KapStone Reports Second Quarter Results

News provided by

KapStone Paper and Packaging Corporation

Jul 29, 2015, 04:15 ET

NORTHBROOK, Ill., July 29, 2015 /PRNewswire/ -- KapStone Paper and Packaging Corporation (NYSE:KS)("KapStone", or the "Company") today reported results for the second quarter ended June 30, 2015. As compared to 2014's second quarter, results for 2015's second quarter are below:

  • Net sales of $671 million up $81 million, or 14 percent
  • Net income of $34 million down $17 million, or 33 percent
  • Adjusted net income of $42 million down $14 million, or 24 percent 
  • Adjusted EBITDA of $110 million down $16 million, or 13 percent
  • Adjusted EBITDA margin of 16.4 percent, down from 21.4 percent   
  • Diluted EPS of $0.35 down $0.18 per share, or 34 percent  
  • Adjusted diluted EPS of $0.44 down $0.14 per share, or 24 percent

Roger W. Stone, Chairman and Chief Executive Officer, stated, "KapStone's mill operations performed very well this quarter, delivering record second quarter production despite the loss of 10,400 tons due to the planned Roanoke Rapids mill outage. Our corrugated products shipments year-to-date were up 4 percent on an average weekly basis over the same period in 2014.  The stronger dollar, however, negatively impacted our export sales, resulting in lower sales prices for saturating kraft, export containerboard, and extensible grade kraft paper and a less favorable product mix.

"We closed on the Victory Packaging acquisition on June 1, 2015, and our quarterly results include Victory's operations for 30 days. Victory's results for June were very positive, with revenues of $93 million and adjusted EBITDA of $7 million. We are aggressively working on realizing the benefits of increased integration that Victory provides."

Second Quarter Operating Highlights

Consolidated net sales of $671 million in the second quarter of 2015 increased by $81 million, or 14 percent compared to $590 million for the 2014 second quarter. The increase is primarily due to $93 million from the Victory acquisition partially offset by $4 million, reflecting a stronger U.S. dollar compared to the Euro which impacted sales in Europe and some exports, and slightly lower sales volume. The Company sold 710,000 tons of paper during the second quarter of 2015 compared to 720,000 tons a year earlier. The Company's average mill selling price of $667 per ton in the second quarter of 2015 decreased by $18 per ton compared to the second quarter of 2014, due to the stronger U.S. dollar and lower domestic and export containerboard prices, partially offset by higher kraft paper prices.

Operating income of $61 million for the 2015 second quarter decreased by $24 million, or 28 percent, compared to the 2014 second quarter. The lower operating earnings primarily reflects higher planned maintenance outage costs as we moved our Roanoke Rapids mill outage from October in 2014 to April of this year, in addition to lower average mill selling prices, 10,000 tons of lower sales volume, higher fiber costs, inflation on compensation and benefit costs, and the stronger U.S. dollar which impacted prices in Europe and for some exports partially offset by lower severance expenses. In addition, over $6 million of Victory Packaging acquisition-related expenses were incurred in the 2015 second quarter, including $4 million for a non-cash inventory step-up charge as well as $2 million for amortization expense of identified intangible assets.     

Interest expense, net, was $9 million for the second quarter of 2015, slightly higher than a year ago, reflecting lower interest rates and voluntary debt repayments in late 2014, partially offset by the additional borrowings in June 2015 to finance the Victory Packaging acquisition and higher debt fees amortization. Our weighted average interest rate as of June 30, 2015 is 1.8 percent compared to 2.0 percent a year ago. 

The effective income tax rate for the 2015 second quarter was 35.2 percent compared to 33.6 percent for the 2014 second quarter.  The increase reflects a deferred tax adjustment and higher state taxes resulting from the Victory acquisition.

Cash Flow and Working Capital

Cash and cash equivalents increased by $18 million to $29 million in the quarter ended June 30, 2015, from March 31, 2015.    Operating activities generated $76 million during the second quarter while financing activities generated $593 million, reflecting borrowings to support the acquisition. The Victory Packaging acquisition totaled $617 million and capital expenditures in the second quarter were $35 million.   

At June 30, 2015, the Company had approximately $410 million of working capital and $466 million of revolver borrowing capacity. 

