Business News

KapStone Paper and Packaging Corporation Reports Fourth Quarter and Year End 2009 Results

Thursday 04. March 2010 - Fourth Quarter Cash Flows From Operations Generate $77 Million

KapStone Paper and Packaging Corporation (NYSE:KS) (“KapStone” or the “Company”) today reported results for the fourth quarter and year ended December 31, 2009.

For the fourth quarter ended December 31, 2009:
— Net income of $25.4 million, up $23.5 million versus prior year
— Cash flows from operations of $77.4 million, up $58.1 million versus
prior year
— Alternative fuel mixture tax credit of $56.5 million
— Diluted EPS of $0.55, up $0.48 per share versus prior year
— Net debt (total debt less cash) reduced by $67.0 million in the
quarter


For the year ended December 31, 2009:
— Net income of $80.3 million, up $60.6 million versus prior year
— Cash flows from operations of $201.2 million, up $153.9 million versus
prior year
— Alternative fuel mixture tax credit of $164.0 million
— Diluted EPS of $2.29, up $1.72 per share versus prior year
— Net debt (total debt less cash) reduced by $286.4 million in the year




Roger W. Stone, chairman and chief executive officer, stated, “Despite some very difficult conditions due to weak demand, especially in the first half of the year, and steep declines in pricing, KapStone prospered in 2009 overcoming the challenges with quick and effective actions. Cash flows from operations enhanced by $165 million received from the alternative fuel mixture tax credits enabled us to slash our debt from over $470 million just eighteen months ago to $152 million by year end, and KapStone now has a strong balance sheet with a debt to capitalization ratio of 30%.”

“In the first half of the year, we took significant downtime due to the lack of orders. We reached out to new customers, and demand in our markets gradually improved enabling us to achieve operating rates in the high 90% range for the last half of the year. The dynamics created from both increasing demand coupled with industry capacity reductions have positioned KapStone to be able to successfully achieve price recovery in our linerboard and kraft paper product lines. Late in the fourth quarter, we successfully implemented a $20 per ton price increase for kraft paper, followed by an additional $20 per ton increase in January 2010. Export linerboard prices began gradually increasing in the fourth quarter and that trend is continuing. A $50 per ton price increase for domestic linerboard was implemented in January 2010. On February 25, 2010, the Company announced a $60 per ton price increase effective April 1, 2010 on our kraft paper and domestic linerboard products.”

Fourth Quarter Operating Highlights

The Company’s annual planned maintenance outage at Roanoke Rapids mill took place in the fourth quarter during 2009 versus the third quarter in 2008 and this impacts comparisons to the prior year’s quarter. In 2009, the nine day mill outage reduced production at Roanoke Rapids by approximately 10,000 tons, and lowered operating income by approximately $6.0 million. In addition, during the first week of December 2009, the Charleston mill experienced operating inefficiencies during its migration to a new enterprise resource planning (ERP) system implemented to replace transition support services provided by MeadWestvaco Corporation (“MWV”). During the migration, production was reduced by approximately 6,000 tons reducing operating income by approximately $1.5 million. The mill is back to running at normal operating rates. Due to the ERP migration, EBITDA in 2010 will improve by over $3 million as we will no longer be paying fees to MWV for transition support.

Unit sales volume increased during the fourth quarter of 2009 compared to 2008 by over 15 percent. However, consolidated net sales decreased $16.5 million to $165.1 million compared to $181.6 million from the same quarter a year ago. Lower selling prices and less favorable product mix on a higher percentage of export linerboard sales reduced revenues by $39.6 million. The sale of the dunnage bag business in March 2009 accounted for $7.3 million of the change.

Operating income of $45.3 million for the 2009 fourth quarter increased by $33.6 million, or 289 percent, compared to the 2008 quarter due to $56.5 million of alternative fuel mixture tax credits, $12.3 million from higher sales volume, $7.3 million from lower costs on materials, energy and transportation and $2.0 million of lower bad debt expense, partially offset by $37.1 million of lower average selling prices and unfavorable mix, $6.0 million due to a change in the timing of the annual cold mill outage from the third quarter in 2008 to the fourth quarter in 2009, $1.5 million from the ERP start up inefficiencies, and $1.8 million for the restoration of certain benefits for salaried employees that had been temporarily curtailed in the beginning of the year.

