e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission
File Number 001-32563
Orchids Paper Products Company
(Exact name of Registrant as Specified in its Charter)
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Delaware
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23-2956944 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
4826 Hunt Street
Pryor, Oklahoma 74361
(Address of Principal Executive Offices and Zip Code)
(918) 825-0616
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
Number of shares outstanding of the issuers Common Stock, par value $.001 per share, as of April
30, 2008: 6,328,986 shares.
ORCHIDS PAPER PRODUCTS COMPANY
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2008
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ORCHIDS PAPER PRODUCTS COMPANY
BALANCE SHEETS
(Dollars in thousands, except share data)
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March 31, |
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December 31, |
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2008 |
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2007 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash |
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$ |
3 |
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$ |
3 |
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Accounts receivable, net of allowance of $118 in 2008 and
$100 in 2007 |
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6,837 |
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5,527 |
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Inventories, net |
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5,559 |
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4,874 |
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Income taxes receivable |
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30 |
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24 |
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Prepaid expenses |
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434 |
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381 |
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Deferred income taxes |
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516 |
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516 |
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Total current assets |
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13,379 |
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11,325 |
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Property, plant and equipment |
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65,258 |
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64,899 |
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Accumulated depreciation |
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(8,797 |
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(8,043 |
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Net property, plant and equipment |
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56,461 |
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56,856 |
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Deferred debt issuance costs, net of accumulated amortization
of $579 in 2008 and $570 in
2007 |
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113 |
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122 |
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Total assets |
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$ |
69,953 |
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$ |
68,303 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
4,557 |
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$ |
4,760 |
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Accrued liabilities |
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2,694 |
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2,460 |
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Current portion of long-term debt |
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2,442 |
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2,391 |
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Total current liabilities |
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9,693 |
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9,611 |
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Long-term debt, less current portion |
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23,872 |
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23,264 |
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Deferred income taxes |
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7,669 |
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7,386 |
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Stockholders equity: |
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Common stock, $.001 par value, 25,000,000 shares
authorized in 2008 and 2007, 6,328,986 and 6,322,648
shares issued and outstanding in 2008 and 2007,
respectively |
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6 |
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6 |
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Additional paid-in capital |
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21,952 |
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21,879 |
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Common stock warrants |
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134 |
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141 |
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Retained earnings |
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6,627 |
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6,016 |
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Total stockholders equity |
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28,719 |
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28,042 |
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Total liabilities and stockholders equity |
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$ |
69,953 |
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$ |
68,303 |
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See notes to financial statements.
-3-
ORCHIDS PAPER PRODUCTS COMPANY
STATEMENTS OF INCOME
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Three Months Ended March 31, |
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2008 |
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2007 |
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(unaudited) |
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(unaudited) |
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(Dollars in thousands, except |
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share and per share data) |
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Net sales |
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$ |
20,275 |
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$ |
16,637 |
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Cost of sales |
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17,586 |
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14,905 |
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Gross profit |
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2,689 |
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1,732 |
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Selling, general and administrative expenses |
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1,385 |
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1,059 |
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Operating income |
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1,304 |
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673 |
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Interest expense |
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411 |
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873 |
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Other income, net |
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(1 |
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(20 |
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Income (loss) before income taxes |
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894 |
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(180 |
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Provision (benefit) for income taxes: |
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Deferred |
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283 |
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(49 |
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Net income (loss) |
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$ |
611 |
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$ |
(131 |
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Net income (loss) per share: |
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Basic |
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$ |
0.10 |
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$ |
(0.02 |
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Diluted |
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$ |
0.09 |
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$ |
(0.02 |
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Shares used in calculating net income (loss) per share: |
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Basic |
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6,327,049 |
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6,234,346 |
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Diluted |
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6,554,357 |
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6,234,346 |
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See notes to financial statements.