Conclusion

In summary, Stone commented, "Having now worked together with the team from Victory, I am even more optimistic regarding the opportunities available to KapStone.  These insights coupled with the strength of our industry, provide strong assurance that KapStone is well positioned for the future."

Conference Call

KapStone will host a conference call at 10:00 a.m. CDT, Thursday, July 30, 2015, to discuss the Company's financial results for the 2015 second 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: 866-318-8617
International:  617-399-5136
Participant Passcode:  56808150

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, 21 converting plants and 65 distribution centers. The business has approximately 6,200 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 and liquidity 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, Basic EPS to Adjusted Basic EPS, 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, including changes in cost, competition, changes in the Company's product mix and demand and pricing for the Company's products; (2) market and economic factors, including changes in raw material and healthcare costs, exchange rates and interest rates; (3) results of legal proceedings and compliance costs, including unanticipated expenditures related to the cost of compliance with environmental and other governmental regulations; (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 and (7) realizing the synergies and benefits of the Victory Packaging acquisition. 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, 2014, under Part II, Item 1.A. "Risk Factors" in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, 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)




















Fav / (Unfav)




Fav / (Unfav)


Quarter Ended June 30,

Variance

Six Months Ended June 30,

Variance


2015

2014

%

2015

2014

%















Net sales 

$  671,255

$  590,449

13.7%

$1,217,544

$1,139,401

6.9%















Cost and expenses:












 Cost of sales, excluding depreciation and amortization

470,478

392,245

-19.9%

852,676

775,493

-10.0%

 Depreciation and amortization

36,996

33,874

-9.2%

72,117

66,583

-8.3%

 Freight and distribution expenses

53,891

44,924

-20.0%

97,318

85,656

-13.6%

 Selling, general and administrative expenses

48,481

34,093

-42.2%

86,675

68,238

-27.0%

Operating income 

61,409

85,313

-28.0%

108,758

143,431

-24.2%















Foreign exchange gain / (loss)

(53)

125

-142.4%

(938)

101

-1028.7%

Interest expense, net

8,515

7,971

-6.8%

14,928

17,200

13.2%

Income before provision for income taxes

52,841

77,467

-31.8%

92,892

126,332

-26.5%

Provision for income taxes

18,585

26,008

28.5%

32,536

42,774

23.9%

Net income 

$    34,256

$    51,459

-33.4%

$     60,356

$     83,558

-27.8%















Net income per share:












Basic

$        0.36

$        0.54


$         0.63

$         0.87



Diluted

$        0.35

$        0.53


$         0.62

$         0.86































Weighted-average number of shares outstanding:        












Basic

96,269,619

95,892,033


96,196,889

95,806,181



Diluted

97,664,781

97,418,941


97,647,666

97,367,354































Effective income tax rate

35.2%

33.6%


35.0%

33.9%























































































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



















Net income (GAAP)

$    34,256

$    51,459

-33.4%

$     60,356

$     83,558

-27.8%

   Interest expense, net

8,515

7,971

-6.8%

14,928

17,200

13.2%

   Provision for income taxes

18,585

26,008

28.5%

32,536

42,774

23.9%

   Depreciation and amortization

36,996

33,874

-9.2%

72,117

66,583

-8.3%

EBITDA (Non-GAAP)

$    98,352

$  119,312

-17.6%

$   179,937

$   210,115

-14.4%















Stock-based compensation expense

2,757

1,311

-110.3%

6,537

4,229

-54.6%

Longview integration expenses

724

933

22.4%

1,209

2,747

56.0%

Victory Packaging acquisition expenses

6,472

–

N/A

6,555

–

N/A

Voluntary separation plan and severance

2,025

4,818

58.0%

2,664

4,818

44.7%

Adjusted EBITDA (Non-GAAP)

$  110,330

$  126,374

-12.7%

$   196,902

$   221,909

-11.3%





























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







Net income (GAAP)

$    34,256

$    51,459


$     60,356

$     83,558



Stock-based compensation expense

1,803

859


4,275

2,770



Longview integration and other expenses

473

611


791

1,799



Victory Packaging acquisition expenses

4,233

-


4,287

-



Voluntary separation plan and severance

1,324

3,156


1,742

3,156



Victory Packaging tax adjustments

398

–


398

–



Adjusted Net Income (Non-GAAP)

