Kapstone Reports Third Quarter 2011 Results

Nov. 2, 2011 - KapStone Paper and Packaging Corporation today reported results for the third quarter ended September 30, 2011.

  • Record net sales of $216 million, up 4 percent versus 2010
  • Adjusted EBITDA of $42.3 million, up $3.6 million versus 2010
  • Diluted EPS of $0.35, down $0.47, or 57 percent versus 2010
  • Adjusted diluted EPS of $0.39 equal to 2010
  • Free cash flow of $0.79 per share, up $0.26 per share versus 2010

Roger W. Stone, Chairman and Chief Executive Officer, stated, "KapStone's strong production in the third quarter of 2011 enabled us to achieve record net sales of $216 million and generate $38 million of free cash flow. Our mills produced nearly 329,000 tons of paper, and we improved operating margins year-over-year with pricing and productivity improvements. We are implementing a $50 per ton price increase for our kraft paper grades which will be fully realized in early 2012. Our order backlog remains strong."

Third Quarter Operating Highlights

Net sales for the quarter ended September 30, 2011 were $215.8 million, an increase of 4.0 percent, when compared to third quarter of 2010 net sales of $207.5 million. The increase in net sales was attributable primarily to higher unit selling prices. Average revenue per ton increased to $639 in 2011 versus $614 during the third quarter of 2010 and accounted for $7.3 million of the improvement in sales. The higher average unit selling prices reflect full realization of price increases effective in 2010 and the first half of 2011. Sales revenues in the third quarter of 2011 benefited by $1.5 million from favorable exchange rates. Offsetting the increase in net sales was $0.5 million due to Hurricane Irene in August 2011.

Operating income of $30.1 million for the 2011 quarter exceeded prior year's results by $3.5 million. The primary reasons for the improved results were higher unit pricing and improved mix which contributed $7.9 million and productivity improvements of $1.7 million. The stronger Euro, up 10 percent on the third quarter average, improved operating income by $1.5 million. However, operating income was negatively impacted by $5.1 million of inflation on input costs, mainly for caustic soda, higher wages, and freight-in for wood and $1.2 million for higher maintenance work at our Charleston mill. In addition, KapStone incurred $1.1 million of expenses related to the USC acquisition.

Interest expense and amortization of debt issuance costs was $1.0 million for the third quarter of 2011, which decreased by $0.3 million versus the comparable quarter in 2010 as a result of year over year outstanding net debt reduction of $60.4 million. Net debt at September 30, 2011, is $18.3 million, and the interest rate on the majority of the Company's debt is 1.74 percent.

The effective tax rate for the 2011 third quarter was 42.3 percent compared to negative 49.9 percent for the 2010 third quarter. The 2011 effective tax rate includes a $0.7 million discrete adjustment as 2010 income tax returns were filed during the quarter and a $0.6 million reduction in the expected benefit from the 2011 domestic manufacturing deduction. The 2010 effective tax rate included a $20.7 million benefit from the cellulosic biofuel producer's credit. KapStone expects a 39.5 percent effective tax rate for the fourth quarter of 2011.

In August 2011, the Internal Revenue Service advised us that our tax returns for the years 2007 through 2009 have been forwarded to the Joint Committee on Taxation for final review and approval.

Cash Flow and Working Capital

Cash and cash equivalents increased by $17.5 million in the quarter ended September 30, 2011, reflecting $51.0 million provided by operating activities offset by $28.3 million used in investing activities and $5.1 million used in financing activities. Cash used for investing activities includes a $15.0 million deposit associated with the U.S. Corrugated Acquisition ("USC") which was paid in conjunction with signing the definitive agreement on September 22, 2011.

Total net debt outstanding as of September 30, 2011, was $18.3 million and was reduced by $38.4 million during the third quarter of 2011.

At September 30, 2011, the Company had approximately $82.3 million of cash (including $15.0 million deposit for USC), $114.7 million of working capital and $91.7 million of revolver borrowing capacity.

USC Acquisition

In conjunction with our consummation of the USC acquisition on October 31, 2011, we entered into a new credit agreement with Bank of America. As we previously reported, the new credit agreement includes a $375.0 million five year, LIBOR based, term loan and a $150.0 million revolving credit facility. At closing, we retired our remaining $100.8 million due under our old credit agreement and paid $12.5 million in bank fees.

Conclusion

Stone concluded, "Our legacy KapStone operations are performing very well, and we are now thoroughly engaged in welcoming and integrating U.S. Corrugated into the KapStone family."

Headquartered in Northbrook, IL, KapStone Paper and Packaging Corporation is a leading North American producer of unbleached kraft paper products, linerboard and shipping containers. The Company is the parent company of KapStone Kraft Paper Corporation which includes paper mills in Roanoke Rapids, NC, North Charleston, SC, and Cowpens, SC, fourteen converting locations in the east and midwest, and a lumber mill in Summerville, SC. The business employs approximately 2,700 people.

SOURCE: KapStone Paper and Packaging Corporation