UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
| [X] | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|
| For the quarterly period ended April 3, 2004 |
| [ ] | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|
| For the transition period from to |
Commission File Number 0-50063
MOD-PAC CORP.
| New York (State or other jurisdiction of incorporation or organization) |
16-0957153 (IRS Employer Identification Number) |
|
| 1801 Elmwood Avenue, Buffalo, New York (Address of principal executive offices) |
14207 (Zip code) |
(716) 873-0640
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(g) of the Act:
$.01 par value Common Stock, $.01 par value Class B Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the exchange act).
Yes [ ] No [X]
As of April 3, 2004, 3,734,378 shares of common stock were outstanding consisting of 2,766,765 shares of common stock ($.01 par value) and 967,613 shares of Class B common stock ($.01 par value).
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
MOD-PAC CORP.
| Dollars in Thousands |
||||||||
| April 3, 2004 | December 31, | |||||||
| (Unaudited) |
2003 |
|||||||
Current Assets: |
||||||||
Cash |
$ | 1,064 | $ | 1,310 | ||||
Accounts Receivable: |
||||||||
Vista Print Ltd. |
2,264 | 2,239 | ||||||
All other customers |
2,939 | 2,968 | ||||||
Refundable income taxes |
— | 565 | ||||||
Inventories |
3,462 | 2,878 | ||||||
Prepaid expenses |
444 | 338 | ||||||
Total current assets |
10,173 | 10,298 | ||||||
Property, Plant and Equipment, at cost |
55,331 | 53,744 | ||||||
Less accumulated depreciation and amortization |
26,023 | 24,866 | ||||||
Net property, plant and equipment |
29,308 | 28,878 | ||||||
Other Assets |
1,058 | 1,340 | ||||||
| $ | 40,539 | $ | 40,516 | |||||
Current Liabilities: |
||||||||
Current maturities of long-term debt |
$ | 1,445 | $ | 1,429 | ||||
Accounts payable |
2,361 | 2,107 | ||||||
Accrued expenses |
1,101 | 1,639 | ||||||
Total current liabilities |
4,907 | 5,175 | ||||||
Long-term debt |
9,482 | 9,657 | ||||||
Other liabilities |
3,561 | 3,733 | ||||||
Common Shareholders’ Equity: |
||||||||
Common stock, $.01 par value
Authorized 20,000,000 shares, issued
2,973,945 in 2004, 2,943,384 in 2003 |
30 | 30 | ||||||
Class B common stock, $.01 par value
Authorized 5,000,000 shares, issued
967,613 in 2004, 975,979 in 2003 |
10 | 10 | ||||||
Additional paid-in capital |
400 | 359 | ||||||
Accumulated other comprehensive income (loss) |
(57 | ) | (59 | ) | ||||
Retained earnings |
23,267 | 22,613 | ||||||
| 23,650 | 22,953 | |||||||
Less treasury shares, at cost 207,180 in 2004
and 199,082 in 2003 |
1,061 | 1,002 | ||||||
Total shareholders’ equity |
22,589 | 21,951 | ||||||
| $ | 40,539 | $ | 40,516 | |||||
See notes to financial statements ..
MOD-PAC CORP.
| (Dollars in Thousands) | ||||||||
| (Unaudited) | ||||||||
| THREE MONTHS |
||||||||
| 2004 |
2003 |
|||||||
Sales |
$ | 11,915 | $ | 9,430 | ||||
Less: Freight Charges |
351 | 262 | ||||||
Net Sales |
11,564 | 9,168 | ||||||
Costs and Expenses: |
||||||||
Cost of products sold |
8,560 | 6,836 | ||||||
Selling, general and
administrative expenses |
1,890 | 1,490 | ||||||
Interest expenses |
101 | 9 | ||||||
Total costs and expenses |
10,551 | 8,335 | ||||||
Income before taxes |
1,013 | 833 | ||||||
Provision for income taxes |
359 | 306 | ||||||
Net income |
$ | 654 | $ | 527 | ||||
Retained Earnings: |
||||||||
January 1 |
22,613 | 20,413 | ||||||
April 3 |
23,267 | 20,941 | ||||||
Earnings per share: |
||||||||
Basic |
$ | .18 | $ | .13 | ||||
Diluted |
$ | .17 | $ | .13 | ||||
See notes to financial statements
MOD-PAC CORP.
