10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 September 30, 2013

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-32563

Orchids Paper Products Company

(Exact name of Registrant as Specified in its Charter)

Delaware	23-2956944
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

4826 Hunt Street

Pryor, Oklahoma 74361

(Address of Principal Executive Offices and Zip Code)

(918) 825-0616

(Registrant’s Telephone Number, Including Area Code)

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 requirement for the past 90 days.  Yes  x    No  o

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 during the preceding 12 months. Yes  x   No   o

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

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o

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

Number of shares outstanding of the issuer’s Common Stock, par value $.001 per share, as of October 25, 2013: 8,036,309 shares.

ORCHIDS PAPER PRODUCTS COMPANY

TABLE OF CONTENTS

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013

		Page
	PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements	3
	Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012	3
	Statements of Income for the three months ended September 30, 2013 and 2012 (Unaudited) and the nine months ended September 30, 2013 and 2012 (Unaudited)	4
	Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (Unaudited)	5
	Notes to Unaudited Interim Financial Statements	6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	23
ITEM 4.	Controls and Procedures	23
	PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	23
ITEM 1A.	Risk Factors	24
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
ITEM 3.	Defaults Upon Senior Securities	24
ITEM 4.	Mine Safety Disclosures	24
ITEM 5.	Other Information	24
ITEM 6.	Exhibits	24
	Signatures	25

2

PART I. FINANCIAL INFORMATION

ITEM 1.  Financial Statements

ORCHIDS PAPER PRODUCTS COMPANY

BALANCE SHEETS

(Dollars in thousands, except share data)

	September 30,			December 31,
	2013			2012
	(Unaudited)
ASSETS
Current assets:
Cash	$	5,030		$	5,734
Accounts receivable, net of allowance of $120 in 2013 and $125 in 2012	7,901			5,406
Inventories, net	11,802			10,275
Income taxes receivable	1,063			607
Short-term investments	5,033			5,027
Prepaid expenses	1,129			637
Other current assets	—			44
Deferred income taxes	277			393
Total current assets	32,235			28,123
Property, plant and equipment	133,143			125,579
Accumulated depreciation	(40,082		)	(34,391		)
Net property, plant and equipment	93,061			91,188
Deferred debt issuance costs, net of accumulated amortization of $16 in 2013 and $11 in 2012	42			47
Total assets	$	125,338		$	119,358
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,312		$	3,685
Accrued liabilities	3,540			2,832
Current portion of long-term debt	1,152			1,152
Total current liabilities	8,004			7,669
Long-term debt, less current portion	14,215			15,079
Deferred income taxes	19,590			19,432
Stockholders’ equity:
Common stock, $.001 par value, 25,000,000 shares authorized, 8,026,309 and 7,642,475 shares issued and outstanding in 2013 and 2012, respectively	8			8
Additional paid-in capital	45,523			41,238
Retained earnings	37,998			35,932
Total stockholders’ equity	83,529			77,178
Total liabilities and stockholders’ equity	$	125,338		$	119,358

See notes to unaudited interim financial statements.

3

ORCHIDS PAPER PRODUCTS COMPANY

STATEMENTS OF INCOME

(Dollars in thousands, except share and per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net sales	$	29,760		$	25,778		$	85,601		$	76,784
Cost of sales	22,620			20,388			64,938			59,657
Gross profit	7,140			5,390			20,663			17,127
Selling, general and administrative expenses	2,122			2,029			6,912			6,428
Operating income	5,018			3,361			13,751			10,699
Interest expense	92			99			280			308
Other (income) expense, net	(9		)	(4		)	(21		)	312
Income before income taxes	4,935			3,266			13,492			10,079
Provision for income taxes:
Current	1,110			847			3,259			2,886
Deferred	102			94			274			109
	1,212			941			3,533			2,995
Net income	$	3,723		$	2,325		$	9,959		$	7,084
Net income per share:
Basic	$	0.47		$	0.31		$	1.27		$	0.94
Diluted	$	0.47		$	0.29		$	1.25		$	0.90
Shares used in calculating net income per share:
Basic	7,964,254			7,568,604			7,813,762			7,549,348
Diluted	8,073,771			7,863,021			7,908,772			7,845,429
Dividends per share	$	0.35		$	0.20		$	1.00		$	0.60

See notes to unaudited interim financial statements.

4

ORCHIDS PAPER PRODUCTS COMPANY

STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	Nine Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2013			2012
	(unaudited)			(unaudited)
Cash Flows From Operating Activities
Net income	$	9,959		$	7,084
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	5,696			5,611
Provision for doubtful accounts	(5		)	(20		)
Deferred income taxes	274			109
Stock compensation expense	380			318
Loss on disposal of property, plant and equipment	—			336
Changes in cash due to changes in operating assets and liabilities:
Accounts receivable	(2,490		)	(1,487		)
Inventories	(1,527		)	(1,288		)
Income taxes receivable	(456		)	285
Prepaid expenses	(492		)	(469		)
Other current assets	44			292
Accounts payable	(373		)	483
Accrued liabilities	708			511
Net cash provided by operating activities	11,718			11,765
Cash Flows From Investing Activities
Purchases of property, plant and equipment	(7,564		)	(4,314		)
Purchases of short-term investments	(6		)	(3,004		)
Net cash used in investing activities	(7,570		)	(7,318		)
Cash Flows From Financing Activities
Principal payments on long-term debt	(864		)	(864		)
Dividends paid to stockholders	(7,893		)	(4,533		)
Proceeds from the exercise of stock options	2,942			384
Excess tax benefit of stock options exercised	963			24
Net cash used in financing activities	(4,852		)	(4,989		)
Net decrease in cash	$	(704	)	$	(542	)
Cash, beginning	5,734			4,297
Cash, ending	$	5,030		$	3,755
Supplemental Disclosure:
Interest paid	$	279		$	307
Income taxes paid	$	2,753		$	2,443
Tax benefits realized from stock options exercised	$	329		$	29

See notes to unaudited interim financial statements.

5

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

Orchids Paper Products Company (“Orchids” or the “Company”) was formed in 1998 to acquire and operate the paper manufacturing facility, built in 1976, in Pryor, Oklahoma.  Orchids Acquisition Group, Inc. (“Orchids Acquisition”) was established in November 2003, for the purpose of acquiring the common stock of Orchids.  The sale of equity and debt securities closed in March 2004 and Orchids Acquisition Group, Inc. acquired Orchids for a price of $21.6 million.  Orchids Acquisition was subsequently merged into Orchids.  In July 2005, the Company completed its initial public offering of its common stock.  The Company’s stock trades on the NYSE MKT under the ticker symbol “TIS.”

The accompanying financial statements have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States have been condensed or omitted pursuant to the rules and regulations.  However, the Company believes that the disclosures made are adequate to make the information presented not misleading when read in conjunction with the audited financial statements and the notes in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on March 11, 2013.  Management believes that the financial statements contain all adjustments necessary for a fair presentation of the results for the interim periods presented.  All adjustments were of a normal, recurring nature.  The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year.

Note 2 — Fair Value Measurements

The Company does not report any assets or liabilities at fair value in the financial statements.  However, the estimated fair value of the Company’s short-term investments, which consist of commercial deposits in money market funds, was $5,033,000 and $5,027,000 at September 30, 2013 and December 31, 2012, respectively.  These short-term investments are considered Level 1 measurements in the fair value valuation hierarchy.  The fair value of the Company’s long-term debt is estimated by management to approximate the carrying value of $15,367,000 and $16,231,000 at September 30, 2013 and December 31, 2012, respectively.  Management’s estimates are based on periodic comparisons of the characteristics of the Company’s obligations, including floating interest rate, credit rating, maturity and collateral, to current market conditions as stated by an independent third-party financial institution.  Such valuation inputs are considered a Level 2 measurement in the fair value valuation hierarchy.

There were no transfers among Level 1, Level 2 or Level 3 assets or liabilities during the first nine months in 2013 or 2012.

6

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS (continued)

Note 3 — Commitments and Contingencies

The Company may be involved from time to time in litigation arising from the normal course of business. In management’s opinion, as of the date of this report, the Company is not engaged in legal proceedings which individually or in the aggregate are expected to have a materially adverse effect on the Company’s results of operations or financial condition.

In October 2008, the Company entered into a contract to purchase 334,000 MMBTU per year of natural gas.  This contract has been extended through December 2016 and provides for approximately 60% to 70% of the Company’s natural gas requirements through December 31, 2016 as follows:

Period	MMBTUs	Price per MMBTU		Management fee per MMBTU
April 2011 - March 2012	334,207	$	6.50	$	0.07
April 2012 - March 2013	334,207	$	5.50	$	0.07
April 2013 - December 2014	556,886	$	4.905	$	0.07
April 2013 - September 2013	additional 5,000/month	$	4.70	$	0.07
October 2013 - March 2014	additional 5,000/month	$	4.75	$	0.07
April 2014 - December 2014	additional 5,000/month	$	4.70	$	0.07
January 2015 - March 2015	95,900	$	4.50	$	0.07
April 2015 - June 2015	93,600	$	4.30	$	0.07
July 2015 - September 2015	92,300	$	4.35	$	0.07
October 2015 - December 2015	91,900	$	4.50	$	0.07
January 2016 - March 2016	95,900	$	4.53	$	0.07
April 2016 - June 2016	93,600	$	4.17	$	0.07
July 2016 - September 2016	92,300	$	4.26	$	0.07
October 2016 - December 2016	91,900	$	4.42	$	0.07

Purchases under the gas contract were $0.5 million for each of the three months ended September 30, 2013 and 2012.  Purchases under the gas contract were $1.4 million and $1.5 million for the nine-month periods ended September 30, 2013 and 2012, respectively. If the Company is unable to purchase the contracted amounts and the market price at that time is less than the contracted price, the Company would be obligated under the terms of the agreement to reimburse an amount equal to the difference between the contracted amount and the amount actually purchased, multiplied by the difference between the contract price and current spot price.

