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KapStone Reports Record Third Quarter Results

2018-10-23 16:15 ET - News Release

STRONG CASH FLOWS PROVIDE FOR $100 MILLION DEBT REDUCTION

NORTHBROOK, Ill., Oct. 23, 2018 /PRNewswire/ -- KapStone Paper and Packaging Corporation (NYSE:KS) today reported record results for the third quarter ended September 30, 2018. As compared to 2017's third quarter, results for 2018's third quarter are below:

  • Net sales of $894 million up $25 million, or 3 percent
  • Net income of $73 million up $42 million, or 142 percent
  • Diluted EPS of $0.72 up $0.42 per share, or 140 percent

Non U.S. GAAP financial measures for the 2018 third quarter compared to 2017 are as follows:

  • Adjusted EBITDA of $163 million up $42 million, or 35 percent
  • Adjusted net income of $78 million up $40 million, or 104 percent
  • Adjusted diluted EPS of $0.78 up $0.39 per share, or 100 percent

Matt Kaplan, President and Chief Executive Officer, stated, "I'm extremely proud of our record third quarter results which reflect continued higher prices, good demand and excellent operating performance despite Hurricane Florence's $6 million EBITDA impact.  In addition, we successfully completed our once every five years cold mill maintenance outage at Longview.

"Our balance sheet has strengthened substantially in the past year.  Record operating cash flows enabled us to reduce our debt by over $100 million from June 30, 2018, and our bank debt to EBITDA leverage ratio is now 2.33, a significant improvement from a year ago.

"Victory Packaging, our distribution business, had a seasonally strong third quarter and is expecting a strong finish for 2018."

Third Quarter Operating Highlights

Consolidated net sales of $894 million in the third quarter of 2018 increased by $25 million, or 3 percent, compared to $868 million for the 2017 third quarter. The increase in net sales is primarily due to higher prices, partially offset by lower sales volume. The Company sold 702,000 tons of paper during the third quarter of 2018 compared to 735,000 tons a year earlier. The Company's average mill selling price of $756 per ton in the third quarter of 2018 increased by $58 per ton, or about 8 percent, compared to the third quarter of 2017 due to higher prices for most products and a favorable product mix. Mill selling prices increased by $20 per ton, or nearly 3 percent, compared to the second quarter of 2018.

Net income of $73 million for the 2018 third quarter increased by $42 million, or 142 percent, compared to the 2017 third quarter. The higher earnings primarily reflects:

  • Higher selling prices and a better product mix of $41 million;
  • Improved productivity and lower spending generated $9 million of benefits;
  • Planned maintenance costs were $4 million lower than the prior year;
  • Lower recycled fiber costs of $14 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:

  • WestRock merger related expenses of $5 million;
  • Inflation of $12 million driven by higher virgin fiber, freight and compensation costs;
  • Hurricane Florence idled our Charleston mill for five days with a negative impact of $6 million; and
  • $7 million of higher management incentives due to higher earnings.

Cash Flow and Working Capital

Cash and cash equivalents of $22 million as of September 30, 2018, increased by $13 million from June 30, 2018.  Operating activities provided $156 million during the third quarter. Investing activities used $32 million and financing activities used $110 million of cash in the current quarter, reflecting a $75 million debt prepayment, $25 million of other debt reductions and a $10 million quarterly dividend payment.   

On August 30, 2018, our Board of Directors approved a regular $0.10 per share cash dividend which was paid on October 11th.

At September 30, 2018, the Company had approximately $501 million of working capital and $484 million of revolver borrowing capacity. The Company's net debt to EBITDA ratio as defined by our credit agreement decreased to 2.33 times at September 30, 2018, down from 3.87 times a year ago.

KapStone and WestRock are targeting completing the proposed merger by the end of the calendar year 2018, subject to satisfaction or waiver of the closing conditions in the merger agreement.

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, 22 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) the ability of KapStone and WestRock to receive the required regulatory approvals for the proposed acquisition of KapStone by WestRock (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 proposed transaction) and to satisfy the other conditions to the closing of the proposed 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 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 Whiskey Holdco, Inc. shares that may be issued in the 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. There can be no assurance that the proposed transaction will in fact be consummated in the manner described or at all. 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 September 30,



Nine Months Ended Sept. 30,


2018


2017



2018


2017










Net sales 

$     893,595


$   868,418



$ 2,605,526


$ 2,456,978










Cost and expenses:









Cost of sales, excluding depreciation and amortization

593,231


613,997



1,781,741


1,770,536

Depreciation and amortization

45,129


47,462



138,823


138,864

Plant closure costs

-


8,967



1,752


8,967

Freight and distribution expenses

82,158


77,043



236,997


225,671

Selling, general and administrative expenses

61,721


62,767



192,826


196,565

Merger expenses

4,590


-



20,490


-

Gain on sale of property

(680)