Included in the 2009 and 2008 fourth quarters’ operating results are charges of $2.4 million and $2.1 million, respectively, for the amortization of an intangible asset relating to an acquired coal contract with favorable prices valued at $14.1 million at the date of the Charleston acquisition. The coal contract and related amortization ended on December 31, 2009.

Interest expense of $3.1 million for the fourth quarter of 2009 decreased by $5.4 million over the comparable quarter in 2008 and reflected the impact of over $288 million of debt repayments and lower interest rates since a year ago. In the 2009 fourth quarter, the Company incurred approximately $1.8 million of non-cash amortization charges related to debt issuance costs which included a charge of approximately $1.2 million for the acceleration of the amortization associated with the fourth quarter debt repayments.

The effective tax rate for the 2009 quarter was 40.1 percent compared to 33.6 percent for the 2008 fourth quarter. The full year tax rate was 39.4 percent in 2009 compared to 38.8 percent for 2008.

Cash Flow and Working Capital

Cash flow for the 2009 fourth quarter reflects $77.4 million provided by operating activities, $10.5 million used in investing activities and $67.6 million used in financing activities. Since the Charleston acquisition, the Company has reduced its debt by approximately $320 million for a 68 percent reduction, bringing the total debt outstanding as of December 31, 2009 to $152.3 million.

Capital expenditures for the year ended December 31, 2009 were $29.2 million, including $8.1 million for upgrading the ERP system and migrating the Charleston operations.

The Company was in compliance with all debt covenants at December 31, 2009. Due to the significant debt reduction and the high EBITDA generated over the past year, the Company’s debt to EBITDA ratio is 0.84 to 1 at December 31, 2009 compared to 3.67 to 1 at December 31, 2008. The improved ratio has allowed the Company to pay a significantly lower interest rate on the majority of its debt which was 1.73 percent at December 31, 2009 as compared to 6.1 percent at December 31, 2008.

On March 31, 2009, KapStone received approval from the IRS for its registration as an alternative fuel mixer, which provides a refund of $0.50 per gallon of alternative fuel used in KapStone’s pulp making process. KapStone submitted refund claims totaling $178.3 million based on fuel usage from mid-January 2009 through December 31, 2009. The pre-tax impact of the alternative fuel mixture tax credit is included in cost of sales in the consolidated financial statements in the amounts of $56.5 million and $164.0 million for the three and twelve months ended December 31, 2009, respectively. Approximately $14.3 million of the credit is included in the consolidated balance sheet as a reduction to finished goods inventory at December 31, 2009, based on the amount of production for the period in accordance with the Company’s first-in, first-out accounting policy. The alternative fuel mixture tax credit expired on December 31, 2009.

For income tax purposes, the Company has taken the position that the alternative fuel mixture tax credit is not taxable as it is similar to an excise tax refund. Since the IRS has issued no specific guidance in this area, the Company has recorded a $43 million liability for an unrecognized tax benefit.

For 2010, the Company is evaluating if it qualifies for a $1.01 per gallon tax credit for cellulosic biofuel producers under Section 40(b)(6) of the Internal Revenue Code. The Company’s registration, which was filed in December, is being reviewed by the Internal Revenue Service (“IRS”). Legislation regarding potential credits for the paper industry is currently in a state of flux, and at this point, it is not possible for the Company to estimate the potential benefits, if any.

At December 31, 2009, the Company had working capital of $55.6 million compared to $63.9 million at December 31, 2008.

Conclusion

In summary, Stone commented, “2009 turned out to be a great year for KapStone despite the very difficult economic conditions. For 2010, our key challenges will be to recapture our pricing, improve our product mix, and focus on growth opportunities for KapStone.”