Note 4 — Inventories

Inventories at September 30, 2013 and December 31, 2012 were as follows:

	September 30,			December 31,
	2013			2012
	(in thousands)
Raw materials	$	3,772		$	2,879
Bulk paper rolls	2,615			2,111
Converted finished goods	5,549			5,463
Inventory valuation reserve	(134		)	(178		)
	$	11,802		$	10,275

7

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS (continued)

Note 5 — Income Taxes

As of September 30, 2013, our annual estimated effective income tax rate is 27.5%.  For the quarter ended September 30, 2013, our actual effective income tax rate was 24.6%.  For the nine months ended September 30, 2013, our actual effective income tax rate was 26.2%. The actual effective tax rate differs from the annual estimated effective income tax rate due to recognition of $222,000 of an Indian employment tax credit (“IEC”) for 2012 during the first quarter of 2013.  Recognition of the IEC for 2012 was deferred until the first quarter of 2013 as the American Taxpayer Relief Act of 2012, which extended the IEC, was not signed into law by the President of the United States until 2013.  For the quarter and nine months ended September 30, 2012, our actual effective income tax rate was 28.8% and 29.7%, respectively.  The annual estimated effective tax rate for 2013 and 2012 is lower than the statutory rate due to: (i) manufacturing tax credits, (ii) IECs, (iii) Oklahoma Investment Tax Credits primarily associated with our investments in a new paper machine in 2006 and new converting warehouse and new converting line that were completed in 2010, and (iv) tax benefits realized on incentive stock options exercised during the period.

Note 6 — Earnings per Share

During the first quarter of 2013, the Company granted restricted stock to certain employees. These awards include a nonforfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common shareholders.  Therefore, the Company calculates basic and diluted earnings per common share using the two-class method, under which net earnings are allocated to each class of common stock and participating security.  We expect all the shares of restricted stock to ultimately vest, and therefore, we have not estimated any forfeitures of restricted stock.

The computation of basic and diluted net income per common share for the three-month and nine-month periods ended September 30, 2013 and 2012 is as shown in the following table. The presentation of 2012 net income per share has been conformed to presentation under the two-class method.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Net income - ($ thousands)	$	3,723		$	2,325	$	9,959		$	7,084
Less: distributed earnings allocable to participating securities	(6		)	—		(16		)	—
Less: undistributed earnings allocable to participating securities	(2		)	—		(4		)	—
Distributed and undistributed earnings allocable to common shareholders	$	3,715		$	2,325	$	9,939		$	7,084
Weighted average shares outstanding	7,964,254			7,568,604		7,813,762			7,549,348
Effect of stock options	109,517			294,417		95,010			296,081
Weighted average shares outstanding - assuming dilution	8,073,771			7,863,021		7,908,772			7,845,429
Net income per share:
Basic	$	0.47		$	0.31	$	1.27		$	0.94
Diluted	$	0.47		$	0.29	$	1.25		$	0.90
Stock options not considered above because they were anti-dilutive	—			75,500		—			75,500

Note 7 — Stock Incentive Plan

In April 2005, the board of directors and the stockholders approved the 2005 Stock Incentive Plan (the “Plan”).  The Plan provides for the granting of stock options and other stock based awards to employees and board members selected by the board’s compensation committee.  A total of 1,097,500 shares may be issued pursuant to the Plan.  As of September 30, 2013, there were 147,750 shares available for issuance under the Plan.

The Company uses the Black-Scholes option valuation model to estimate the grant date fair value of its options.  Option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  The following table details the options granted to certain members of the board of directors and management during the nine months ended September 30, 2013 and 2012.

Grant	Number	Exercise		Grant Date		Risk-Free		Estimated		Dividend		Expected
Date	of Shares	Price		Fair Value		Interest Rate		Volatility		Yield		Life
May-13	40,000	$	22.95	$	5.28	1.87	%	43	%	5.88	%	5 years
February-13	3,750	$	21.695	$	5.68	2.02	%	43	%	4.61	%	5 years
May-12	38,500	$	17.845	$	4.78	1.70	%	44	%	4.48	%	5 years
Jan-12	27,000	$	18.77	$	5.42	1.97	%	45	%	4.26	%	5 - 6 years

8

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS (continued)

The Company expenses the cost of options granted over the vesting period of the option based on the grant-date fair value of the award.  The Company recognized expense of $18,000 and $27,000 for the three months ended September 30, 2013 and 2012, respectively, and $303,000 and $318,000 for the nine months ended September 30, 2013 and 2012, respectively, related to options granted under the Plan.

During the nine months ended September 30, 2013, the Company granted 16,000 shares of restricted stock to certain employees under the Plan.  These awards were valued at the arithmetic mean of the high and low market price of the Company’s stock on the grant date, which was $21.695 per share, and vest ratably over a three year period beginning on the first anniversary of the grant date.  The Company expenses the cost of restricted stock granted over the vesting period of the shares based on the grant-date fair value of the award.  The Company recognized expense of $29,000 and $77,000 for the three and nine month periods ended September 30, 2013, respectively, related to the shares granted under the Plan.

Note 8 — Major Customers and Concentration of Credit Risk

The Company sells its paper production in the form of parent rolls and converted products.  Revenues from converted product sales and parent roll sales in the three months and nine months ended September 30, 2013 and 2012 were:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Converted product ne sales	$	28,190	$	22,781	$	80,601	$	68,716
Parent roll net sales	1,570		2,997		5,000		8,068
Net sales	$	29,760	$	25,778	$	85,601	$	76,784

Credit risk for the Company in the three months and nine months ended September 30, 2013 and 2012 was concentrated in the following customers who each comprised more than 10% of the Company’s total net sales:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Converted product customer 1	51	%	46	%	52	%	44	%
Converted product customer 2	12	%	14	%	11	%	14	%
Converted product customer 3	*		*		*		11	%
Converted product customer 4	10	%	*		*		*
Total percent of net sales	73	%	60	%	63	%	69	%

* Customer did not account for more than 10% of sales during the period indicated

At September 30, 2013 and December 31, 2012 the four significant customers accounted for the following amounts of the Company’s accounts receivable (in thousands):

	September 30,				December 31,
	2013				2012
Converted product customer 1	$	2,765	35	%	$	1,318	24	%
Converted product customer 2		1,820	23	%		1,601	30	%
Converted product customer 3	*		*			589	11	%
Converted product customer 4		722	9	%	*		*
Total of accounts receivable	$	5,307	67	%	$	3,508	65	%

* Customer did not account for more than 10% of sales during the period indicated

9

ORCHIDS PAPER PRODUCTS COMPANY

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS (continued)

Note 9 — New Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued pronouncements and concluded that there are no recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect on the Company’s financial position, results of operations or cash flows.

Note 10 — Subsequent Event

The Company’s Credit Agreement with JPMorgan Chase Bank, N.A. dated April 25, 2011 (the “Credit Agreement”) contains two debt covenants that effectively limit annual capital expenditures: the Unfunded Capital Expenditure Limit and the Fixed Charge Coverage Ratio.  While the Company was in compliance with all debt covenants included in the Credit Agreement as of September 30, 2013, due to the expected level of the Company’s 2013 annual capital expenditures, management requested a waiver of these covenants for the period ending December 31, 2013.  On October 30, 2013, the Company obtained an advanced waiver from compliance with these covenants from JPMorgan Chase.

10

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements.  These statements relate to, among other things:

·our business strategy;

·the market opportunity for our products, including expected demand for our products;

·our estimates regarding our capital requirements; and

·any of our other plans, objectives, and intentions contained in this report that are not historical facts.

These statements relate to future events or future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms or other comparable terminology.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  These statements are only predictions.

You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are, in some cases, beyond our control and that could materially affect actual results, levels of activity, performance or achievements.  Factors that could materially affect our actual results, levels of activity, performance or achievements include, without limitation, those detailed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the SEC on March 11, 2013, and include the following items:

·intense competition in our markets and aggressive pricing by our competitors could force us to decrease our prices and reduce our profitability;

·a substantial percentage of our converted product revenues are attributable to a small number of customers who may decrease or cease purchases at any time;

·disruption in our supply or increase in the cost of fiber;

·indebtedness limits our free cash flow and subjects us to restrictive covenants relating to the operation of our business;

·increased competition in our region;

·changes in our retail trade customers’ policies and increased dependence on key retailers in developed markets;

·excess supply in the market may reduce our prices;

·the availability of and prices for energy;

·failure to purchase the contracted quantity of natural gas may result in financial exposure;

·our exposure to variable interest rates;

·the loss of key personnel;

·labor interruption;

·natural disaster or other disruption to our facilities;

·ability to finance the capital requirements of our business;

·cost to comply with existing and new laws and regulations;

·failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud;

·the parent roll market is a commodity market and subject to fluctuations in demand and pricing;

·an inability to continue to implement our business strategies; and

·inability to sell the capacity generated from our converting lines.

If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected.  Any forward-looking statement you read in the following Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects our current views with respect to future events and is subject to the risks listed above and other risks, uncertainties, and assumptions relating to our operations, results of operations, growth strategy, and liquidity.  We assume no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise.

11

Overview

We are an integrated manufacturer of tissue products serving the private label segment of the “at-home” market.  We produce bulk tissue paper, known as parent rolls, and convert parent rolls into finished products, including paper towels, bathroom tissue and paper napkins. We sell any remaining parent rolls to other converters.  Our core customer base consists of dollar stores and other discount retailers. By dollar stores, we mean retailers that offer a limited selection across a broad range of products at everyday low prices in a smaller store format.  We have focused on the dollar stores (which are also referred to as discount retailers) and the broader discount retail market because of their overall market growth, consistent order patterns and low number of stock keeping units (“SKUs”).  The at-home tissue market consists of several quality levels, including a value tier, mid-tier and premium tier.  Our historical business strategy has focused on the value tier market, primarily due to the dollar stores’ concentration of product offerings in that market and, to some extent, limitations of certain manufacturing equipment.  As part of our growth strategy, we began to systematically invest in manufacturing assets to improve quality, expand our product offerings and strengthen our position as a low cost manufacturer.  This began with the investment in a new paper machine in 2006 which provided the opportunity to produce parent rolls for value tier, mid-tier and premium tier converted products and improved our cost structure.  Further, we undertook an expansion project that included the purchase and installation of a new converting line and the construction of a new converted product warehouse in mid-2010.  This project had three main objectives: increase the capacity of our converting operation, provide the capability to produce higher-quality mid-tier and premium tier converted products and reduce warehousing costs by centralizing all warehousing and shipping.  While we have customers located throughout the United States, most of our products are distributed within an approximate 900-mile radius of our Oklahoma facility. However, our sales efforts are focused on an area within approximately 500 miles of our facility in northeast Oklahoma, which includes Texas, Oklahoma, Kansas, Missouri, Arkansas, Nebraska and Iowa, as we believe this radius maximizes our freight cost advantage over our competitors. Because we are one of the few tissue paper manufacturers in this area, we typically have lower freight costs to our customers’ distribution centers located in our target region. At-home tissue market growth has historically been closely correlated to population growth and as such, performs well in a variety of economic conditions. Our target region has experienced strong population growth in the past ten years relative to the national average, and these trends are expected to continue.