-4-
ORCHIDS PAPER PRODUCTS COMPANY
STATEMENTS OF CASH FLO WS
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Three Months Ended March 31, |
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2008 |
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2007 |
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(unaudited) |
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(unaudited) |
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(Dollars in thousands) |
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Cash Flows From Operating Activities |
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Net income (loss) |
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$ |
611 |
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$ |
(131 |
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Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities: |
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Depreciation and amortization |
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763 |
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849 |
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Provision for doubtful accounts |
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15 |
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15 |
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Deferred income taxes |
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283 |
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(49 |
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Stock option plan expense |
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51 |
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60 |
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Changes in cash due to changes in operating assets and liabilities: |
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Accounts receivable |
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(1,325 |
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(388 |
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Inventories |
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(685 |
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(106 |
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Income taxes receivable |
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(6 |
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Prepaid expenses |
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(53 |
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(10 |
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Accounts payable |
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(203 |
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571 |
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Accrued liabilities |
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234 |
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119 |
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Net cash provided by (used in) operating activities |
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(315 |
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930 |
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Cash Flows From Investing Activities |
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Purchases of property, plant and equipment |
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(359 |
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(77 |
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Cash Flows From Financing Activities |
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Principal payments on long-term debt |
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(413 |
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(630 |
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Net borrowings (repayments) on revolving credit line |
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1,072 |
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(223 |
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Proceeds from the exercise of warrants attached to subordinated debentures |
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15 |
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Net cash provided by (used in) financing activities |
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674 |
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(853 |
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Net change in cash |
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Cash, beginning |
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3 |
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3 |
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Cash, ending |
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$ |
3 |
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$ |
3 |
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Supplemental Disclosure: |
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Interest paid |
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$ |
338 |
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$ |
778 |
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Income taxes paid |
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$ |
6 |
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$ |
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See notes to financial statements.
-5-
ORCHIDS PAPER PRODUCTS COMPANY
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
Note 1 Basis of Presentation
Orchids Paper Products Company (Orchids or the Company) was formed in 1998 to acquire and
operate the paper manufacturing facility, built in 1976, in Pryor, Oklahoma. Orchids Acquisition
Group, Inc. (Orchids Acquisition) was established in November 2003, for the purpose of acquiring
the common stock of Orchids. Orchids Acquisition closed the sale of its equity and debt securities
on March 1, 2004, and immediately thereafter closed the acquisition of Orchids. In April 2005,
Orchids Acquisition merged with and into Orchids, with Orchids as the surviving entity.
On July 20, 2005, the Company completed its public offering of 3,234,375 shares of its common
stock. The public offering price of the shares was $5.33. The net proceeds from the offering were
$15,011,000 after deducting the underwriting discount and offering expenses. The Companys stock
trades on the American Stock Exchange under the ticker symbol TIS.
The accompanying financial statements have been prepared without an audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (the Commission). Certain information
and footnote disclosures normally included in annual financial statements prepared in accordance
with accounting principles generally accepted in the United States have been condensed or omitted
pursuant to the rules and regulations. However, the Company believes that the disclosures made are
adequate to make the information presented not misleading when read in conjunction with the audited
financial statements and the notes thereto. Management believes that the financial statements
contain all adjustments necessary for a fair statement of the results for the interim periods
presented. All adjustments were of a normal, recurring nature. The results of operations for the
interim period are not necessarily indicative of the results for the entire fiscal year.
For income statement purposes, the Company reclassified certain expenses from selling, general and
administrative expenses to cost of sales at year-end 2007. The income statement for the three
months ended March 31, 2007 has been restated to conform to the revised classification.
Note 2 Commitments and Contingencies
On August 1, 2007, the Company received a new water discharge permit that requires the Company to
expand its existing pre-treatment facility to reduce biological oxygen demand and total suspended
solids from its discharge water. Under the permit, the Company is required to complete the
expansion and make operational its pre-treatment facility by August 1, 2009. The project is in the
pre-engineering phase and is expected to cost approximately $3 million. The cost of this facility
is expected to be financed through a construction loan from the Companys bank lenders. This loan
was included in the bank debt refinancing that closed in April 2007.
In March 2008, the Company announced that its board of directors had approved a capital expenditure
of $4.75 million to automate certain processes in its converting operation. The project will
involve the purchase of case packers, conveyors and case unitizing equipment and should be
operational by the fourth quarter of 2008. Contractual commitments in connection with this project
were not material at March 31, 2008.
