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KapStone Reports Second Quarter Results

NORTHBROOK, Ill., July 25, 2018 /PRNewswire/ -- KapStone Paper and Packaging Corporation(NYSE:KS) today reported results for the second quarter ended June 30, 2018. As compared to 2017's second quarter, results for 2018's second quarter are below:

  • Net sales of $913 million up $90 million, or 11 percent
  • Net income of $53 million up $33 million, or 169 percent
  • Diluted EPS of $0.53 up $0.33 per share, or 165 percent  

Non U.S. GAAP financial measures for the 2018 second quarter compared to 2017 are as follows:

  • Adjusted EBITDA of $138 million up $38 million, or 38 percent   
  • Adjusted net income of $58 million up $31 million, or 114 percent      
  • Adjusted diluted EPS of $0.58 up $0.31 per share, or 115 percent

Matt Kaplan, President and Chief Executive Officer, stated, "Our second quarter results reflect continued higher prices, good demand and strong operating performance.  We announced a $50 per ton kraft paper price increase effective with shipments in May as well as a $40 per ton price increase for Kraftpak® effective with shipments in early August 2018.  In addition, we completed our annual planned maintenance outage at the Roanoke Rapids mill ahead of schedule.

"Victory Packaging, our distribution business, had a seasonally strong second quarter and is expecting a strong second half of the year.  

"We continue to work on the merger with WestRock."

Second Quarter Operating Highlights

Consolidated net sales of $913 million in the second quarter of 2018 increased by $90 million, or 11 percent, compared to $823 million for the 2017 second quarter. The increase in net sales is primarily due to higher prices and higher sales volume. The Company sold 743,000 tons of paper during the second quarter of 2018 compared to 699,000 tons a year earlier. The Company's average mill selling price of $736 per ton in the second quarter of 2018 increased by $75 per ton, or about 11 percent, compared to the second quarter of 2017 due to higher prices for most products and a favorable product mix. Mill selling prices increased by $17 per ton, or 2 percent, compared to the first quarter of 2018.

Net income of $53 million for the 2018 second quarter increased by $33 million, or 169 percent, compared to the 2017 second quarter. The higher earnings primarily reflects:

  • Higher selling prices and a better product mix of $58 million;
  • $7 million of additional margin mainly due to higher mill production;
  • Lower recycled fiber costs of $11 million; and
  • A lower effective income tax rate resulting from the passage of the Tax Cuts and Jobs Act passed in December 2017.

The above items were partially offset by:

  • Merger expenses of $2 million;
  • $3 million of higher planned maintenance costs, mainly at Roanoke Rapids and Charleston;
  • Inflation of $18 million driven by higher virgin fiber, freight and compensation costs;
  • $11 million of higher management incentives due to higher earnings; and
  • An increase in interest charges of $3 million due to higher interest rates.

Cash Flow and Working Capital

Cash and cash equivalents of $9 million as of June 30, 2018, declined by $10 million from March 31, 2018.  Operating activities provided $28 million during the second quarter. Investing activities used $41 million and financing activities provided $4 million of cash in the current quarter, reflecting $13 million of higher borrowings, partially offset by a $10 million quarterly dividend payment.   

On June 14, 2018, our Board of Directors approved a regular $0.10 per share cash dividend which was paid on July 11th.

At June 30, 2018, the Company had approximately $495 million of working capital and $458 million of revolver borrowing capacity. The Company's net debt to EBITDA ratio as defined by our credit agreement decreased to 2.78 times at June 30, 2018, down from 4.17 a year ago.