Our products are sold primarily under our customers’ private labels and, to a lesser extent, under our brand names such as Colortex®, My Size®, Velvet®, Big Mopper®, Soft & Fluffy®, Tackle®, Noble® and Linen Soft®.  All of our converted product revenue is derived through truck load purchase orders from our customers.  Parent roll revenue is derived from purchase orders that generally cover a one-month time period. We do not have supply contracts with any of our customers, which is normal practice within our industry.  Because our product is a daily consumable item, the order stream from our customer base is fairly consistent with no significant seasonal fluctuations. Changes in the national economy, in general, do not materially affect the market for our converted products.

Our profitability depends on several key factors, including:

·        the market price of our products;

·        the cost of fiber used in producing paper;

·        the efficiency of operations in both our paper mill and converting facility; and

·        the cost of energy.

The private label market of the tissue industry is highly competitive, and many discount retail customers are extremely price sensitive.  As a result, it is difficult to affect price increases.  We expect these competitive conditions to continue.

Background

Since June 2006, when we began operations of a new paper machine, our paper-making capacity of approximately 57,000 tons per year has exceeded the demand requirements of our converting operations. We sell the excess supply into the market in the form of parent rolls.  We adjust our paper making production based on our internal converting needs for parent rolls and the open market demand for parent rolls.  Parent rolls are a commodity product and thus are subject to market pricing.  We plan to continue to sell any excess parent roll capacity on the open market as long as market pricing is profitable.  When converting production requirements exceed paper mill capacity, we will purchase bulk rolls in the open market to meet those converting requirements.

Our parent rolls are converted into paper towels, bathroom tissue and napkins in our adjacent converting facility. Our eleven converting lines currently have a total annual estimated capacity of approximately 11.5 million cases of finished tissue products, depending upon the mix of converted products produced, including the product configurations.  Our strategy is to sell all of our parent roll capacity as converted products, which generally carry higher margins than parent rolls. To help achieve that goal, we are placing significant focus on improving our sales efforts to sell all of our converting capacity.  In addition, we continue to focus considerable efforts to improve our converting efficiencies.

12

Our strategy is to expand our position as a low cost provider of high-quality private label tissue products to the growing discount retail channel while leveraging our competitive advantages to increase our presence in the mid-tier and premium tier markets within the discount retail channel as well as other retail channels.  We expect to accomplish this strategy through the expansion of our product offerings through new product development, our continued high service levels and increased total manufacturing capacity.

We are implementing this strategy through our key initiatives set forth below:

·maintain and strengthen our core customer relationships;

·improve the product quality of our higher tier offerings to meet and or exceed customers’ required attributes;

·increase our flexibility to meet a wider array of customer needs;

·further expand our customer base in other retail channels; and

·continue to improve operating efficiencies and reduce manufacturing costs.

We continue to focus our efforts on growth of our converted product sales and expansion of our product offerings through development of mid-tier and premium tier products.  The following graph shows shipments of our mid-tier and premium tier products as a percentage of total cases shipped:

Since our inception in 1998, we have strategically expanded capacity and capability in both paper manufacturing and finished product converting to meet market demand and customers’ quality requirements.  In 2010, we increased our annual converting capacity with the installation of a new converting line, which, along with other strategic investments, increased our annual converting capacity to approximately 11.5 million cases per year, depending upon the mix of converted products produced, including the product configurations.  This additional converting capacity has enabled us to both increase sales of existing products and to provide the flexibility to manufacture higher tier products for sales to our core customer base and into new retail channels.

Although we have an annual estimated converting capacity of approximately 11.5 million cases, our in-house supply of parent rolls provides enough to convert approximately 9.5 million cases.  In order to convert at an annual capacity above approximately 9.5 million cases, we would have to supplement our supplies by purchasing parent rolls in the open market, which we believe would have an unfavorable impact on our gross profit margin.

13

Comparative Three-Month Periods Ended September 30, 2013 and 2012

Net Sales

	Three Months Ended September 30,
	2013		2012
	(in thousands, except tons)
Converted product net sales	$	28,190	$	22,781
Parent roll net sales	1,570		2,997
Net sales	$	29,760	$	25,778
Converted product tons shipped	13,688		11,058
Parent roll tons shipped	1,554		2,957
Total tons shipped	15,242		14,015

Net sales in the quarter ended September 30, 2013, increased 15% to $29.8 million, compared to $25.8 million in the same period of 2012. Net sales figures represent the gross selling price, including freight, less discounts and pricing allowances.  The increase in net sales is due to a $5.4 million increase in net sales of converted product which was partially offset by a $1.4 million decrease in parent roll net sales.

Net sales of converted product increased in the quarter ended September 30, 2013, by $5.4 million, or 24%, to $28.2 million compared to $22.8 million in the same period last year. The increase in net sales of converted product is the result of a 24% increase in the tonnage shipped.  There was no significant change in the net selling price per ton.  The increase in converted product tonnage shipped is primarily due to increased sales of our mid and premium tier product lines to both existing and new customers.

Net sales of parent rolls decreased $1.4 million, or 48%, to $1.6 million in the quarter ended September 30, 2013, compared to $3.0 million in the same period last year.  Net sales of parent rolls decreased due to the higher requirements by our converting operation resulting in less excess paper available to sell in parent roll form.  The higher converting requirements are due to the increased sales of converted product.  Tonnage shipments decreased 47%, while there was no significant change in the net selling price per ton of parent rolls.

Cost of Sales

	Three Months Ended September 30,
	2013			2012
(in thousands, except gross profit margin % and paper cost per ton consumed)
Cost of paper	$	11,514		$	11,145
Non-paper materials, labor, supplies, etc.	9,190			7,286
Sub-total	20,704			18,431
Depreciation	1,916			1,957
Cost of sales	$	22,620		$	20,388
Gross profit	$	7,140		$	5,390
Gross profit margin %	24.0		%	20.9		%
Total paper cost per ton consumed	$	753		$	786

The major components of cost of sales are the cost of internally produced paper, raw materials, direct labor and benefits, freight costs of products shipped to customers, insurance, repairs and maintenance, energy, utilities and depreciation.

Cost of sales increased 11% to $22.6 million, compared to $20.4 million in the same period of 2012, due to the previously discussed higher net sales amounts.  As a percentage of net sales, cost of sales decreased to 76.0% in the 2013 quarter from 79.1% in the 2012 quarter.  Cost of sales as a percentage of net sales for the third quarter of 2013 was favorable to the prior year quarter due to a higher percentage of converted product sales, lower paper production costs and lower fiber costs being partially offset by increased labor costs and the costs associated with the purchase of external parent rolls, which exceeds the cost of parent rolls produced internally, for consumption in our converting operation.

14

Our overall cost of paper in the third quarter of 2013 was $753 per ton, a decrease of $33 per ton compared to the same period in 2012.  Paper production costs decreased primarily due to lower fiber costs, lower maintenance and repair costs, lower labor costs, lower production supply costs and lower utility costs, which were partially offset by the costs associated with a higher percentage of virgin fiber utilized to meet the quality characteristics of our mid and premium tier products.  Average fiber prices decreased approximately 17% in the third quarter of 2013 compared to the same quarter in 2012, thereby decreasing our cost of sales by approximately $570,000 in the quarter-over-quarter comparison.  As a result of strong cost controls, maintenance and repair costs in the paper mill were approximately $462,000 lower in the 2013 quarter than in the prior year quarter.

In anticipation of a short term spike in parent roll requirements of the converting plant, we purchased parent rolls to supplement our paper making capacity.  We consumed those purchased parent rolls during the third quarter, which negatively affected costs by approximately $254,000.  Excluding the effects of depreciation and external warehousing costs, converting production costs on a per unit basis were higher in the 2013 quarter compared to the 2012 quarter, primarily due to labor costs incurred in our converting operation, which increased $178,000 compared to the same quarter in 2012.  The Company also incurred $107,000 of outside warehousing expense during the 2013 quarter; costs that were not incurred during the 2012 quarter.  The percentage of our parent roll production sold as converted products increased in the third quarter of 2013 compared to the same quarter last year, which had a positive effect on our gross margin percentage as converted product sales generally generate a higher margin than the sale of parent rolls.

Gross Profit

Gross profit in the quarter ended September 30, 2013, increased $1.7 million, or 32%, to $7.1 million compared to $5.4 million in the same period last year.  Gross profit as a percentage of net sales in the 2013 quarter was 24.0% compared to 20.9% in the 2012 quarter.  The gross profit increase as a percent of net sales was primarily the result of a higher percentage of converted product sales, lower paper production costs, and lower fiber costs.

Selling, General and Administrative Expenses

	Three Months Ended September 30,
	2013			2012
	(In thousands, except SG&A as a % of net sales)
Commission expense	$	490		$	360
Other S,G&A expenses	1,632			1,669
Selling, General & Adm exp	$	2,122		$	2,029
SG&A as a % of net sales	7.1		%	7.9		%

Selling, general and administrative expenses include salaries, commissions to brokers and other miscellaneous expenses.  Selling, general and administrative expenses increased $93,000, or 5%, in the quarter ended September 30, 2013 as compared to the same period in 2012 primarily due to higher commission expense due to the improved level of converted product sales.  As a percentage of net sales, selling, general and administrative expenses decreased to 7.1% in the third quarter of 2013 compared to 7.9% in the same period of 2012.

15

Operating Income

As a result of the foregoing factors, operating income for the quarter ended September 30, 2013, was $5.0 million compared to operating income of $3.4 million for the same period of 2012.

Interest Expense and Other Income

	Three Months Ended September 30,
	2013			2012
	(In thousands)
Interest expense	$	92		$	99
Other (income) expense	$	(9	)	$	(4	)
Income (loss) before income taxes	$	4,935		$	3,266

Interest expense includes interest on all debt and amortization of deferred debt issuance costs.  Interest expense decreased $7,000 to $92,000 in the quarter ended September 30, 2013, compared to $99,000 in the quarter ended September 30, 2012.  The decrease in interest expense resulted from lower average borrowing levels.

Income Before Income Taxes

As a result of the foregoing factors, income before income taxes increased $1.6 million to $4.9 million in the quarter ended September 30, 2013, compared to $3.3 million in the same period in 2012.

Income Tax Provision

As of September 30, 2013, our annual estimated effective income tax rate is 27.5%.  This compares to the 29.7% we estimated as of the end of the second quarter of 2013.  As a result, for the quarter ended September 30, 2013, our actual effective income tax rate was 24.6%, while our actual effective income tax rate was 28.8% for the quarter ended September 30, 2012.  The  annual estimated effective income tax rate is lower than the statutory rate due to: (i) manufacturing tax credits, (ii) Indian employment tax credits (“IECs”), (iii) Oklahoma Investment Tax Credits primarily associated with our investments in a new paper machine in 2006 and new converting warehouse and new converting line that were completed in 2010 and (iv) tax benefits realized on incentive stock options exercised during the period.