-6-
Note 3 Credit Agreements
On April 9, 2007, the Company entered into a credit agreement with its existing bank group, which
was subsequently amended on March 6, 2008. The amended terms were as follows:
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The revolving line of credit facility was increased from $6.0 million to $8.0 million. |
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The annual limit on unfinanced capital expenditures was increased from $1.5 million to
$6.25 million for fiscal year 2008. The limit reverts to $1.5 million for 2009 and
thereafter. |
Note 4 Earnings per Share
The computation of basic and diluted net income per share for the three-month periods ended March
31, 2008 and 2007 is as follows:
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Three Months Ended March 31, |
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2008 |
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2007 |
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Net income (loss) ($ thousands) |
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$ |
611 |
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$ |
(131 |
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Weighted average shares outstanding |
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6,327,049 |
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6,234,346 |
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Effect of stock options |
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99,642 |
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(1) |
Effect of dilutive warrants |
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127,666 |
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(1) |
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Weighted average shares
outstanding assuming dilution |
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6,554,357 |
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6,234,346 |
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Net income (loss) per share: |
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Basic |
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$ |
0.10 |
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$ |
(0.02 |
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Diluted |
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$ |
0.09 |
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$ |
(0.02 |
) (1) |
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Stock options not considered above
because they were anti-dilutive |
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33,750 |
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18,750 |
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(1) |
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Due to net loss, option and warrant shares of 270,764 for the three months ended March
31, 2007 are anti-dilutive and thus not considered. |
Note 6 Stock Incentive Plan
In April 2005, the board of directors and the stockholders approved the 2005 Stock Incentive Plan
(the Plan). The Plan provides for the granting of incentive stock options to employees selected
by the boards compensation committee. The Plan authorizes up to 697,500 shares to be issued. The
compensation committee in April 2005 awarded options for 405,000 shares to officers of the Company
at an exercise price of $5.33, which was equal to the initial public offering price of the stock.
The options vest 20% on the date of grant and then ratably 20% over the following four years and
have a ten-year term. All share and per share amounts have been adjusted for the 3-for-2 stock
split that was effected in July 2006. During the third quarter of 2007, unvested options for
93,000 shares were forfeited by Michael Sage, the Companys former President and CEO who retired
effective July 15, 2007. Mr. Sage exercised his vested options covering 139,500 shares in October
2007. Options for 225,000 shares were granted effective August 20, 2007, to Robert Snyder, the
Companys new President and CEO, at an exercise price of $6.81, the market price on the date of the
grant. The options vest 20% on the date of grant and then ratably 20% over the following four
years and have a ten-year term.
-7-
During the first three months of 2007, options covering 3,750 shares were granted to a new member
of the Companys board of directors at an exercise price of $8.58 for a ten-year term. The
assumptions used in the Black-Scholes option valuation model for that option grant were as follows:
risk-free interest rate of 4.83%, estimated volatility of 40%, no dividend yield or expected
forfeitures and an expected life of 5 years. No options were granted in the first three months of
2008.
The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable. In addition,
options valuation models require the input of highly subjective assumptions including the expected
stock price volatility.
In connection with the approval of the Plan, the Company adopted SFAS No. 123 (R) Share-Based
Payments and expenses the cost of options granted over the vesting period of the option based on
the grant-date fair value of the award. The Company recognized an expense of $51,000 and $60,000
for the three months ended March 31, 2008 and 2007, respectively, related to options granted under
the Plan.
Note 6 Major Customers and Concentration of Credit Risk
Credit risk for the Company is concentrated in four significant customers. Three are converted
product customers, each of whom operates discount retail stores located throughout the United
States and one customer who accounts for most of the Companys third party sales of parent rolls.
During the three months ended March 31, 2008 and 2007, sales to the four significant customers
accounted for approximately 65% and 68% of the Companys total sales, respectively. At March 31,
2008 and 2007, respectively, approximately $5.0 million (73%) and $4.0 million (71%) of accounts
receivable was due from these four significant customers. No other customers of the Company
accounted for more than 10% of sales during these periods. The Company generally does not require
collateral from its customers and has not incurred any significant losses on uncollectible accounts
receivable.
Note 7 New Accounting Standards
The Financial Accounting Standards Board (FASB) periodically issues new accounting standards in a
continuing effort to improve standards of financial accounting and reporting. We have reviewed the
recently issued pronouncements and concluded that the following new accounting standards could be
applicable to the Company.
In December 2007, the FASB revised SFAS No. 141 Business Combinations to clarify certain issues
regarding business combinations. The major impact on the Company would be the requirement to
write-off certain costs of completing an acquisition as incurred. The standard is effective for
periods beginning after December 15, 2008.
Also in December 2007, the FASB issued SFAS No. 160 Non-controlling Interests in Consolidated
Financial Statements. At present this standard would not apply to the Company as it has no
subsidiaries. The standard is effective for minority interest accounting for periods beginning
after December 15, 2008.