$    42,487

$    56,085


$     71,849

$     91,283

















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







Basic EPS (GAAP)

$        0.36

$        0.54


$         0.63

$         0.87



Stock-based compensation expense

0.02

0.01


0.04

0.03



Longview integration and other expenses

-

–


0.01

0.02



Victory Packaging acquisition expenses

0.04

–


0.04

–



Voluntary separation plan and severance

0.01

0.03


0.02

0.03



Victory Packaging tax adjustments

0.01

–


0.01

–



Adjusted Basic EPS (Non-GAAP)

$        0.44

$        0.58


$         0.75

$         0.95

















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










Diluted earnings per share (GAAP)

$        0.35

$        0.53


$         0.62

$         0.86



Stock-based compensation expense

0.02

0.01


0.04

0.03



Longview integration and other expenses

0.01

0.01


0.01

0.02



Victory Packaging acquisition expenses

0.04

–


0.04

–



Voluntary separation plan and severance

0.01

0.03


0.02

0.03



Victory Packaging tax adjustments

0.01

–


0.01

–



Adjusted Diluted EPS (Non-GAAP) 

$        0.44

$        0.58


$         0.74

$         0.94



KapStone Paper and Packaging Corporation

Consolidated Balance Sheets

(In thousands)




June 30,

December 31,

2015

2014

(unaudited)


Assets



Current assets:



   Cash and cash equivalents

$      28,737

$         28,467

   Trade accounts receivable, net of allowances

427,942

228,740

   Other receivables

13,951

12,833

   Inventories

339,065

238,329

   Prepaid expenses and other current assets

14,455

7,172

Total current assets

824,150

515,541





Plant, property and equipment, net

1,407,829

1,386,670

Other assets

12,353

10,135

Intangible assets, net

359,318

110,077

Goodwill

701,554

533,851

Total assets

$ 3,305,204

$   2,556,274










Liabilities and Stockholders' Equity



Current liabilities:



Short-term borrowings 

$      15,000

$                   –

Current portion of long-term debt

51,750


  Other current borrowings

4,420

–

Dividend payable

9,776

9,911

Accounts payable

208,611

149,600

Accrued expenses

59,228

48,340

Accrued compensation costs

63,217

62,491

Accrued income taxes

573

6,477

Deferred income taxes

1,836

1,990

Total current liabilities

414,411

278,809





Long-term debt, net of current portion

1,604,967

1,046,063

Pension and post-retirement benefits

27,058

32,800

Deferred income taxes

415,562

412,293

Other liabilities

16,854

8,182

Total other liabilities

2,064,441

1,499,338





Stockholders' equity:



Common stock $0.0001 par value

10

10

Additional paid-in capital

262,298

255,505

Retained earnings

615,627

574,601

Accumulated other comprehensive (loss) income 

(51,583)

(51,989)

Total stockholders' equity

826,352

778,127

Total liabilities and stockholders' equity

$ 3,305,204

$   2,556,274

KapStone Paper and Packaging Corporation

Consolidated Statements of Cash Flows 

(In thousands)

(unaudited)







Quarter Ended June 30,

Six Months Ended June 30,

2015

2014

2015

2014

Operating activities:






   Net income

$    34,256

$  51,459

$    60,356

$  83,558

   Adjustments to reconcile net income to net cash provided by






   operating activities:






   Depreciation and amortization

36,996

33,874

72,117

66,583

   Stock-based compensation expense

2,757

1,311

6,537

4,229

   Pension and postretirement

(2,524)

(2,754)

(5,416)

(6,834)

 Excess tax benefits from stock-based compensation

(120)

(391)

(1,511)

(2,612)

   Amortization of debt issuance costs

2,040

1,483

3,047

2,933

   Loss on disposal of fixed assets

32

37

210

1,016

   Deferred income taxes

587

(1,144)

2,451

2,179

   Changes in operating assets and liabilities

2,475

(14,172)

(65,204)

(42,398)

Net cash provided by operating activities

$    76,499

$  69,703

$    72,587

$108,654






Investing activities:






   Victory Packaging acquisition

(616,564)

–

(616,564)

–

   Capital expenditures

(34,949)

(41,256)

(63,711)

(73,676)

Net cash used in investing activities

$(651,513)

$(41,256)