16

Comparative Nine-Month Periods Ended September 30, 2013 and 2012

Net Sales

	Nine Months Ended September 30,
	2013		2012
	(in thousands, except tons)
Converted product net sales	$	80,601	$	68,716
Parent roll net sales	5,000		8,068
Net sales	$	85,601	$	76,784
Converted product tons shipped	38,964		33,246
Parent roll tons shipped	4,859		8,153
Total tons shipped	43,823		41,399

Net sales increased 11% to $85.6 million in the nine months ended September 30, 2013, compared to $76.8 million in the same period of 2012. Net sales figures represent gross selling price, including freight, less discounts and pricing allowances.  The increase in net sales is due to an $11.9 million increase in the sales of converted products being partially offset by a $3.1 million decrease in the net sales of parent rolls.

Net sales of converted product increased for the nine months ended September 30, 2013, by $11.9 million, or 17%, to $80.6 million compared to $68.7 million in the same period last year. The increase in net sales of converted products is the result of a 17% increase in the tons of product shipped.  Net selling price did not change significantly when compared to the same period last year.  Sales of new mid and premium tier products to both existing and new customers were the primary reasons for the increased shipments.

Net sales of parent rolls decreased $3.1 million, or 38%, to $5.0 million in the nine months ended September 30, 2013, compared to $8.1 million in the same period last year.  Net sales of parent rolls decreased due to a 40% decrease in parent roll tonnage shipped offset by a 4% increase in net selling prices.  Higher converting requirements due to increased sales were the primary reason for the decreased parent roll sales, while net selling prices increased due to the stronger parent roll market and market reaction to higher virgin fiber prices.

Cost of Sales

	Nine Months Ended September 30,
	2013			2012
(in thousands, except gross profit margin % and paper cost per ton consumed)
Cost of paper	$	32,725		$	32,059
Non-paper materials, labor, supplies, etc.	26,523			21,992
Sub-total	59,248			54,051
Depreciation	5,690			5,606
Cost of sales	$	64,938		$	59,657
Gross profit	$	20,663		$	17,127
Gross profit margin %	24.1		%	22.3		%
Total paper cost per ton consumed	$	754		$	762

The major components of cost of sales are the cost of internally produced paper, raw materials, direct labor and benefits, freight costs of products shipped to customers, insurance, repairs and maintenance, energy, utilities and depreciation.

17

Cost of sales increased approximately $5.3 million, or 9%, to $64.9 million for the nine months ended September 30, 2013, compared to $59.7 million in the same period of 2012, due to higher net sales levels.  As a percentage of net sales, cost of sales decreased to 75.9% of net sales in the nine-month period ended September 30, 2013, compared to 77.7% of net sales in the nine-month period ended September 30, 2012. The decrease in cost of sales as a percentage of net sales in the nine months ended September 30, 2013, was primarily attributed to a higher percentage of converted product shipments, lower recycled fiber prices and lower paper manufacturing costs, being partially offset by external warehousing costs.

In the nine months ended September 30, 2013, our overall cost of paper was $754 per ton, a decrease of $8 per ton when compared to the same period in 2012.  Our cost per ton decreased due to lower paper production costs, including labor, maintenance and repairs, production supplies and utility costs.  Average fiber prices decreased 13% from the 2012 period to the 2013 period, which reduced the cost of sales by approximately $1.2 million in the first nine months of 2013 compared to the same period of 2012.  Maintenance and repair costs decreased by approximately $825,000 in the 2013 period compared to the prior year period.

Converting production costs on a per unit basis, excluding depreciation and external warehousing costs, increased slightly during the first nine months of 2013 compared to the same period in 2012, primarily due to $310,000 of increased labor costs in our converting operation.  The Company also incurred $730,000 of outside warehousing expense during 2013, which was not incurred during the prior year period.  However, the previously discussed decrease in the percentage of our production sold as parent rolls positively affected our gross margin percentage.

Gross Profit

Gross profit in the nine months ended September 30, 2013, increased $3.5 million, or 21%, to $20.7 million compared to $17.1 million in the same period last year.  Gross profit as a percentage of net sales in the nine-month period ended September 30, 2013, was 24.1% compared to 22.3% in the same period in 2012.  The increase in gross profit as a percent of net sales was primarily due to a higher percentage of converted product sales, lower recycled fiber prices and lower paper production costs, which were partially offset by external warehousing costs.

Selling, General and Administrative Expenses

	Nine Months Ended September 30,
	2013			2012
	(In thousands, except SG&A as a % of net sales)
Commission expense	$	1,403		$	1,064
Other S,G&A expenses	5,509			5,364
Selling, General & Adm exp	$	6,912		$	6,428
SG&A as a % of net sales	8.1		%	8.4		%

Selling, general and administrative expenses include salaries, commissions to brokers and other miscellaneous expenses.  Selling, general and administrative expenses increased $484,000, or 8%, to $6.9 million in the nine months ended September 30, 2013 compared to $6.4 million in the comparable 2012 period, mainly as a result of higher commission expense due to the higher level of converted product sales and, to a lesser extent, higher director related fees and expenses, including stock option expense, which were partially offset by lower professional fees.  As a percentage of net sales, selling, general and administrative expenses decreased to 8.1% in the nine months ended September 30, 2013 compared to 8.4% in the same period of 2012.

Operating Income

As a result of the foregoing factors, operating income for the nine months ended September 30, 2013 was $13.8 million compared to operating income of $10.7 million for the same period of 2012.

18

Interest Expense and Other Income

	Nine Months Ended September 30,
	2013			2012
	(In thousands)
Interest expense	$	280		$	308
Other (income) expense	$	(21	)	$	312
Income (loss) before income taxes	$	13,492		$	10,079

Interest expense decreased by $28,000 to $280,000 in the nine months ended September 30, 2013, compared to $308,000 in the same period in the prior year.  The decrease was primarily attributable to lower balances of outstanding debt during 2013 due to regular principal payments made in accordance with our credit agreement.  Other expense for the nine months ended September 30, 2012 included a loss of approximately $336,000 due to the disposal of several pieces of converting equipment, including a wrapper and two case packers, following the completion of three capital expenditure projects totaling $2.1 million during the period.

Income Before Income Taxes

As a result of the foregoing factors, income before income taxes increased $3.4 million to $13.5 million in the nine months ended September 30, 2013, compared to $10.1 million in the same period in 2012.

Income Tax Provision

As of September 30, 2013, our annual estimated effective income tax rate is 27.5%.  For the nine months ended September 30, 2013, our actual effective income tax rate was 26.2%.  This rate differs from the annual estimated effective income tax rate due to recognition of $222,000 of an IEC for 2012 during the first quarter of 2013.  Recognition of the IEC for 2012 was deferred until the first quarter of 2013 as the American Taxpayer Relief Act of 2012, which extended the IEC, was not signed into law by the President of the United States until 2013.  For the nine months ended September 30, 2012, our actual effective income tax rate was 29.7%.  The annual estimated effective income tax rates for 2013 and 2012 are lower than the statutory rate due to: (i) manufacturing credits, (ii) IECs, (iii) Oklahoma Investment Tax Credits associated with our investments in a new paper machine in 2006, and a new converting warehouse and new converting line completed in 2010 and (iv) tax benefits realized when incentive stock options were exercised during the period.

Liquidity and Capital Resources

Liquidity refers to the liquid financial assets available to fund our business operations and pay for near-term obligations.  These liquid financial assets consist of cash and short-term investments as well as unused borrowing capacity under our revolving credit facility. Our cash requirements have historically been satisfied through a combination of cash flows from operations and debt financings.

During the nine months ended September 30, 2013, cash decreased $704,000 to $5.0 million at September 30, 2013.  During the 2013 period, we incurred $7.6 million of capital expenditures and paid $7.9 million in dividends to stockholders.

As of September 30, 2013, total debt outstanding was $15.4 million.  Cash and short-term investments as of September 30, 2013, totaled $10.1 million, resulting in a net debt level of $5.3 million.  This compares to $16.2 million in total debt and $10.8 million in total cash and short-term investments as of December 31, 2012, resulting in a net debt level of $5.5 million.  There are no amounts outstanding under our $18.0 million revolving line of credit.

The Company’s Credit Agreement with JPMorgan Chase Bank, N.A. dated April 25, 2011 (the “Credit Agreement”) contains two debt covenants that effectively limit annual capital expenditures: the Unfunded Capital Expenditure Limit and the Fixed Charge Coverage Ratio.  While the Company was in compliance with all debt covenants included in the Credit Agreement as of September 30, 2013, due to the expected level of the Company’s 2013 annual capital expenditures, management requested a waiver of these covenants for the period ending December 31, 2013.  On October 30, 2013, the Company obtained an advanced waiver from compliance with these covenants from JPMorgan Chase.

19

The following table summarizes key cash flow information for the nine-month periods ended September 30, 2013 and 2012:

	Nine Months Ended September 30,
	2013			2012
	(in thousands)
Cash flows provided by (used in):
Operating activities	$	11,718		$	11,765
Investing activities	$	(7,570	)	$	(7,318	)
Financing activities	$	(4,852	)	$	(4,989	)

Cash flows provided by operating activities was $11.7 million in the nine-month period ended September 30, 2013, which primarily resulted from earnings before non-cash charges, which were partially offset by increases in accounts receivable and inventories.  The increase in accounts receivable is primarily related to the timing of sales and related cash receipts.  The increase in inventories is primarily related to higher inventories of virgin fiber and parent rolls due to the change in product mix toward mid and premium tier products.

Cash flows used in investing activities was $7.6 million in the first nine months of 2013 as a result of $7.6 million in expenditures on capital projects.

Cash flows used in financing activities was $4.9 million in the nine-month period ended September 30, 2013, primarily as a result of $7.9 million of cash dividends paid to stockholders and $864,000 of principal repayments on our long-term debt, which were partially offset by $3.9 million of proceeds and excess tax benefits from the exercise of stock options.  While we expect to continue to declare quarterly dividends, the payment of future dividends is at the discretion of the Board of Directors and the timing and amount of any future dividends will depend upon earnings, cash requirements and financial condition of the Company.

Cash flows provided by operating activities was $11.8 million in the nine-month period ended September 30, 2012, which primarily resulted from earnings before non-cash charges, collection of other receivables and an increase in accounts payable and accrued liabilities, partially offset by increases in accounts receivable and inventories. The increase in accounts receivable is primarily related to increased sales of converted products. The increase in inventories is primarily related to a change in product mix toward mid-tier products. The increase in accounts payable and accrued liabilities is primarily due to timing.