| (Dollars in Thousands) | ||||||||
| (Unaudited) |
||||||||
| 2004 |
2003 |
|||||||
Cash Flows from Operating Activities: |
||||||||
Net income |
$ | 654 | $ | 527 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Depreciation and amortization |
1,171 | 895 | ||||||
Other |
(172 | ) | 100 | |||||
Cash flows from changes in operating
assets and liabilities, excluding effects
of acquisitions: |
||||||||
Accounts receivable |
(70 | ) | (1,055 | ) | ||||
Inventories |
(584 | ) | (251 | ) | ||||
Prepaid expenses |
(105 | ) | (238 | ) | ||||
Accounts payable |
328 | 1,399 | ||||||
Accrued expenses |
25 | (443 | ) | |||||
Net cash provided by Operating Activities |
1,247 | 934 | ||||||
Cash Flows from Investing Activities: |
||||||||
Change in other assets |
271 | (11 | ) | |||||
Capital expenditures |
(1,587 | ) | (3,896 | ) | ||||
Net Cash used by Investing Activities |
(1,316 | ) | (3,907 | ) | ||||
Cash Flows from Financing Activities |
||||||||
New long-term debt |
200 | 8,700 | ||||||
Principal payments on long-term debt and capital lease |
(359 | ) | (290 | ) | ||||
Astronics through spin-off |
— | (4,848 | ) | |||||
Proceeds from issuance of stock |
41 | — | ||||||
Purchase of treasury stock |
(59 | ) | — | |||||
Net Cash used by Financing Activities |
(177 | ) | (3,562 | ) | ||||
Net (decrease) increase in Cash and Cash Equivalents |
(246 | ) | 589 | |||||
Cash and Cash Equivalents at Beginning of Year |
1,310 | 1 | ||||||
Cash and Cash Equivalents at April 3 |
$ | 1,064 | $ | 590 | ||||
Cash payments for: |
||||||||
Interest |
$ | 123 | $ | 1 | ||||
Income taxes |
$ | (329 | ) | $ | 286 | |||
See notes to financial statements.
MOD-PAC CORP.
Notes to Financial Statements
April 3, 2004
| 1) | The accompanying unaudited statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. Operating results for the three-month period ended April 3, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. | |||
| The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. | ||||
| For further information, refer to the financial statements and footnotes thereto included in the Company’s 2003 annual report. | ||||
| On March 14, 2003, MOD-PAC CORP. was spun off from Astronics Corporation (Astronics) by means of a tax-free distribution (“The Distribution”) of all of the outstanding shares of MOD-PAC CORP.’s common stock and Class B Stock. The Astronics Board of Directors set a one-for-two distribution ratio, in which (i) each Astronics common stock holder received one share of MOD-PAC CORP. common stock for every two shares of Astronics common stock owned on the record date for the Distribution and (ii) each Astronics Class B stock owner received one share of MOD-PAC CORP. Class B for every two shares of Astronics Class B stock owned on the record date for the Distribution. As a result of the Distribution, MOD-PAC CORP. became a separately traded, publicly held company. | ||||
| At March 14, 2003 the Company paid Astronics all amounts due at the time of the spin-off with a portion of the proceeds of a $10 million term loan facility with HSBC Bank USA. At April 3, 2004 the Company has $8.9 million outstanding under the term loan facility, which is repayable in quarterly installments through 2010. Interest is paid monthly at floating rates 125 basis points over LIBOR. | ||||
| Prior to the Distribution, the Company was recapitalized. Astronics exchanged its existing shares of MOD-PAC CORP. common stock for approximately 2,868,316 share of MOD-PAC CORP. Common stock and approximately 1,007,341 shares of MOD-PAC CORP. Class B stock. The accompanying financial statements give retroactive effect to this recapitalization. | ||||
| The Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 and its related interpretations. The measurement prescribed by APB Opinion No. 25 does not recognize compensation expense if the exercise price of the stock option equals the market price of the underlying stock on the date of grant. Accordingly, no compensation expense related to stock options has been recorded in the financial statements. Stock options exercised in the first quarter of 2004 resulted in the issuance of 22,195 shares of the Company’s Common stock. | ||||