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 over 60 distribution centers. The business has approximately 6,300 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; (9) unanticipated business interruptions; and (10) various factors related to the pending transaction with WestRock, including but not limited to the ability of KapStone and WestRock to receive the required regulatory approvals (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction), to receive the required approval of KapStone's stockholders and to satisfy the other conditions to the closing of the transaction on a timely basis or at all; the occurrence of events that may give rise to a right of one or both of the parties to terminate the merger agreement; negative effects of the announcement or the consummation of the proposed transaction on the market price of WestRock's or KapStone's common stock and/or on their respective businesses, financial conditions, results of operations and financial performance; risks relating to the value of the shares that may be issued in the proposed transaction, significant transaction costs and/or unknown liabilities; the possibility that the anticipated benefits from the proposed transaction cannot be realized in full or at all or may take longer to realize than expected; risks associated with third party contracts containing consent and/or other provisions that may be triggered by the proposed transaction; risks associated with transaction-related litigation; the possibility that costs or difficulties related to the integration of KapStone's operations with those of WestRock will be greater than expected; the outcome of legally required consultation with employees, or other employee representatives; and the ability of KapStone and the combined company to retain and hire key personnel. Further information on these and other risks and uncertainties is provided under Part I, Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 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 June 30,



Six Months Ended June 30,


2018


2017



2018


2017










Net sales 

$     912,736


$   822,717



$1,711,931


$1,588,560










Cost and expenses:









 Cost of sales, excluding depreciation and amortization

635,441


594,078



1,188,510


1,156,539

 Depreciation and amortization

47,329


46,054



93,694


91,402

 Plant closure costs

-


-



1,752


-

 Freight and distribution expenses

78,253


75,640



154,839


148,628

   Selling, general and administrative expenses 

67,494


67,313



131,105


133,798

  Merger expenses

2,368


-



15,900


-

   Gain on sale of property

-


-



(7,453)


-

Operating income

81,851


39,632



133,584


58,193










Foreign exchange loss / (gain) 

984


(1,004)



947


(1,086)

Non operating pension and postretirement income

(3,091)


(1,563)



(6,183)


(3,126)

Equity method investment income

(720)


(29)



(1,240)


(706)

Interest expense, net

15,711


12,311



30,056


23,041

Income before provision for income taxes

68,967


29,917



110,004


40,070

Provision for income taxes

15,784


10,141



24,080


14,302

Net income 

$       53,183


$     19,776



$     85,924


$     25,768










Net income per share:









Basic

$           0.54


$         0.20



$         0.88


$         0.27

Diluted

$           0.53


$         0.20



$         0.86


$         0.26



















Weighted-average number of shares outstanding:        









Basic

97,787,680


96,801,906



97,559,393


96,750,272

Diluted

100,043,827


98,520,218



99,872,730


98,457,450



















Effective income tax rate

22.9%


33.9%



21.9%


35.7%



















Supplemental Information

GAAP to Non-GAAP Reconciliations

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

(unaudited)



Quarter Ended June 30,



Six Months Ended June 30,


2018


2017



2018


2017










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



Net income (GAAP)

$       53,183


$     19,776



$     85,924


$     25,768

   Interest expense, net

15,711


12,311



30,056


23,041

   Provision for income taxes

15,784


10,141



24,080


14,302

   Depreciation and amortization

47,329


46,054



93,694


91,402

EBITDA (Non-GAAP)

$     132,007


$     88,282



$   233,754


$   154,513










Acquisition, integration, start-up and other expenses

1,397


5,611



3,353


7,416

Union contract ratification cost





4,979

Merger expenses

2,368




15,900


Plant closure costs




1,752


Change in fair value of contingent consideration liability


1,054




3,570

Gain on sale of property




(7,453)


Stock-based compensation expense

2,158


4,761



5,165


10,026

Accumulated EBITDA adjustments

5,923


11,426



18,717


25,991

Adjusted EBITDA (Non-GAAP)

$     137,930


$     99,708



$   252,471


$   180,504










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









Net income (GAAP)

$       53,183


$     19,776



$     85,924


$     25,768

Accumulated EBITDA adjustments

5,923


11,426



18,717


25,991

Accumulated tax adjustments

(1,422)


(4,285)



(4,492)


(9,747)

Adjusted Net Income (Non-GAAP)

$       57,684


$     26,917



$   100,149


$     42,012










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









Diluted earnings per share (GAAP)

$           0.53


$         0.20



$         0.86


$         0.26

Accumulated EBITDA adjustments

0.06


0.11



0.18


0.27

Accumulated tax adjustments

( 0.01)


( 0.04)



( 0.04)


( 0.10)