Cash flows used in investing activities was $7.3 million in the first nine months of 2012 as the result of $4.3 million in expenditures on capital projects and the purchase of $3.0 million of short-term investments.

Cash flows used in financing activities was $5.0 million in the nine-month period ended September 30, 2012, primarily as the result of $4.5 million of cash dividends paid to stockholders.

Critical Accounting Policies and Estimates

The preparation of our financial statements and related disclosures in conformity with GAAP in the United States requires management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenue and expense, and related disclosures of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances.  Management believes that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances.  We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our financial statements:

20

Accounts Receivable.  Accounts receivable consist of amounts due to us from normal business activities.  Our management must make estimates of accounts receivable that will not be collected.  We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s creditworthiness as determined by our review of their current credit information.  We continuously monitor collections and payments from our customers and maintain an allowance for estimated losses based on historical experience and specific customer collection issues that we have identified.  Trade receivables are written-off when all reasonable collection efforts have been exhausted, including, but not limited to, external third-party collection efforts and litigation.  While such credit losses have historically been within management’s expectations and the provisions established, there can be no assurance that we will continue to experience the same credit loss rates as in the past.  During the nine-month period ended September 30, 2013, $35,000 of accounts receivable not expected to be collected were written off against the allowance for doubtful accounts, while the provision was increased $30,000 based on historical experience and an evaluation of the quality of existing accounts receivable, resulting in a net decrease of $5,000 in the provision.  During the nine-month period ended September 30, 2012, no amounts were written off against the allowance for doubtful accounts and the provision was decreased by $20,000 based on historical experience and an evaluation of the quality of existing accounts receivable, resulting in a net decrease of $20,000 in the provision.  There were no recoveries credited during the first nine months of 2013 or 2012.

Inventory.  Our inventory consists of converted finished goods, bulk paper rolls and raw materials and is stated at the lower of cost or market.  Our management regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based on the age of the inventory and forecasts of product demand.  A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand.  During the first nine months of 2013, the inventory allowance was increased $6,000 based on a specific review of estimated slow moving or obsolete inventory items and was decreased $49,000 due to actual write-offs of obsolete inventory items, resulting in a net decrease in the allowance of $43,000.  During the first nine months of 2012, the inventory allowance was increased $75,000 based on a specific review of estimated slow moving or obsolete inventory items and was decreased $40,000 due to actual write-offs of obsolete inventory items, resulting in a net increase in the allowance of $35,000.

Property, plant and equipment.  Significant capital expenditures are required to establish and maintain a paper mill and converting facility. Our property, plant and equipment consists of land, buildings and improvements, machinery and equipment, vehicles, parts and spares and construction-in-process, which are stated at cost, net of accumulated depreciation. Depreciation of property, plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Our management regularly reviews estimated useful lives to determine whether any changes are necessary to reflect the related assets’ actual productive lives. The lives of our property, plant and equipment currently range from 2.5 to 40 years.

New Accounting Pronouncements

Refer to the discussion of recently adopted/issued accounting pronouncements under Part I, Notes to Unaudited Interim Financial Statements Note 9 — New Accounting Pronouncements.

Non-GAAP Discussion

In addition to our GAAP results, we also consider non-GAAP measures of our performance for a number of purposes.

We use EBITDA as a supplemental measure of our performance that is not required by, or presented in accordance with GAAP. EBITDA should not be considered as an alternative to net income, operating income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities or a measure of our liquidity.

EBITDA represents net income before net interest expense, income tax expense, depreciation and amortization. Amortization of deferred debt issuance costs is included in net interest expense.  We believe EBITDA facilitates operating performance comparisons from period to period and company to company by eliminating potential differences caused by variations in capital structures (affecting relative interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense).

EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for any of our results as reported under GAAP.  Some of these limitations are:

·it does not reflect our cash expenditures for capital assets;

·it does not reflect changes in, or cash requirements for, our working capital requirements;

·it does not reflect cash requirements for cash dividend payments;

·it does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our indebtedness;

·although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect cash requirements for such replacements; and

·other companies, including other companies in our industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure.

21

Because of these limitations, EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or to reduce our indebtedness.  We compensate for these limitations by relying primarily on our GAAP results and using EBITDA on a supplemental basis.

The following table reconciles EBITDA to net income for the three months ended September 30, 2013 and 2012:

	Three Months Ended September 30,
	2013			2012
	(in thousands, except % of net sales)
Net income	$	3,723		$	2,325
Plus: Interest expense, net	92			99
Plus: Income tax expense	1,212			941
Plus: Depreciation	1,916			1,957
EBITDA	$	6,943		$	5,322
% of net sales	23.3		%	20.6		%

EBITDA increased $1.6 million to $6.9 million in the quarter ended September 30, 2013, compared to $5.3 million in the same period in 2012.  EBITDA as a percent of net sales increased to 23.3% in the third quarter of 2013 from 20.6% in the third quarter of 2012.  The foregoing factors discussed in the net sales, cost of sales and selling, general and administrative expenses sections are the reasons for the increase.

The following table reconciles EBITDA to net income for the nine months ended September 30, 2013 and 2012:

	Nine Months Ended September 30,
	2013			2012
	(in thousands, except % of net sales)
Net income	$	9,959		$	7,084
Plus: Interest expense, net	280			308
Plus: Income tax expense	3,533			2,995
Plus: Depreciation	5,690			5,606
EBITDA	$	19,462		$	15,993
% of net sales	22.7		%	20.8		%

EBITDA increased $3.5 million to $19.5 million in the nine months ended September 30, 2013, compared to $16.0 million in the same period of 2012.  EBITDA as a percent of net sales increased to 22.7% in the current nine-month period from 20.8% in the prior year nine-month period.  The foregoing factors discussed in the net sales, cost of sales and selling, general and administrative sections are the reasons for these changes.

We use Net Debt as a supplemental measure of our leverage that is not required by, or presented in accordance with GAAP. Net Debt should not be considered as an alternative to total debt, total liabilities or any other performance measure derived in accordance with GAAP. Net Debt represents total debt reduced by cash and short-term investments. We use this figure as a means to evaluate our ability to repay our indebtedness and to measure the risk of our financial structure.

Net Debt represents the amount that cash and short-term investments is less than total debt of the Company. The amounts included in the Net Debt calculation are derived from amounts included in the historical Balance Sheets. We have reported Net Debt because we regularly review Net Debt as a measure of the Company’s leverage. However, the Net Debt measure presented in this document may not be comparable to similarly titled measures reported by other companies due to differences in the components of the calculation.

22

Net Debt decreased from $5.5 million on December 31, 2012, to $5.3 million on September 30, 2013, as a result of a decrease in total debt being partially offset by a decrease in our total cash and short-term investments.  The decrease in total debt is due to the required principal payments of our debt.  The decrease in the total cash and short-term investment balances is due to cash received from operating activities being more than offset by capital expenditures and dividends paid to stockholders.

The following table presents Net Debt as of September 30, 2013, and December 31, 2012:

	As of
	September 30,			December 31,
	2013			2012
	(in thousands)
Current portion long-term debt	$	1,152		$	1,152
Long-term debt	14,215			15,079
Total debt	15,367			16,231
Less: Cash	(5,030		)	(5,734		)
Less: Short-term investments	(5,033		)	(5,027		)
Net debt	$	5,304		$	5,470

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

There has been no material change in the information provided in response to Item 7A of the Company’s Form 10-K for the year ended December 31, 2012.

ITEM 4. Controls and Procedures

Our management, under the supervision and with the participation of our chief executive officer and our chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q.  Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.  Based on such evaluation, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2013.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

ITEM 1.  Legal Proceedings

In management’s opinion, as of the date of this report, the Company is not engaged in legal proceedings which individually or in the aggregate are expected to have a materially adverse effect on the Company’s results of operations or financial condition.  Further, management is not aware that any such proceedings are being contemplated or threatened.

23

ITEM 1A. Risk Factors

As of the date of this filing, there have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 as filed with the SEC on March 11, 2013.  We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations.  The risks, uncertainties and other factors set forth in our Annual Report on Form 10-K may cause our actual results, performances and achievements to be materially different from those expressed or implied by our forward-looking statements.  If any of these risks or events occur, our business, financial condition or results of operations may be adversely affected.

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

(a) Unregistered Sales of Equity Securities

None.

(b) Initial Public Offering and Use of Proceeds from the Sale of Registered Securities

None.

(c) Repurchases of Equity Securities

We do not have any programs to repurchase shares of our common stock and no such repurchases were made during the three or nine months ended September 30, 2013.

ITEM 3.  Defaults Upon Senior Securities

None.

ITEM 4.  Mine Safety Disclosures

Not applicable.

ITEM 5.  Other Information

None.

ITEM 6.  Exhibits

See the Exhibit Index following the signature page to this Form 10-Q, which Exhibit Index is hereby incorporated by reference herein.

24

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.

ORCHIDS PAPER PRODUCTS COMPANY
Date: October 31, 2013	By:	/s/ Keith R. Schroeder
		Keith R. Schroeder
		Chief Financial Officer
		(On behalf of the registrant and as Chief Accounting Officer)

25

Exhibit Index

Exhibit	Description
3.1	As amended copy of Amended and Restated Certificate of Incorporation of the Registrant dated April 14, 2005, incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 (SEC Accession No. 0000950137-05-004608) filed with the SEC on April 19, 2005, which was amended by that Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant dated June 19, 2007, incorporated by reference to Exhibit 3.1.1. to the Registrant’s Form 10-Q (SEC Accession No. 0000950137-07-012340) filed with the SEC on August 14, 2007; and which was further amended by that Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant dated May 17, 2013, incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K (SEC Accession No. 0001144204-13-030242) filed with the SEC on May 17, 2013.
3.2	As amended copy of Amended and Restated Bylaws of the Registrant effective April 14, 2005, incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 (SEC Accession No. 0000950137-05-004608) filed with the SEC on April 19, 2005, which was amended by that Amendment to Amended and Restated Bylaws of the Registrant, incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K (SEC Accession No. 0001144204-13-030242) filed with the SEC on May 17, 2013.
10.1	Advanced Covenant Waiver, dated as of October 30, 2013.
31.1	Certification of Chief Executive Officer Pursuant to Section 302.
31.2	Certification of Chief Financial Officer Pursuant to Section 302.
32.1	Certification of Chief Executive Officer Pursuant to Section 906.
32.2	Certification of Chief Financial Officer Pursuant to Section 906.
101	The following financial information from Orchids Paper Products Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Statements of Income for the three months ended September 30, 2013 and 2012 and the nine months ended September 30, 2013 and 2012, (ii) Balance Sheets as of September 30, 2013 and December 31, 2012, (iii) Statements of Cash Flows for the nine months ended September 30, 2013 and 2012, and (iv) Notes to Unaudited Interim Financial Statements.

