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KapStone Reports Third Quarter Results
Cash Flow Allows For $75 Million Debt Prepayment

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:   888-608-7946
International:   484-747-6633
Participant 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

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