| For purpose of pro forma disclosures, the estimated fair value of the MOD-PAC stock options at the date of grant is amortized to expense over the option’s vesting period. The Company’s pro forma information for the 2004 and 2003 is presented in the table below. | ||||
| THREE MONTHS |
||||||||
| 2004 |
2003 |
|||||||
| (in thousands) | ||||||||
Net income as reported |
$ | 654 | $ | 527 | ||||
Adjustments to record compensation expense for stock option awards
under the fair value method of accounting |
(40 | ) | (33 | ) | ||||
Pro forma net income |
$ | 614 | $ | 494 | ||||
Pro forma basic earnings per share |
$ | .17 | $ | .13 | ||||
Pro forma diluted earnings per share |
$ | .16 | $ | .12 | ||||
| 2) | Inventories are stated at the lower of cost or market, cost being determined in accordance with the first-in, first-out method. Inventories are as follows: |
| (in thousands) | ||||||||
| April 3, 2004 | December 31, 2003 | |||||||
| (Unaudited) |
|
|||||||
Finished Goods |
$ | 2,021 | $ | 1,707 | ||||
Work in Progress |
194 | 151 | ||||||
Raw Material |
1,247 | 1,020 | ||||||
| $ | 3,462 | $ | 2,878 | |||||
| 3) | The Company performed printing and order fulfillment services for VistaPrint Limited, resulting in net sales of $4,046,000 and $2,913,000, respectively for the first three months of 2004 and 2003. VistaPrint owed MOD-PAC CORP. $2,264,000 and $2,239,000 at April 3, 2004 and December 31, 2003 respectively, related to such services. Roberts S. Keane, the son of Kevin T. Keane, is a shareholder in and chief executive officer of VistaPrint Limited. In addition, Kevin T. Keane is a shareholder in VistaPrint Limited, holding less than 5% of its capital stock. | |||
| The Company has a supply agreement with VistaPrint Limited pursuant to which the Company is VistaPrint Limited’s exclusive North American supplier of printed products. Printed products delivered to VistaPrint Limited’s customers pursuant to this agreement are billed to VistaPrint Limited at the Company’s fully burdened cost divided by 0.75. VistaPrint Limited is obligated to pay the Company for such shipments within 40 days of invoice. This agreement expires April 2, 2011. | ||||
| The Company has an additional supply agreement with VistaPrint Limited for outside of North America, whereby VistaPrint Limited is obligated to give the Company a commercially reasonable opportunity to bid for the manufacturing rights of VistaPrint Limited’s printed products outside North America. Pursuant to this agreement, the price for products shall be negotiated, but in no event shall they exceed the Company’s fully burdened cost divided by 0.75. This agreement also expires April 2, 2011 | ||||
| 4) | Comprehensive income: | |||
| THREE MONTHS |
||||||||
| 2004 |
2003 |
|||||||
Net Income |
$ | 654 | $ | 527 | ||||
Other Comprehensive (Expense) Income |
2 | — | ||||||
| $ | 656 | $ | 527 | |||||
| 5) | The following table sets forth the computation of earnings per share: |
| (in thousands, except for per share data) | ||||||||
| Three Months Ended April 3 |
||||||||
| 2004 |
2003 |
|||||||
Net income |
$ | 654 | $ | 527 | ||||
Basic earnings per share weighted average shares |
3,727 | 3,916 | ||||||
Net effect of dilutive stock options |
87 | 75 | ||||||
Diluted earnings per share weighted average shares |
3,814 | 3,991 | ||||||
Basic earnings per share |
$ | .18 | $ | .13 | ||||
Diluted earnings per share |
$ | .17 | $ | .13 | ||||
MOD-PAC CORP.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following table sets forth income statement data as a percent of net sales:
| Percent of Net Sales | ||||||||
| Three Months Ended April 3 |
||||||||
| 2004 |
2003 |
|||||||
Net Sales: |
100.0 | % | 100.0 | % | ||||
Cost of products sold |
74.0 | 74.6 | ||||||
Selling, general and
administrative expenses |
16.3 | 16.2 | ||||||
Interest expense, net |
.9 | .1 | ||||||
| 91.2 | 90.9 | % | ||||||
Income before provision
for income taxes |
8.8 | % | 9.1 | % | ||||
Provision for taxes |
3.1 | 3.3 | ||||||
Net Income |
5.7 | % | 5.8 | % | ||||
NET SALES
|
For the first quarter of 2004 net sales were $11.6 million compared with $9.2 million in 2003, an increase of 26.1%. This increase of $2.4 million was mainly due to the $1.1 million increase in short run commercial printing net sales and a $0.8 million increase in net sales for the custom folding carton product line. | |