Adjusted Diluted EPS (Non-GAAP) 

$           0.58


$         0.27



$         1.00


$         0.43

 

KapStone Paper and Packaging Corporation

Consolidated Balance Sheets

(In thousands)




June 30,


December 31,




2018


2017




(Unaudited)





Assets






Current assets:






   Cash and cash equivalents

$        9,149


$          28,065



   Trade accounts receivable, net of allowances

502,018


443,462



   Other receivables

17,601


23,289



   Inventories

342,068


315,575



   Prepaid expenses and other current assets

23,232


17,470



Total current assets

894,068


827,861









Plant, property and equipment, net

1,465,287


1,453,607



Other assets

26,190


24,431



Intangible assets, net

281,987


297,475



Goodwill

720,611


720,611



Total assets

$ 3,388,143


$    3,323,985















Liabilities and Stockholders' Equity






Current liabilities:






Short-term borrowings 

$      25,000


$                    –



 Other current borrowings

4,528




 Other financial obligations

1,113


30



Dividend payable

10,301


10,302



Accounts payable

202,309


199,574



Accrued expenses

85,259


105,951



Accrued compensation costs

67,963


75,215



Accrued income taxes

2,710


31,458



Total current liabilities

399,183


422,530









Long-term debt, net of current portion

1,382,968


1,374,502



Long-term financing obligations

92,069


82,199



Capital lease obligation

4,579


4,595



Pension and post-retirement benefits

8,466


14,196



Deferred income taxes

254,683


252,101



Other liabilities

31,696


36,848



Total other liabilities

1,774,461


1,764,441









Stockholders' equity:






Common stock $0.0001 par value

10


10



Additional paid-in capital

302,551


291,629



Retained earnings

960,308


894,061



Accumulated other comprehensive loss

(48,370)


(48,686)



Total stockholders' equity

1,214,499


1,137,014



Total liabilities and stockholders' equity

$ 3,388,143


$    3,323,985


 

KapStone Paper and Packaging Corporation

Consolidated Statement of Cash Flows 

(In thousands)

(Unaudited)










Quarter Ended June 30,


Six Months Ended June 30,


2018


2017


2018


2017

Operating activities:








   Net income

$  53,183


$  19,776


$  85,924


$   25,768

   Adjustments to reconcile net income to net cash provided by








   operating activities:








   Depreciation of plant and equipment

39,585


38,234


78,206


75,992

   Amortization of intangible assets

7,744


7,820


15,488


15,410

   Stock-based compensation expense

2,158


4,761


5,165


10,026

   Pension and postretirement

(2,530)


(654)


(5,082)


(1,226)

   Amortization of debt issuance costs

1,174


1,179


2,350


2,358

   Loss on disposal of fixed assets

597


460


1,025


986

   Deferred income taxes

679


7


2,426


1,528

   Change in fair value of contingent consideration liability


1,054



3,570

   Equity method investments income, net of cash received

226


275


(294)


108

   Plant closure costs



793


   Provision for bad debts

411



858


Gain on sale of property



(7,453)


   Multiemployer pension plan withdrawal expense

226



226


   Changes in operating assets and liabilities

(75,561)


(56,084)


(146,617)


(85,023)

Net cash provided by operating activities

$  27,892


$  16,828


$  33,015


$   49,497









Investing activities:








    Capital expenditures

(41,380)


(35,109)


(78,405)


(73,778)

    Proceeds from the sale of property



14,681


    API acquisition




(33,500)

Net cash used in investing activities

$(41,380)


$(35,109)


$ (63,724)


$(107,278)

















Financing activities:








Proceeds from revolving credit facility

$131,500


$145,512


$242,000


$ 268,500

Repayments on revolving credit facility

(126,500)


(149,500)


(217,000)


(246,500)

Proceeds from receivables credit facility

12,452


33,363


35,726


50,394

Repayments on receivables credit facility

(1,733)


-


(29,447)


(21,621)

Repayments on other financing obligations

(272)


(11)


(537)


(11)

Proceeds from other current borrowings



6,767


6,214

Payments on other current borrowings

(2,239)


(2,059)


(2,239)


