Kapstone First Quarter Profit Up on Sales
May 11, 2009 - KapStone Paper and Packaging Corp. today reported results for the first quarter ended March 31, 2009.
- Net sales of $140.6 million, up 109 percent, versus prior year
- Net income of $11.1 million, up 54 percent, versus prior year
- EBITDA of $39.5 million, up 178 percent versus prior year
- Diluted EPS of $0.39, up 86 percent versus prior year
- Sale of dunnage bag business for $36.1 million and $17.4 million pre-tax gain
- Alternative fuel mixture tax incentive of $23.9 million generated for the quarter of which $5.4 million was recognized in earnings and $18.5 million deferred in inventory
Roger W. Stone, Chairman and Chief Executive Officer, stated, "Our financial results for the quarter were strong benefiting from the sale of the dunnage bag business and our credits earned for the alternative fuel mixture tax incentive. The extremely difficult global economic conditions challenged us with the lowest continuing industry operating rates that I have ever experienced. While the industry has done a remarkable job of balancing supply with demand, lower demand is now negatively impacting our prices. We reduced the costs we could control and took advantage of an opportunity to lower our debt and focus on our core business by selling our dunnage bag business at an attractive price."
First 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 March 31, 2009, resulting in significant changes in results over the prior year period. On March 31, 2009, the Company sold its dunnage bag business to Illinois Tool Works Inc. (ITW) for $36.1 million resulting in a pre-tax gain of $17.4 million.
Consolidated net sales of $140.6 million in the first quarter of 2009 increased from $67.1 million for the 2008 first quarter, up 109 percent, due to $85.8 million of sales from the Charleston acquisition. Operating income of $26.2 million for the 2009 quarter increased by $14.6 million, or 125 percent compared to the 2008 quarter primarily due to a $17.4 million pre-tax gain on the sale of the dunnage bag business and a $5.4 million benefit from the alternative fuel mixture tax incentive. Although the alternative fuel tax credit generated in the quarter was $23.9 million, $18.5 million was deferred and included in our first-in first-out based finished goods inventory and will be recognized in earnings upon the sale of that inventory. Operating income also benefited from the Company's mid-quarter implementation of cost curtailments and totaled approximately $3 million. However, offsetting these gains were the impacts from the significant volume declines, inflation on raw materials and energy costs which, despite the recent declines, are still higher than the prior year period, increased bad debt expense, and higher corporate expenses primarily due to the Charleston acquisition.
Unbleached kraft segment sales increased to $129.5 million, an increase of $69.1 million, or 115 percent over 2008. The Charleston acquisition accounted for $80.7 million of the sales increase. Due to a lack of orders in the first quarter of 2009, the Company decided to run four of its five machines alternating downtime among the machines at the Charleston mill. Therefore, the Company's production was down from fourth quarter 2008 levels by 22 percent. Our operating rate for the first quarter of 2009 was approximately 72%. Excluding the effect from the Charleston acquisition, sales were down on a volume decline of 20 percent, or $11.6 million, due to the very difficult economic environment. Average selling prices remained higher than the 2008 first quarter, but were down from the fourth quarter of 2008.
Operating income for the unbleached kraft segment was $15.5 million in the first quarter of 2009, a $0.9 million, or 6 percent increase, over the prior year. The $5.4 million alternative fuel mixture tax credit boosted operating income, but significant volume declines and a $2.4 million quarterly charge for the amortization of an intangible asset negatively impacted the results. The amortization is 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.
Excluding the Charleston acquisition, unbleached kraft segment operating income was down $1.7 million primarily due to lower volume, higher costs for raw materials and energy, and increased bad debt expense. Partially offsetting these negative impacts were benefits from the alternative fuel tax credit.
Net sales for the all other segment, consisting of the dunnage bag business and the Summerville lumber mill (Summerville), totaled $12.0 million. Summerville was acquired as part of the Charleston acquisition from MWV. Operating loss in the segment was $0.8 million for the first quarter of 2009 reflecting lower dunnage bag volume and low sales volumes and selling prices for Summerville mainly due to a continued slowdown in the number of new housing starts and lower consumer spending. As part of the dunnage bag business sale, the Company signed a long-term paper supply agreement with ITW.
Corporate expenses of $5.8 million for the first quarter of 2009 were $1.6 million higher than the comparable quarter in the prior year and reflected higher costs to support the Charleston acquisition, partially offset by lower compensation costs due to salary and benefit curtailments.
Interest expense of $4.9 million for the first quarter of 2009 increased by $4.2 million over the comparable quarter in 2008 and reflected the cost of the Company's new senior secured credit facility. Beginning in January 2009 the Company has been locking into interest rates on a monthly basis. In January, the Company reset the interest rate on the majority of its debt, or approximately $388 million of term loans, to 3.5 percent. Amortization of debt issuance costs amounted to $0.8 million for the first quarter of 2009 compared to $0.1 million for the 2008 quarter and increased due to the higher financing costs for the senior secured credit facility established as part of the CKD acquisition.
The effective tax rate for the 2009 quarter was 45.0 percent compared to 36.8 percent for the 2008 quarter and reflects higher taxes for the gain on sale of the dunnage bag business and a lower expected benefit from the domestic manufacturing tax deduction. The anticipated effective tax rate for the full year of 2009 is approximately 39 percent.
Cash Flow and Working Capital
Cash flow for the first quarter of 2009 reflects a $2.6 million outflow comprised of $3.6 million of cash used for operations, $27.3 million of cash provided by investing activities and $26.3 million of cash used for financing activities. Total debt outstanding as of March 31, 2009 was $414.5 million, down $25.9 million from year end mainly due to cash proceeds generated from the sale of the dunnage bag business. The Company was in compliance with all debt covenants at March 31, 2009.
In January 2009 the Company received a $9.3 million federal tax refund. An additional tax refund of approximately $4.3 million is expected later in 2009.
At March 31, 2009, the Company had working capital of $70 million.
Alternative Fuel Tax Credit
The federal government has implemented an incentive program through the U.S. Internal Revenue Code that provides 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. KapStone qualifies for the alternative fuel mixtures tax credit because it uses a bio-fuel known as black liquor, which is a byproduct of its wood pulping process, to power its mills.
In March, the Company was notified that its registration as an alternative fuel mixer was approved by the Internal Revenue Service. The Company submitted refund claims totaling $23.9 million for the first quarter covering fuel used at its Charleston mill from January 29 through March 31 and for its Roanoke Rapids mill from February 14 through March 31. On April 20, 2009, the Company received the $23.9 million refund. The Company now files for refunds on a weekly basis which approximate $3.2 million to $3.6 million at current operating rates. The credit is currently scheduled to expire on December 31, 2009. 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 would have a material adverse effect on KapStone's future cash flows and results of operations.
In summary, Stone commented, "We are hopeful that the demand for our products bottomed out in the first quarter, and we are cautiously optimistic that there is some meaningful strengthening in demand. However, demand will have to increase significantly before we are in a position to resume normal operations for all five of our machines. We expect cash flow from operations to be sufficient to meet our obligations, particularly with the continued benefit from the alternative fuel mixture tax incentive. We are focused on maintaining strong cash flows and reducing our debt to ensure a healthy and profitable future."
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 1,550 people.
SOURCE: KapStone Paper and Packaging Corp .