improving operating performance, and implementing the base paper supply agreement with Domtar," Richards said.
Sales of thermal papers grew more than 9% for third quarter 2012 and nearly 10% for first nine months of 2012. Shipments increased more than 7% for the third quarter and nearly 6% for first nine months of 2012.

Richards said Appleton's state-of-the-art thermal product manufacturing capabilities, improved cost structure, and enhanced market insight are helping the Company reduce its development time for new thermal products, enrich its product mix, and increase its global market share. He cited the Company's recent introduction of Résiste 185-3.3, a new high-performance thermal face stock developed for retail weigh scale label applications, as the latest example.

Appleton realized approximately $5 million in savings in third quarter 2012 from improved operating efficiencies and reduced manufacturing costs associated with the implementation of the base paper supply agreement with Domtar. The Company continues to reduce inventories it built to support the transition to using Domtar base paper. Third quarter reductions kept Appleton on track to reach its year-end goal of lowering working capital by $25 to $30 million. The Company defines working capital as inventories and accounts receivable minus accounts payable.

The growth of Appleton's thermal papers segment nearly offset the decline of the carbonless segment and soft sales for the Encapsys business. Carbonless sales declined approximately 13% for the third quarter and nearly 9% for the first nine months of 2012, compared to the same periods in 2011. Appleton's carbonless sales declined by 4% in both the third quarter and first nine months of 2012, after adjusting for the Company's previously-announced decision to discontinue selling carbonless papers into certain non-strategic international markets.

Sales for the Company's specialty chemical segment, Encapsys, were down approximately 11% for both the third quarter and first nine months of 2012. Encapsys continues to be affected by weak economic conditions that reduced short-term demand for its customers' products containing microencapsulated ingredients.

Carbonless Papers
Third quarter 2012 carbonless papers net sales of $95.9 million were down 13.1%, compared to third quarter 2011, on lower shipment volumes of approximately 16%. Excluding the impact of the Company's decision to discontinue the sale of carbonless papers into certain non-strategic international markets, third quarter 2012 carbonless shipment volumes were approximately 3% lower than the same quarter in 2011. During the first nine months of 2012, carbonless net sales totaled $315.7 million, a decrease of 8.8 % from the prior year. Year-to-date, shipment volumes were approximately 11% lower than last year. Adjusting for the decision not to sell into certain non-strategic international markets, volumes declined approximately 4%. For both the current year three- and nine-month periods, the impact of lower volumes was offset by the benefits realized from favorable pricing and product mix.

Third quarter 2012 adjusted operating income was $11.0 million compared to adjusted operating income of $6.4 million in the same quarter last year. Adjusted operating income of $25.9 million was reported during the first nine months of 2012 compared to adjusted operating income of $21.4 million for the same period of 2011.

Thermal Papers
Current quarter net sales of thermal papers increased 9.3%, compared to the prior year quarter, largely due to increased shipment volumes of over 7%. Continued strong demand for Appleton's tag, label and entertainment ("TLE") thermal products resulted in a nearly 24% increase in TLE shipment volumes. Year-to-date, TLE volumes were up almost 21% over 2011. TLE sales into international markets were up over 30%.

Adjusted operating income of $10.5 million and $28.2 million were recorded during the three and nine months ended September 30, 2012, respectively. These compared to adjusted operating income of $4.1 million and $11.3 million for the same periods of 2011, respectively. The positive impact of higher shipment volumes, favorable pricing and the continued strong demand for TLE products resulted in much-improved results that were more than double that of the prior year periods.

Encapsys
Third quarter 2012 net sales of $12.8 million were $1.6 million, or 11.4%, lower than third quarter 2011. Third quarter 2012 volumes were approximately 15% lower than the prior year due to the weak global economy reducing the short-term demand for customer products using Encapsys microencapsulation. Encapsys volumes were also affected by the decline in carbonless papers production. For the first nine months of 2012, Encapsys recorded net sales of $39.0 million which were $4.9 million, or 11.2%, lower than the same period last year. Year-to-date shipment volumes were down approximately 16%. Though the weak economy negatively impacted the short-term demand for customer products using Encapsys microencapsulation, the Company recorded three sequential quarters of increased shipment volumes.