(2,059)

Payment of loan amendment costs

(162)


(187)


(162)


(187)

Cash dividends paid

(9,749)


(9,679)


(19,472)


(19,343)

Payment of withholding taxes on vested stock awards

(122)


(19)


(1,905)


(875)

Proceeds from exercises of stock options

778


402


7,168


853

Proceeds from issuance of shares to ESPP

-


-


494


487

Payment of Victory Packaging contingent consideration

-


-


(9,600)


-

Net cash provided by financing activities

$    3,953


$  17,822


$  11,793


$   35,852









Net (decrease) in cash and cash equivalents 

(9,535)


(459)


(18,916)


(21,929)

Cash and cash equivalents-beginning of period

18,684


7,915


28,065


29,385

Cash and cash equivalents-end of period

$    9,149


$    7,456


$    9,149


$     7,456

 

KapStone Paper and Packaging Corporation

Operating Segment Information

(In thousands)

(Unaudited)
















Net Sales









Three Months Ended June 30, 2018

Trade


Inter-segment


Total


Operating Income (Loss)


Depreciation and Amortization


Capital Expenditures


Total Assets at June 30, 2018

Paper and Packaging

$  647,635


$22,504


$  670,139


$   84,139


$       39,800


$       39,642


$2,674,612

Distribution 

265,101


-


265,101


12,798


5,911


619


674,735

Corporate 

-


-


-


(15,086)


1,618


1,119


38,796

Intersegment eliminations

-


(22,504)


(22,504)


-


-


-


-


$  912,736


$         -


$   912,736


$   81,851


$       47,329


$       41,380


$3,388,143






























Net Sales









Three Months Ended June 30, 2017

Trade


Inter-segment


Total


Operating Income (Loss)


Depreciation and Amortization


Capital Expenditures


Total Assets at June 30, 2017

Paper and Packaging

$  561,917


$25,681


$   587,598


$   42,697


$       38,192


$       33,703


$2,642,143

Distribution 

260,800


-


260,800


10,785


5,972


1,064


694,099

Corporate 

-


-


-


(13,850)


1,890


342


36,330

Intersegment eliminations

-


(25,681)


(25,681)


-


-


-


-


$  822,717


$          -


$   822,717


$   39,632


$       46,054


$       35,109


$3,372,572












































Net Sales









Six Months Ended June 30, 2018

Trade


Inter-segment


Total


Segment Operating Income (Loss)


Depreciation and Amortization


Capital Expenditures



Paper and Packaging

$1,215,620


$39,618


$1,255,238


$ 158,850


$       78,476


$       74,790



Distribution 

496,311


-


496,311


15,289


11,818


906



Corporate 

-


-


-


(40,555)


3,400


2,709



Intersegment eliminations

-


(39,618)


(39,618)


-


-


-




$1,711,931


$         -


$1,711,931


$ 133,584


$       93,694


$       78,405
































Net Sales









Six Months Ended June 30, 2017

Trade


Inter-segment


Total


Segment Operating Income (Loss)


Depreciation and Amortization


Capital Expenditures



Paper and Packaging

$1,109,561


$46,878


$1,156,439


$   75,449


$       75,598


$       71,408



Distribution 

478,999


-


478,999


13,382


11,950


1,743



Corporate 

-


-


-


(30,638)


3,854


627



Intersegment eliminations

-


(46,878)


(46,878)


-


-


-




$1,588,560


$         -


$1,588,560


$   58,193


$       91,402


$       73,778



 

KapStone Paper and Packaging Corporation

Operating Segment EBITDA and Adjusted EBITDA

(In thousands)

(Unaudited)












Quarter Ended June 30,


Six Months Ended June 30,

Paper and Packaging


2018


2017


2018


2017

Segment operating income


$  84,139


$ 42,697


$158,850


$  75,449

Equity method investments income


(720)


(29)


(1,240)


(706)

Foreign exchange loss / (gain) 


620


(591)


481


(636)

Non operating pension and postretirement income


(3,091)


(1,563)


(6,183)


(3,126)