-



(8,133)


-

Operating income

107,446


58,182



241,030


116,375










Foreign exchange (gain) / loss 

(187)


(415)



760


(1,501)

Non operating pension and postretirement income

(3,092)


(1,563)



(9,275)


(4,689)

Equity method investment income

(311)


(671)



(1,551)


(1,377)

Loss on debt extinguishment

456


631



456


631

Interest expense, net

15,865


15,164



45,921


38,205

Income before provision for income taxes

94,715


45,036



204,719


85,106

Provision for income taxes

22,204


15,010



46,284


29,312

Net income 

$       72,511


$     30,026



$    158,435


$      55,794










Net income per share:









Basic

$            0.74


$         0.31



$           1.62


$           0.58

Diluted

$            0.72


$         0.30



$           1.59


$           0.57



















Weighted-average number of shares outstanding:        









Basic

97,874,258


96,931,315



97,665,114


96,811,060

Diluted

100,135,846


98,707,395



99,955,448


98,521,491



















Effective income tax rate

23.4%


33.3%



22.6%


34.4%



















Supplemental Information

GAAP to Non-GAAP Reconciliations

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

(unaudited)



Quarter Ended September 30,



Nine Months Ended Sept. 30,


2018


2017



2018


2017










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








Net income (GAAP)

$       72,511


$     30,026



$    158,435


$      55,794

   Interest expense, net

15,865


15,164



45,921


38,205

   Provision for income taxes

22,204


15,010



46,284


29,312

   Depreciation and amortization

45,129


47,462



138,823


138,864

EBITDA (Non-GAAP)

$     155,709


$   107,662



$    389,463


$    262,175










Acquisition, integration, start-up and other expenses

$           (922)


$       1,815



$        2,431


$        9,231

Union contract ratification cost

1,036


946



1,036


5,925

Merger expenses

4,590




20,490


Plant closure costs 


8,967



1,752


8,967

Change in fair value of contingent consideration liability

518


(3,910)



518


(340)

Gain on sale of property / loss on asset disposals

(680)


1,960



(8,133)


1,960

Stock-based compensation expense

2,011


2,650



7,176


12,676

Loss on debt extinguishment

456


631



456


631

Accumulated EBITDA adjustments

7,009


13,059



25,726


39,050

Adjusted EBITDA (Non-GAAP)

$     162,718


$   120,721



$    415,189


$    301,225










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









Net income (GAAP)

$       72,511


$     30,026



$    158,435


$      55,794

Accumulated EBITDA adjustments

7,009


13,059



25,726


39,050

Accumulated tax adjustments

(1,682)


(4,897)



(6,174)


(14,644)

Adjusted Net Income (Non-GAAP)

$       77,838


$     38,188



$    177,987


$      80,200










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









Diluted earnings per share (GAAP)

$            0.72


$         0.30



$           1.59


$           0.57

Accumulated EBITDA adjustments

0.08


0.14



0.25


0.39

Accumulated tax adjustments

( 0.02)


( 0.05)



( 0.06)


( 0.15)

Adjusted Diluted EPS (Non-GAAP) 

$            0.78


$         0.39



$           1.78


$           0.81

 

KapStone Paper and Packaging Corporation

Consolidated Balance Sheets

(In thousands)



September 30,


December 31,



2018


2017



(Unaudited)




Assets





Current assets:





   Cash and cash equivalents

$           22,431


$          28,065


   Trade accounts receivable, net of allowances

488,007


443,462


   Other receivables

17,218


23,289


   Inventories

348,432


315,575


   Prepaid expenses and other current assets

18,177


17,470


Total current assets

894,265


827,861







Plant, property and equipment, net

1,456,648


1,453,607


Other assets

27,760


24,431


Intangible assets, net

274,243


297,475


Goodwill

720,611


720,611


Total assets

$      3,373,527


$    3,323,985












Liabilities and Stockholders' Equity





Current liabilities:





Short-term borrowings 

$                     –


$                    –


 Other current borrowings

2,272



 Other financial obligations

1,123


30


Dividend payable

10,392


10,302


Accounts payable

210,098


199,574


Accrued expenses

85,948


105,951


Accrued compensation costs

82,457


75,215


Accrued income taxes

528


31,458


Total current liabilities

392,818


422,530







Long-term debt, net of current portion

1,309,486


1,374,502


Long-term financing obligations

91,794


82,199


Capital lease obligation

4,570


4,595


Pension and post-retirement benefits

5,574


14,196


Deferred income taxes

254,968


252,101


Other liabilities

32,471


36,848


Total other liabilities

1,698,863


1,764,441







Stockholders' equity:





Common stock $0.0001 par value

10


10


Additional paid-in capital

306,711


291,629


Retained earnings

1,022,942


894,061


Accumulated other comprehensive loss

(47,817)


