MOD PAC CORP - FORM 10-Q - November 2, 2011

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EXCEL - IDEA: XBRL DOCUMENT - MOD PAC CORP	Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - MOD PAC CORP	ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - MOD PAC CORP	ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - MOD PAC CORP	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - MOD PAC CORP	ex31-1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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: October 1, 2011
	OR
[ ]	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.

(Exact Name of Registrant as Specified in its Charter)

New York

(State or other jurisdiction of incorporation or organization)

1801 Elmwood Avenue, Buffalo, New York

(Address of principal executive office)

16-0957153

(I.R.S. Employer Identification No.)

14207

(Zip Code)

(716) 873-0640

(Registrant's telephone number, including area code)

______________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

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 requirements for the past 90 days. Yes [ X ] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]	Accelerated filer [ ]

Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [ X ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

The number of shares outstanding of each class of common stock as of October 1, 2011 was:

Common Stock, $0.01 par value 2,571,207 shares

Class B Common Stock, $0.01 par value 599,073 shares

MOD-PAC CORP.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Balance Sheets
	October 1, 2011 and December 31, 2010	3

	Consolidated Statements of Income
	Nine Months Ended and Three Months Ended
	October 1, 2011 and October 2, 2010	4

	Consolidated Statements of Cash Flows
	Nine Months Ended October 1, 2011 and
	October 2, 2010	5

	Notes to Consolidated Financial
	Statements	6-10

Item 2.	Management’s Discussion and Analysis of
	Financial Condition and Results of Operation	11-13

Item 3.	Quantitative and Qualitative Disclosures about
	Market Risk	14

Item 4.	Controls and Procedures	14


PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	15

Item 1A.	Risk Factors	15

Item 2.	Unregistered Sales of Equity Securities	15

Item 3.	Defaults Upon Senior Securities	15

Item 4.	(Removed and Reserved)	15

Item 5.	Other Information	15

Item 6.	Exhibits	15


SIGNATURES		16

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

MOD-PAC CORP.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)
	(Unaudited)
	October 1, 2011			December 31, 2010
Current assets:
Cash and cash equivalents	$	2,207		$	3,440

Accounts receivable		6,001			5,003
Allowance for doubtful accounts		(61	)		(96	)
Net accounts receivable		5,940			4,907
Inventories		7,584			5,234
Prepaid expenses		368			440
Total current assets		16,099			14,021

Property, plant and equipment, at cost:
Land		1,170			1,170
Buildings and improvements		12,460			12,460
Machinery and equipment		49,555			48,697
Construction in progress		1,108			56
		64,293			62,383
Less accumulated depreciation		(50,301	)		(48,114	)
Net property, plant and equipment		13,992			14,269
Other assets		469			487
Total assets	$	30,560		$	28,777

Current liabilities:
Current maturities of long-term debt	$	91		$	110
Accounts payable		2,248			1,302
Accrued expenses		1,008			939
Income taxes payable		90			40
Total current liabilities		3,437			2,391

Long-term debt		1,841			1,958
Other liabilities		26			24
Deferred income taxes		63			6
Total liabilities		5,367			4,379

Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000 shares, issued 3,570,016 in 2011, 3,549,017 in 2010		36			35
Class B common stock, $.01 par value, authorized 5,000,000 shares, issued 599,073 in 2011, 616,472 in 2010		6			6
Additional paid-in capital		3,575			3,232
Retained earnings		29,586			28,125
Treasury stock at cost, 998,809 shares in 2011 and 816,270 in 2010		(8,010	)		(7,000	)
Total shareholders' equity		25,193			24,398

Total liabilities and shareholders' equity	$	30,560		$	28,777

See accompanying notes to financial statements

MOD-PAC CORP.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands)	(Unaudited)
	Nine Months Ended						Three Months Ended
	October 1, 2011			October 2, 2010			October 1, 2011			October 2, 2010
Revenue:
Net sales	$	41,331		$	35,535		$	14,249		$	12,267
Rental income		335			382			111			113
Total revenue		41,666			35,917			14,360			12,380