Depreciation and amortization


39,800


38,192


78,476


75,598

EBITDA


127,130


83,072


244,268


155,515

Acquisition, integration, start-up and other expenses


1,255


2,986


2,481


4,352

Gain on sale of property


-


-


(7,453)


-

Plant closure costs


-


-


1,752


-

Union contract ratification costs


-


-


-


4,979

Multiemployer pension plan withdrawal expense


226


-


226


-

Adjusted EBITDA


$128,611


$86,058


$241,274


$164,846

Adjusted EBITDA margin


19.2%


14.6%


19.2%


14.3%












Quarter Ended June 30,


Six Months Ended June 30,

Distribution


2018


2017


2018


2017

Segment operating income


$  12,798


$ 10,785


$  15,289


$  13,382

Foreign exchange loss / (gain)


364


(413)


466


(450)

Depreciation and amortization


5,911


5,972


11,818


11,950

EBITDA


18,345


17,170


26,641


25,782

Acquisition, integration, start-up and other expenses


(425)


1,500


126


1,663

Adjusted EBITDA


$  17,920


$ 18,670


$  26,767


$  27,445

Adjusted EBITDA margin


6.8%


7.2%


5.4%


5.7%












Quarter Ended June 30,


Six Months Ended June 30,

Corporate


2018


2017


2018


2017

Segment operating (loss)


$(15,086)


$(13,850)


$(40,555)


$(30,638)

Depreciation and amortization


1,618


1,890


3,400


3,854

EBITDA


(13,468)


(11,960)


(37,155)


(26,784)

Stock-based compensation expense


2,158


4,761


5,165


10,026

Acquisition, integration, start-up and other expenses


341


1,125


520


1,401

Change in fair value of contingent consideration liability

-


1,054


-


3,570

Merger expenses


2,368


-


15,900


-

Adjusted EBITDA


$  (8,601)


$  (5,020)


$(15,570)


$(11,787)












Quarter Ended June 30,


Six Months Ended June 30,

Consolidated


2018


2017


2018


2017

Segment operating income


$  81,851


$ 39,632


$133,584


$  58,193

Equity method investments income


(720)


(29)


(1,240)


(706)

Foreign exchange loss / (gain)


984


(1,004)


947


(1,086)

Non operating pension and postretirement income


(3,091)


(1,563)


(6,183)


(3,126)

Depreciation and amortization


47,329


46,054


93,694


91,402

EBITDA


132,007


88,282


233,754


154,513

Stock-based compensation expense


2,158


4,761


5,165


10,026

Acquisition, integration, start-up and other expenses


1,171


5,611


3,127


7,416

Union contract ratification costs


-


-


-


4,979

Plant closure costs


-


-


1,752


-

Change in fair value of contingent consideration liability

-


1,054


-


3,570

Gain on sale of property


-


-


(7,453)


-

Multiemployer pension plan withdrawal expense


226


-


226


-

Merger expenses


2,368


-


15,900


-

Adjusted EBITDA


$137,930


$ 99,708


$252,471


$180,504

 

KapStone Paper and Packaging Corporation

Summary of Interest Expense, net

(In thousands)

(Unaudited)












Quarter Ended June 30,


Six Months Ended June 30,



2018


2017


2018


2017

Interest on term loans and revolver


$10,513


$  9,811


$ 20,409


$ 18,425

Interest on receivables securitization facility


2,118


1,281


3,965


2,336

Sub-total


12,631


11,092


24,374


20,761










Amortization of debt issuance costs


1,174


1,179


2,350


2,358

Implicit interest on long-term financing obligations


2,206


253


3,889


253

Interest on capital lease obligation


133


223


266


223

Interest on insurance financing


49


-


49


-

Capitalized interest


(438)


(390)


(785)


(462)

Interest income


(44)


(46)


(87)


(92)

Total interest expense, net


$15,711


$12,311


$ 30,056


$ 23,041

 

Cision View original content:http://www.prnewswire.com/news-releases/kapstone-reports-second-quarter-results-300686423.html

SOURCE KapStone Paper and Packaging Corporation

Andrea K. Tarbox, Executive Vice President and Chief Financial Officer, 847.239.8812