26

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer Pursuant to Section 302

I, Robert A. Snyder, certify that:

1.             I have reviewed this quarterly report on Form 10-Q of Orchids Paper Products Company (the “Registrant”);

2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.            Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.            The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.             The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: October 31, 2013	/s/ Robert A. Snyder
	Robert A. Snyder
	Chief Executive Officer and President

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer Pursuant to Section 906

In connection with the quarterly report of Orchids Paper Products Company (the “Company”) on Form 10-Q for the period ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert A. Snyder, Chief Executive Officer and President of the Company, certify, to the best of my knowledge, pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Robert A. Snyder

Robert A. Snyder

Chief Executive Officer and President

October 31, 2013

XML

Inventories (Tables)

9 Months Ended

Sep. 30, 2013

Inventories

Schedule of inventories

	September 30,			December 31,
	2013			2012
	(in thousands)
Raw materials	$	3,772		$	2,879
Bulk paper rolls	2,615			2,111
Converted finished goods	5,549			5,463
Inventory valuation reserve	(134		)	(178		)
	$	11,802		$	10,275

XML

Income Taxes

9 Months Ended

Sep. 30, 2013

Income Taxes

Income Taxes

Note 5 — Income Taxes

As of September 30, 2013, our annual estimated effective income tax rate is 27.5%.  For the quarter ended September 30, 2013, our actual effective income tax rate was 24.6%.  For the nine months ended September 30, 2013, our actual effective income tax rate was 26.2%. The actual effective tax rate differs from the annual estimated effective income tax rate due to recognition of $222,000 of an Indian employment tax credit (“IEC”) for 2012 during the first quarter of 2013.  Recognition of the IEC for 2012 was deferred until the first quarter of 2013 as the American Taxpayer Relief Act of 2012, which extended the IEC, was not signed into law by the President of the United States until 2013.  For the quarter and nine months ended September 30, 2012, our actual effective income tax rate was 28.8% and 29.7%, respectively.  The annual estimated effective tax rate for 2013 and 2012 is lower than the statutory rate due to: (i) manufacturing tax credits, (ii) IECs, (iii) Oklahoma Investment Tax Credits primarily associated with our investments in a new paper machine in 2006 and new converting warehouse and new converting line that were completed in 2010, and (iv) tax benefits realized on incentive stock options exercised during the period.

XML

Inventories (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Inventories
Raw materials	$ 3,772	$ 2,879
Bulk paper rolls	2,615	2,111
Converted finished goods	5,549	5,463
Inventory valuation reserve	(134)	(178)
Total	$ 11,802	$ 10,275

XML

Earnings per Share (Tables)

9 Months Ended

Sep. 30, 2013

Earnings per Share

Schedule of computation of basic and diluted net income per common share

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Net income - ($ thousands)	$	3,723		$	2,325	$	9,959		$	7,084
Less: distributed earnings allocable to participating securities	(6		)	—		(16		)	—
Less: undistributed earnings allocable to participating securities	(2		)	—		(4		)	—
Distributed and undistributed earnings allocable to common shareholders	$	3,715		$	2,325	$	9,939		$	7,084
Weighted average shares outstanding	7,964,254			7,568,604		7,813,762			7,549,348
Effect of stock options	109,517			294,417		95,010			296,081
Weighted average shares outstanding - assuming dilution	8,073,771			7,863,021		7,908,772			7,845,429
Net income per share:
Basic	$	0.47		$	0.31	$	1.27		$	0.94
Diluted	$	0.47		$	0.29	$	1.25		$	0.90
Stock options not considered above because they were anti-dilutive	—			75,500		—			75,500

XML

Stock Incentive Plan (Details) (USD $)	1 Months Ended						3 Months Ended	9 Months Ended			3 Months Ended		9 Months Ended
	May 31, 2013 Options Board of Directors and Management	Feb. 28, 2013 Options Board of Directors and Management	May 31, 2012 Options Board of Directors and Management	Jan. 31, 2012 Options Board of Directors and Management	Jan. 31, 2012 Options Board of Directors and Management Minimum	Jan. 31, 2012 Options Board of Directors and Management Maximum	Sep. 30, 2013 Restricted stock	Sep. 30, 2013 Restricted stock	Sep. 30, 2013 Stock Incentive Plan	Apr. 30, 2005 Stock Incentive Plan	Sep. 30, 2013 Stock Incentive Plan Options	Sep. 30, 2012 Stock Incentive Plan Options	Sep. 30, 2013 Stock Incentive Plan Options	Sep. 30, 2012 Stock Incentive Plan Options
Stock Incentive Plan
Number of shares which may be issued pursuant to the Plan										1,097,500
Number of shares available for issuance under the Plan									147,750
Number of shares	40,000	3,750	38,500	27,000
Exercise Price (in dollars per share)	$ 22.95	$ 21.695	$ 17.845	$ 18.77
Grant Date Fair Value (in dollars per share)	$ 5.28	$ 5.68	$ 4.78	$ 5.42
Risk-Free Interest Rate (as a percent)	1.87%	2.02%	1.70%	1.97%
Estimated Volatility (as a percent)	43.00%	43.00%	44.00%	45.00%
Dividend Yield (as a percent)	5.88%	4.61%	4.48%	4.26%
Expected Life	5 years	5 years	5 years		5 years	6 years
Compensation expense recognized							$ 29,000	$ 77,000			$ 18,000	$ 27,000	$ 303,000	$ 318,000
Granted (in shares)								16,000
Value on the grant date (in dollars per share)								$ 21.695
Vesting period								3 years

XML

Earnings per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Earnings per Share
Net income	$ 3,723	$ 2,325	$ 9,959	$ 7,084
Less: distributed earnings allocable to participating securities	(6)		(16)
Less: undistributed earnings allocable to participating securities	(2)		(4)
Distributed and undistributed earnings allocable to common shareholders	$ 3,715	$ 2,325	$ 9,939	$ 7,084
Weighted average shares outstanding	7,964,254	7,568,604	7,813,762	7,549,348
Effect of stock options (in shares)	109,517	294,417	95,010	296,081
Weighted average common shares outstanding - assuming dilution	8,073,771	7,863,021	7,908,772	7,845,429
Net income per share, basic (in dollars per share)	$ 0.47	$ 0.31	$ 1.27	$ 0.94
Net income per share, diluted (in dollars per share)	$ 0.47	$ 0.29	$ 1.25	$ 0.90
Stock options not considered above because they were anti-dilutive (in shares)		75,500		75,500

XML

Income Taxes (Details) (USD $)	3 Months Ended			9 Months Ended
	Sep. 30, 2013	Mar. 31, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Income Taxes
Estimated annual effective income tax rate (as a percent)				27.50%
Actual effective income tax rate (as a percent)	24.60%		28.80%	26.20%	29.70%
Difference in annual effective income tax rate due to recognition of the IEC		$ 222,000

XML

Basis of Presentation

9 Months Ended

Sep. 30, 2013

Basis of Presentation

Basis of Presentation

Note 1 — Basis of Presentation

Orchids Paper Products Company (“Orchids” or the “Company”) was formed in 1998 to acquire and operate the paper manufacturing facility, built in 1976, in Pryor, Oklahoma.  Orchids Acquisition Group, Inc. (“Orchids Acquisition”) was established in November 2003, for the purpose of acquiring the common stock of Orchids.  The sale of equity and debt securities closed in March 2004 and Orchids Acquisition Group, Inc. acquired Orchids for a price of $21.6 million.  Orchids Acquisition was subsequently merged into Orchids.  In July 2005, the Company completed its initial public offering of its common stock.  The Company’s stock trades on the NYSE MKT under the ticker symbol “TIS.”

The accompanying financial statements have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States have been condensed or omitted pursuant to the rules and regulations.  However, the Company believes that the disclosures made are adequate to make the information presented not misleading when read in conjunction with the audited financial statements and the notes in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on March 11, 2013.  Management believes that the financial statements contain all adjustments necessary for a fair presentation of the results for the interim periods presented.  All adjustments were of a normal, recurring nature.  The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year.

XML

Commitments and Contingencies

9 Months Ended

Sep. 30, 2013

Commitments and Contingencies

Commitments and Contingencies

Note 3 — Commitments and Contingencies

The Company may be involved from time to time in litigation arising from the normal course of business. In management’s opinion, as of the date of this report, the Company is not engaged in legal proceedings which individually or in the aggregate are expected to have a materially adverse effect on the Company’s results of operations or financial condition.

In October 2008, the Company entered into a contract to purchase 334,000 MMBTU per year of natural gas.  This contract has been extended through December 2016 and provides for approximately 60% to 70% of the Company’s natural gas requirements through December 31, 2016 as follows:

Period	MMBTUs	Price per MMBTU		Management fee per MMBTU
April 2011 - March 2012	334,207	$	6.50	$	0.07
April 2012 - March 2013	334,207	$	5.50	$	0.07
April 2013 - December 2014	556,886	$	4.905	$	0.07
April 2013 - September 2013	additional 5,000/month	$	4.70	$	0.07
October 2013 - March 2014	additional 5,000/month	$	4.75	$	0.07
April 2014 - December 2014	additional 5,000/month	$	4.70	$	0.07
January 2015 - March 2015	95,900	$	4.50	$	0.07
April 2015 - June 2015	93,600	$	4.30	$	0.07
July 2015 - September 2015	92,300	$	4.35	$	0.07
October 2015 - December 2015	91,900	$	4.50	$	0.07
January 2016 - March 2016	95,900	$	4.53	$	0.07
April 2016 - June 2016	93,600	$	4.17	$	0.07
July 2016 - September 2016	92,300	$	4.26	$	0.07
October 2016 - December 2016	91,900	$	4.42	$	0.07

Purchases under the gas contract were $0.5 million for each of the three months ended September 30, 2013 and 2012.  Purchases under the gas contract were $1.4 million and $1.5 million for the nine-month periods ended September 30, 2013 and 2012, respectively. If the Company is unable to purchase the contracted amounts and the market price at that time is less than the contracted price, the Company would be obligated under the terms of the agreement to reimburse an amount equal to the difference between the contracted amount and the amount actually purchased, multiplied by the difference between the contract price and current spot price.