Costs and expenses:
Cost of products sold		33,890			29,405			11,532			9,638
Selling, general and administrative expenses		5,561			5,362			1,790			1,705
Income from operations		2,215			1,150			1,038			1,037

Interest expense		(145	)		(148	)		(48	)		(44	)
Other income		145			83			-			11
Income before taxes		2,215			1,085			990			1,004
Income tax expense		754			19			365			4
Net income	$	1,461		$	1,066		$	625		$	1,000

Income per share:
Basic	$	0.44		$	0.31		$	0.19		$	0.29

Diluted	$	0.42		$	0.30		$	0.18		$	0.28

See accompanying notes to financial statements

MOD-PAC CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)	(Unaudited)
	Nine Months Ended
	October 1, 2011			October 2, 2010
Cash flows from operating activities:
Net income	$	1,461		$	1,066
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,198			2,079
Provision for doubtful accounts		(12	)		(29	)
Stock option compensation expense		337			347
Deferred income taxes		57			-
Gain on disposal of assets		(49	)		(34	)
Cash flows from changes in operating assets and liabilities:
Accounts receivable		(1,019	)		(875	)
Inventories		(2,350	)		(1,109	)
Prepaid expenses		72			(230	)
Other liabilities		2			(13	)
Accounts payable		946			(952	)
Income taxes payable		50			-
Accrued expenses		69			(24	)

Net cash provided by operating activities		1,762			226

Cash flows from investing activities:
Proceeds from the sale of assets		49			131
Change in other assets		8			(5	)
Capital expenditures		(1,912	)		(1,242	)

Net cash used in investing activities		(1,855	)		(1,116	)

Cash flows from financing activities:
Principal payments on long-term debt		(136	)		(400	)
Proceeds from the issuance of stock		6			-
Purchase of stock for treasury		(1,010	)		(232	)
Deferred financing fees		-			(21	)

Net cash used in financing activities		(1,140	)		(653	)

Net decrease in cash and cash equivalents		(1,233	)		(1,543	)

Cash and cash equivalents at beginning of year		3,440			3,780

Cash and cash equivalents at end of period	$	2,207		$	2,237

See accompanying notes to financial statements

MOD-PAC CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED OCTOBER 1, 2011

(unaudited)

1) Basis of Presentation

The Registrant, MOD-PAC CORP., is referred to in this Quarterly Report on Form 10-Q as “MOD-PAC” or "the Company" or in the nominative “we” or the possessive “our.”

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 and are of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full year. Operating results for the nine-month period ended October 1, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

The balance sheet at December 31, 2010 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 U.S. accounting principles for complete financial statements.

For further information, refer to the financial statements and footnotes thereto included in the Company's 2010 annual report on Form 10-K.

Revenue is recognized when title, ownership, and risk of loss pass to the customer, all of which occurs upon shipment or delivery of the product and is based on the applicable shipping terms.

2) Product Line Net Sales

Product line net sales are as follows:

(in thousands)
	Nine Months Ended				Three Months Ended
	October 1, 2011		October 2, 2010		October 1, 2011		October 2, 2010
Folding cartons:
Custom folding cartons	$	32,527	$	26,966	$	11,205	$	9,251
Stock packaging		6,586		6,253		2,319		2,259
Folding cartons sub-total		39,113		33,219		13,524		11,510

Personalized print		2,218		2,316		725		757

Total	$	41,331	$	35,535	$	14,249	$	12,267

3) Income Per Share

The following table sets forth the computation of income per share:

(in thousands, except per share data)
	Nine Months Ended				Three Months Ended
	October 1, 2011		October 2, 2010		October 1, 2011		October 2, 2010
Net income	$	1,461	$	1,066	$	625	$	1,000

Basic weighted average shares outstanding		3,323		3,424		3,269		3,410
Net effect of diluted stock options		119		135		123		119
Diluted weighted average shares outstanding		3,442		3,559		3,392		3,529

Basic income per share	$	0.44	$	0.31	$	0.19	$	0.29

Diluted income per share	$	0.42	$	0.30	$	0.18	$	0.28

For the nine months ended October 1, 2011 and October 2, 2010, approximately 325 thousand and 396 thousand of common shares potentially issuable from the exercise of stock options were excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of common stock for the respective period.

