KapStone Reports Third Quarter Results

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Cash Flow Allows For $75 Million Debt Prepayment

October 25, 2017 4:15 PM EDT

NORTHBROOK, Ill., Oct. 25, 2017 /PRNewswire/ -- KapStone Paper and Packaging Corporation (NYSE: KS) today reported results for the third quarter ended September 30, 2017. As compared to 2016's third quarter, results for 2017's third quarter are below:

  • Net sales of $868 million up $92 million, or 12 percent
  • Net income of $30 million down $1 million, or 3 percent
  • Diluted EPS of $0.30 down $0.02 per share, or 6 percent 

Non U.S. GAAP financial measures for the 2017 third quarter are as follows:                                            

  • Adjusted EBITDA of $121 million up $13 million, or 12 percent
  • Adjusted net income of $38 million up $2 million, or 5 percent 
  • Adjusted diluted EPS of $0.39 up $0.02 per share, or 5 percent

Matt Kaplan, President and Chief Executive Officer, stated, "Markets for our products are strong.  In September of 2017, we announced a $50 per ton price increase, effective with shipments in October 2017, for certain specialty paper products, which when fully realized, should yield approximately $25 million annually of additional revenues.    

"During the third quarter, we streamlined our West Coast box operations with the closure of our Oakland, California box plant and distributed its production to our other facilities including our newest plant in Ontario, California.   The closure resulted in a $9 million pre-tax charge against earnings.  

"Finally, strong operating cash flow of $126 million in the third quarter of 2017 enabled KapStone to make a $75 million prepayment on our term loans. This combined with our improved operating performance resulted in our leverage ratio being reduced to 3.87 times."

Third Quarter Operating Highlights

Consolidated net sales of $868 million in the third quarter of 2017 were $92 million, or 12 percent higher than the 2016 third quarter. This increase was due to $57 million of higher prices and a more favorable product mix, and higher volume in the paper and packaging segment. Net sales in the distribution segment increased $8 million due to higher prices partially offset by lower volume. The Company's average mill selling price of $698 per ton in the third quarter of 2017 increased by $72 per ton, or nearly 12 percent, compared to the third quarter of 2016 due to higher domestic and export containerboard prices, and higher kraft paper prices.

Net income of $30 million for the 2017 third quarter was $1 million lower than the 2016 third quarter. The lower earnings primarily reflect the following (all dollar amounts on a pre-tax basis):

  • Inflation driven higher recycled fiber costs, salaries and wages of $12 million;
  • $9 million of higher planned maintenance outages:
  • Higher management incentives and reinstated employee benefits of $12 million;
  • A total of $7 million for unplanned boiler downtime, a bad debt charge due to a customer bankruptcy in our distribution segment, and the effects of Hurricanes Harvey and Irma;
  • A $9 million charge for the closure of the Oakland, California box plant; and
  • Higher interest expense due to higher interest rates on term loans and interest on long-term financial obligations of $5 million.

These items were partially offset by $57 million of significantly higher selling prices and a better product mix, and a $4 million reduction in the fair value of the contingent consideration liability relating to the earn-out for the Victory Packaging acquisition.

The effective income tax rate for the 2017 third quarter was 33.3 percent compared to 28.9 percent for the 2016 third quarter.  The 2017 effective income tax rate increased due to higher state income taxes. The 2016 third quarter effective income tax rate was lower due to a favorable discrete tax adjustment reflecting higher energy tax credits.

Cash Flow and Working Capital

Cash and cash equivalents increased by $4 million during the 2017 third quarter to $11 million at September 30, 2017.  Operating activities provided $126 million during the 2017 third quarter, including seasonally improved working capital. Investing activities used $34 million for capital expenditures.  Financing activities used $88 million, including a $75 million debt prepayment and $10 million for a cash dividend payment.

On August 10, 2017, our Board of Directors approved a regular $0.10 per share cash dividend which was paid on October 12, 2017.

At September 30, 2017, the Company had approximately $437 million of working capital and $483 million of revolver borrowing capacity. 