XML

Earnings per Share

9 Months Ended

Sep. 30, 2013

Earnings per Share

Earnings per Share

Note 6 — Earnings per Share

During the first quarter of 2013, the Company granted restricted stock to certain employees. These awards include a nonforfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common shareholders.  Therefore, the Company calculates basic and diluted earnings per common share using the two-class method, under which net earnings are allocated to each class of common stock and participating security.  We expect all the shares of restricted stock to ultimately vest, and therefore, we have not estimated any forfeitures of restricted stock.

The computation of basic and diluted net income per common share for the three-month and nine-month periods ended September 30, 2013 and 2012 is as shown in the following table. The presentation of 2012 net income per share has been conformed to presentation under the two-class method.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Net income - ($ thousands)	$	3,723		$	2,325	$	9,959		$	7,084
Less: distributed earnings allocable to participating securities	(6		)	—		(16		)	—
Less: undistributed earnings allocable to participating securities	(2		)	—		(4		)	—
Distributed and undistributed earnings allocable to common shareholders	$	3,715		$	2,325	$	9,939		$	7,084
Weighted average shares outstanding	7,964,254			7,568,604		7,813,762			7,549,348
Effect of stock options	109,517			294,417		95,010			296,081
Weighted average shares outstanding - assuming dilution	8,073,771			7,863,021		7,908,772			7,845,429
Net income per share:
Basic	$	0.47		$	0.31	$	1.27		$	0.94
Diluted	$	0.47		$	0.29	$	1.25		$	0.90
Stock options not considered above because they were anti-dilutive	—			75,500		—			75,500

XML

Inventories

9 Months Ended

Sep. 30, 2013

Inventories

Inventories

Note 4 — Inventories

Inventories at September 30, 2013 and December 31, 2012 were as follows:

	September 30,			December 31,
	2013			2012
	(in thousands)
Raw materials	$	3,772		$	2,879
Bulk paper rolls	2,615			2,111
Converted finished goods	5,549			5,463
Inventory valuation reserve	(134		)	(178		)
	$	11,802		$	10,275

XML

Major Customers and Concentration of Credit Risk (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013 Customer	Sep. 30, 2012	Dec. 31, 2012 Customer
Major Customers and Concentration of Credit Risk
Net sales	$ 29,760	$ 25,778	$ 85,601	$ 76,784
Concentration risk amount	7,901		7,901		5,406
Number of significant customers			4		4
Net sales | Customer concentration risk | All significant customers
Major Customers and Concentration of Credit Risk
Concentration risk percentage	73.00%	60.00%	63.00%	69.00%
Net sales | Customer concentration risk | Converted product customer 1
Major Customers and Concentration of Credit Risk
Concentration risk percentage	51.00%	46.00%	52.00%	44.00%
Net sales | Customer concentration risk | Converted product customer 2
Major Customers and Concentration of Credit Risk
Concentration risk percentage	12.00%	14.00%	11.00%	14.00%
Net sales | Customer concentration risk | Converted product customer 3
Major Customers and Concentration of Credit Risk
Concentration risk percentage				11.00%
Net sales | Customer concentration risk | Converted product customer 4
Major Customers and Concentration of Credit Risk
Concentration risk percentage	10.00%
Accounts receivable | Credit risk | All significant customers
Major Customers and Concentration of Credit Risk
Concentration risk amount	5,307		5,307		3,508
Concentration risk percentage			67.00%		65.00%
Accounts receivable | Credit risk | Converted product customer 1
Major Customers and Concentration of Credit Risk
Concentration risk amount	2,765		2,765		1,318
Concentration risk percentage			35.00%		24.00%
Accounts receivable | Credit risk | Converted product customer 2
Major Customers and Concentration of Credit Risk
Concentration risk amount	1,820		1,820		1,601
Concentration risk percentage			23.00%		30.00%
Accounts receivable | Credit risk | Converted product customer 3
Major Customers and Concentration of Credit Risk
Concentration risk amount					589
Concentration risk percentage					11.00%
Accounts receivable | Credit risk | Converted product customer 4
Major Customers and Concentration of Credit Risk
Concentration risk amount	722		722
Concentration risk percentage			9.00%
Converted product
Major Customers and Concentration of Credit Risk
Net sales	28,190	22,781	80,601	68,716
Parent roll
Major Customers and Concentration of Credit Risk
Net sales	$ 1,570	$ 2,997	$ 5,000	$ 8,068

XML

BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
BALANCE SHEETS
Accounts receivable, allowance (in dollars)	$ 120	$ 125
Deferred debt issuance costs, accumulated amortization (in dollars)	$ 16	$ 11
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	25,000,000	25,000,000
Common stock, shares issued	8,026,309	7,642,475
Common stock, shares outstanding	8,026,309	7,642,475

XML

New Accounting Pronouncements

9 Months Ended

Sep. 30, 2013

New Accounting Pronouncements

New Accounting Pronouncements

Note 9 — New Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued pronouncements and concluded that there are no recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect on the Company’s financial position, results of operations or cash flows.

XML

STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash Flows From Operating Activities
Net income	$ 9,959	$ 7,084
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	5,696	5,611
Provision for doubtful accounts	(5)	(20)
Deferred income taxes	274	109
Stock compensation expense	380	318
Loss on disposal of property, plant and equipment		336
Changes in cash due to changes in operating assets and liabilities:
Accounts receivable	(2,490)	(1,487)
Inventories	(1,527)	(1,288)
Income taxes receivable	(456)	285
Prepaid expenses	(492)	(469)
Other current assets	44	292
Accounts payable	(373)	483
Accrued liabilities	708	511
Net cash provided by operating activities	11,718	11,765
Cash Flows From Investing Activities
Purchases of property, plant and equipment	(7,564)	(4,314)
Purchases of short-term investments	(6)	(3,004)
Net cash used in investing activities	(7,570)	(7,318)
Cash Flows From Financing Activities
Principal payments on long-term debt	(864)	(864)
Dividends paid to stockholders	(7,893)	(4,533)
Proceeds from the exercise of stock options	2,942	384
Excess tax benefit of stock options exercised	963	24
Net cash used in financing activities	(4,852)	(4,989)
Net decrease in cash	(704)	(542)
Cash, beginning	5,734	4,297
Cash, ending	5,030	3,755
Supplemental Disclosure:
Interest paid	279	307
Income taxes paid	2,753	2,443
Tax benefits realized from stock options exercised	$ 329	$ 29

XML

BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Current assets:
Cash	$ 5,030	$ 5,734
Accounts receivable, net of allowance of $120 in 2013 and $125 in 2012	7,901	5,406
Inventories, net	11,802	10,275
Income taxes receivable	1,063	607
Short-term investments	5,033	5,027
Prepaid expenses	1,129	637
Other current assets		44
Deferred income taxes	277	393
Total current assets	32,235	28,123
Property, plant and equipment	133,143	125,579
Accumulated depreciation	(40,082)	(34,391)
Net property, plant and equipment	93,061	91,188
Deferred debt issuance costs, net of accumulated amortization of $16 in 2013 and $11 in 2012	42	47
Total assets	125,338	119,358
Current liabilities:
Accounts payable	3,312	3,685
Accrued liabilities	3,540	2,832
Current portion of long-term debt	1,152	1,152
Total current liabilities	8,004	7,669
Long-term debt, less current portion	14,215	15,079
Deferred income taxes	19,590	19,432
Stockholders' equity:
Common stock, $.001 par value, 25,000,000 shares authorized, 8,026,309 and 7,642,475 shares issued and outstanding in 2013 and 2012, respectively	8	8
Additional paid-in capital	45,523	41,238
Retained earnings	37,998	35,932
Total stockholders' equity	83,529	77,178
Total liabilities and stockholders' equity	$ 125,338	$ 119,358

XML

Subsequent Event (Details) (Subsequent event)	Sep. 30, 2013 Covenant
Subsequent event
Subsequent event
Number of debt covenants under the Credit Agreement that effectively limit annual capital expenditures	2

XML

Commitments and Contingencies (Details) (Natural gas, USD $) In Millions, unless otherwise specified	1 Months Ended	3 Months Ended		9 Months Ended
	Oct. 31, 2008 MMBTU	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Commitments and Contingencies
Quantity of natural gas per year (in MMBTUs)	334,000
Purchases under the gas contract		$ 0.5	$ 0.5	$ 1.4	$ 1.5
April 2011 - March 2012
Commitments and Contingencies
Quantity of natural gas requirements (in MMBTUs)				334,207
Price per MMBTU				6.50
Management fee per MMBTU				0.07
April 2012 - March 2013
Commitments and Contingencies
Quantity of natural gas requirements (in MMBTUs)				334,207
Price per MMBTU				5.50
Management fee per MMBTU				0.07
April 2013 - December 2014
Commitments and Contingencies
Quantity of natural gas requirements (in MMBTUs)				556,886
Price per MMBTU				4.905
Management fee per MMBTU				0.07
April 2013 - September 2013
Commitments and Contingencies
Additional MMBTUs per month				5,000
Price per MMBTU				4.70
Management fee per MMBTU				0.07
October 2013 - March 2014
Commitments and Contingencies
Additional MMBTUs per month				5,000
Price per MMBTU				4.75
Management fee per MMBTU				0.07
April 2014 - December 2014
Commitments and Contingencies
Additional MMBTUs per month				5,000
Price per MMBTU				4.70
Management fee per MMBTU				0.07
January 2015 - March 2015
Commitments and Contingencies
Quantity of natural gas requirements (in MMBTUs)				95,900
Price per MMBTU				4.50
Management fee per MMBTU				0.07
April 2015 - June 2015
Commitments and Contingencies
Quantity of natural gas requirements (in MMBTUs)				93,600
Price per MMBTU				4.30
Management fee per MMBTU				0.07
July 2015 - September 2015
Commitments and Contingencies
Quantity of natural gas requirements (in MMBTUs)				92,300
Price per MMBTU				4.35
Management fee per MMBTU				0.07
October 2015 - December 2015
Commitments and Contingencies
Quantity of natural gas requirements (in MMBTUs)				91,900
Price per MMBTU				4.50
Management fee per MMBTU				0.07
January 2016 - March 2016
Commitments and Contingencies
Quantity of natural gas requirements (in MMBTUs)				95,900
Price per MMBTU				4.53
Management fee per MMBTU				0.07
April 2016 - June 2016
Commitments and Contingencies
Quantity of natural gas requirements (in MMBTUs)				93,600
Price per MMBTU				4.17
Management fee per MMBTU				0.07
July 2016 - September 2016
Commitments and Contingencies
Quantity of natural gas requirements (in MMBTUs)				92,300
Price per MMBTU				4.26
Management fee per MMBTU				0.07
October 2016 - December 2016
Commitments and Contingencies
Quantity of natural gas requirements (in MMBTUs)				91,900
Price per MMBTU				4.42
Management fee per MMBTU				0.07
Minimum
Commitments and Contingencies
Amount under the contract as a percent of the entity's requirements				60.00%
Maximum
Commitments and Contingencies
Amount under the contract as a percent of the entity's requirements				70.00%

