Business News

KapStone Reports Fourth Quarter and Full Year 2008 Results

Monday 16. March 2009 - KapStone Paper and Packaging Corporation (NASDAQ:KPPC) today reported results for the fourth quarter and year ended December 31, 2008.

For the fourth quarter of 2008:
— Net sales of $181.6 million versus $64.9 million in prior year
— Net income and adjusted net income of $1.9 million and $4.1 million,
respectively
— Diluted and adjusted diluted EPS of $0.07 and $0.15, respectively
— Adjusted EBITDA of $25.9 million up 54 percent over prior year


For the full year:
— Net sales of $524.5 million versus $256.8 million in prior year
— Net income and adjusted net income of $19.7 million and $25.3 million,
respectively
— Diluted and adjusted diluted EPS of $0.57 and $0.73, respectively
— Adjusted EBITDA of $86.2 million up 49 percent over prior year




Roger W. Stone, KapStone’s Chairman and Chief Executive Officer, stated, “The fourth quarter of 2008 was a challenging quarter for KapStone. Our manufacturing performance was outstanding, but the impact of the struggling economy reduced demand for our products and required us to take market related downtime of 25,000 tons in order to balance our inventory levels with demand. However, despite these challenges, we delivered relatively strong operating cash flows for both the quarter and the year.”

Fourth Quarter Operating Highlights

Due to the acquisition of the Charleston Kraft Division (Charleston) from MeadWestvaco Corporation (MWV) on July 1, 2008, a full quarter of Charleston’s operations are included for the three months ended December 31, 2008, resulting in significant changes in results over prior year periods.

Net sales of $181.6 million in the fourth quarter of 2008 increased from $64.9 million for the 2007 fourth quarter, or 180 percent mainly due to the acquisition. Charleston sales in the fourth quarter totaled $113.0 million, but were down by $28.1 million from the third quarter of 2008 mainly due to lower volume. Net income of $1.9 million decreased 78 percent primarily reflecting higher interest expense on the new credit facility and the impact of lower shipments. EBITDA of $24.6 million was up 49 percent over the same quarter last year due to the inclusion of Charleston.

Reconciliation of all non-GAAP financial measures used in this press release to their most directly comparable GAAP measures is found on p. 9 of this press release.

Reconciliation of Net Income and Diluted EPS to Adjusted Net Income (Non-GAAP) and Adjusted Diluted EPS (Non-GAAP) and EBITDA (non-GAAP) to Adjusted EBITDA (non-GAAP):

Quarter Ended 4th Quarter
December 31, Diluted EPS
————- ————-
2008 2007 2008 2007
—- —- —- —-
Net income (GAAP) $1,879 $8,634 $0.07 $0.23
Stock compensation 375 157 0.01 –
Charleston start up expenses 501 – 0.02 –
Amortization of acquired coal
contract with favorable prices 1,363 – 0.05 –
—– — —- —
Adjusted Net Income (Non-GAAP) $4,118 $8,791 $0.15 $0.23
====== ====== ===== =====


EBITDA (Non-GAAP) $24,561 $16,515
Stock compensation 565 238
Charleston start up expenses 755 –
— —
Adjusted EBITDA (Non-GAAP) $25,881 $16,753
======= =======



Unbleached kraft segment sales increased to $170.2 million, an increase of $112.2 million, or 194 percent over 2007. The Charleston acquisition accounted for $107.9 million of the sales increase. The balance of the change is due to higher prices of $4.7 million, partially offset by a $0.4 million decline in sales volume, or about 1,100 tons.

Operating income for the unbleached kraft segment was $19.0 million in the fourth quarter of 2008, a $3.8 million, or 25 percent increase over the prior year. The acquisition accounted for $5.4 million of the increase. In addition, higher selling prices of $4.7 million and productivity gains were offset by $5.3 million of inflation on raw material and freight costs as well as $2.0 million of higher bad debt provisions. Included in Charleston’s quarterly operating results is a $2.1 million charge for the amortization of an intangible asset recorded for an acquired coal contract with favorable prices valued at $14.1 million at the date of acquisition. The contract and its related amortization expense will terminate December 31, 2009.

Net sales for other operating segments, consisting of the Company’s dunnage bag and the lumber segments, increased by $4.4 million to $12.5 million, or a 54 percent increase over the prior year. The lumber business was acquired as part of the Charleston acquisition. The inclusion of lumber added $5.1 million to net sales for the fourth quarter of 2008. The balance of the change was due to lower dunnage bag volume as the slowdown in the economy reduced freight shipments and lowered demand. Other operating segments posted a loss for the quarter of $1.1 million compared to an operating profit of $1.6 million in the prior year quarter driven by lower volume.

