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KapStone Reports First Quarter Results

NORTHBROOK, Ill., April 26, 2017 /PRNewswire/ -- KapStone Paper and Packaging Corporation (NYSE:KS) today reported results for the first quarter ended March 31, 2017. As compared to 2016's first quarter, results for 2017's first quarter are below:

  • Net sales of $766 million up $28 million, or 4 percent
  • Net income of $6 million down $10 million, or 63 percent
  • Diluted EPS of $0.06 down $0.11 per share, or 65 percent  

Non U.S. GAAP financial measures for the 2017 first quarter compared to 2016 are as follows:

  • Adjusted EBITDA of $81 million down $7 million, or 9 percent   
  • Adjusted net income of $15 million down $7 million, or 32 percent      
  • Adjusted diluted EPS of $0.15 down $0.08 per share, or 35 percent

Matt Kaplan, President and Chief Executive Officer, stated, "While first quarter results were disappointing, we are experiencing exceptional positive momentum.  Demand for containerboard, corrugated boxes, and kraft paper is strong.  Pricing across our important product lines is rapidly increasing.  Our product mix has improved as domestic containerboard and box sales have increased while exports have declined. 

"Victory Packaging, our distribution business, had a solid first quarter and is entering its seasonally strong portion of the year.   Our operations, after a slow start in January and February, are improving.   All of these factors combined contributed to a strong March which accounted for about 45 percent of our adjusted quarterly EBITDA and point to an improved second quarter and a strong back half of 2017."

First Quarter Operating Highlights

Consolidated net sales of $766 million in the first quarter of 2017 increased by $28 million, or 4 percent compared to $738 million for the 2016 first quarter. The increase is primarily due to a better product mix, higher containerboard prices and higher sales volume. The Company sold 699,000 tons of paper during the first quarter of 2017 compared to 692,000 tons a year earlier. The Company's average mill selling price of $648 per ton in the first quarter of 2017 increased by $23 per ton, or about 4 percent compared to the first quarter of 2016 due to higher domestic and export containerboard prices and a favorable product mix. Mill selling prices increased by $31 per ton or 5 percent compared to the fourth quarter of 2016 due to a favorable product mix.

Operating income of $20 million for the 2017 first quarter decreased by $14 million, or 42 percent, compared to the 2016 first quarter. The lower operating earnings primarily reflect higher fiber costs due to the rapid increase in OCC costs over the last six months.  In addition, there were one-time costs associated with ratifying a union contract at the Company's North Charleston paper mill and higher operating costs, including restoration of employee benefits, stock compensation expenses and change in the fair value of a contingent consideration liability. These items were partially offset by a better product mix, higher containerboard prices and lower severance expenses.

Interest expense, net, was $11 million for the first quarter of 2017, up $1 million from a year ago as a result of higher interest rates. Our weighted average interest rate as of March 31, 2017 is 2.6 percent compared to 2.1 percent as of March 31, 2016. 

The effective income tax rate for the 2017 first quarter was 41.0 percent compared to 34.5 percent for the 2016 first quarter. The higher effective income tax rate in the current quarter reflects the Company adopting a new accounting standard which requires the tax impact of elements of stock compensation to be recorded in the provision for income taxes.   

Cash Flow and Working Capital

Cash and cash equivalents of $8 million as of March 31, 2017, declined by $21 million from December 31, 2016. Operating activities provided $33 million during the first quarter. Investing activities used $72 million, including $39 million for capital expenditures and $33.5 million for an acquisition. Financing activities provided $18 million of cash in the current quarter reflecting higher borrowings, partially offset by a quarterly dividend payment.   

On March 8, 2017, our Board of Directors approved a regular $0.10 per share cash dividend which was paid on April 12th.

At March 31, 2017, the Company had approximately $388 million of working capital and $457 million of revolver borrowing capacity. 

Conclusion

In summary, Kaplan commented, "Looking ahead to the second quarter, I expect to see our operations continue to perform better. In addition, operating earnings should benefit from our March price increases and a better product mix, but will be impacted by higher scheduled maintenance outage costs and high OCC costs." 