4) Inventories

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)
	October 1, 2011		December 31, 2010
Finished goods	$	3,847	$	2,787
Work in progress		291		227
Raw material		3,446		2,220
Total inventory	$	7,584	$	5,234

5) Income Taxes

The Company’s effective tax rate for the third quarter and first nine months of 2011 was 36.9% and 34.0%, respectively. The Company’s effective tax rate for the third quarter and first nine months of 2010 was 0.4% and 1.8%, respectively. The effective tax rate for the first nine months and third quarter of 2010 was recorded at a rate lower than customary mainly due to the utilization of available net operating loss carry-forward credits for which a full valuation allowance was previously recorded.

The Company's continuing practice is not to recognize interest and/or penalties related to income tax matters in income tax expense. As of October 1, 2011, the Company had no amounts accrued related to uncertain tax positions. The tax years 2007, 2008, 2009 and 2010 remain open to examination by the major taxing jurisdictions to which the Company is subject.

6) Stock-Based Compensation

MOD-PAC CORP. established a Stock Option Plan that authorized the issuance of 800,000 shares of Common Stock for the purpose of attracting and retaining executive officers and key employees, and to align management’s interests with those of the shareholders of MOD-PAC CORP. The options must be exercised no more than ten years from the grant date and vest over up to a five-year period. The exercise price for the options is equal to the fair market value of the common stock at the date of grant.

MOD-PAC CORP. established the Director’s Stock Option Plan that authorized the issuance of 200,000 shares of Common Stock for the purpose of attracting and retaining the services of experienced and knowledgeable outside directors, and to align their interest with those of its shareholders. The options must be exercised no more than ten years from the grant date and vest after six months. The exercise price for the options is equal to the fair market value at the date of grant.

The Company uses a straight-line method of attributing the value of stock-based compensation expense, subject to minimum levels of expense, based on vesting. Stock compensation expense recognized during the period is based on the value of the portion of shared-based payment awards that is ultimately expected to vest during the period.

The fair value of stock options granted was estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average fair value of the options was $3.20 and $4.12 for options granted during the nine months ended October 1, 2011 and October 2, 2010, respectively. The following table provides the range of assumptions used to value stock options granted during the nine months ended October 1, 2011 and October 2, 2010.

	Nine Months Ended
	October 1, 2011			October 2, 2010
Expected volatility		77	%		82	%
Risk-free rate		2.2	%		2.5	%
Expected dividends		0	%		0	%
Expected term (in years)		5.5			5.5

To determine expected volatility, the Company uses historical volatility based on weekly closing prices of its Common Stock since the Company’s spin-off from Astronics Corporation in March 2003. The risk-free rate is based on the United States Treasury yield curve at the time of grant for the appropriate term of the options granted. Expected dividends are based on the Company’s history and expectation of dividend payouts. The expected term of stock options is based on vesting schedules, expected exercise patterns and contractual terms.

A summary of the Company’s stock option activity and related information for the nine months ended October 1, 2011 is as follows:

(aggregate intrinsic value in thousands)
	Options			Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding at January 1, 2011		717,666		$	6.58	$	567
Options granted		20,000			4.86
Options forfeited		(1,750	)		4.49
Options expired		(15,347	)		11.48
Options exercised		(3,600	)		1.85
Outstanding at October 1, 2011		716,969		$	6.38	$	795

Exercisable at October 1, 2011		611,519		$	6.71	$	628

The aggregate intrinsic value in the preceding table represents the total pretax option holder’s intrinsic value, based on the Company’s closing stock price of Common Stock of $5.67 as of October 1, 2011, which would have been received by the option holders had all option holders with an exercise price less than the market price been exercised as of that date. The Company’s current policy is to issue additional new shares upon exercise of stock options.