Conclusion

In summary, Kaplan commented, "As the year winds down, the benefits of the positive momentum related to the strong market should drive positive results in the fourth quarter and beyond. We have high expectations for 2018." 

Conference Call

KapStone will host a conference call at 10:00 a.m. CDT, Thursday, October 26, 2017, to discuss the Company's financial results for the 2017 third quarter. All interested parties are invited to listen and may do so by either accessing a simultaneous broadcast webcast on KapStone's website, http://www.kapstonepaper.com, or for those unable to access the webcast, the following dial-in numbers are available:

Domestic:   888-608-7946International:   484-747-6633Participant Passcode:  97997521

A presentation to be viewed in conjunction with the call will also be available on our website, http://www.kapstonepaper.com, in the "Investors" section.

Replay of the webcast will be available for 30 days on the Company's website following the call.

About the Company

Headquartered in Northbrook, IL, KapStone Paper and Packaging Corporation is the fifth largest producer of containerboard and corrugated packaging products and is the largest kraft paper producer in the United States. The Company has four paper mills, 23 converting plants and 60 distribution centers. The business has approximately 6,400 employees.

Non-GAAP Financial Measures

This press release includes certain non-GAAP financial measures, including "EBITDA", "Adjusted EBITDA", "Adjusted Net Income", and "Adjusted Diluted EPS" to measure our operating performance. Management uses these measures to focus on the on-going operations, and believes it is useful to investors because they enable them to perform meaningful comparisons of past and present operating results. The Company believes that EBITDA and Adjusted EBITDA provide useful information to investors because they improve the comparability of the financial results between periods and provide for greater transparency to key measures used to evaluate the performance of the Company. Management uses EBITDA and Adjusted EBITDA for evaluating the Company's performance against competitors and as a primary measure for employees' incentive programs. Reconciliations of Net Income to EBITDA, EBITDA to Adjusted EBITDA, Net Income to Adjusted Net Income, and Diluted EPS to Adjusted Diluted EPS are included in the financial schedules contained in this press release. However, these measures should not be construed as an alternative to any other measure of performance determined in accordance with GAAP.

Forward-Looking Statements

Statements in this news release that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can often be identified by words such as "may," "will," "should," "would,' "expect," "project," "anticipate," "intend," "plan," "believe," "estimate," "potential," "outlook," or "continue," the negative of these terms or other similar expressions. These statements reflect management's current views and are subject to risks, uncertainties and assumptions, many of which are beyond the Company's control that could cause actual results to differ materially from those expressed or implied in these statements.  Factors that could cause actual results to differ materially include, but are not limited to: (1) industry conditions; (2) market and economic factors; (3) results of legal proceedings and compliance costs; (4) the ability to achieve and effectively manage growth; (5) the ability to pay the Company's debt obligations; (6) the ability to carry out the Company's strategic initiatives and manage associated costs; (7) managing labor relations; (8) realizing the synergies and benefits of strategic investments, and (9) unanticipated business disruptions. Further information on these and other risks and uncertainties is provided under Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 and elsewhere in reports that the Company files with the SEC. These filings can be found on KapStone's Web site at http://www.kapstonepaper.com and the SEC's Web site at www.sec.gov. Forward-looking statements included herein speak only as of the date hereof and the Company disclaims any obligation to revise or update such statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events or circumstances.

KapStone Paper and Packaging Corporation

Consolidated Statements of Income

(In thousands, except share and per share amounts)

(Unaudited)

Quarter Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Net sales 

$  868,418

$  776,636

$ 2,456,978

$ 2,299,762

Cost and expenses:

 Cost of sales, excluding depreciation and amortization

612,434

548,811

1,765,847

1,650,919

 Depreciation and amortization

47,462

44,954

138,864

135,528

 Freight and distribution expenses

77,043

71,750

225,671

207,787

 Plant closure costs

8,967

-

8,967

-

 Selling, general and administrative expenses

62,767

56,113

196,565

172,407

Operating income 

59,745

55,008

121,064

133,121

Foreign exchange (gain) / loss

(415)