EXPENSES AND MARGINS
|
Cost of products sold as a percentage of net sales for the three months ended April 3, 2004 was 74.0% compared to 74.6% for the three months ended March 29, 2003, a decrease of .6% due to improved leverage because of volume. | |
| Selling, general and administrative costs, increased $0.4 million for the 2004 first quarter to $1.9 million from $1.5 million in 2003 due to higher administrative employee costs and professional services due to our expansion and growth. |
| As a result of the $2.4 million increase in net sales, the 0.6% decrease, as a percentage of net sales, in cost of products sold offset by the $0.4 million increase in selling, general and administrative costs, earnings before interest and taxes (EBIT), was up $0.3 million to $1.1 million in the first quarter 2004 from $0.8 million in the first quarter 2003. EBIT margin increased in the first quarter of 2004 to 9.6% from 9.2% in 2003’s first quarter. | ||
| Interest expense increased to $101,000 for the first quarter 2004 compared to $10,000 for the first quarter 2003. This is mainly a result of increased borrowings to finance capacity expansion. | ||
TAXES
|
Our effective income tax rate was 35.4% in 2004 compared to 36.7% for 2003. | |
NET INCOME AND EARNINGS PER SHARE |
Net income for the first quarter of 2004 was $654,000, up $127,000 or 24.1%, from the 2003 first quarter; diluted earnings per share were $.17 compared to $.13. Average shares outstanding for purposes of the diluted earnings per share calculation were 4.4% lower in 2004 compared to 2003, which impacted the calculation by $0.01 per share for the quarter. | |
LIQUIDITY
|
Cash provided by operating activities was $1,247,000 during the first three months of 2004. Net income plus depreciation, amortization and other non-cash expenses was $1,653,000, which was offset by an increase in working capital components of $406,000. | |
| The Company’s capital expenditures of $1,587,000 for the three months of 2004 were down by $2,309,000 from 2003 level. Although the Company expects this gap to narrow somewhat over the balance of 2004, it expects capital expenditures in 2004 to be less than the 2003 level. | ||
| We have a $6 million dollar line of credit facility available to us. At April 3, 2004 there are no borrowings on this line of credit. Interest on the line of credit is either 1.25% over LIBOR or the prime rate, at the company’s option. | ||
COMMITMENTS
|
The Company has commitments for items that it purchases in the normal on-going affairs of the business. The Company is not aware of any obligations in excess of normal market conditions, or of any long-term commitments that would have a material adverse affect on its financial condition. | |
MARKET RISK
|
Risks due to fluctuation in interest rates are a function of the Company’s floating rate debt obligations that total $8,929,000 at April 3, 2004. As a result, a change of 1% in interest rates would impact annual net income by approximately $54,000. | |
| As a result of the commissioning of its 2.0-megawatt co-generation facility, over 90% company’s power needs are met through natural gas. The company is investigating supply contracts of various lengths; it made no such arrangements beyond 30 days at April 3, 2004. The price of natural gas has fluctuated widely in the past 24 months, from a low of $3.00 per decatherm to a high of $7.00 and is currently in the range of $5.40 per decatherm. A one-dollar per decatherm change in the price of natural gas would affect the company’s annual net income by $32,000. An alternative power source would be a diesel-powered generator. The company has made arrangements for and tested this alternative. We have no foreign operations, nor do we transact business in foreign currencies. Accordingly, we have no foreign currency market risks. | ||
CRITICAL
|
The preparation of financial statements in accordance with generally accepted |
ACCOUNTING POLICIES
|
