Appleton's Q4 net loss narrows to US$37.1M from loss of US$59.4M in year-ago period; net sales down slightly to US$205.5M with increases in thermal papers, Encapsys sales offset by 15% decline in carbonless sales
March 5, 2013
Fourth Quarter 2012
Appleton reported a 2012 operating loss of $88.5 million compared to an operating loss of $9.4 million in 2011. Excluding one-time and other items as explained below, adjusted operating income was $74.8 million, $30.0 million higher than adjusted operating income reported for 2011. Costs related to ceasing papermaking operations at the West Carrollton, Ohio facility and transitioning to Domtar base paper were $117.4 million for the year and included $28.6 million of restructuring expense, $77.4 million of other related costs and $11.4 million of transition costs.
During fourth quarter 2012, the Company adopted mark-to-market accounting for its pension and other postretirement benefit plans whereby all gains and losses are immediately recognized in current year earnings. In addition, the Company also elected to change its method of accounting for certain costs included in inventory, whereby retiree benefit costs for former employees are excluded from inventoriable costs. Both of these accounting method changes were retroactively applied to all periods presented. The change in retiree benefits accounting resulted in a mark-to-market adjustment of $33.6 million in fourth quarter 2012 and $51.1 million in fourth quarter 2011.
Current year results also include $7.5 million of business combination transaction costs, a $7.0 million multiemployer pension plan settlement charge and a $2.2 million environmental expense insurance recovery. Prior year adjusted operating income included a $3.1 million charge for a litigation settlement.
Continued transformation and growth
“2012 was a strong year for Appleton, one marked by disciplined implementation of our strategy and ongoing transformation which will set the stage for the future,” said Mark Richards, Appleton’s chairman, president and chief executive officer. The Company’s decision to shed old, high-cost, non-integrated papermaking assets at its West Carrollton mill and have Domtar provide most of the base paper Appleton needs to produce its thermal, carbonless and other specialty paper products helped drive success in 2012 and better positioned the Company for future growth.
Strong sales and earnings growth from the thermal papers segment, combined with the savings from the Domtar supply agreement, contributed to a 157% year over year improvement in fourth quarter adjusted operating income and a 67% improvement in full year results.
“Our implementation of the supply agreement with Domtar has reduced our exposure to the unpredictable costs for pulp and waste paper, and has made us more competitive with integrated paper companies,” Richards said. “We have also significantly reduced our fixed costs and the need for future capital expenditures on non-core assets.”
Richards said the Company realized approximately $10 million in savings in the second half of 2012 from improved operating efficiencies and reduced manufacturing costs associated with the implementation of the Domtar supply agreement. The Company also lowered working capital by $26 million in 2012 primarily due to improved payment terms.
“We gained greater flexibility to use our production capacity more effectively,” Richards said. “As a result, we believe we have achieved a cost position that is among the lowest in the thermal paper industry. Those improvements, combined with the advanced capabilities of our manufacturing network, our broad portfolio of market-driven products, and our service support, have strengthened our market leadership position in thermal products.”
Sales of thermal papers grew 15% for the fourth quarter 2012 and 11% for all of 2012. Shipments increased 19% for the fourth quarter 2012 and nearly 9% for the full year as we continued to expand our presence in markets worldwide.
Richards stated that consistent with its transformation plan, the Company discontinued selling carbonless papers into certain non-strategic international markets. Adjusting for that decision, Appleton’s carbonless sales grew by 1% in the fourth quarter, while seeing a decline of 3% for all of 2012.
Full year sales for Encapsys were down approximately 7% due to weak economic conditions that reduced short-term demand for its customers’ products containing microencapsulated ingredients.
However, fourth quarter sales for Encapsys rose nearly 11% and supported the Company’s optimism about the long-term growth potential for this business. “We are confident in our strategic plan for Encapsys and encouraged by the development opportunities we have underway,” Richards said.
Fourth quarter 2012 net sales of $91.1 million were down 14.6%, compared to fourth quarter 2011, on lower shipment volumes of approximately 18%. Excluding the impact of the Company’s decision to discontinue the sale of carbonless papers into certain non-strategic international markets, fourth quarter 2012 carbonless shipment volumes were nearly 4% higher than the same quarter in 2011. Carbonless papers net sales for full year 2012 were $406.8 million which was 10.2% lower than prior year. Shipment volumes were approximately 13% lower than last year. Adjusting for the decision not to sell into certain non-strategic international markets, volumes declined approximately 2%.
Fourth quarter 2012 adjusted operating income was $9.6 million compared to adjusted operating income of $4.9 million in the prior year quarter. Thermal papers 2012 adjusted operating income of $39.5 compared to adjusted operating income of $16.9 million for the same period in 2011.
Fourth quarter 2012 net sales were $12.0 million which was 10.9% higher than prior year. Encapsys net sales for 2012 were $51.0 million which was a decrease of 6.9% from 2011 net sales. Shipment volumes for fourth quarter and full year 2012 were approximately 5% higher and 12% lower than last year, respectively. The continued weak global economy continued to reduce the short-term demand for customer products using Encapsys microencapsulation. Encapsys volumes were also impacted by the decline in carbonless papers production.
Other (unallocated) includes unallocated corporate expenses. Fourth quarter 2012 adjusted costs of $4.3 million were $2.0 million higher than the prior year quarter. Total year 2012 adjusted costs of $12.4 million were $4.7 million higher than total year 2011 largely due to increased performance-based incentive compensation.
At year-end 2012, the Company held cash balances of $1.9 million compared to cash balances of $7.2 million at year-end 2011. During 2012, the Company generated $23.3 million of cash from operations. Working capital decreased $26.4 million, due largely to an increase in accounts payable of $20.1 million due to improved terms. Appleton invested $17.1 million for capital projects and contributed $25.0 million to the pension fund. There were also net redemptions of company stock totaling $11.2 million. Net debt (total debt less cash) was $513.7 million, up $9.2 million from 2011 due in part to costs incurred to cease papermaking at West Carrollton, as well as expenses associated with the discontinued business combination transaction. The Company had approximately $67 million of liquidity at the end of the current quarter.
Appleton expects continued strong sales and earnings growth from its thermal papers segment due to increased demand for its tag, label and entertainment products as well as its point-of-sale receipt paper. Since January 1, Appleton has announced plans to increase coating capacity for its thermal receipt paper products by approximately 35,000 tons to meet increased market demand for its thermal products and to prepare for the potential withdrawal by the Koehler Paper Group from the U.S. market.
Richards said Appleton will increase production capacity by expanding its coating capabilities and reallocating some thermal production to increase operational efficiencies. Those improvements will begin in 2013 and be fully implemented by early 2014. The Company will also continue to consider options to provide even more capacity to address the longer-term market needs.
The Company’s decision to discontinue selling carbonless papers into certain international markets will likely account for a significant portion of the carbonless volume decline the Company anticipates in 2013and help improve earnings for that segment.
Sales and earnings for the Encapsys business are expected to be essentially flat in 2013 compared to 2012 as the Company prepares for expected growth in 2014 and beyond due to new product launches and geographical expansion.
The Company will continue its implementation of the base paper supply agreement with Domtar and work to capture all of the $25 to $30 million in savings forecast for the project. Richards said Appleton also expects to reduce working capital by $10 million and debt by approximately $25 million by year-end.
“We will continue our disciplined execution of our transformation and expect to realize substantial improvements to our operating efficiencies, cost structure and manufacturing focus,” Richards said. 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 2012 results on Tuesday, March 5, 2013, 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 March 18.
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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