KapStone Posts Second Quarter Profit on Strong Sales
Aug. 4, 2010 - KapStone Paper and Packaging Corp. today reported results for the second quarter ended June 30, 2010.
- Net sales of $199 million, up 13 percent versus Q1 2010; up 27 percent, versus 2009
- Average revenue per ton of $585, up $50 versus Q1 2010; up $56 versus 2009
- Cash flows from operations of $35.0 million, up $12.0 million versus Q1 2010
- Adjusted diluted EPS of $0.17, up $0.23 from Q1 2010; up $0.59 versus 2009
"Our strong operating performance in the second quarter of 2010 coupled with favorable industry dynamics enabled KapStone to achieve record sales of $199.1 million, excluding the dunnage bag business," said Roger W. Stone, Chairman and Chief Executive Officer.
"Our mills produced 323,000 tons of paper and ran at a 99 percent operating rate. The $60 per ton price increase for linerboard and kraft paper announced in April should be fully realized next quarter. In July, we announced an additional price increase of $60 per ton for linerboard and $40 to $60 per ton for kraft paper, both expected to be substantially realized in the fourth quarter of 2010. KapStone's order backlog remains very strong.
"Our wood costs are declining from earlier in the year when unusually wet weather in the Southeast had put upward pressure on wood costs. We decided not to make any voluntary repayments on our low cost debt, and therefore, our cash balance grew to nearly $22 million at June 30th and net debt was $106 million," Stone added.
Second Quarter Operating Highlights
Net sales for the quarter ended June 30, 2010 were $199.1 million compared to $156.5 million for the second quarter of 2009, an increase of $42.6 million or 27.2 percent. The increase in net sales was driven by $23.7 million of higher sales volume in the second quarter of 2010 compared to the second quarter of 2009, mainly due to increased demand reflecting improving economic conditions, $12.2 million due to higher average selling prices and $8.0 million due to a more favorable product mix reflecting a lower percentage of export linerboard sales. Exchange rates negatively impacted net sales by $1.3 million.
Excluding 2009's $48.5 million of alternative fuel mixture tax credits ("AFTC") (the tax credit expired on December 31, 2009), operating income of $12.5 million for the 2010 quarter increased by $27.6 million compared to the 2009 quarter primarily due to approximately $12.4 million of higher sales volume, $12.2 million of higher average selling prices, $6.2 million due to improved mix, $2.4 million of lower amortization expenses resulting from the expiration of a coal contract acquired as part of the Charleston Kraft Division acquisition, and $1.4 million of lower selling and administrative expenses due to the termination of the MeadWestvaco transitional support agreement in the fourth quarter of 2009. Partially offsetting these gains were $4.0 million of higher compensation costs as certain benefits were reinstated in the first quarter of 2010. Additionally, foreign exchange rates negatively impacted operating income by $1.3 million.
Interest expense of $0.8 million for the second quarter of 2010 decreased by $3.3 million over the comparable quarter in 2009 and reflected significantly lower debt levels as the Company made over $250 million of debt repayments in the last twelve months. At June 30, 2010, the interest rate on the majority of the Company's debt is 1.85 percent.
The effective tax rate for the 2010 second quarter was 33.7 percent compared to 36.5 percent for the 2009 second quarter. The 2010 effective tax rate is lower due to the benefit related to the refundable tax credit from the inorganic content of black liquor burned in 2009 and a higher expected benefit from the domestic manufacturing deduction.
Cash Flow and Working Capital
Cash and cash equivalents increased by $18.0 million in the quarter ended June 30, 2010, reflecting $35.0 million provided by operating activities offset by $8.3 million used in investing activities and $8.7 million used in financing activities.
Total debt outstanding as of June 30, 2010, was $128.2 million and was reduced by $8.8 million during the second quarter of 2010. The Company was in compliance with all debt covenants at June 30, 2010.
At June 30, 2010, the Company had approximately $73.7 million of working capital and $87.7 million of revolver borrowing capacity. During the quarter ended June 30, 2010, the Company received in cash approximately $13.2 million in federal income tax refunds and $7.9 million from alternative fuel mixture tax credits which were reflected in operating income in the quarter ended March 31, 2010. KapStone made no voluntary debt prepayments in the second quarter of 2010, but rather started to build cash reserves.
In December 2009, the Company filed its registration as a cellulosic biofuel producer for the year 2009 and is awaiting approval. The cellulosic biofuel tax credit ("CBTC"), under Section 40(b)(6) of the Internal Revenue Service ("IRS") Code, is a $1.01 per gallon credit for cellulosic biofuel producers. The IRS recently indicated in a memorandum dated June 28, 2010 that black liquor qualifies for the cellulosic biofuel producer credit. However, the IRS also made it clear that companies could not use the same gallon of black liquor to claim both the AFTC and the CBTC. The IRS is expected to provide guidance for converting AFTC's to CBTC's for qualifying producers. KapStone claimed the AFTC for all gallons of black liquor burned once its AFTC registrations were approved in early 2009. At this time, the Company estimates a $22 million potential future after tax benefit for CBTC relating to black liquor burned in 2009 prior to the Company's AFTC registrations being approved. If the Company were to receive any tax credits related to cellulosic biofuel it would be realized by reducing income tax payable beginning in late 2010.
In summary, Stone commented, "We achieved two key goals during the second quarter as we successfully implemented price increases and improved our product mix by converting a portion of our export linerboard business to domestic customers. We believe that KapStone's second half of 2010 will benefit on an increasing basis from the realization of the announced price increases and better mix management. We are focused on maintaining strong cash flows to ensure a healthy and profitable future."
SOURCE: KapStone Paper and Packaging Corp.