(48,686)


Total stockholders' equity

1,281,846


1,137,014


Total liabilities and stockholders' equity

$      3,373,527


$    3,323,985


 

KapStone Paper and Packaging Corporation

Consolidated Statement of Cash Flows 

(In thousands)

(Unaudited)










Quarter Ended September 30,


Nine Months Ended Sept. 30,


2018


2017


2018


2017

Operating activities:








   Net income

$    72,511


$   30,026


$ 158,435


$    55,794

   Adjustments to reconcile net income to net cash provided by operating activities:








   Depreciation of plant and equipment

37,385


39,718


115,591


115,710

   Amortization of intangible assets

7,744


7,744


23,232


23,154

   Stock-based compensation expense

2,011


2,650


7,176


12,676

   Pension and postretirement

(2,568)


(745)


(7,650)


(1,971)

   Amortization of debt issuance costs

1,203


1,199


3,553


3,557

   Loss on debt extinguishment

456


631


456


631

   Loss on disposal of fixed assets

474


2,799


1,499


3,785

   Deferred income taxes

207


(7,768)


2,633


(6,240)

   Change in fair value of contingent consideration liability

518


(3,910)


518


(340)

   Equity method investments income, net of cash received

749


365


455


473

   Plant closure costs


8,043


793


8,043

   Provision for bad debts

322


2,012


1,180


2,926

   Gain on sale of property

(680)



(8,133)


   Multiemployer pension plan withdrawal expense



226


   Changes in operating assets and liabilities

35,549


43,658


(111,068)


(42,279)

Net cash provided by operating activities

$  155,881


$ 126,422


$ 188,896


$  175,919









Investing activities:








    Capital expenditures

(33,334)


(34,234)


(111,739)


(108,012)

    Proceeds from the sale of property

1,039



15,720


    API acquisition




(33,500)

Net cash used in investing activities

$   (32,295)


$ (34,234)


$ (96,019)


$(141,512)

















Financing activities:








Proceeds from revolving credit facility

$    28,000


$   79,000


$ 270,000


$  347,500

Repayments on revolving credit facility

(53,000)


(98,500)


(270,000)


(345,000)

Proceeds from receivables credit facility

9,873


24,854


45,599


75,248

Repayments on receivables credit facility

(10,014)


(5,055)


(39,461)


(26,676)

Repayments on long-term debt

(75,000)


(75,000)


(75,000)


(75,000)

Repayments on other financing obligations

(275)


(271)


(812)


(282)

Proceeds from other current borrowings



6,767


6,214

Payments on other current borrowings

(2,256)


(2,071)


(4,495)


(4,130)

Payment of loan amendment costs


(1,301)


(162)


(1,488)

Cash dividends paid

(9,781)


(9,683)


(29,253)


(29,026)

Payment of withholding taxes on vested stock awards

(52)


(996)


(1,957)


(1,871)

Proceeds from exercises of stock options

1,759


188


8,927


1,041

Proceeds from issuance of shares to ESPP

442


485


936


972

Payment of Victory Packaging contingent consideration

-


-


(9,600)


-

Net cash provided by financing activities

$(110,304)


$ (88,350)


$ (98,511)


$   (52,498)









Net increase (decrease) in cash and cash equivalents 

13,282


3,838


(5,634)


(18,091)

Cash and cash equivalents-beginning of period

9,149


7,456


28,065


29,385

Cash and cash equivalents-end of period

$    22,431


$   11,294


$   22,431


$    11,294

 

KapStone Paper and Packaging Corporation

Operating Segment Information

(In thousands)

(Unaudited)
















Net Sales









Three Months Ended September 30, 2018

Trade


Inter-segment


Total


Operating Income (Loss)


Depreciation and Amortization


Capital Expenditures


Total Assets at Sept. 30, 2018

Paper and Packaging

$    632,406


$ 20,201


$    652,607


$ 109,695


$       37,880


$       32,586


$ 2,657,300

Distribution 

261,189


-


261,189


11,793


5,757


67


672,321

Corporate 

-


-


-


(14,042)


1,492


681


43,906

Intersegment eliminations

-


(20,201)


(20,201)


-


-


-


-


$    893,595


$        -


$    893,595


$ 107,446


$       45,129


$       33,334


$ 3,373,527






























Net Sales









Three Months Ended September 30, 2017

Trade


Inter-segment


Total


Operating Income (Loss)


Depreciation and Amortization


Capital Expenditures


Total Assets at Sept. 30, 2017

Paper and Packaging

$    617,255


$ 21,234


$    638,489


$   61,871


$       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


$   58,182


$       47,462


$       34,234


$ 3,367,277












































Net Sales









Nine Months Ended September 30, 2018

Trade


Inter-segment


Total


Segment Operating Income (Loss)