$(680,275)

$ (73,676)














Financing activities:






Proceeds from revolving credit facility

$  179,800

$  41,400

$  266,200

$  97,900

Repayments on revolving credit facility

(174,800)

(41,400)

(251,200)

(97,900)

Proceeds from receivables credit facility

90,773

–

103,735

–

Repayments on receivables credit facility

–

–

(4,962)

–

Repayments of long-term debt 

–

(1,175)

–

(2,350)

Proceeds from long-term debt

519,763

–

519,763

–

Payment of debt issuance and loan amendment costs

(10,790)

(706)

(10,790)

(706)

Proceeds from other current borrowings

–

–

6,615

6,300

Repayments of other current borrowings

(2,195)

(1,729)

(2,195)

(3,402)

Cash dividend paid

(9,626)

–

(19,464)

–

Payment of withholding taxes on vested stock awards

(126)

–

(2,448)

(1,641)

Proceeds from exercises of stock options

287

175

778

389

Proceeds from issuance of shares to ESPP

–

–

415

205

Excess tax benefits from stock-based compensation

120

391

1,511

2,612

Net cash provided by (used in) financing activities

$  593,206

$  (3,044)

$  607,958

$    1,407






Net increase / (decrease) in cash and cash equivalents 

18,192

25,403

270

36,385

Cash and cash equivalents-beginning of period

10,545

23,949

28,467

12,967

Cash and cash equivalents-end of period

$    28,737

$  49,352

$    28,737

$  49,352

KapStone Paper and Packaging Corporation

Operating Segment Information

(In thousands)

(unaudited)
















Net Sales








Three Months Ended June 30, 2015

Trade

Inter-segment

Total

Operating Income (Loss)

Depreciation and Amortization

Capital Expenditures

Total Assets at June 30, 2015

Paper and Packaging

$   577,857

$     788

$   578,645

$  71,844

$       34,187

$       30,256

$ 2,553,708

Distribution (a)

93,398

-

93,398

1,720

1,945

243

527,704

Corporate (b)

-

-

-

(12,155)

864

4,450

223,792

Intersegment eliminations

-

(788)

(788)

-

-

-

-

$   671,255

$       -

$   671,255

$  61,409

$       36,996

$       34,949

$ 3,305,204































Net Sales








Three Months Ended June 30, 2014 

Trade

Inter-segment

Total

Operating Income (Loss)

Depreciation and Amortization

Capital Expenditures

Total Assets at June 30, 2014

Paper and Packaging

$   590,449

$       -

$   590,449

$  94,392

$       32,937

$       37,540

$ 2,664,290

Distribution (a)

-

-

-

-

-

-

-

Corporate 

-

-

-

(9,079)

937

3,716

71,208

Intersegment eliminations

-

-

-

-

-

-

-

$   590,449

$       -

$   590,449

$  85,313

$       33,874

$       41,256

$ 2,735,498































Net Sales








Six Months Ended June 30, 2015

Trade

Inter-segment

Total

Operating Income (Loss)

Depreciation and Amortization

Capital Expenditures


Paper and Packaging

$1,124,395

$     788

$1,125,183

$ 130,136

$       68,664

$       56,506


Distribution (a)

93,398

-

93,398

1,720

1,945

243


Corporate 

-

-

-

(23,098)

1,508

6,962


Intersegment eliminations

-

(788)

(788)

-

-

-



$1,217,793

$       -

$1,217,793

$ 108,758

$       72,117

$       63,711

































Net Sales








Six Months Ended June 30, 2014

Trade

Inter-segment

Total

Operating Income (Loss)

Depreciation and Amortization

Capital Expenditures


Paper and Packaging

$1,139,401

$       -

$1,139,401

$ 161,842

$       64,859

$       68,880


Distribution (a)

-

-

-

-

-

-


Corporate

-

-

-

(18,411)

1,724

4,796


Intersegment eliminations

-

-

-

-

-

-



$1,139,401

$       -

$1,139,401

$ 143,431

$       66,583

$       73,676
































(a) Reflects Victory Packaging acquisition as of June 1, 2015

(b) Total assets at June 30, 2015 includes $167.7 million of goodwill associated with the Victory acquisition which will be allocated to the operating segments


SOURCE KapStone Paper and Packaging Corporation