-8-
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
The following Managements Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements. These statements relate to, among other things:
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our business strategy; |
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the market opportunity for our products, including expected demand for our products; |
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our estimates regarding our capital requirements; and |
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any of our other plans, objectives, and intentions contained in this report that are not
historical facts. |
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, 2007, as filed with the
Securities and Exchange Commission, and the following items:
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we face intense competition in our market and our
profitability would be reduced if aggressive pricing by our competitors forces us to decrease our prices; |
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a substantial percentage of our converted product revenues are attributable to three large customers which may decrease or
cease purchases at any time; |
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we have significant indebtedness which limits our free cash flow and subjects us to restrictive covenants relating to the
operation of our business; |
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the availability of and prices for energy could significantly affect our business; |
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our exposure to variable interest rates may affect our financial health; |
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the disruption in supply or cost of waste paper; |
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the loss of key personnel; |
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labor interruptions; |
-9-
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natural disaster or other disruption to our facility; |
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ability to finance the capital requirements of our business; |
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. |
|
cost to comply with government regulations; and |
|
. |
|
failure to maintain an effective system of internal controls necessary to accurately report our financial results and
prevent fraud. |
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 Managements 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 reasons, 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. Our
products are sold primarily under our customers private labels and, to a lesser extent, under our
brand names such as Colortex® and Velvet®. 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 the market for our product.
Our profitability depends on several key factors, including:
. |
|
the market price of our product; |
|
. |
|
the cost of recycled paper used in producing paper; |
|
. |
|
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 effect 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,
-10-
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 54,000 tons per year. Prior to the third quarter of 2006, we had purchased parent
rolls on the open market since 1998 because our own parent roll production had not adequately
supplied the requirements of our converting facility. We purchased approximately 1,675, 6,970 and
12,200 tons of paper on the open market in the years 2007, 2006 and 2005, respectively, to
supplement our paper-making capacity. Parent rolls are a commodity product and thus are subject to
market price and availability.
Comparative Three-Month Periods Ended March 31, 2008 and 2007
Net Sales
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
(in thousands, except average |
|
|
price per ton and tons) |
Net sales
|
|
$ |
20,275 |
|
|
$ |
16,637 |
|
|
|
|
|
|
|
|
|
|
Total tons shipped
|
|
|
12,962 |
|
|
|
11,161 |
|
Average price per ton
|
|
$ |
1,564 |
|
|
$ |
1,491 |
|
Net sales increased 22%, to $20.3 million in the quarter ended March 31, 2008, compared to $16.6
million in the same period of 2007. Net sales figures include gross selling price, including
freight, less discounts and pricing allowances. The increase in net sales is primarily the result
of a more than two-fold increase in the shipment of parent rolls and a 9% increase in the net
selling price per ton of converted product shipments and, to a lesser extent, a 20% increase in the
selling price of parent rolls. Total shipments in the 2008 quarter increased by 1,801 tons, or
16%, to 12,962 tons compared to 11,161 tons in the same period of 2007, primarily due to higher
levels of parent roll shipments, which was attributable to the increased production provided by our
paper mill. Shipments of converted product increased 2% in the first quarter of 2008 compared to
the prior year quarter. Our overall net selling price per ton increased by 5% in the first quarter
of 2008 to $1,564 compared to the prior year quarter. This increase was negatively affected by the
increased sales of parent rolls, which are sold at lower prices than converted products.
Cost of Sales
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands, except |
|
|
|
gross profit margin % |
|
|
|
and paper cost per ton) |
|
Cost of paper |
|
$ |
10,604 |
|
|
$ |
8,672 |
|
Non-paper materials, labor, supplies, etc. |
|
|
6,227 |
|
|
|
5,484 |
|
|
|
|
|
|
|
|
Sub-total |
|
$ |
16,831 |
|
|
|
14,156 |
|
Depreciation |
|
|
755 |
|
|
|
749 |
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
17,586 |
|
|
$ |
14,905 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
2,689 |
|
|
$ |
1,732 |
|
Gross profit margin % |
|
|
13.3 |
% |
|
|
10.4 |
% |
Total paper cost per ton consumed |
|
$ |
818 |
|
|
$ |
777 |
|
-11-
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 increased approximately $2.7 million, or 18%, to $17.6 million for the quarter ended
March 31, 2008, compared to $14.9 million in the same period of 2007. As a percentage of net
sales, cost of sales declined from 90% to 87% of net sales. The decline in cost of sales as a
percentage of net sales in the quarter ended March 31, 2008 was primarily attributed to higher
selling prices and higher tonnage volumes being partially offset by higher paper production costs.
Our cost of sales in the first quarter of 2008 was negatively affected by down time experienced on
our new paper machine in January that totaled approximately three days of lost production time in
order to effect repairs. The unplanned shutdown was required to correct certain issues with the
surface of the yankee dryer and resulted in approximately $200,000 of increased production costs.
The surface issues causing the shutdown were corrected during the month of January.
