KapStone Reports Second Quarter Results

News provided by

KapStone Paper and Packaging Corporation

Jul 25, 2018, 16:15 ET

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

SOURCE KapStone Paper and Packaging Corporation