Orchids Paper Products Company (NYSE MKT: TIS) today reported fourth quarter and year-end 2014 financial results.
Full year net sales increased $26.4 million, or 23%, to $142.7 million, a new twelve-month record, compared to $116.4 million in 2013. Total net sales in the fourth quarter of 2014 increased 34%, to $41.3 million, compared to $30.8 million in the fourth quarter of 2013.
Full year net sales of converted product increased $28.8 million, or 26%, to $138.4 million, a new twelve-month record, compared to $109.6 million in 2013. Total converted product net sales increased 43% in the fourth quarter of 2014, from $29.0 million in 2013 to $41.3 million in 2014. Converted product shipments from our Oklahoma facility were 8,405,000 cases during 2014, compared to 8,179,000 cases in 2013.
Adjusted EBITDA for the full year of 2014 totaled $27.7 million, a new twelve-month record, which represented an increase of $1.1 million, or 4%, over 2013. Adjusted EBITDA decreased 4%, or $251,000, to $6.4 million in the fourth quarter of 2014, compared to $6.7 million in 2013. Despite increased net sales during the fourth quarter, the effects of our new paper machine project, which included reduced absorption of fixed costs, external parent roll purchases and lost margins on parent roll sales, were the primary factor in the decrease in Adjusted EBITDA.
Adjusted net income for the full year of 2014 decreased 11%, or $1.5 million, to $12.1 million, compared with $13.6 million of net income in the same period of 2013. Adjusted net income for the fourth quarter of 2014 decreased 17%, or $573,000, to $2.8 million, compared with $3.3 million of net income in the same period of 2013.
Adjusted diluted net income per share for the full year of 2014 was $1.42 per diluted share compared with $1.71 per diluted share in 2013. Adjusted diluted net income per share for the fourth quarter 2014 was $0.31 per diluted share compared with $0.41 per diluted share in the same period in 2013.
Mr. Jeff Schoen, President and Chief Executive Officer, stated, "We are pleased that our results for the full year of 2014 include record converted product shipments from our Pryor location and record west coast sales from our partnership with Fabrica. In total, we increased sales by 23%, with organic growth in both our west coast and central operations. We believe the strong improvement in sales is a tangible indicator that we are making positive strides toward our vision of being recognized as a national supplier of high quality consumer tissue products in the value, premium and ultra-premium tier product segments."
Mr. Schoen continued, "We also expect the investments that were made in 2014 to establish our partnership with Fabrica and to begin building new paper making and converting capacity in Pryor will lower our overall cost structure and will position Orchids to improve its gross margins while also creating the capacity to further grow sales over 2014 levels. The costs incurred in the fourth quarter were necessary as part of the strategic plan to upgrade our assets, which are temporary costs as we execute the plan. As previously stated, we expect the projects at Pryor to add an additional $6 to 8 million in EBITDA starting in the second quarter of 2015 as we go into full production on the new paper machine."
Three-month period ended December 31, 2014
Net sales in the quarter ended December 31, 2014 were $41.3 million, an increase of 34% compared to $30.8 million in the same period of 2013. Net sales of converted product were $41.3 million in the 2014 quarter, an increase of 43% compared to $29.0 million in the in the same quarter last year. There were no net sales of parent rolls in the fourth quarter of 2014 due to the demolition of two paper machines in conjunction with our new paper machine project, which represented a decrease of $1.8 million compared to the same quarter of 2013. The increase in converted product net sales was primarily due to a 53% increase in converted product tonnage shipped, which was partially offset by a 7% decrease in net selling price per ton. The decrease in selling price was due to a change in mix of converted products sold.
During the fourth quarter of 2014, we incurred $304,000 in additional non-cash expenses related to stock options granted to management and $193,000 of costs to demolish two paper machines that are being replaced with a new paper machine expected to begin operations in the first quarter of 2015 and be at full production by the beginning of the second quarter of 2015. As such, earnings before interest, taxes, depreciation and amortization adjusted to exclude these expenses (Adjusted EBITDA) was $6.4 million, or 15.6% of net sales, in the fourth quarter of 2014, compared to $6.7 million, or 21.8% of net sales for the same period in the prior year. Net income adjusted to exclude these expenses was $2.8 million, a decrease of $573,000, or 17%, compared with $3.3 million of net income in the same period of 2013, and diluted net income per share as adjusted to exclude these expenses was $0.31 per diluted share for the fourth quarter of 2014 compared with $0.41 per diluted share in the same period in 2013.
Gross profit for the fourth quarter of 2014 was $6.4 million, a decrease of $770,000, or 11%, when compared with a gross profit of $7.2 million in the prior year quarter. Gross profit as a percent of net sales was 15.6% in the fourth quarter of 2014 compared to 23.5% for the same period in 2013. As a percent of net sales, gross profit decreased primarily due to higher paper production costs related to the new paper machine project, higher converting production costs and higher depreciation. As part of the new paper machine project in the Oklahoma facility, two paper machines were de-commissioned in September of 2014. This had the effect of reducing production and reducing fixed cost absorption during the construction phase of the project. The reduced production also resulted in the need to purchase parent rolls in the open market to supplement our paper making capacity. In addition, fiber prices were higher in the quarter over quarter comparison. As a result, our cost of paper shipped from the Oklahoma facility increased by $1.6 million compared to the previous year quarter, resulting in a 5 percentage point reduction in gross profit margin. Converting production costs also increased due to higher labor costs, higher outside warehousing costs and a one-time charge related to the new converting line project.