Our overall cost of paper in the first quarter of 2008 was $818 per ton, an increase of $41 per ton
compared to the same period in 2007. Our cost per ton increased primarily due to increased waste
paper prices being partially offset by the effects of higher production on fixed and semi-variable
costs. The prices we paid for waste paper increased approximately 19% in the first quarter of
2008 compared with the same period in 2007, resulting in an increased cost of waste paper consumed
of approximately $1.0 million, as an overall tight waste paper market resulted in significant price
increases across all grades of waste paper.
Gross Profit
Gross profit in the quarter ended March 31, 2008 increased $1.0 million, or 55%, to $2.7 million
compared to $1.7 million in the same period last year. The previously discussed unplanned shutdown
of our new paper machine negatively affected gross profit by approximately $330,000 due to lost
production and certain related out of pocket expenses. Gross profit as a percentage of net sales
in the 2008 quarter was 13.3% compared to 10.4% in the 2007 quarter. The effect of higher selling
prices and higher tonnage volumes, which were partially offset by higher waste paper costs and the
effects of the previously discussed unplanned paper machine shutdown, were the major reasons for
the increase in gross profit and gross profit as a percentage of net sales.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, except SG&A |
|
|
|
as a % of net sales) |
|
Commission expense |
|
$ |
242 |
|
|
$ |
222 |
|
Other S,G&A expenses |
|
|
1,143 |
|
|
|
837 |
|
|
|
|
|
|
|
|
Selling, General & Adm exp |
|
$ |
1,385 |
|
|
$ |
1,059 |
|
SG&A as a % of net sales |
|
|
6.8 |
% |
|
|
6.4 |
% |
Selling, general and administrative expenses include salaries, commissions to brokers and other
miscellaneous expenses. Selling, general and administrative expenses increased $326,000, or 31%,
to $1.4 million in the quarter ended March 31, 2008 compared to $1.1 million in the comparable 2007
period, mainly as a result of higher accruals under our incentive bonus plan, higher costs
associated with additions to our senior management team and increased legal and
-12-
other professional fees. As a percent of net sales, selling, general and administrative
expenses increased to 6.8% in the first quarter of 2008 compared to 6.4% in the same period of
2007.
Operating Income
As a result of the foregoing factors, operating income for the quarter ended March 31, 2008 was
$1.3 million compared to operating income of $673,000 for the same period of 2007.
Interest Expense and Other Income
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
(In thousands) |
Interest expense
|
|
$ |
411 |
|
|
$ |
873 |
|
Other income, net
|
|
$ |
(1 |
) |
|
$ |
(20 |
) |
Interest expense includes interest on all debt and amortization of both deferred debt issuance
costs and the discount on our subordinated debt related to warrants issued with that debt.
Interest expense decreased $462,000 to $411,000 in the quarter ended March 31, 2008, compared to
$873,000 in the quarter ended March 31, 2007, primarily as a result of lower overall borrowing
levels, lower LIBOR interest rates and reduced interest margins under our new credit agreement that
closed on April 9, 2007. Our average bank borrowings in the quarter ended March 31, 2008 were
$25.7 million compared with $30.0 million in the same period of 2007. Additionally in December
2007, we retired all of our outstanding 12% subordinated debentures totaling $2.15 million.
Other income decreased from $20,000 in the first quarter of 2007 to $1,000 in the first quarter of
2008, primarily due to the absence of interest on the restricted certificate of deposit which was
released in connection with the closing of our new credit facility.
Income (Loss) Before Income Taxes
As a result of the foregoing factors, income (loss) before income taxes increased $1.1 million to
income of $894,000 in the quarter ended March 31, 2008 compared to a loss of $180,000 in the same
period in 2007.
Income Tax Provision (Benefit)
For the quarter ended March 31, 2008, our effective income tax rate was 32%. It is lower than the
statutory rate because of Oklahoma Investment Tax Credits associated with our investment in a new
paper machine. This factor was partially offset by state income taxes. As of March 31, 2007, we
estimated our annual effective income tax rate to be 27%. The 2007 effective tax rate was lower
than the statutory rate because of the Oklahoma Investment Tax Credits cited above and the
utilization of Federal Indian Employment Credits. The first quarter of 2008 does not reflect any
benefit for the Indian Employment Tax Credit because the credit expired as of December 31, 2007 and
as of the date of this filing it has not been extended.
No current taxes are owing to either state or federal taxing authorities because of net operating
loss carryforwards for both state and federal tax purposes, Federal Indian Employment Credit
carryforwards and Oklahoma Investment Tax Credit carryforwards.