Third quarter operating income of $3.4 million was $0.2 million lower than last year's third quarter, largely due to the lower shipment volumes. Year-to-date 2012 operating income of $8.4 million was $2.3 million lower than 2011 through the same period.

Other (Unallocated)
Other (unallocated) includes unallocated corporate expenses. Third quarter 2012 unallocated corporate expenses of $0.1 million were $1.9 million lower than the prior year quarter primarily due to $2.2 million of environmental expense insurance recovery recorded during the current quarter. Year-to-date 2012 expense of $13.4 million was $4.8 million higher than expense recorded for the first nine months of 2011 and included $7.2 million of discontinued business combination transaction costs. Unallocated corporate charges for 2011 included a $3.1 million litigation settlement.

Balance Sheet
Through nine months of 2012, the Company held cash balances totaling $2.4 million, compared to cash balances of $7.2 million at year-end 2011, and provided $9.7 million of cash from operations. Working capital decreased $19.0 million, due largely to an increase of $37.1 million in accounts payable and other accrued liabilities, offset by increases in inventory and accounts receivable of $10.5 million and $6.0 million, respectively. Increased accounts payable reflects extended payment terms negotiated with suppliers and other accrued liabilities includes an increase in accrued interest of $13.6 million as most interest due is paid each year in June and December. The increase in inventories results from a planned inventory build which began during first quarter and peaked in second quarter. Inventory levels decreased in third quarter and will continue to do so during fourth quarter. Through three quarters of 2012, the Company contributed $25.0 million to the pension fund. $9.0 million was invested in capital projects and there were net redemptions of company stock totaling $6.9 million. Net debt was $517.1 million, up $12.6 million from year-end 2011 due in part to an outstanding balance on the revolving credit facility of $7.6 million. The Company had approximately $75 million of liquidity at the end of the current quarter.

Outlook
During fourth quarter 2012, Appleton expects continued strong sales and earnings growth from its thermal papers segment, led by its TLE business. The Company's decision to discontinue selling carbonless papers into certain international markets will likely account for most of the carbonless volume decline the Company anticipates for the fourth quarter and help improve fourth quarter earnings for the segment. Appleton expects improved sales and earnings for its Encapsys business during the fourth quarter 2012 compared to the same period last year. Appleton is also mindful that the devastation caused by Hurricane Sandy could impact fourth quarter results as it is expected to reduce short-term demand for its products.

Implementation of the base paper supply agreement with Domtar will continue to be a focus of Appleton's operations network and a key to improving the Company's cost structure, earnings and cash flow. Appleton expects to reduce working capital by $25 to $30 million by year-end.

Richards said the supply agreement with Domtar has enabled Appleton to implement its asset-light operating model and gain significant flexibility for its manufacturing network. He added that by narrowing its manufacturing focus to the Company's coatings and formulations capabilities, Appleton will no longer need to temporarily reduce base paper production to match inventory to market conditions as it did in fourth quarter 2011.

The Company will continue its intense focus on reducing waste, improving operational performance, increasing cash flow, and driving innovation across all its businesses.

Earnings release conference call
Appleton will host a conference call to discuss its third quarter 2012 results on Tuesday, November 6, 2012, at 11:00 a.m. ET. The call will be broadcast through its Web site, www.appletonideas.com/investors. A replay will be available through November 19.

About Appleton
Appleton creates product solutions through its development and use of coating formulations, coating applications and Encapsys® microencapsulation technology. The Company produces thermal, carbonless and security papers and Encapsys products. Appleton, headquartered in Appleton, Wisconsin, has manufacturing operations in Wisconsin, Ohio and Pennsylvania, employs approximately 1,600 people and is 100 percent employee-owned. For more information, visit www.appletonideas.com. 

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