Conference Call

KapStone will host a conference call at 10:00 a.m. CDT, Thursday, April 27, 2017, to discuss the Company's financial results for the 2017 first 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:  888-608-7946
International:  484-747-6633
Participant Passcode:  5574428

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, 24 converting plants and over 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; and (8) realizing the synergies and benefits of the Victory Packaging acquisition and other strategic investments. 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 March 31,




2017


2016









Net sales 

$   765,843


$   738,215









Cost and expenses:






 Cost of sales, excluding depreciation and amortization

560,898


533,277



 Depreciation and amortization

45,348


44,539



 Freight and distribution expenses

72,988


65,059



 Selling, general and administrative expenses

66,485


60,740



Operating income 

20,124


34,600









Foreign exchange (gain) / loss

(82)


103



Equity method investments income

(677)


-



Interest expense, net

10,730


9,811



Income before provision for income taxes

10,153


24,686



Provision for income taxes

4,161


8,512



Net income 

$       5,992


$     16,174









Net income per share:






Basic

$         0.06


$         0.17



Diluted

$         0.06


$         0.17















Weighted-average number of shares outstanding:        






Basic

96,698,637


96,399,351



Diluted

98,463,667


97,509,528















Effective income tax rate

41.0%


34.5%















 

Supplemental Information

GAAP to Non-GAAP Reconciliations

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

(unaudited)






Quarter Ended March 31,


2017


2016





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



Net income (GAAP)

$       5,992


$     16,174

   Interest expense, net

10,730


9,811

   Provision for income taxes

4,161


8,512

   Depreciation and amortization

45,348


44,539

EBITDA (Non-GAAP)

$     66,231


$     79,036





Acquisition, integration, start-up and other expenses

1,805


1,229

Union contract ratification cost

4,979


Change in fair value of contingent consideration liability

2,516


1,526

Severance expenses


3,048

Stock-based compensation expense

5,265


3,421

Accumulated EBITDA adjustments

14,565


9,224

Adjusted EBITDA (Non-GAAP)

$     80,796


$     88,260





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




Net income (GAAP)

$       5,992


$     16,174

Accumulated EBITDA adjustments

14,565


9,224

Accumulated tax adjustments

(5,462)


(3,163)

Adjusted Net Income (Non-GAAP)

$     15,095


$     22,235









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




Diluted earnings per share (GAAP)

$         0.06


$         0.17

Accumulated EBITDA adjustments

0.15


0.09

Accumulated tax adjustments

( 0.06)


( 0.03)

Adjusted Diluted EPS (Non-GAAP) 

$         0.15


$         0.23





 

KapStone Paper and Packaging Corporation

Consolidated Balance Sheets

(In thousands)







March 31,


December 31,



2017


2016



(Unaudited)




Assets





Current assets:





   Cash and cash equivalents

$        7,915


$          29,385


   Trade accounts receivable, net of allowances

416,591


392,962


   Other receivables

14,177


13,562


   Inventories

341,403


322,664


   Prepaid expenses and other current assets

22,824


10,247


Total current assets

802,910


768,820







Plant, property and equipment, net

1,452,636


1,441,557


Other assets

25,887


25,468


Intangible assets, net

320,913


314,413


Goodwill

720,473


705,617


Total assets

$ 3,322,819


$    3,255,875












Liabilities and Stockholders' Equity





Current liabilities:





Short-term borrowings 

$      25,988


$                    –


  Other borrowings

6,214



Dividend payable

10,043


10,052


Accounts payable

232,429


189,350


Accrued expenses

94,023


76,480


Accrued compensation costs

45,797


48,840


Accrued income taxes

225


15,971


Total current liabilities

414,719


340,693







Long-term debt, net of current portion

1,481,912


1,485,323


Pension and post-retirement benefits

32,805


34,207


Deferred income taxes

407,393


405,561


Other liabilities

79,212


85,761


Total other liabilities

2,001,322


2,010,852







Stockholders' equity:





Common stock $0.0001 par value

10


10


Additional paid-in capital

281,317


275,970


Retained earnings

685,891


689,668


Accumulated other comprehensive loss

(60,440)


(61,318)


Total stockholders' equity

906,778


904,330


Total liabilities and stockholders' equity

$ 3,322,819


$    3,255,875







 

KapStone Paper and Packaging Corporation

Consolidated Statement of Cash Flows 

(In thousands)

(Unaudited)








Quarter Ended March 31,




2017


2016



Operating activities:






   Net income

$     5,992


$        16,174



   Adjustments to reconcile net income to net cash provided by






   operating activities:






   Depreciation of plant and equipment

37,758


35,603



   Amortization of intangible assets

7,590


8,936



   Stock-based compensation expense

5,265


3,421



   Pension and postretirement

(572)


(448)



  Excess tax benefit from stock-based compensation


140



   Amortization of debt issuance costs

1,179


1,124



   (Gain) / Loss on disposal of fixed assets

526


(62)



   Deferred income taxes

1,521


1,064



   Change in fair value of contingent consideration liability

2,516


1,526



   Equity method investments income, net of cash received

(167)




   Changes in operating assets and liabilities

(28,939)


(8,873)



Net cash provided by operating activities

$   32,669


$        58,605









Investing activities:






    Capital expenditures

(38,669)


(36,163)



    Purchase of intangible assets


(500)



    API acquisition

(33,500)




    Proceeds from the sale of assets


4,856



Net cash used in investing activities

$ (72,169)