-13-
Liquidity and Capital Resources
Liquidity refers to the liquid financial assets available to fund our business operations and pay
for near-term obligations. These liquid financial assets consist of cash as well as unused
borrowing capacity under our revolving credit facility. Our cash requirements have historically
been satisfied through a combination of cash flows from operations and debt financings.
Cash was unchanged in the three months ended March 31, 2008 at $3,000. Cash was also unchanged at
$3,000 in the three months ended March 31, 2007.
The following table summarizes key cash flow information for the three-month periods ended March
31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
|
|
(in thousands) |
Cash flow provided by (used in): |
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
(315 |
) |
|
$ |
930 |
|
|
Investing activities
|
|
$ |
(359 |
) |
|
$ |
(77 |
) |
|
Financing activities
|
|
$ |
674 |
|
|
$ |
(853 |
) |
Cash flow used in operating activities was $315,000 in the three-month period ended March 31, 2008,
which primarily resulted from increased trade receivables and inventories, partly offset by
earnings before non-cash charges.
Cash flows used in investing activities were $359,000 in the first quarter of 2008 as the result of
expenditures on capital projects.
Cash provided by financing activities was $674,000 in the three-month period ended March 31, 2008
and was primarily attributable to $1.1 million in borrowings under the revolving credit agreement,
which were partially offset by principal payments of $413,000 on our term loans.
On April 9, 2007, we closed the re-financing of our credit facility with our existing bank group.
On March 6, 2008 we amended the facility to increase the revolving credit facility and the 2008
capital expenditures limit. Following the amendment, the credit facility consists of the
following:
. |
|
a $8.0 million revolving credit facility with a three-year term;
($1.37 million outstanding at March 31, 2008). In addition, $489,000
of bank overdrafts are included with long-term debt at March 31, 2008.
The borrowing base for the revolving credit facility is determined by
adding qualified receivables and inventory. At March 31, 2008, the
borrowing base for the revolving credit facility was $7.5 million; |
|
. |
|
a $10.0 million term loan A with a ten-year term that has no principal
repayments for the first 24 months of the loan and then will be
amortized as if the loan had an 18-year life ($10.0 million
outstanding at March 31, 2008); |
|
. |
|
a $16.5 million term loan B with a four-year term that is being
amortized as if the loan had a six-year life ($14.4 million
outstanding at March 31, 2008); and |
-14-
. |
|
a $3.0 million capital expenditures facility with a four-year term
that will be amortized as if the loan had a five-year life ($0
outstanding at March 31, 2008). |
Under the terms of the credit agreement, amounts outstanding under the revolving credit facility
bear interest at our election at the prime rate or LIBOR plus a margin and amounts outstanding
under term loan B and the capital expenditures facility bear interest at LIBOR plus a margin. The
margin is set quarterly and based on the ratio of funded debt to EBITDA less income taxes paid.
Amounts outstanding under term loan A bear interest at LIBOR plus 180 basis points. For the
revolving credit facility, the margin ranges from a negative 50 basis points to 150 basis points
for prime rate loans and 200 to 375 basis points for LIBOR-based loans. For term loan B, the
margin ranges from 200 basis points to 300 basis points over LIBOR. For the capital expenditures
facility, which we expect to utilize in conjunction with the construction of our new environmental
pre-treatment facility by August 1, 2009, the margin ranges from 150 basis points to 250 basis
points over LIBOR. At March 31, 2008, our weighted average borrowing rate was 4.83% under this
credit agreement.
The credit agreement contains covenants that, among other things, require us to maintain a specific
funded debt to EBITDA ratio, debt service coverage ratio and an annual limit on un-financed capital
expenditures. In connection with the re-financing, the $1.5 million restricted certificate of
deposit was released and applied to the revolving credit facility. The amount available under the
revolving credit line may be reduced in the event that our borrowing base, which is based upon our
qualified receivables and qualified inventory, is less than $8.0 million. Obligations under the
amended and restated credit agreement are secured by substantially all of our assets. The
agreement contains representations and warranties, and affirmative and negative covenants customary
for financings of this type, including, but not limited to, a covenant prohibiting us from
declaring or paying dividends. The financial covenants in the agreement require us to maintain
specific ratios of funded debt to EBITDA and debt service coverage which are tested as of the end
of each quarter and places a limit on the amount of annual non-financed capital expenditures. The
maximum allowable funded debt-to-EBITDA ratio is 4.0-to-1.0 and the minimum allowable debt service
coverage ratio is 1.25-to-1.0. Our annual expenditures for non-financed capital equipment are
limited to $6.25 million for fiscal year 2008 and $1.5 million per fiscal year thereafter.