543

(1,501)

1,518

Equity method investments income

(671)

-

(1,377)

-

Loss on debt extinguishment

631

679

631

679

Interest expense, net

15,164

10,148

38,205

29,965

Income before provision for income taxes

45,036

43,638

85,106

100,959

Provision for income taxes

15,010

12,620

29,312

33,045

Net income 

$    30,026

$    31,018

$      55,794

$      67,914

Net income per share:

Basic

$        0.31

$        0.32

$          0.58

$          0.70

Diluted

$        0.30

$        0.32

$          0.57

$          0.70

Weighted-average number of shares outstanding:        

Basic

96,931,315

96,581,703

96,811,060

96,499,771

Diluted

98,707,395

97,888,469

98,521,491

97,639,370

Effective income tax rate

33.3%

28.9%

34.4%

32.7%

 

Supplemental Information

GAAP to Non-GAAP Reconciliations

($ in thousands, except share and per share amounts)

(unaudited)

Quarter Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Net Income (GAAP) to EBITDA (Non-GAAP) to Adjusted EBITDA (Non-GAAP):

Net income (GAAP)

$    30,026

$    31,018

$      55,794

$      67,914

   Interest expense, net

15,164

10,148

38,205

29,965

   Provision for income taxes

15,010

12,620

29,312

33,045

   Depreciation and amortization

47,462

44,954

138,864

135,528

EBITDA (Non-GAAP)

$  107,662

$    98,740

$    262,175

$    266,452

Stock-based compensation expense

2,650

1,826

12,676

7,188

Acquisition, integration, start-up and other expenses

1,815

1,674

7,197

4,215

Longview piping inspection settlement

–

–

2,034

–

Union contract ratification cost

946

–

5,925

–

Plant closure costs

8,967

–

8,967

–

Loss on asset disposals

1,960

2,270

1,960

2,270

Change in fair value of contingent consideration liability

(3,910)

1,527

(340)

4,579

Severance expenses

–

863

–

7,027

Loss on debt extinguishment

631

679

631

679

Accumulated EBITDA adjustments

13,059

8,839

39,050

25,958

Adjusted EBITDA (Non-GAAP)

$  120,721

$  107,579

$    301,225

$    292,410

Net Income (GAAP) to Adjusted Net Income (Non-GAAP):

Net income (GAAP)

$    30,026

$    31,018

$      55,794

$      67,914

Accumulated EBITDA adjustments

13,059

8,839

39,050

25,958

Accumulated tax adjustments

(4,897)

(3,315)

(14,644)

(9,734)

Adjusted Net Income (Non-GAAP)

$    38,188

$    36,542

$      80,200

$      84,138

Diluted EPS (GAAP) to Adjusted Diluted EPS (Non-GAAP): 

Diluted earnings per share (GAAP)

$        0.30

$        0.32

$          0.57

$          0.70

Accumulated EBITDA adjustments

0.14

0.09

0.39

0.27

Accumulated tax adjustments

( 0.05)

( 0.04)

( 0.15)

( 0.11)

Adjusted Diluted EPS (Non-GAAP) 

$        0.39

$        0.37

$          0.81

$          0.86

 

KapStone Paper and Packaging Corporation

Consolidated Balance Sheets

(In thousands)

September 30,

December 31,

2017

2016

(Unaudited)

Assets

Current assets:

   Cash and cash equivalents

$        11,294

$       29,385

   Trade accounts receivable, net of allowances

468,630

392,962

   Other receivables

15,625

13,562

   Inventories

333,606

322,664

   Prepaid expenses and other current assets

14,810

10,247

Total current assets

843,965

768,820

Plant, property and equipment, net

1,472,369

1,441,557

Other assets

25,113

25,468

Intangible assets, net

305,219

314,413

Goodwill

720,611

705,617

Total assets

$   3,367,277

$  3,255,875

Liabilities and Stockholders' Equity

Current liabilities:

