Mod-Pac Corp.'s third-quarter profits jumped by 68 percent as the Buffalo printing and packaging company booked the first payment from the restructuring of a major short-run printing contract.
The soaring profits and 20 percent revenue increase, however, masked slower growth rates and sharply lower profit margins from its printing and packaging operations after excluding the $611,000 in revenue that Mod-Pac received from VistaPrint for giving up its exclusive supplier rights in North America after August 2005.
Mod-Pac executives blamed the shrinking gross margins from operations, which dropped to 18.6 percent from 23.7 percent a year ago, primarily on lower utilization rates at its local factories, which have doubled their production capacity over the last year, along with higher paperboard prices and increased repair and training costs.
The company expects profit margins to pick up again as sales increase in its commercial printing and folding carton products, as well as for its stock boxes, said Daniel G. Keane, Mod-Pac's president and chief executive officer. He estimated that Mod-Pac's factories have the capacity to handle a 40 percent to 50 percent increase in production.
"The key is higher volume," said C. Anthony Rider, Mod-Pac's chief financial officer.
Mod-Pac's profits soared to $856,000, or 22 cents per share, from $510,000, or 14 cents per share. But the company's operating profits, which exclude taxes and interest payments, grew by a much slower rate, rising 12 percent to $993,000 from $887,000 a year ago.
The company's total revenues grew by 20 percent to $12.2 million from $10.2 million, bolstered by the first installment on the $22 million VistaPrint agreement, which was paid in full during August but is being counted as revenue in 36 monthly payments spread out through September 2007.
Excluding the VistaPrint revenue, Mod-Pac's net product sales grew by 13 percent to $11.5 million, buoyed by a 19 percent increase in sales of commercial print products through VistaPrint and a 13 percent jump in revenues from custom folding cartons, along with a 9 percent improvement in stock box sales. Revenues from its personalized print products slipped by 5 percent to $798,000 from $836,000.
The VistaPrint business, which had $4.1 million in sales during the quarter, remains on pace to generate $16 million to $16.5 million in sales this year. "They continue to be a very good customer for us," Keane said.
Mod-Pac said it used $9 million of the VistaPrint money to pay down most of its long-term debt, which stood at slightly more than $2 million at the beginning of the month. Another $8 million will be used in December to pay income taxes. The company also bought back 18,000 shares of its stock during the quarter.