The capital expenditures facility is intended to fund an expansion of our wastewater pre-treatment
facilities. A new water discharge permit was issued effective August 1, 2007 which requires us to
expand our existing pre-treatment facility to reduce biological oxygen demand and total suspended
solids from our discharge water. Under the new permit, we are required to complete the expansion
and make operational our pre-treatment facility by August 1, 2009. The project is in the
pre-engineering phase and is expected to cost approximately $3 million.
If an event of default occurs, the agent may declare the banks obligation to make loans terminated
and all outstanding indebtedness, and all other amounts payable under the credit agreement, due and
payable.
Critical Accounting Policies and Estimates
The preparation of our financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States requires management to make estimates and
judgments that affect our reported amounts of assets and liabilities, revenue and expense, and
related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates and assumptions based upon historical experience and various other factors and
-15-
circumstances. Management believes that our estimates and assumptions are reasonable under the
circumstances; however, actual results may vary from these estimates and assumptions under
different future circumstances. We have identified the following critical accounting policies that
affect the more significant judgments and estimates used in the preparation of our financial
statements:
Accounts Receivable. Accounts receivable consist of amounts due to us from normal business
activities. Our management must make estimates of accounts receivable that will not be collected.
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment
history and the customers creditworthiness as determined by our review of their current credit
information. We continuously monitor collections and payments from our customers and maintain an
allowance for estimated losses based on historical experience and specific customer collection
issues that we have identified. Trade receivables are written-off when all reasonable collection
efforts have been exhausted, including, but not limited to, external third party collection efforts
and litigation. While such credit losses have historically been within managements expectations
and the allowance provided, there can be no assurance that we will continue to experience the same
credit loss rates as in the past. During the three-month periods ended March 31, 2008 and 2007,
provisions for doubtful accounts were recognized in the amount of $15,000 for each period. In
addition, $3,000 of recoveries of accounts previously written off were credited to the allowance
during the first three months of 2008. There were no recoveries credited during the first three
months of 2007. There were no accounts receivable balances written off in the three-month periods
ended March 31, 2008 and 2007.
Inventory. Our inventory consists of finished goods and raw materials and is stated at the lower
of cost or market. Our management regularly reviews inventory quantities on hand and records a
provision for excess and obsolete inventory based on the age of the inventory and forecasts of
product demand. A significant decrease in demand could result in an increase in the amount of
excess inventory quantities on hand. During the first three months of 2008, $15,000 was provided
and there were no charges against the valuation reserve. During the first three months of 2007,
$15,000 was provided and there were no charges against the reserve.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) periodically issues new accounting standards in a
continuing effort to improve standards of financial accounting and reporting. We have reviewed the
recently issued pronouncements and concluded that the following new accounting standards could be
applicable to us.
In December 2007, the FASB revised SFAS No. 141 Business Combinations to clarify certain issues
regarding business combinations. The major impact on Orchids would be the requirement to write-off
certain costs of completing an acquisition as incurred. The standard is effective for periods
beginning after December 15, 2008.
Also in December 2007, the FASB issued SFAS No. 160 Non-controlling Interests in Consolidated
Financial Statements. At present this standard would not apply to Orchids as we have no
subsidiaries. The standard is effective for minority interest accounting for periods beginning
after December 15, 2008.
-16-
Non-GAAP Discussion
In addition to our GAAP results, we also consider non-GAAP measures of our performance for a number
of purposes. We use EBITDA as a supplemental measure of our performance that is not required by,
or presented in accordance with, GAAP. EBITDA is not a measurement of our financial performance
under GAAP and should not be considered as an alternative to net income, operating income or any
other performance measure derived in accordance with GAAP, or as an alternative to cash flow from
operating activities or a measure of our liquidity.
EBITDA represents net income before net interest expense, income tax expense, depreciation and
amortization. We believe EBITDA facilitates operating performance comparisons from period to
period and company to company by eliminating potential differences caused by variations in capital
structures (affecting relative interest expense), tax positions (such as the impact on periods or
companies of changes in effective tax rates or net operating losses) and the age and book
depreciation of facilities and equipment (affecting relative depreciation expense).
EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a
substitute for any of our results as reported under GAAP. Some of these limitations are:
. |
|
it does not reflect our cash expenditures for capital assets; |
|
. |
|
it does not reflect changes in, or cash requirements for, our working capital requirements; |
|
. |
|
it does not reflect the interest expense, or the cash requirements
necessary to service interest or principal payments on our
indebtedness; |
|
. |
|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized will often have to be replaced
in the future, and EBITDA does not reflect cash requirements for such
replacements; and |
|
. |
|
other companies, including other companies in our industry, may
calculate these measures differently than we do, limiting their
usefulness as a comparative measure. |
Because of these limitations, EBITDA should not be considered as a measure of discretionary cash
available to us to invest in the growth of our business or to reduce our indebtedness. We
compensate for these limitations by relying primarily on our GAAP results and using EBITDA on a
supplemental basis.
The following table reconciles EBITDA to net income for the quarters ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, except % of net sales) |
|
Net income (loss) |
|
$ |
611 |
|
|
$ |
(131 |
) |
Plus: Interest expense, net |
|
|
411 |
|
|
|
873 |
|
Plus: Income tax expense (benefit) |
|
|
283 |
|
|
|
(49 |
) |
Plus: Depreciation |
|
|
754 |
|
|
|
749 |
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
2,059 |
|
|
$ |
1,442 |
|
% of net sales |
|
|
10.2 |
% |
|
|
8.7 |
% |
-17-
EBITDA increased $617,000 to $2.06 million in the quarter ended March 31, 2008, compared to $1.44
million in the same period of 2007. EBITDA as a percent of net sales increased to 10.2% in the
current year quarter compared to 8.7% in the prior year quarter. The foregoing factors discussed
in the net sales, cost of sales and selling, general and administrative sections are the reasons
for these changes. The largest causes of the increase in EBITDA as a percentage of net sales were
higher selling prices and higher selling volumes.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Our market risks relate primarily to changes in interest rates. Our revolving line of credit and
our term loans carry variable interest rates that are tied to market indices and, therefore, our
statement of income and our cash flows will be exposed to changes in interest rates. As of March
31, 2008, we have borrowings totaling $25.8 million that carry a variable interest rate.
Outstanding balances under our line of credit and term loans bear interest at the prime rate or
LIBOR, plus a margin based upon the debt service coverage ratio or a fixed margin over LIBOR.
Based on the borrowings on March 31, 2008, a 100 basis point change in interest rates would result
in a $258,000 change to our annual interest expense.
ITEM 4. Controls and Procedures
Our management, under the supervision and with the participation of our chief executive officer and
our chief financial officer, has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. Based on such evaluation, our chief
executive officer and our chief financial officer have concluded that our disclosure controls and
procedures were effective as of March 31, 2008.
There were no changes in the Companys internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2008, that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
-18-
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 1A. Risk Factors
There have been no material changes from the risk factors disclosed in the Companys Annual Report
on Form 10-K dated March 18, 2008.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sales of Equity Securities
None.
(b) Initial Public Offering and Use of Proceeds from the Sale of Registered Securities
None.
(c) Repurchases of Equity Securities
We do not have any programs to repurchase shares of our common stock and no such repurchases were
made during the three months ended March 31, 2008.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
See the Exhibit Index following the signature page to this Form 10-Q, which Exhibit Index is hereby
incorporated by reference herein.
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
ORCHIDS PAPER PRODUCTS COMPANY
|
|
Date: May 2, 2008 |
By: |
/s/ Keith R. Schroeder
|
|
|
|
Keith R. Schroeder |
|
|
|
Chief Financial Officer
(On behalf of the registrant and
as Chief Accounting Officer) |
|
-20-
Exhibit Index
|
|
|
Exhibit |
|
Description |
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation of the
Registrant incorporated by reference to Exhibit 3.1 to the
Registrants Registration Statement on Form S-1 (File No.
333-124173) filed with the Securities and Exchange Commission on
April 19, 2005. |
|
|
|
3.1.1
|
|
Amendment to the Amended and Restated Certificate of Incorporation
of the Registrant incorporated by reference to the Form 10-Q
filed with the Securities and Exchange Commission on August 14,
2007. |
|
|
|
3.2
|
|
Amended and Restated Bylaws of the Registrant incorporated by
reference to Exhibit 3.2 to the Registrants Registration
Statement on Form S-1 (File No. 333-124173) filed with the
Securities and Exchange Commission on April 19, 2005. |
|
|
|
10.1*
|
|
Supplier Agreement, dated February 20, 2008, between Dixie Pulp &
Paper, Inc. and the Registrant. |
|
|
|
10.2
|
|
Amendment Two to Second Amended and Restated Agented Credit
Agreement, dated March 6, 2008, incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K (File
No. 001-32563) filed with the Securities and Exchange Commission
on March 11, 2008. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Section 302. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Section 302. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to Section 906. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to Section 906. |
|
|
|
*
|
|
Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission. |
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