Short-term borrowings 

$          2,500

$                –

  Other current borrowings

2,084

–

  Capital lease obligation

29

–

Dividend payable

10,215

10,052

Accounts payable

220,147

189,350

Accrued expenses

101,531

76,480

Accrued compensation costs

60,597

48,840

Accrued income taxes

9,983

15,971

Total current liabilities

407,086

340,693

Long-term debt, net of current portion

1,461,595

1,485,323

Long-term financing obligations

85,840

–

Capital lease obligation

4,603

–

Pension and post-retirement benefits

29,746

34,207

Deferred income taxes

400,254

405,561

Other liabilities

32,148

85,761

Total other liabilities

2,014,186

2,010,852

Stockholders' equity:

Common stock $0.0001 par value

10

10

Additional paid-in capital

288,788

275,970

Retained earnings

716,139

689,668

Accumulated other comprehensive loss

(58,932)

(61,318)

Total stockholders' equity

946,005

904,330

Total liabilities and stockholders' equity

$   3,367,277

$  3,255,875

 

KapStone Paper and Packaging Corporation

Consolidated Statement of Cash Flows 

(In thousands)

(Unaudited)

Quarter Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Operating activities:

   Net income

$   30,026

$   31,018

$    55,794

$    67,914

   Adjustments to reconcile net income to net cash provided by

   operating activities:

   Depreciation of plant and equipment

39,718

37,442

115,710

110,143

   Amortization of intangible assets

7,744

7,512

23,154

25,385

   Stock-based compensation expense

2,650

1,826

12,676

7,188

   Pension and postretirement

(745)

(561)

(1,971)

(1,588)

  Excess tax benefit from stock-based compensation

–

–

–

150

   Amortization of debt issuance costs

1,199

1,250

3,557

3,625

   Loss on debt extinguishment

631

679

631

679

   Loss on disposal of assets

2,799

2,503

3,785

3,156

   Deferred income taxes

(7,768)

(484)

(6,240)

220

   Change in fair value of contingent consideration liability

(3,910)

1,527

(340)

4,579

   Equity method investments income, net of cash received

365

–

473

–

   Plant closure costs

8,043

–

8,043

–

   Provision for bad debt

2,012

–

2,926

–

   Changes in operating assets and liabilities

43,658

40,050

(42,279)

(9,064)

Net cash provided by operating activities

$ 126,422

$ 122,762

$  175,919

$  212,387

Investing activities:

    Capital expenditures

(34,234)

(26,873)

(108,012)

(99,246)

    Purchase of intangible assets

–

(500)

–

(2,025)

    Acquisition, net of cash acquired

–

(15,438)

(33,500)

(15,438)

    Equity method investments

–

(10,500)

–

(11,750)

    Proceeds from the sales of assets

–

25

–

4,881

Net cash used in investing activities

$ (34,234)

$ (53,286)

$(141,512)

$(123,578)

Financing activities:

Proceeds from revolving credit facility

$   79,000

$   89,500

$  347,500

$  353,200

Repayments on revolving credit facility

(98,500)

(94,000)

(345,000)

(348,100)

Proceeds from receivables credit facility

24,854

15,462

75,248

36,556

Repayments on receivables credit facility

(5,055)

(5,497)

(26,676)

(32,667)

Proceeds from long-term debt 

–

–

–

–

Repayments on long-term debt

(75,000)

(64,687)

(75,000)

(64,687)

Repayments on long-term financial obligations

(263)

–

(263)

–

Payment of loan amendment costs 

(1,301)

138

(1,488)

(2,250)

Proceeds from other current borrowings

–

–

6,214

–

Repayments on other current borrowings

(2,071)

–

(4,130)

–

Repayments on capital lease obligation

(8)

–

(19)

–

Cash dividends paid

(9,683)

(9,653)

(29,026)

(29,001)

Payment of withholding taxes on vested stock awards

(996)

(55)

(1,871)

(841)

Proceeds from exercises of stock options

188

367

1,041

788

Proceeds from issuance of shares to ESPP

485

508

972

971

Excess tax benefit from stock-based compensation

–

-

–

(150)

