KapStone 2Q Income Boosted by Alternative Fuel Tax Credits
July 30, 2009 - KapStone Paper and Packaging Corp. today reported results for the second quarter ended June 30, 2009.
"Having endured the lowest sustained operating rates that I can recall, I am relieved to report that we have seen continued volume improvement in our markets since the first quarter of this year," said Roger W. Stone, Chairman and Chief Executive Officer.
"In June, we shipped the highest volume of product since last September, and by mid-June, we were able to bring all our paper machines back on-line while substantially reducing our inventory levels from year-end. We optimized machine down-time by transferring some production from Charleston to Roanoke Rapids, and our operations ran well during the quarter. We benefited from lower operating costs as a result of lower raw materials costs and the curtailment savings we previously announced," Stone said.
"However, pricing deterioration, lower operating rates, and a less favorable product mix negatively impacted our earnings in the second quarter," he said.
"Generating strong cash flows and reducing our debt are key objectives, and by July 31st we will make $40 million of voluntary debt pre-payments. Further, we intend to continue to make voluntary debt pre-payments during the third quarter," Stone added.
Second 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 June 30, 2009, resulting in significant changes in results over the prior year period.
Consolidated net sales of $156.5 million in the second quarter of 2009 increased from $68.2 million for the 2008 second quarter, or a 130 percent increase. The Charleston acquisition accounted for $102.4 million of the net sales increase. Operating income of $33.4 million for the 2009 quarter increased by $20.2 million, or 152 percent compared to the 2008 quarter primarily due to $48.6 million of alternative fuel mixture tax credits partially offset by lower selling prices, unfavorable product mix and higher corporate expenses primarily due to the Charleston acquisition.
Unbleached kraft segment net sales increased to $150.4 million, an increase of $89.9 million, or 148 percent over 2008. The Charleston acquisition accounted for $96.3 million of the net sales increase. Net sales in the 2009 second quarter improved by $20.9 million compared to the first quarter of 2009 due to an increase in incoming orders. To balance production with demand, the Company ran four of its five paper machines alternating downtime among the three machines at the Charleston mill. By mid-June 2009, both paper mills were running at normal capacity. Average selling prices declined by 11 percent from the first quarter of 2009 to the 2009 second quarter.
Operating income for the unbleached kraft segment increased to $40.9 million in the second quarter of 2009, a $25.0 million, or a 157 percent increase, over the prior year. The $48.6 million of alternative fuel mixture tax credits boosted operating income in addition to savings from lower operating costs partially offset by lower operating rates and lower average selling prices. Included in the second quarter of 2009 operating results is a $2.4 million charge 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 acquisition. The coal contract terminates on December 31, 2009.
Net sales in the second quarter of 2009 for the all other segment, consisting of the dunnage bag business and the Summerville lumber mill (Summerville), totaled $6.1 million compared to $8.9 million for the 2008 second quarter. There were no sales for the dunnage bag business in the second quarter of 2009 due to its sale on March 31, 2009. Summerville was acquired as part of the Charleston acquisition from MWV. Operating loss in the segment was $1.5 million for the second quarter of 2009 reflecting the first quarter sale of the dunnage bag business 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.
Corporate expenses of $5.3 million for the second quarter of 2009 were $1.3 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. Corporate expenses in the second quarter of 2009 were $0.5 million less than the first quarter of 2009 as the Company was able to reduce the amount of support services provided by MWV. The Company expects to completely transition from MWV's support services before the end of the year eliminating approximately an additional $0.5 million of expense per quarter.
Interest expense of $4.2 million for the second quarter of 2009 increased by $3.7 million over the comparable quarter in 2008 and reflected the cost of the Company's new senior secured credit facility. Effective August 1, 2009, the Company's average interest rate on its term loans will be reduced to 2.9 percent down from an average of 3.5 percent for the quarter ended June 30, 2009. The reduction in the interest rates and the lower debt is projected to save the Company $1.3 million of interest charges in the third quarter of 2009 compared to the 2009 second quarter although there will be a non-cash charge of approximately $0.6 million in the third quarter for the acceleration of the amortization of the deferred financing fees associated with the senior secured notes that will be paid in full. Amortization of debt issuance costs amounted to $0.9 million for the second quarter of 2009 compared to less than $0.1 million for the 2008 quarter and increased due to the higher financing costs for the new senior secured credit facility established as part of the Charleston acquisition.
The effective tax rate for the 2009 quarter was 36.5 percent compared to 36.8 percent for the 2008 quarter. The anticipated effective tax rate for the full year of 2009 is approximately 38 percent.
Cash Flow and Working Capital
Cash flow for the first six months of 2009 reflects $62.8 million generated from operating activities and $62.1 million of cash used to paydown debt, mainly due to cash proceeds generated from the sale of the dunnage bag business and cash from operations. Total debt outstanding as of June 30, 2009 was $378.3 million. By July 31, 2009 the Company will make $40 million of voluntary debt prepayments. The Company reached agreement with the lender of the 8.3 percent notes to pre-pay the senior secured notes in their entirety. The Company anticipates making further voluntary debt prepayments by September 30, 2009. The cash receipts and pre-tax earnings generated from the alternative fuel mixture tax credit are currently expected to exceed $50 million for the third quarter of 2009.
The Company was in compliance with all debt covenants at June 30, 2009.
At June 30, 2009, the Company had working capital of $67 million.
In summary, Stone commented, "We see demand for our products increasing. Pricing seems to have stabilized, and in fact, with improved market demand and low industry inventory levels, on July 15th we announced a $50/ton price increase for our kraft paper. With higher operating rates, increased shipments, potential benefits from kraft paper price increases, a lower cost profile, and a much stronger balance sheet, we are optimistic about the balance of 2009 and the opportunities that await us."
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 Corporation