Corporate expenses of $6.2 million for the fourth quarter were $2.8 million higher than the comparable quarter in the prior year and reflected increases mainly due to $0.8 million of acquisition start up expenses, $1.7 million of transitional services provided by MWV, $0.3 million of higher stock compensation costs and $0.5 million of other cost increases, partially offset by $0.5 million of lower transitional services provided by International Paper Company (IP) as the Company migrated to its own enterprise resource planning (ERP) system and terminated transitional services with IP in the second quarter of 2008.

Interest expense was up $6.7 million to $7.6 million for the fourth quarter of 2008 over the comparable quarter in 2007 and reflects the impact of the new senior secured credit facility used for the Charleston acquisition. In addition, amortization of financing costs for the current quarter totaled $0.8 million compared to $0.1 million in the 2007 quarter.

The effective tax rate was approximately 34 percent for each of the 2008 and 2007 fourth quarters. The effective tax rate for the full year of 2008 is 38.8 percent compared to 36.0 percent for 2007 and increased due to a lower expected benefit from the domestic manufacturing deduction.

Full Year Operating Highlights

The acquisition on July 1, 2008, of Charleston and the inclusion of their operations for the remainder of the year significantly changed KapStone’s results as compared to prior year periods.

Net sales of $524.5 million for the full year of 2008 increased from $256.8 million in the prior year, up $267.7 million or 104 percent mainly due to the acquisition and higher prices. Charleston sales totaled $254.1 million with the balance of the increase resulting from higher prices of $18.8 million from the full realization of price increases implemented in 2007 and the partial realization of multiple price increases implemented throughout 2008, partially offset by $5.2 million of lower volume. Net income of $19.7 million decreased 27 percent primarily reflecting the impact of the Charleston acquisition and higher prices offset by inflation on raw materials and energy costs, volume declines, acquisition related start up costs, transitional services provided by MWV, bad debt provisions and higher interest expense on the new credit facility. Adjusted EBITDA of $86.2 million was up 49 percent over last year on the inclusion of Charleston and the benefit of higher prices, partially offset by inflation on raw materials and energy costs and volume declines.

Cash Flow and Working Capital

Cash flow for the fourth quarter reflects a net outflow of $37.7 million mainly due to $56.7 million used to pay down debt and $10.5 million for capital expenditures, partially offset by $19.3 million of cash flow from operating activities. At December 31, 2008, we had a cash balance of $4.2 million and had borrowings on our new senior secured credit facility of $440.4 million. Interest rates for the fourth quarter on the credit facility term loans approximated 6.1 percent, which were in effect until early January 2009 when we reset the rate to LIBOR plus 3.0 percent resulting in an interest rate reduction of approximately 2 percent on our tem loan A, which will result in about a $2.6 million expected quarterly savings. The interest rate on the $40 million senior notes is fixed at 8.3 percent for the seven-year term of the loan.

Cash flow for the year ended December 31, 2008, reflects a net cash outflow of $52.5 million. Operating activities generated cash of $47.4 million. We used $490.6 million for investing activities mainly for the CKD acquisition of $467.4 million and $23.2 million of capital expenditures of which about $20 million was spent on upgrades and replacements at the two paper mills. Financing activities provided $390.7 million primarily from net borrowings under the new senior secured credit facility. At December 31, 2008, the Company had working capital of $63.9 million and was in compliance with all debt covenants.

Of special note for 2009, the federal government has implemented a program that provides incentive payments under certain circumstances for the use of alternative fuels and alternative fuel mixtures in lieu of fossil-based fuels. The credit is based on the amount of alternative fuel contained in the mixture. In late January 2009, KapStone filed applications with the Internal Revenue Service for certification of its eligibility to receive incentive payments for its use of black liquor in alternative fuel mixtures in the recovery boilers at Charleston and Roanoke Rapids mills. The Company is accumulating information to file for the credits for eligible periods, generally subsequent to January 2009. If the credits are approved, the payments that KapStone may receive could be material. At the same time, there can be no assurance that the federal incentive program for alternative fuel mixtures will continue in effect, and that its provisions will not be changed in a manner that impacts KapStone.

In summary, Stone concluded, “The business continues to perform well and is generating cash to support our obligations. We are cautious about 2009 and how long it will take for the economy to recover, but we will remain focused on satisfying our customers by providing outstanding service, quality, and innovation. In the first quarter of 2009, we have curtailed our production in line with our customers’ demand. We are monitoring the situation closely, controlling what we can control, and are taking proactive measures to reduce our operating expenses and to position KapStone to succeed. Despite the current global economic crisis, we remain confident about our future.”