The fair value of options vested since December 31, 2010 is $235 thousand. At October 1, 2011, total compensation costs related to non-vested awards not yet recognized was $183 thousand which will be recognized over a weighted average period of 2.0 years.

The following is a summary of weighted average exercise prices and contractual lives for outstanding and exercisable stock options as of October 1, 2011:

	Outstanding						Exercisable
Exercise Price Range	Shares		Weighted Average Remaining Life in Years		Weighted Average Exercise Price		Shares		Weighted Average Remaining Life in Years		Weighted Average Exercise Price
$1.68 to $5.62		391,695		7.4	$	3.64		305,045		7.1	$	3.61
$6.03 to $8.44		148,300		4.8	$	7.66		133,700		4.7	$	7.69
$10.00 to $11.73		132,474		4.3	$	10.79		128,274		4.3	$	10.82
$12.41 to $15.54		44,500		3.3	$	13.17		44,500		3.3	$	13.17
		716,969		6.1	$	6.38		611,519		5.7	$	6.71

7) Capital Structure

The Company's Class B stock is fully convertible into Common stock on a one-for-one basis at no cost. During the first nine months of 2011, 17,399 shares of Class B stock were converted to Common stock.

8) Information Regarding Industry Segments

The Company operates as one reporting segment. The Company’s customer base is comprised of companies and individuals throughout the United States and North America and is diverse in both geographic and demographic terms. The format of the information used by the Company’s President and CEO is consistent with the reporting format used in the Company’s 2010 Form 10-K and other external information.

9) Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying value of the Company’s accounts receivable and accounts payable approximate fair value due to the short-term nature of the instruments. The recorded amounts for long-term debt approximate fair value based on current market rates of similar instruments.

10) Long-Term Debt

Long-term debt includes the following:

(in thousands)
	October 1, 2011			December 31, 2010
Capital lease obligations:
Building - due in 2023; bears interest at
10%; payable monthly	$	1,800		$	1,800
Equipment		34			55
		1,834			1,855
Less estimated current maturities		(27	)		(27	)
Capital lease obligations - long-term		1,807			1,828

Loans:
Equipment loans		98			143
Other		-			70
		98			213
Less estimated current maturities		(64	)		(83	)
Loans - long-term		34			130

Total long-term debt	$	1,841		$	1,958

11) Assets Under Capital Leases Included in Property, Plant and Equipment

Assets under capital leases included in property, plant and equipment are summarized as follows:

(in thousands)
	October 1, 2011			December 31, 2010
Land	$	400		$	400
Building		4,148			4,148
Equipment		89			89
		4,637			4,637
Less accumulated depreciation		(1,261	)		(1,104	)

Net assets under capital leases	$	3,376		$	3,533

12) Long-Lived Assets

Long-lived assets, including acquired identifiable intangible assets, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. An impairment loss is recognized if the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. That assessment is based on the carrying amount of the asset or asset group at the date tested. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset or asset group exceeds its fair value which is based upon estimated future discounted cash flows.

Based on this testing, no asset impairment charges were recognized in the first nine months of 2011 or 2010.

13) Line of Credit

The Company has access to a $3.0 million secured line of credit with a commercial bank which expires June 9, 2013. Interest on the line of credit is based on LIBOR plus 2.75%, with an interest floor of 3.35%. At October 1, 2011, $0.2 million was in use through a standby letter of credit and there was no balance drawn on the line. The Company was in compliance with all applicable covenants at October 1, 2011. The amount of the line of credit that was unused and available to the Company at October 1, 2011 was $2.8 million.