XML

Major Customers and Concentration of Credit Risk

9 Months Ended

Sep. 30, 2013

Major Customers and Concentration of Credit Risk

Major Customers and Concentration of Credit Risk

Note 8 — Major Customers and Concentration of Credit Risk

The Company sells its paper production in the form of parent rolls and converted products.  Revenues from converted product sales and parent roll sales in the three months and nine months ended September 30, 2013 and 2012 were:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Converted product ne sales	$	28,190	$	22,781	$	80,601	$	68,716
Parent roll net sales	1,570		2,997		5,000		8,068
Net sales	$	29,760	$	25,778	$	85,601	$	76,784

Credit risk for the Company in the three months and nine months ended September 30, 2013 and 2012 was concentrated in the following customers who each comprised more than 10% of the Company’s total net sales:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Converted product customer 1	51	%	46	%	52	%	44	%
Converted product customer 2	12	%	14	%	11	%	14	%
Converted product customer 3	*		*		*		11	%
Converted product customer 4	10	%	*		*		*
Total percent of net sales	73	%	60	%	63	%	69	%

* Customer did not account for more than 10% of sales during the period indicated

At September 30, 2013 and December 31, 2012 the four significant customers accounted for the following amounts of the Company’s accounts receivable (in thousands):

	September 30,				December 31,
	2013				2012
Converted product customer 1	$	2,765	35	%	$	1,318	24	%
Converted product customer 2		1,820	23	%		1,601	30	%
Converted product customer 3	*		*			589	11	%
Converted product customer 4		722	9	%	*		*
Total of accounts receivable	$	5,307	67	%	$	3,508	65	%

* Customer did not account for more than 10% of sales during the period indicated

XML

Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2013

Commitments and Contingencies

Schedule of purchase contracts of natural gas

Period	MMBTUs	Price per MMBTU		Management fee per MMBTU
April 2011 - March 2012	334,207	$	6.50	$	0.07
April 2012 - March 2013	334,207	$	5.50	$	0.07
April 2013 - December 2014	556,886	$	4.905	$	0.07
April 2013 - September 2013	additional 5,000/month	$	4.70	$	0.07
October 2013 - March 2014	additional 5,000/month	$	4.75	$	0.07
April 2014 - December 2014	additional 5,000/month	$	4.70	$	0.07
January 2015 - March 2015	95,900	$	4.50	$	0.07
April 2015 - June 2015	93,600	$	4.30	$	0.07
July 2015 - September 2015	92,300	$	4.35	$	0.07
October 2015 - December 2015	91,900	$	4.50	$	0.07
January 2016 - March 2016	95,900	$	4.53	$	0.07
April 2016 - June 2016	93,600	$	4.17	$	0.07
July 2016 - September 2016	92,300	$	4.26	$	0.07
October 2016 - December 2016	91,900	$	4.42	$	0.07

XML

Stock Incentive Plan

9 Months Ended

Sep. 30, 2013

Stock Incentive Plan

Stock Incentive Plan

Note 7 — Stock Incentive Plan

In April 2005, the board of directors and the stockholders approved the 2005 Stock Incentive Plan (the “Plan”).  The Plan provides for the granting of stock options and other stock based awards to employees and board members selected by the board’s compensation committee.  A total of 1,097,500 shares may be issued pursuant to the Plan.  As of September 30, 2013, there were 147,750 shares available for issuance under the Plan.

The Company uses the Black-Scholes option valuation model to estimate the grant date fair value of its options.  Option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  The following table details the options granted to certain members of the board of directors and management during the nine months ended September 30, 2013 and 2012.

Grant	Number	Exercise		Grant Date		Risk-Free		Estimated		Dividend		Expected
Date	of Shares	Price		Fair Value		Interest Rate		Volatility		Yield		Life
May-13	40,000	$	22.95	$	5.28	1.87	%	43	%	5.88	%	5 years
February-13	3,750	$	21.695	$	5.68	2.02	%	43	%	4.61	%	5 years
May-12	38,500	$	17.845	$	4.78	1.70	%	44	%	4.48	%	5 years
Jan-12	27,000	$	18.77	$	5.42	1.97	%	45	%	4.26	%	5 - 6 years

The Company expenses the cost of options granted over the vesting period of the option based on the grant-date fair value of the award.  The Company recognized expense of $18,000 and $27,000 for the three months ended September 30, 2013 and 2012, respectively, and $303,000 and $318,000 for the nine months ended September 30, 2013 and 2012, respectively, related to options granted under the Plan.

During the nine months ended September 30, 2013, the Company granted 16,000 shares of restricted stock to certain employees under the Plan.  These awards were valued at the arithmetic mean of the high and low market price of the Company’s stock on the grant date, which was $21.695 per share, and vest ratably over a three year period beginning on the first anniversary of the grant date.  The Company expenses the cost of restricted stock granted over the vesting period of the shares based on the grant-date fair value of the award.  The Company recognized expense of $29,000 and $77,000 for the three and nine month periods ended September 30, 2013, respectively, related to the shares granted under the Plan.

XML

Fair Value Measurements

9 Months Ended

Sep. 30, 2013

Fair Value Measurements

Fair Value Measurements

Note 2 — Fair Value Measurements

The Company does not report any assets or liabilities at fair value in the financial statements.  However, the estimated fair value of the Company’s short-term investments, which consist of commercial deposits in money market funds, was $5,033,000 and $5,027,000 at September 30, 2013 and December 31, 2012, respectively.  These short-term investments are considered Level 1 measurements in the fair value valuation hierarchy.  The fair value of the Company’s long-term debt is estimated by management to approximate the carrying value of $15,367,000 and $16,231,000 at September 30, 2013 and December 31, 2012, respectively.  Management’s estimates are based on periodic comparisons of the characteristics of the Company’s obligations, including floating interest rate, credit rating, maturity and collateral, to current market conditions as stated by an independent third-party financial institution.  Such valuation inputs are considered a Level 2 measurement in the fair value valuation hierarchy.

There were no transfers among Level 1, Level 2 or Level 3 assets or liabilities during the first nine months in 2013 or 2012.

XML

Stock Incentive Plan (Tables)

9 Months Ended

Sep. 30, 2013

Stock Incentive Plan

Schedule of details of options granted to certain members of the board of directors and management

Grant	Number	Exercise		Grant Date		Risk-Free		Estimated		Dividend		Expected
Date	of Shares	Price		Fair Value		Interest Rate		Volatility		Yield		Life
May-13	40,000	$	22.95	$	5.28	1.87	%	43	%	5.88	%	5 years
February-13	3,750	$	21.695	$	5.68	2.02	%	43	%	4.61	%	5 years
May-12	38,500	$	17.845	$	4.78	1.70	%	44	%	4.48	%	5 years
Jan-12	27,000	$	18.77	$	5.42	1.97	%	45	%	4.26	%	5 - 6 years

XML

Subsequent Event

9 Months Ended

Sep. 30, 2013

Subsequent Event

Subsequent Event

Note 10 — Subsequent Event

The Company’s Credit Agreement with JPMorgan Chase Bank, N.A. dated April 25, 2011 (the “Credit Agreement”) contains two debt covenants that effectively limit annual capital expenditures: the Unfunded Capital Expenditure Limit and the Fixed Charge Coverage Ratio.  While the Company was in compliance with all debt covenants included in the Credit Agreement as of September 30, 2013, due to the expected level of the Company’s 2013 annual capital expenditures, management requested a waiver of these covenants for the period ending December 31, 2013.  On October 30, 2013, the Company obtained an advanced waiver from compliance with these covenants from JPMorgan Chase.

XML

Fair Value Measurements (Details) (USD $)	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012
Assets
Short-term investments	$ 5,033,000	$ 5,027,000
Liabilities
Level 1 to Level 2 asset transfer amounts	0		0
Level 1 to Level 2 liability transfer amounts	0		0
Level 2 to Level 1 asset transfer amounts	0		0
Level 2 to Level 1 liability transfer amounts	0		0
Level 2 to Level 3 asset or liability transfer amounts	0		0
Level 3 to Level 2 asset or liability transfer amounts	0		0
Level 1 | Commercial Deposit
Assets
Short-term investments	5,033,000	5,027,000
Level 2
Liabilities
Fair value of long-term debt	$ 15,367,000	$ 16,231,000

XML

Major Customers and Concentration of Credit Risk (Tables)

9 Months Ended

Sep. 30, 2013

Major Customers and Concentration of Credit Risk

Schedule of revenues from converted product sales and parent roll sales

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Converted product ne sales	$	28,190	$	22,781	$	80,601	$	68,716
Parent roll net sales	1,570		2,997		5,000		8,068
Net sales	$	29,760	$	25,778	$	85,601	$	76,784

Net sales | Customer concentration risk

Major Customers and Concentration of Credit Risk

Schedule of concentration risk

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Converted product customer 1	51	%	46	%	52	%	44	%
Converted product customer 2	12	%	14	%	11	%	14	%
Converted product customer 3	*		*		*		11	%
Converted product customer 4	10	%	*		*		*
Total percent of net sales	73	%	60	%	63	%	69	%

* Customer did not account for more than 10% of sales during the period indicated

Accounts receivable | Credit risk

Major Customers and Concentration of Credit Risk

Schedule of concentration risk

At September 30, 2013 and December 31, 2012 the four significant customers accounted for the following amounts of the Company’s accounts receivable (in thousands):

	September 30,				December 31,
	2013				2012
Converted product customer 1	$	2,765	35	%	$	1,318	24	%
Converted product customer 2		1,820	23	%		1,601	30	%
Converted product customer 3	*		*			589	11	%
Converted product customer 4		722	9	%	*		*
Total of accounts receivable	$	5,307	67	%	$	3,508	65	%

* Customer did not account for more than 10% of sales during the period indicated

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Oct. 25, 2013
Document and Entity Information
Entity Registrant Name	Orchids Paper Products CO /DE
Entity Central Index Key	0001324189
Document Type	10-Q
Document Period End Date	Sep. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		8,036,309
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3

XML

Basis of Presentation (Details) (USD $) In Millions, unless otherwise specified	1 Months Ended
	Mar. 31, 2004
Basis of Presentation
Price paid for acquisition of reporting entity by Orchids Acquisition Group, Inc.	$ 21.6