Net cash (used in) financing activities

$ (88,350)

$ (67,917)

$   (52,498)

$   (86,181)

Net increase (decrease) in cash and cash equivalents 

3,838

1,559

(18,091)

2,628

Cash and cash equivalents-beginning of period

7,456

7,890

29,385

6,821

Cash and cash equivalents-end of period

$   11,294

$     9,449

$    11,294

$      9,449

 

KapStone Paper and Packaging Corporation

Operating Segment Information

(In thousands)

(Unaudited)

Net Sales

Three Months Ended September 30, 2017

Trade

Inter-segment

Total

Segment Operating Income (Loss)

Depreciation and Amortization

Capital Expenditures

Total Assets at Sept. 30, 2017

Paper and Packaging

$    617,255

$ 21,234

$    638,489

$    63,434

$         39,727

$         32,154

$   2,647,034

Distribution 

251,163

-

251,163

5,776

5,864

118

684,740

Corporate 

-

-

-

(9,465)

1,871

1,962

35,503

Intersegment eliminations

-

(21,234)

(21,234)

-

-

-

-

$    868,418

$         -

$    868,418

$    59,745

$         47,462

$         34,234

$   3,367,277

Net Sales

Three Months Ended September 30, 2016

Trade

Inter-segment

Total

Segment Operating Income (Loss)

Depreciation and Amortization

Capital Expenditures

Total Assets at Sept. 30, 2016

Paper and Packaging

$    533,562

$ 18,674

$    552,236

$    57,731

$         37,491

$         24,900

$   2,526,342

Distribution 

243,074

-

243,074

8,230

5,795

936

676,350

Corporate 

-

-

-

(10,953)

1,668

1,037

41,376

Intersegment eliminations

-

(18,674)

(18,674)

-

-

-

-

$    776,636

$         -

$    776,636

$    55,008

$         44,954

$         26,873

$   3,244,068

Net Sales

Nine Months Ended September 30, 2017

Trade

Inter-segment

Total

Segment Operating Income (Loss)

Depreciation and Amortization

Capital Expenditures

Paper and Packaging

$ 1,726,816

$ 68,112

$ 1,794,928

$  142,009

$       115,325

$       101,695

Distribution 

730,162

-

730,162

19,158

17,814

1,861

Corporate 

-

-

-

(40,103)

5,725

4,456

Intersegment eliminations

-

(68,112)

(68,112)

-

-

-

$ 2,456,978

$         -

$ 2,456,978

$  121,064

$       138,864

$       108,012

Net Sales

Nine Months Ended September 30, 2016

Trade

Inter-segment

Total

Segment Operating Income (Loss)

Depreciation and Amortization

Capital Expenditures

Paper and Packaging

$ 1,586,173

$ 55,667

$ 1,641,840

$  145,054

$       112,790

$         91,520

Distribution 

713,589

-

713,589

21,947

17,158

3,934

Corporate 

-

-

-

(33,880)

5,580

3,792

Intersegment eliminations

-

(55,667)

(55,667)

-

-

-

$ 2,299,762

$         -

$ 2,299,762

$  133,121

$       135,528

$         99,246

 

KapStone Paper and Packaging Corporation

Operating Segment EBITDA and Adjusted EBITDA

(In thousands)

(Unaudited)

Quarter Ended September 30,

Nine Months Ended September 30,

Paper and Packaging

2017

2016

2017

2016

Segment operating income

$   63,434

$   57,731

$ 142,009

$ 145,054

Equity method investments income

(671)

-

(1,377)

-

Foreign exchange (gain) / loss

(173)

18

(809)

(18)