14) Legal Proceedings

The Company was a third party defendant in an action filed in Supreme Court, Erie County, New York (David George, Plaintiff v. Speedways Conveyors, Incorporated and H.M. Cross & Sons, Inc., Defendants and Speedways Conveyors, Incorporated, Third-Party Plaintiff v. Mod-Pac Corporation, Third-Party Defendant. (Erie Co. Index No. 2003-8579 and 2003-8579 TP-1) by one of its employees for injuries he suffered during the course of his employment. The action has been settled without any monetary contribution from the Company.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

In the third quarter of 2011, we continued to focus our resources on our growing custom folding carton line. We believe that we are beginning to gain some traction in our sales and marketing efforts in this product line with the more concentrated approach we have applied since rationalizing our product lines and exiting the commercial print market in the second quarter of 2009. As a result of that rationalization, we also have realized a significant improvement in our operating performance. Over the last two years, we lowered our cost structure, improved our operating efficiency and implemented sustainable improvements in every area of our business resulting in more than two full years of profitability.

Our custom folding carton customers are generally in the healthcare, confectionary, food and food service, and automotive industries, including private label manufacturers. Our expertise in this market is our ability to run, on-demand, the specific quantities required by our customers as opposed to doing long runs and creating inventory and obsolescence challenges. As a result, we do not require minimum print orders and are more flexible than most printers in addressing our customers’ needs. This capability has served our private label customers, who may have several of the same carton requirements with varying print requirements for their customers, extremely well.

We also plan to continue developing our stock packaging and personalized print product lines. Our stock packaging line, which serves primarily private confectionaries, is seasonal in nature and driven by the economy. Nonetheless, we believe that we are a leader in this market with more than 3,000 customers that we serve primarily in the United States.

Our personalized print product line is focused on store, catalog and web sales. Because we provide products such as personalized dinner and cocktail napkins, small boxes for sundries at events, and other celebration-type items for both the retail and corporate markets, this product line is heavily impacted by economic downturns. We compete in personalized print with much larger companies, yet we have developed a strong brand as Krepe-Kraft among event planners and wedding coordinators. Our website, www.partybasics.com, has had some success, and we also provide our products to third-party web stores as well.

REVENUE

For the third quarter of 2011, total revenue was $14.4 million compared with $12.4 million in 2010, an increase of 16.0%. The custom folding carton product line sales were $11.2 million compared with $9.3 million in the third quarter of 2010. The 21.1% increase was mainly due to increased business from several large existing customers, business from two new customers and increased waste sales due to improved market conditions, offset partially by decreased business with several existing customers. Sales of the Company’s stock packaging product line were $2.3 million in the third quarter of 2011, up 2.7% from the third quarter of 2010, primarily due to improved market conditions. Personalized print sales for the second quarter of 2011 were $0.7 million compared with $0.8 million in 2010, a decrease of 4.2%, mainly due to continued weakness in this market.

For the first nine months of 2011, total revenue was $41.7 million, compared with $35.9 million in 2010, an increase of 16.0%. The custom folding cartons product line sales were $32.5 million compared with $27.0 million in 2010. The increase of 20.6% was mainly due to increased business from several large existing customers, business from three new customers and increased waste sales due to improved market conditions, offset partially by decreased business from several large customers. Sales of the Company’s stock packaging product line were $6.6 million, compared with $6.3 million in the prior year, an increase of 5.3% mainly due to improved general business conditions. Personalized print sales for the first nine months of 2011 were $2.2 million, a decrease of 4.2% compared to the in the same period of 2010, primarily due to continued weakness in the market.

EXPENSES AND MARGINS

Gross margin was 19.7% for the third quarter of 2011, compared with 22.1% in the third quarter of 2010. Gross margin in 2011 was negatively affected by increased paperboard, repairs, supplies costs and sales mix, offset, partially, by decreased rental expense and operational leverage generated by increased product sales.