Depreciation and Amortization


Capital Expenditures



Paper and Packaging

$ 1,848,026


$ 59,819


$ 1,907,845


$ 268,545


$     116,356


$     107,376



Distribution 

757,500


-


757,500


27,082


17,575


973



Corporate 

-


-


-


(54,597)


4,892


3,390



Intersegment eliminations

-


(59,819)


(59,819)


-


-


-




$ 2,605,526


$        -


$ 2,605,526


$ 241,030


$     138,823


$     111,739
































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


$ 137,320


$     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


$ 116,375


$     138,864


$     108,012



 

KapStone Paper and Packaging Corporation

Operating Segment EBITDA and Adjusted EBITDA

(In thousands)

(Unaudited)












Quarter Ended September 30,


Nine Months Ended Sept. 30,

Paper and Packaging


2018


2017


2018


2017

Segment operating income


$ 109,695


$   61,871


$ 268,545


$ 137,320

Equity method investments income


(311)


(671)


(1,551)


(1,377)

Foreign exchange loss / (gain) 


70


(173)


551


(809)

Non operating pension and postretirement income


(3,092)


(1,563)


(9,275)


(4,689)

Loss on debt extinguishment


456


-


456


-

Depreciation and amortization


37,880


39,727


116,356


115,325

EBITDA


150,452


104,005


394,720


259,520

Acquisition, integration, start-up and other expenses


948


988


3,655


5,340

Gain on sale of property / loss on asset disposals


(680)


645


(8,133)


645

Plant closure costs 


-


8,967


1,752


8,967

Loss on debt extinguishment


456


-


456


-

Union contract ratification costs


1,036


946


1,036


5,925

Adjusted EBITDA


$ 152,212


$ 115,551


$ 393,486


$ 280,397

Adjusted EBITDA margin


23.3%


18.1%


20.6%


15.6%












Quarter Ended September 30,


Nine Months Ended Sept. 30,

Distribution


2018


2017


2018


2017

Segment operating income


$   11,793


$     5,776


$   27,082


$   19,158

Foreign exchange (gain) / loss


(257)


(242)


209


(692)

Depreciation and amortization


5,757


5,864


17,575


17,814

EBITDA


17,807


11,882


44,448


37,664

Gain on sale of property / loss on asset disposals


-


1,315


-


1,315

Acquisition, integration, start-up and other expenses


(1,637)


51


(1,511)


1,714

Adjusted EBITDA


$   16,170


$   13,248


$   42,937


$   40,693

Adjusted EBITDA margin


6.2%


5.3%


5.7%


5.6%












Quarter Ended September 30,


Nine Months Ended Sept. 30,

Corporate


2018


2017


2018


2017

Segment operating (loss)


$ (14,042)


$   (9,465)


$ (54,597)


$ (40,103)

Loss on debt extinguishment


-


631


-


631

Depreciation and amortization


1,492


1,871


4,892


5,725

EBITDA


(12,550)


(8,225)


(49,705)


(35,009)

Stock-based compensation expense


2,011


2,650


7,176


12,676

Acquisition, integration, start-up and other expenses


(233)


776


287


2,177

Change in fair value of contingent consideration liability


518


(3,910)


518


(340)

Loss on debt extinguishment


-


631


-


631

Merger expenses


4,590


-


20,490


-

Adjusted EBITDA


$   (5,664)


$   (8,078)


$ (21,234)


$ (19,865)












Quarter Ended September 30,


Nine Months Ended Sept. 30,

Consolidated


2018


2017


2018


2017

Segment operating income


$ 107,446


$   58,182


$ 241,030


$ 116,375

Equity method investments income


(311)


(671)


(1,551)


(1,377)

Foreign exchange (gain) / loss


(187)


(415)


760


(1,501)

Non operating pension and postretirement income


(3,092)


(1,563)


(9,275)


(4,689)

Loss on debt extinguishment


456


631


456


631

Depreciation and amortization


45,129


47,462


138,823


138,864

EBITDA


155,709


107,662


389,463


262,175

Stock-based compensation expense


2,011


2,650


7,176


12,676

Acquisition, integration, start-up and other expenses


(922)


1,815


2,431


9,231

Union contract ratification costs


1,036


946


1,036


5,925

Plant closure costs 


-


8,967


1,752


8,967

Loss on debt extinguishment


456


631


456


631

Change in fair value of contingent consideration liability


518


(3,910)


518


(340)

Gain on sale of property / loss on asset disposals


(680)


1,960


(8,133)


1,960

Merger expenses


4,590


-


20,490


-

Adjusted EBITDA


$ 162,718


$ 120,721


$ 415,189


$ 301,225

 

Cision View original content:http://www.prnewswire.com/news-releases/kapstone-reports-record-third-quarter-results-300736436.html

SOURCE KapStone Paper and Packaging Corporation

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