$       (31,807)















Financing activities:






Proceeds from revolving credit facility

$ 122,988


$      134,600



Repayments on revolving credit facility

(97,000)


(131,000)



Proceeds from receivables credit facility

17,031


6,670



Repayments on receivables credit facility

(21,621)


(24,700)



Payment of loan amendment costs

-


(2,250)



Proceeds from other current borrowings

6,214




Cash dividends paid

(9,664)


(9,696)



Payment of withholding taxes on vested stock awards

(856)


(692)



Proceeds from exercises of stock options

451


209



Proceeds from issuance of shares to ESPP

487


464



Excess tax benefit from stock-based compensation

-


(140)



Net cash (used in) / provided by financing activities

$   18,030


$       (26,535)









Net (decrease) / increase in cash and cash equivalents 

(21,470)


263



Cash and cash equivalents-beginning of period

29,385


6,821



Cash and cash equivalents-end of period

$     7,915


$           7,084









 

KapStone Paper and Packaging Corporation

Operating Segment Information

(In thousands)

(Unaudited)
















Net Sales









Three Months Ended March 31, 2017

Trade


Inter-
segment


Total


Operating
Income
(Loss)


Depreciation
and
Amortization


Capital
Expenditures


Total Assets
at March 31,
2017

Paper and Packaging

$ 547,644


$ 21,197


$ 568,841


$  34,315


$       37,406


$       36,490


$  2,591,747

Distribution 

218,199


-


218,199


2,597


5,978


679


687,854

Corporate 

-


-


-


(16,788)


1,964


1,500


43,218

Intersegment eliminations

-


(21,197)


(21,197)


-


-


-


-


$ 765,843


$        -


$ 765,843


$  20,124


$       45,348


$       38,669


$  3,322,819






























Net Sales









Three Months Ended March 31, 2016

Trade


Inter-
segment


Total


Operating
Income

 (Loss)


Depreciation
and
Amortization


Capital
Expenditures


Total Assets
at March 31,
2016

Paper and Packaging

$ 520,040


$ 16,469


$ 536,509


$  46,241


$       37,136


$       32,355


$  2,501,605

Distribution 

218,175


-


218,175


1,381


5,661


2,066


665,458

Corporate 

-


-


-


(13,022)


1,742


1,742


45,603

Intersegment eliminations

-


(16,469)


(16,469)


-


-


-


-


$ 738,215


$        -


$ 738,215


$  34,600


$       44,539


$       36,163


$  3,212,666















 

KapStone Paper and Packaging Corporation

Operating Segment EBITDA and Adjusted EBITDA

(In thousands)

(Unaudited)










Quarter Ended March 31,



Paper and Packaging


2017


2016



Segment operating income


$          34,315


$          46,241



Equity method investments income


(677)


-



Foreign exchange (gain) / loss


(45)


(287)



Depreciation and amortization


37,406


37,136



EBITDA


72,443


83,664



Severance expenses


-


2,262



Acquisition, integration, start-up and other expenses


1,366


884



Union contract ratification costs


4,979


-



Adjusted EBITDA


$          78,788


$          86,810



Adjusted EBITDA margin


14.4%


16.7%












Quarter Ended March 31,



Distribution


2017


2016



Segment operating income


$            2,597


$            1,381



Foreign exchange (gain) / loss


(37)


390



Depreciation and amortization


5,978


5,661



EBITDA


8,612


6,652



Acquisition, integration, start-up and other expenses


163


263



Severance expenses


-


391



Adjusted EBITDA


$            8,775


$            7,306



Adjusted EBITDA margin


4.0%


3.3%












Quarter Ended March 31,



Corporate


2017


2016



Segment operating (loss)


$        (16,788)


$        (13,022)



Depreciation and amortization


1,964


1,742



EBITDA


(14,824)


(11,280)



Stock-based compensation expense


5,265


3,421



Acquisition, integration, start-up and other expenses


276


82



Change in fair value of contingent consideration liability


2,516


1,526



Severance expenses


-


395



Adjusted EBITDA


$          (6,767)


$          (5,856)












Quarter Ended March 31,



Consolidated


2017


2016



Segment operating income


$          20,124


$          34,600



Equity method investments income


(677)


-



Foreign exchange (gain) / loss


(82)


103



Depreciation and amortization


45,348


44,539



EBITDA


66,231


79,036



Stock-based compensation expense


5,265


3,421



Acquisition, integration, start-up and other expenses


1,805


1,229



Union contract ratification costs


4,979


-



Change in fair value of contingent consideration liability


2,516


1,526



Severance expenses


-


3,048



Adjusted EBITDA


$          80,796


$          88,260










 

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SOURCE KapStone Paper and Packaging Corporation

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