Selling, general, and administrative (“SG&A”) costs were $1.8 million in the third quarter of 2011, an increase of 5.0% from the same period in the prior year. This increase was driven primarily by higher selling commissions.

Gross margin was 18.7% for the first nine months of 2011, compared to 18.1% for the same period of 2010. Operational leverage generated by increased product sales had a positive impact on gross margin. Gross margin was also positively affected by decreased rental expense, offset partially by increased repairs, supplies and paperboard costs, depreciation expense and sales mix.

SG&A costs increased 3.7% to $5.6 million in the first nine months of 2011 from $5.4 million during the same period in the prior year. This increase was primarily the result of increased employee related costs and selling commissions offset partially by decreased professional services costs.

TAXES

NET INCOME AND INCOME PER SHARE

The net income for the third quarter of 2011 was $625 thousand, compared with net income of $1.0 million in the third quarter of 2010. The net income was due to the fluctuations discussed above. Diluted income per share was $0.18 in the third quarter of 2011 and $0.28 in the third quarter of 2010.

The net income for the first nine months of 2011 was $1.5 million or $0.42 per diluted share, compared with $1.1 million, or $0.30 per diluted share, in the first nine months of 2010. This net income was due to the fluctuations discussed above.

LIQUIDITY

Cash and cash equivalents at October 1, 2011 was $2.2 million, which was down from the $3.4 million balance at December 31, 2010 for the reasons set forth below.

Accounts payable increased $0.9 million during the first nine months of 2011, primarily due to the timing of purchases and payments.

Accounts receivable increased by $1.0 million during the first nine months of 2011, primarily due to increased sales and the timing of payments from customers.

Inventory increased by $2.4 million mainly due to build-up of raw material and finished goods to satisfy customer needs.

Capital expenditures, driven primarily by productivity improvement and capacity investments, for the first nine months of 2011 and 2010 were $1.9 million and $1.2 million, respectively. Depreciation and amortization for the first nine months of 2011 and 2010 was $2.2 million and $2.1 million, respectively.

The Company made estimated tax payments of $0.6 million during the first nine months of 2011. This is less than the 2011 year to date tax expense of $0.8 million due to the utilization of available net operating loss carry-forwards for which a valuation allowance was previously recorded.

There were 182,539 shares repurchased by the Company during the first nine months of 2011. The Company has authorization to repurchase 200,000 shares at October 1, 2011. The closing price of the Company’s stock at October 1, 2011 was $5.67. At this price, the repurchase of 200,000 shares would require $1.1 million.

The Company believes that cash and cash equivalents, which totaled $2.2 million at October 1, 2011, in combination with cash expected to be generated from operations, will be adequate for the Company to meet its obligations, other working capital requirements and capital expenditure needs for the foreseeable future.

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 effect on its financial condition.

MARKET RISK

There has been no significant change in market risks since December 31, 2010.

As a result of short cycle times, the Company does not have any long-term commitments to purchase production raw materials or sell products that would present significant risks due to price fluctuations. Raw paper stock is available to us from multiple domestic sources; as a result, we believe the risk of supply interruptions due to such things as strikes at the source of supply or to failures in logistics systems are limited.

Risks due to fluctuation in interest rates are not material to the Company at October 1, 2011 because of our limited exposure to floating rate debt.

Over 90% of the Company's power needs are met through natural gas. The Company has investigated supply contracts of various lengths and currently it has supply arrangements for fixed prices on approximately 80% of its estimated usage through October 2011 and 100% of its usage from November 2011 to October 2012. Historically, the price of natural gas has fluctuated widely. The Company monitors the availability of natural gas, considering such factors as amount in storage, gas production data and transportation data, so that it can take appropriate action if concerns about availability occur. The Company has investigated and tested a back-up power source in the form of a rented transportable diesel-powered generator.