Depreciation and amortization

39,727

37,491

115,325

112,790

EBITDA

104,005

95,240

259,520

257,862

Severance expenses

-

701

-

5,998

Acquisition, integration, start-up and other expenses

988

-

3,306

1,819

Longview piping inspection settlement

-

-

2,034

-

Plant closure costs

8,967

-

8,967

-

Loss on asset disposals

645

1,710

645

1,710

Union contract ratification costs

946

-

5,925

-

Adjusted EBITDA

$ 115,551

$   97,651

$ 280,397

$ 267,389

Adjusted EBITDA margin

18.1%

17.7%

15.6%

16.3%

Quarter Ended September 30,

Nine Months Ended September 30,

Distribution

2017

2016

2017

2016

Segment operating income

$     5,776

$     8,230

$   19,158

$   21,947

Foreign exchange (gain) / loss

(242)

(561)

(692)

1,536

Depreciation and amortization

5,864

5,795

17,814

17,158

EBITDA

11,882

13,464

37,664

37,569

Acquisition, integration, start-up and other expenses

51

1,129

1,714

1,654

Loss on asset disposals

1,315

-

1,315

-

Severance expenses

-

153

-

633

Adjusted EBITDA

$   13,248

$   14,746

$   40,693

$   39,856

Adjusted EBITDA margin

5.3%

6.1%

5.6%

5.6%

Quarter Ended September 30,

Nine Months Ended September 30,

Corporate

2017

2016

2017

2016

Segment operating (loss)

$   (9,465)

$ (10,953)

$ (40,103)

$ (33,880)

Loss on debt extinguishment

631

679

631

$        679

Depreciation and amortization

1,871

1,668

5,725

5,580

EBITDA

(8,225)

(9,964)

(35,009)

(28,979)

Stock-based compensation expense

2,650

1,826

12,676

7,188

Acquisition, integration, start-up and other expenses

776

545

2,177

742

Loss on asset disposals

-

560

-

560

Change in fair value of contingent consideration liability

(3,910)

1,527

(340)

4,579

Loss on debt extinguishment

631

679

631

679

Severance expenses

-

9

-

396

Adjusted EBITDA

$   (8,078)

$   (4,818)

$ (19,865)

$ (14,835)

Quarter Ended September 30,

Nine Months Ended September 30,

Consolidated

2017

2016

2017

2016

Segment operating income

$   59,745

$   55,008

$ 121,064

$ 133,121

Equity method investments income

(671)

-

(1,377)

-

Foreign exchange (gain) / loss

(415)

(543)

(1,501)

1,518

Loss on debt extinguishment

631

679

631

679

Depreciation and amortization

47,462

44,954

138,864

135,528

EBITDA

107,662

98,740

262,175

266,452

Stock-based compensation expense

2,650

1,826

12,676

7,188

Acquisition, integration, start-up and other expenses

1,815

1,674

7,197

4,215

Longview piping inspection settlement

-

-

2,034

-

Union contract ratification costs

946

-

5,925

-

Plant closure costs

8,967

-

8,967

-

Loss on asset disposals

1,960

2,270

1,960

2,270

Change in fair value of contingent consideration liability

(3,910)

1,527

(340)

4,579

Loss on debt extinguishment

631

679

631

679

Severance expenses

-

863

-

7,027

Adjusted EBITDA

$ 120,721

$ 107,579

$ 301,225

$ 292,410

 

KapStone Paper and Packaging Corporation

Summary of Interest Expense, net

(In thousands)

(Unaudited)

Quarter Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Interest on term loans and revolver

$ 10,722

$   8,128

$ 29,147

$ 24,103

Interest on receivables securitization facility

1,601

877

3,937

2,440

Sub-total

12,323

9,005

33,084

26,543

Amortization of debt issuance costs

1,199

1,250

3,557

3,625

Implicit interest on long-term financing obligations

1,523

-

1,776

-

Interest on capital lease obligation

133

-

356

-

Other interest

63

-

63

(9)

Capitalized interest

(28)

(80)

(490)

(151)

Interest income

(49)

(27)

(141)

(43)

Total interest expense, net

$ 15,164

$ 10,148

$ 38,205

$ 29,965

 

 

View original content:http://www.prnewswire.com/news-releases/kapstone-reports-third-quarter-results-300543451.html

SOURCE KapStone Paper and Packaging Corporation


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