KapStone Reports Third Quarter 2010 Results

NORTHBROOK, Ill., Nov. 3, 2010 /PRNewswire-FirstCall/ -- KapStone Paper and Packaging Corporation (NYSE: KS) today reported results for the third quarter ended September 30, 2010.

• Net sales of $207 million, up 22 percent versus 2009
• Net income of $38 million, up 49 percent versus 2009
• Adjusted EBITDA of $39 million up $31 million, or 388 percent, versus 2009
• Diluted EPS of $0.82, up $0.13, or 19 percent, versus 2009
• Adjusted diluted EPS of $0.39, up $0.59, or 295 percent, versus 2009
• Net debt at September 30, 2010, was $79 million, down approximately $400 million since July 2008

Roger W. Stone, Chairman and Chief Executive Officer, stated, "KapStone's record production in the third quarter of 2010 coupled with favorable industry dynamics enabled us to also achieve record sales of $207 million. Our mills produced 329,000 tons of paper, ran at 100 percent of capacity, and significantly improved operating margins. Wood costs continued to decline from earlier in 2010 when unusually wet weather in the Southeast created supply shortages and higher costs. Although the August domestic linerboard price increase was unsuccessful, a $40 per ton price increase for kraft paper announced in August 2010 should be fully realized in this year's fourth quarter along with improved export pricing. KapStone's order backlog remains strong."

Third Quarter Operating Highlights

Net sales for the quarter ended September 30, 2010 were $207.5 million, an increase of 21.8 percent, when compared to third quarter of 2009 sales of $170.3 million. The increase in net sales was attributable primarily to higher unit selling prices and mix improvement. Average revenue per ton increased to $614 versus $495 during the third quarter of 2009 and accounted for $28.4 million of the improvement in sales. Mix enhancement accounted for $12.2 million of the sales increase. Sales revenues in the third quarter of 2010 were negatively impacted by exchange rates and lower sales volumes by $2.1 million and $1.3 million, respectively.

Operating income of $26.6 million for the 2010 third quarter exceeded prior year's results by $33.6 million after excluding the 2009 benefit from the alternative fuel mixture tax credits of $53.5 million. The primary reasons for the improved results were higher unit pricing and mix improvement which contributed $28.4 million and $9.4 million, respectively. Third quarter operating income was negatively impacted by a $3.9 million increase in freight and distribution costs and the $3.8 million reinstatement of certain salaried benefits which had been suspended in the prior year. Additionally, foreign exchange rates reduced operating income by $2.1 million.  

Interest expense was $0.8 million for the third quarter of 2010, which decreased by $2.0 million versus the comparable quarter in 2009 as a result of year over year net debt reduction of $138 million. At September 30, 2010, the interest rate on the majority of the Company's debt was 1.76 percent.  

The effective tax rate for the 2010 third quarter was (49.9) percent compared to 37.9 percent for the 2009 third quarter. The 2010 effective tax rate is lower due to the benefit related to the cellulosic biofuel producer's credit.

In August 2010, the U.S. Internal Revenue Service ("IRS") approved the Company's registration as a producer of cellulosic biofuel for the tax year 2009. With this registration, the Company applied for a nonrefundable income tax credit of $1.01 per gallon of qualified cellulosic biofuel for black liquor burned by the Company in early 2009 for which the Company did not claim the alternative fuel mixture tax credit. A $20.7 million benefit (net of U.S. federal and state taxes) related to the cellulosic biofuel tax credit was reflected in the Company's income tax provision as a discrete item for the quarter ended September 30, 2010. The Company reported $33.9 million (the gross tax credit amount) as a deferred tax asset as of September 30, 2010 which is available to offset taxable income in future years.

Cash Flow and Working Capital

Cash and cash equivalents increased by $19.7 million in the quarter ended September 30, 2010, reflecting $33.1 million provided by operating activities offset by $5.8 million used in investing activities and $7.6 million used in financing activities.  

Total net debt outstanding as of September 30, 2010, was $78.6 million and was reduced by $27.7 million during the third quarter of 2010. The Company was in compliance with all debt covenants at September 30, 2010.    

At September 30, 2010, the Company had approximately $41.6 million of cash, $91.1 million of working capital and $87.7 million of revolver borrowing capacity.

Conclusion

Stone concluded, "Industry fundamentals remain solid characterized by relatively strong demand, high operating rates, low inventories and stable to improving prices."  

Conference Call

KapStone will host a conference call at 11 a.m. ET, Thursday, November 4, 2010, to discuss the Company's financial results for the 2010 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:

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.  

The webcast is also being distributed through the Thomson StreetEvents Network.  Individual investors can listen to the call at http://earnings.com, Thomson's individual investor portal, powered by StreetEvents.  Institutional investors can access the call via Thomson StreetEvents (http://streetevents.com), a password-protected event management site.

An audio replay is available approximately one hour after the end of the call by dialing 888-286-8010 (Domestic) or 617-801-6888 (International), passcode 39854536, through November 11, 2010.  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 a leading North American producer of unbleached kraft paper products and linerboard.  The Company is the parent company of KapStone Kraft Paper Corporation which includes paper mills in Roanoke Rapids, NC and North Charleston, SC, a lumber mill in Summerville, SC, and five chip mills in South Carolina. The business employs approximately 1,600 people.

Non-GAAP Financial Measures

In addition to our audited consolidated financial statements presented in accordance with U.S. GAAP, management uses certain non-GAAP measures, including "EBITDA," "Adjusted EBITDA," "Adjusted Net Income," and "Adjusted Diluted EPS" to measure our operating performance.  Investors are cautioned that EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted EPS are not financial measures under U.S. GAAP.  Management uses these measures to focus on the on-going operations, and believes that they are useful to investors because they enable them to perform meaningful comparisons of past and present operating results. The Company believes that these non-GAAP measures 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 for evaluating the Company's performance against competitors and as a primary measure for employees' incentive programs and potential future contingent earn-out payments to International Paper Company.  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.  In addition, these measures should not be construed as alternatives to any other measures 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) the income tax impact of the federal incentive program for alternative fuel mixtures.  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, 2009, Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 and elsewhere in reports that the Company files or furnishes with the SEC. These filings can be found on KapStone's Web site at 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.

SOURCE KapStone Paper and Packaging Corporation