accounting policies requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. In developing such estimates, management evaluates the facts known to it at the time and applies such facts within the framework of certain critical accounting policies that govern valuation allowances of the Company’s assets. These policies include determining the need for a valuation allowance with respect to doubtful accounts receivable, lower of cost or market reserves related to the Company’s inventories, depreciation allowances and impairment reserves with respect to the Company’s long-lived assets and valuation allowances with respect to the realizability of deferred tax assets. Often, management must make certain assumptions about the future when applying these policies. Management uses past experience in developing such assumptions about the future. Actual experience will be different than the assumptions made and differences could result in material adjustments to management’s estimates. | |
| Specifically, and with respect to deferred tax assets, MOD-PAC had a gross deferred tax asset at April 3, 2004 of $1.5 million, which relates primarily to New York State Investment Tax Credits. These credits are subject to certain statutory provisions, such as the length of available carry forward period and minimum tax, which reduces the probability of realization of the full value of such credits. Management established a valuation allowance of $0.7 million for these credits based on actual historical realization rates and the statutory carry forward period. The valuation allowance is reviewed at least annually. | ||
NEW ACCOUNTING PRONOUNCEMENTS |
There are no recently issued accounting standards that will have a material impact on our financial position or results of operations. | |
FORWARD-LOOKING STATEMENTS |
This Quarterly Report contains “forward-looking statements”. Such statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results expressed or implied by such statements, including general economic and business conditions affecting our customers and suppliers, competitors’ responses to our products and services, particularly with respect to pricing, the overall market acceptance of such products and services and successful completion of our capital expansion program. We use words like “will,” “may,” “should,” “plan,” “believe,” “expect,” “anticipate.” “intend,” “future” and other similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of their respective dates. These forward-looking statements are based on our current expectations and are subject to number of risks and uncertainties. Our actual operating results could differ materially from those predicted in these forward-looking statements, and any other events anticipated in the forward-looking statements may not actually occur. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Market Risk in Item 2, above.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date this evaluation.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
| (d) Maximum Number | ||||||||||||||||
| © Total Number of | (or Approximate | |||||||||||||||
| Shares (or Units) | Dollar Value) of | |||||||||||||||
| Purchased as Part | Shares (or Units) | |||||||||||||||
| (a) Total Number of | (b) Average Price | of Publicly | that May Yet Be | |||||||||||||
| Shares (or Units) | Paid per Share | Announced Plans or | Purchased Under the | |||||||||||||
| Period |
Purchased |
(or Unit) |
Programs |
Plans or Programs |
||||||||||||
January 1 – January 30, 2004 |
— | — | — | 200,000 | ||||||||||||
January 31 – February 28, 2004 |
3,028 | 8.07 | 3,028 | 196,972 | ||||||||||||
February 29 – April 3, 2004 |
5,070 | 8.37 | 8,098 | 188,874 | ||||||||||||
Total |
8,098 | 8.27 | 8,098 | 188,874 | ||||||||||||
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 Section 302 Certification – Chief Executive Officer
Exhibit 31.2 Section 302 Certification – Chief Financial Officer
Exhibit 32. Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed an 8-K on February 9, 2004, regarding its press release of its 2003 annual earnings. The Company filed an 8-K on February 9, 2004, regarding Mr. Kevin T. Keane’s (the Company’s Chairman of the Board) adoption of a written plan pursuant to 10b5-1 of the Securities Exchange Act of 1934.
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.
| MOD-PAC CORP. |
||||
| (Registrant) |
||||
Date: May 6, 2004
|
By: | /s/ C. Anthony Rider | ||
| C. Anthony Rider | ||||
| Vice President-Finance and Treasurer | ||||
| (Principal Financial Officer and Chief Accounting | ||||
| Officer) | ||||