Appleton Posts Third Quarter Loss on Costs

Appleton reported a loss from continuing operations of $25.8 million for third quarter 2008 compared to income from continuing operations of $6.8 million for the same quarter of 2007.

Despite the increased net sales, Appleton's loss from continuing operations for the quarter reflects higher raw material, energy and transportation costs during a period of increased manufacturing costs due to start up of its expansion project in West Carrollton, Ohio, and a $17.7 million goodwill impairment charge recorded in the Performance Packaging segment. Appleton reported a $30.0 million net loss for third quarter 2008 which included $4.2 million of charges recorded in discontinued operations. This compared to $7.3 million of net income recorded in third quarter 2007.

Appleton's net sales from continuing operations for the first nine months of 2008 were $741.2 million, an increase of 2.6 percent compared to the first nine months of 2007. Appleton reported a loss from continuing operations of $4.2 million for the nine months ended September 28, 2008, compared to income of $7.3 million for the same period last year. During the first nine months of 2008, Appleton recorded a $22.3 million net litigation settlement gain, the result of prevailing in a lawsuit to recover previously incurred costs from an insurance carrier, which partially offset the third quarter impairment charge of $17.7 million and higher raw material, energy, transportation and start-up costs experienced during the past nine months. Appleton recorded a net loss of $51.3 million for the first nine months of 2008 compared to $5.4 million of net income for the same period last year.

On August 1, 2008, Appleton completed the sale of Bemrose Group Limited receiving $3.9 million of cash and $6.4 million consisting of two notes receivable to be settled within 75 and 180 days after closing. In anticipation of the sale transaction, the Company recorded impairment charges aggregating $42.2 million related to goodwill and other long-lived assets in the nine-month period ended September 28, 2008. These charges arose due to a decline in the value of the business arising primarily as the result of deteriorating economic conditions and tougher markets for Bemrose products, as well as increased funding requirements of the Bemrose pension plan arising from negotiations with the plan trustees.

Technical Papers
Technical Papers third quarter 2008 net sales of $225.6 million were $3.1 million, or 1.4 percent, higher than third quarter 2007 as higher net sales of thermal and security papers offset lower net sales of coated solutions. Coated solutions net sales decreased $7.2 million, or 4.9 percent, compared to third quarter 2007, primarily due to lower shipment volumes and unfavorable mix which offset gains from improved pricing. Net sales of thermal papers increased $9.6 million, or 13.9 percent, compared to the prior year quarter, due to increased shipment volumes and improved pricing. Net sales of security papers increased $0.6 million, or 8.3 percent, compared to third quarter 2007, due to increased shipment volumes and improved pricing.

In comparison to third quarter 2007, Technical Papers third quarter 2008 operating income decreased $14.7 million to $4.4 million as $14.6 million of raw material and energy inflation and $5.2 million of start-up costs, associated with the expansion project at the Company's paper mill in West Carrollton, Ohio, offset favorable pricing of $9.3 million and lower selling, general and administrative expenses.

On October 16, 2008, the union employees at Appleton's converting plant and distribution center in Appleton, Wisconsin ratified a three-year labor agreement negotiated between Appleton and Local 2-0469 of the United Steelworkers Union. The agreement includes increases in both wages and benefits.

Performance Packaging
Performance Packaging third quarter 2008 net sales were $4.9 million, or 19.8 percent, higher than third quarter 2007 primarily due to improved pricing and favorable mix. However, higher net sales and manufacturing gains were offset by a $17.7 million goodwill impairment charge resulting in a third quarter 2008 operating loss of $15.2 million compared to operating income of $2.0 million recorded during the year earlier period.

In accordance with Statement of Financial Accounting Standards 142, "Goodwill and Other Intangible Assets," Appleton tests its goodwill and intangible assets, with indefinite lives, annually or more frequently if events or changes in circumstances indicate an asset might be impaired. During third quarter 2008, Appleton determined that an impairment had occurred in the Company's performance packaging business. As a result of this analysis, Appleton recorded a $17.7 million goodwill impairment charge for the quarter.

Other (Unallocated)
Other (unallocated) includes costs associated with new business development activities and unallocated corporate expenses. Other (unallocated) costs decreased $0.6 million in third quarter 2008 compared to third quarter 2007.

Balance Sheet
Capital spending during the first nine months of 2008 totaled $74.6 million, of which $67.8 million was associated with the West Carrollton, Ohio, mill expansion project. Through third quarter 2008, Appleton has spent $99.3 million on the $125 million expansion project. Capital spending for this project will continue through the remainder of the year. Capital spending during the first nine months of 2007 was $28.4 million.

At the end of third quarter 2008, Appleton had cash totaling $7.8 million. This compared to cash of $44.8 million at year-end 2007. Through third quarter 2008, the Company had net borrowings of $58.3 million on the revolving line of credit within its senior credit facility. During the first nine months of 2008, Appleton paid $19.7 million of its $25 million portion of the Fox River liability. As of the end of October 2008, Appleton's responsibility for this $25 million has been completely satisfied.

About Appleton
Appleton produces carbonless, thermal, security and performance packaging products. The company is headquartered in Appleton, Wisconsin, and has manufacturing operations in Wisconsin, Ohio, Pennsylvania and Massachusetts. Appleton employs approximately 2,400 people and is 100 percent employee owned.

SOURCE: Appleton