We have no foreign operations, nor do we transact any business in foreign currencies. Accordingly, we have no foreign currency market risks.

The market risk that the Company was exposed to at December 31, 2010 was generally the same as described above.

CRITICAL ACCOUNTING POLICIES

There have been no changes in critical accounting policies in the current year from those disclosed in our 2010 Form 10-K.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report are "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and uncertainties. All statements contained herein that are not clearly historical in nature are forward-looking, and the word "anticipate," "believe," "expect," "estimate," "project," and similar expressions are generally intended to identify forward-looking statements. Any forward looking statement contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission, or in MOD-PAC's communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls, regarding expectations with respect to sales, earnings, cash flows, operating efficiencies, product and market channel expansions, capacity utilization and expansion, and repurchase of capital stock, are subject to known and unknown risks, uncertainties and contingencies. Many of these risks, uncertainties, and contingencies are beyond our control, and may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Factors that might affect such forward-looking statements include, among other things:

Overall economic and business conditions;

The demand for MOD-PAC's goods and services;

Customer acceptance of the products and services MOD-PAC provides;

Competitive factors in print and print services and folding cartons industries;

Changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations);

Fluctuation in costs of natural gas supplies in Western New York State;

The internal and external costs of compliance with laws and regulations such as Section 404 of the Sarbanes-Oxley Act of 2002; and

Litigation against the Company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See Market Risk in Item 2, above.

Item 4. Controls and Procedures

(a.) Evaluation of Disclosure Controls and Procedures:

The Company’s management, with the participation of the Company’s President and Chief Executive Officer, and Chief Operating Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a - 15(e) and 15(d) - 15(e) of the Securities Exchange Act of 1934, as of October 1, 2011. Based on that evaluation, the Company’s President and Chief Executive Officer, and Chief Operating Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of October 1, 2011.

(b.) Changes in Internal Control over Financial Reporting:

There were no changes in the Company’s internal control over financial reporting during the first nine months of 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We were a third party defendant in an action filed in Supreme Court, Erie County, New York (David George, Plaintiff v. Speedways Conveyors, Incorporated and H.M. Cross & Sons, Inc., Defendants and Speedways Conveyors, Incorporated, Third-Party Plaintiff v. Mod-Pac Corporation, Third-Party Defendant. (Erie Co. Index No. 2003-8579 and 2003-8579 TP-1) by an employee for injuries he suffered during the course of his employment with us. The action has been settled without any monetary contribution from the Company.

Item 1A. Risk Factors

There has been no significant change to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Period	(a) Total Number of Shares (or Units) Purchased		b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 3 - July 30, 2011		-		N/A		-		200,000
July 31 - August 27, 2011		182,539	$	5.53		182,539		200,000
August 28 - October 1, 2011		-		N/A		-		200,000
Total		182,539	$	5.53		182,539		200,000

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. (Removed and Reserved)

Item 5. Other Information

Not applicable.

Item 6. Exhibits

	Exhibit 31.1	Section 302 Certification - President and Chief Executive Officer
	Exhibit 31.2	Section 302 Certification – Chief Operating Officer and Chief Financial Officer
	Exhibit 32.1	Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
	Exhibit 32.2	Certification of Chief Operating Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
	Exhibit 101.INS*	XBRL Instance Document
	Exhibit 101.SCH*	XBRL Taxonomy Extension Schema
	Exhibit 101.CAL*	XBRL Taxonomy Extension Calculation Linkbase
	Exhibit 101.DEF*	XBRL Taxonomy Extension Definition Linkbase
	Exhibit 101.LAB*	XBRL Taxonomy Extension Label Linkbase
	Exhibit 101.PRE*	XBRL Taxonomy Extension Presentation Linkbase

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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: November 2, 2011

	By:	/s/ David B. Lupp
		David B. Lupp
		Chief Operating Officer and Chief Financial Officer
		(Principal Financial Officer)

Attached files

MOD PAC CORP Reports

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