Selling, general and administrative expenses in the fourth quarter of 2014 totaled $2.5 million, a slight decrease of $11,000, or less than 1%, compared to the same period in the prior year. The decrease was primarily due to a one-time charge for the former Chief Executive Officer's severance in the fourth quarter of 2013 and lower artwork related expenses in the 2014 quarter, which were partially offset by increased non-cash expenses related to stock options granted to management in 2014, as discussed above, and increased professional fees. Selling, general and administrative expenses as a percent of net sales in the 2014 quarter were 6.2% compared to 8.3% for the prior year quarter. Adjusted for the non-cash compensation expense, selling, general and administrative expenses were $294,000 lower in the current year quarter compared to the prior year quarter.
Interest expense for the fourth quarter of 2014 totaled $56,000 compared to interest expense of $91,000 in the same period in 2013. Interest expense for 2014 excludes $99,000 of interest capitalized on significant projects during the quarter. The higher level of total interest in 2014 resulted from higher debt balances due primarily to additional debt incurred in conjunction with the Fabrica transaction and additional borrowings under our revolving line of credit to finance capital expenditures.
As of December 31, 2014, the effective tax rate for the full year is 31.7%, as compared to the 32.4% effective tax rate estimated as the end of the third quarter of 2014. As a result, the actual effective tax rate for the fourth quarter was 29.7%.
Twelve-month period ended December 31, 2014
Net sales in the twelve-month period ended December 31, 2014 were $142.7 million, an increase of $26.3 million, or 23%, compared to $116.4 million in the same period of 2013. Net sales of converted product were $138.4 million in the 2014 period, an increase of $28.8 million, or 26%, when compared to the $109.6 million of net sales in the same period last year. Net sales of parent rolls decreased $2.4 million, or 36%, to $4.3 million in the twelve-month period of 2014 compared with $6.8 million in the same period last year. The increase in converted product sales resulted from a 29% increase in converted product tonnage shipped, while net selling price per ton decreased 2% over the prior year period.
During 2014, we incurred $1.5 million in additional non-cash expenses related to stock options granted to management in addition to $1.6 million of expenses related to the Fabrica transaction and $400,000 of demolition costs related to two paper machines that will be replaced with a new paper machine. As such, Adjusted EBITDA was $27.7 million, or 19.4% of net sales, in the twelve-month period of 2014, compared to $26.5 million, or 22.8% of net sales for the same period in the prior year.
Gross profit for the twelve-month period of 2014 was $26.7 million, a decrease of $1.1 million, or 4%, when compared with a gross profit of $27.9 million in the prior year period. Gross profit as a percent of net sales was 18.7% in the twelve-month period of 2014 compared to 24.0% for the same period in 2013. As a percent of net sales, gross profit decreased primarily due to higher fiber costs, higher production costs in both converting and the paper production operations, higher depreciation and lower parent roll selling prices. Converting production costs increased primarily due to higher maintenance and repair costs, relocating newly hired employees, and a one-time charge related to the new converting line project. Paper production costs increased primarily due to lower production in our paper production operation as discussed above, and higher fiber costs.
Selling, general and administrative expenses in the twelve-month period of 2014 totaled $11.7 million, an increase of $2.2 million, or 23%, compared to the same period in the prior year. The increase was primarily due to $1.6 million of expenses related to the Fabrica transaction and increased non-cash expenses related to stock options granted to management in 2014, which were partially offset by lower commission expense due to the mix of converted products sold and lower artwork related expenses. Selling, general and administrative expenses as a percent of net sales in the 2014 period were 8.2% compared to 8.1% for the prior year period. Adjusted for the Fabrica transaction related costs and non-cash compensation expense, selling, general and administrative expenses were $762,000 lower in the current year period compared to the prior year period.
Interest expense for the twelve-month period of 2014 totaled $271,000 compared to interest expense of $371,000 in the same period in 2013. Interest expense for 2014 excludes $252,000 of interest capitalized on significant projects during the period. The higher level of total interest in 2014 resulted from writing off $38,000 of deferred debt costs when we refinanced our debt with a new creditor and higher debt balances in the second half of 2014 due primarily to additional debt incurred in conjunction with the Fabrica transaction and additional borrowings to finance capital expenditures.
Cash provided by operations for the twelve-month period ended December 31, 2014 was $20.2 million compared to $20.8 million in the prior year period. The decrease in cash provided by operations is primarily due to the decrease in net income, changes in deferred taxes, and increases in accounts receivable and other assets, which were partially offset by an increase in accounts payable and a decrease in inventories. Cash used in investing activities was $37.4 million in 2014 compared to $12.2 million in the prior period. In 2014, $16.7 million in cash was paid as part of the Fabrica transaction. Cash of $5.0 million was received from the sale of short-term investments. Capital expenditures for the twelve-month periods were $25.8 million in 2014 and $12.2 million in 2013. During the twelve-month period of 2014, cash provided by financing activities was $11.1 million, compared to cash used in financing activities of $7.1 million in the 2013 period. In 2014, $39.4 million of debt proceeds were received, which were offset by $16.4 million of debt repayments. For the twelve-month period, dividend payments totaled $11.8 million, compared to $10.7 million in 2013.
Total long-term debt outstanding as of December 31, 2014 was $36.4 million and net cash was a bank overdraft of $685,000. As a result, Net Debt outstanding as of December 31, 2014 was $37.0 million.
Dividend
On February 4, 2015, the Board of Directors of the Company authorized a quarterly cash dividend of $0.35 per outstanding share of the Company's common stock. The Company expects to pay this dividend on March 3, 2015 to stockholders of record at the close of business on February 17, 2015.
