Business News
KapStone Reports Third Quarter 2008 Results
Tuesday 11. November 2008 - KapStone Paper and Packaging Corporation (NASDAQ:KPPC) today reported results for the third quarter ended September 30, 2008.
— Net sales of $207.7 million versus $66.2 million in prior year
— Net income and adjusted net income of $2.3 million and $10.0
million, respectively
— Diluted and adjusted diluted EPS of $0.06 and $0.27, respectively
— Adjusted EBITDA of $35.8 million up 120 percent over prior year
Roger W. Stone, Chairman and Chief Executive Officer, stated, “We’re off to a great start with our Charleston operations. Their performance has been outstanding. The integration is proceeding well, and we are very pleased with the significant contribution Charleston is bringing to our company. In addition, our Roanoke Rapids mill successfully completed its annual planned maintenance outage and is back on line. We implemented two additional price increases during the third quarter to offset the substantial impact of inflation on our raw materials and freight costs. The full impact of these price increases will be realized in the fourth quarter.”
Third 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 September 30, 2008, resulting in significant changes in results over prior year periods. The change in timing of the annual planned maintenance outage at the Roanoke Rapids Mill also impacts comparisons to the prior year’s quarter. In 2008, the nine day mill outage lowered operating income by $6.0 million due to increased costs. Additionally, production at Roanoke Rapids was reduced by approximately 10,000 tons due to the outage.
Net sales of $207.7 million in the third quarter of 2008 increased from $66.2 million for the 2007 third quarter, up 214 percent mainly due to the acquisition. Net income of $2.3 million decreased by 71 percent primarily on the timing of the planned outage, one-time Charleston start up expenses and higher interest expense on the new credit facility, partially offset by the addition of Charleston. EBITDA of $26.5 million was up 65 percent over the same quarter last year on the inclusion of Charleston.
* Reconciliation of all non-GAAP financial measures used in this press
release to their most directly comparable GAAP measures are found on
p. 8 of this press release.
Reconciliation of Net Income and Diluted EPS to Adjusted EBITDA and Adjusted Diluted EPS (Non-GAAP):
3rd Quarter Net 3rd Quarter
Income Diluted EPS
2008 2007 2008 2007
Net Income/Diluted EPS $2,305 $7,802 $0.06 $0.21
Stock Compensation 302 144 0.01 –
Planned Annual Outage 3,620 – 0.10 –
Inventory Revaluation 439 – 0.01 –
Charleston Start Up Expenses 899 – 0.02 –
Foreign Exchange Loss 368 – 0.01 –
Amortization of Acquired Coal
Contract 1,385 – 0.04 –
Provision for Income Taxes-
Post Acquisition Effective Tax Rate
Change 728 – 0.02 –
Total Adjusted Net Income/Diluted EPS $10,046 $7,946 $0.27 $0.21
EBITDA $26,492 $16,032
Stock Compensation 498 229
Planned Annual Outage 5,966 –
Inventory Revaluation 723 –
Charleston Start Up Expenses 1,482 –
Foreign Exchange Loss 607 –
Total Adjusted EBITDA $35,768 $16,261
Unbleached kraft segment sales increased to $194.7 million, an increase of $135.7 million, or 230 percent over 2007. The acquisition of Charleston accounted for $136.2 million of the sales increase. In addition, full realization of 2007 and first quarter 2008 price increases and the partial realization of third quarter 2008 price increases resulted in a $4.5 million boost in sales. Partially offsetting these gains was a $5.0 million decline in sales volume at Roanoke Rapids due to lower production resulting from their annual maintenance outage. As previously mentioned, the annual maintenance outage occurred in the third quarter of 2008 compared with the second quarter a year ago.
Operating income for the unbleached kraft segment was $19.9 million in the third quarter of 2008, a $4.6 million, or 30 percent increase over the prior year. Operating income improved by $13.4 million as a result of the acquisition of Charleston and higher selling prices, partially offset by the timing of the annual maintenance outage and inflation of raw material and freight costs. The cost of the 2008 annual planned maintenance outage was approximately $6.0 million compared to $4.6 million in the second quarter of 2007. Included in Charleston’s operating results is a $2.3 million quarterly charge for the amortization of an intangible asset recorded for an acquired coal contract with favorable prices valued at $13.7 million at the date of acquisition. The contract and its related amortization expense will terminate December 31, 2009. Also included in Charleston’s operating results is a $1.0 million non-cash purchase accounting charge adjusting acquired finished goods inventory to fair value.
Net sales for other operating segments, consisting of dunnage bags and the Summerville lumber mill (Summerville), were up $5.5 million to $13.8 million. Summerville was acquired as part of the Charleston acquisition from MWV. The inclusion of Summerville added $4.9 million to net sales, and the balance of the increase was due to higher dunnage bag average revenue per bag of $0.7 million.
Operating income in other segments of $1.3 million decreased by $0.1 million for the third quarter of 2008 compared to the same quarter a year ago, due to the acquisition, partially offset by higher operating income for dunnage bags.
Corporate expenses of $7.1 million for the third quarter were $3.2 million higher than the comparable quarter in the prior year and reflected increases mainly due to Charleston start up expenses of $1.5 million, transitional services provided by MWV of $1.8 million, partially offset by lower transitional services provided by International Paper Company (IP) of $0.7 million 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 $7.8 million to $8.8 million for the third quarter of 2008 over the comparable quarter in 2007 and was comprised of $7.8 million of interest and fees, $0.8 million for amortization of financing costs, and $0.2 million for the one-time write off of the deferred financing fees related to the previous credit facility.
The effective tax rate for the quarter ended September 30, 2008, increased to 52.2 percent due to a lower expected benefit from the federal domestic manufacturing deduction. The anticipated effective tax rate for the full year of 2008 is expected to be approximately 39 percent.
Cash Flow and Working Capital
Cash flow for the third quarter reflects the Company’s completion of the Charleston acquisition from MWV on July 1, 2008. The net cash purchase price was $471.7 million and was financed by a new $515 million senior secured credit facility, the issuance of $40 million of senior notes and cash. The new credit facility also paid off $38 million from the old credit facility. Interest rates for the third quarter on the new facility approximate 6.1 percent, which are in effect until January 2009 when they will be reset using either LIBOR plus 3.0 percent or Bank of America’s prime rate plus 1.5 percent, whichever is lower. The interest rate on the $40 million senior notes is fixed for the seven-year term of the loan at 8.3 percent.
Net cash from operating activities for the nine months ended September 30, 2008, totaled $28.0 million. Capital expenditures of $8.1 million in the quarter were primarily used for equipment upgrades for the paper mills. During the quarter the Company received $14.0 million from exercises of common stock warrants of which the majority was used to pre-pay principal on the new credit facility as required by its terms. The Company ended the third quarter of 2008 with approximately $41.9 million of cash on hand, debt of $490.3 million, and was in compliance with all covenants. Working capital at September 30, 2008, was $108.0 million.
Stone concluded, “The business continues to generate cash to support all of our obligations, and, if necessary, we have a substantial revolving credit facility available. We will remain focused on satisfying our customers by providing outstanding service, quality, and innovation. We will continue to take advantage of the opportunities to be highly productive and eliminate unnecessary costs. In short, we will concentrate on the issues that we can control while we closely monitor the external forces that we cannot control. We are in a strong position and are confident about our future.”