Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30,
2009
o
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period
from to
Commission File Number: 001-33494
KapStone Paper and Packaging
Corporation
(Exact name of registrant as specified in its charter)
Delaware
|
|
20-2699372
|
(State or Other
Jurisdiction of
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(I.R.S. Employer
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Incorporation or
Organization)
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Identification
No.)
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KapStone Paper and Packaging
Corporation
1101 Skokie Blvd., Suite 300
Northbrook, IL 60062
(Address of Principal Executive Offices
including zip code)
Registrants Telephone Number, including area
code
(847) 239-8800
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files). Yes
o
No
o
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definitions of large accelerated filer, accelerated
filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
o
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Accelerated filer
x
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|
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|
Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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|
|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
There were 45,413,624 shares of the Registrants
Common Stock, $0.0001 par value, outstanding as of October 30, 2009,
excluding 40,000 shares held as treasury shares.
Table of Contents
KapStone Paper and Packaging Corporation
Index to Form 10-Q
TABLE OF CONTENTS
i
Table of Contents
Part 1. Financial Information
Item 1. Financial Statements
KapStone
Paper and Packaging Corporation
Consolidated
Balance Sheets
(In thousands, except share and per
share amounts)
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|
September 30,
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December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
3,074
|
|
$
|
4,165
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|
Trade accounts
receivable, less allowances of $2,884 in 2009 and $2,421 in 2008
|
|
59,615
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|
71,489
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|
Other receivables
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|
15,189
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|
6,207
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|
Inventories
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|
61,600
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|
89,692
|
|
Refundable and prepaid
income taxes
|
|
2,947
|
|
14,145
|
|
Prepaid expenses and
other current assets
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|
3,193
|
|
1,748
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|
Restricted cash
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|
2,500
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|
|
|
Deferred income taxes
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|
5,620
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|
3,363
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|
Total current assets
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153,738
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|
190,809
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|
|
|
|
|
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Plant, property and
equipment, net
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470,304
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483,780
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Other assets
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1,553
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|
882
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|
Intangible assets, net
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29,517
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|
45,195
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|
Goodwill
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|
5,449
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|
6,524
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|
|
|
|
|
|
|
Total assets
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$
|
660,561
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$
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727,190
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|
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Liabilities
and Stockholders Equity
|
|
|
|
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|
Current liabilities:
|
|
|
|
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|
Current portion of
long-term debt and notes
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|
$
|
25,960
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|
$
|
40,556
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|
Accounts payable
|
|
36,404
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|
42,214
|
|
Accrued expenses
|
|
16,607
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|
30,462
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|
Accrued compensation
costs
|
|
8,689
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|
13,646
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|
Total current
liabilities
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87,660
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|
126,878
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|
|
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Other liabilities:
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|
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Long-term debt and
notes, net
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187,059
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389,374
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Pension and
post-retirement benefits
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6,994
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8,355
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Deferred income taxes
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32,757
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|
15,951
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Other liabilities
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23,556
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5,865
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|
Total other liabilities
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250,366
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419,545
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Commitments and
contingencies
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Stockholders equity:
|
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Preferred stock $0.0001
par value; 1,000,000 shares authorized; no shares issued and outstanding
|
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|
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Common stock $0.0001
par value, 175,000,000 shares authorized; 45,413,624 shares outstanding
(40,000 treasury shares outstanding) at September 30, 2009 and
28,370,248 outstanding at December 31, 2008 (40,000 treasury shares
outstanding)
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5
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3
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Additional paid-in
capital
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219,107
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132,206
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Retained earnings
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103,662
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48,766
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Accumulated other
comprehensive loss
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(239
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)
|
(208
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)
|
Total stockholders
equity
|
|
322,535
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180,767
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|
|
|
|
|
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Total liabilities and
stockholders equity
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$
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660,561
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$
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727,190
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See notes to consolidated financial statements
1
Table of Contents
KapStone Paper and Packaging Corporation
Consolidated Statements of Income
(In
thousands, except share and per share amounts)
(Unaudited)
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|
Three
Months Ended September 30,
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Nine
Months Ended September 30,
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2009
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2008
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2009
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2008
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|
|
|
|
|
|
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Net sales
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$
|
170,335
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$
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207,671
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$
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467,412
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$
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342,962
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|
Cost of sales,
excluding depreciation and amortization
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86,812
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151,064
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271,650
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233,422
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Freight and
distribution expenses
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16,262
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19,969
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42,755
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33,480
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|
Selling, general and
administrative expenses
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7,105
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9,757
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23,292
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19,251
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|
Depreciation and
amortization
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13,664
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12,953
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40,761
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18,381
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|
Gain/(loss) on sale of
business
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(278
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)
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16,417
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|
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Other operating income
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285
|
|
218
|
|
733
|
|
589
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|
Operating income
|
|
46,499
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|
14,146
|
|
106,104
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|
39,017
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|
Foreign exchange
gain/(loss)
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175
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|
(607
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)
|
48
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|
(607
|
)
|
Interest income
|
|
|
|
51
|
|
1
|
|
891
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|
Interest expense
|
|
5,353
|
|
8,772
|
|
16,097
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|
9,985
|
|
Income before provision
for income taxes
|
|
41,321
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|
4,818
|
|
90,056
|
|
29,316
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|
Provision for income
taxes
|
|
15,649
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|
2,513
|
|
35,160
|
|
11,530
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,672
|
|
$
|
2,305
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|
$
|
54,896
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|
$
|
17,786
|
|
|
|
|
|
|
|
|
|
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|
Weighted-average number
of shares outstanding:
|
|
|
|
|
|
|
|
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|
Basic
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36,548,515
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|
26,904,070
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31,096,354
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|
25,859,149
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|
Diluted
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36,940,773
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38,012,635
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31,355,785
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36,429,893
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|
Net income per share:
|
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|
|
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|
|
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Basic
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$
|
0.70
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|
$
|
0.09
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$
|
1.77
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$
|
0.69
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|
Diluted
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|
$
|
0.69
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|
$
|
0.06
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|
$
|
1.75
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|
$
|
0.49
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|
See notes to consolidated financial statements
2
Table
of Contents
KapStone
Paper and Packaging Corporation
Consolidated
Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
Operating
activities
|
|
|
|
|
|
Net income
|
|
$
|
54,896
|
|
$
|
17,786
|
|
Adjustments to
reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
40,761
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|
18,381
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|
Stock based
compensation expense
|
|
1,686
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|
1,189
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|
Amortization of debt
issuance costs
|
|
4,210
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|
1,170
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|
Loss on disposal of
fixed assets
|
|
756
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|
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|
Deferred income taxes
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|
13,750
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|
12,999
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|
Gain on sale of
business
|
|
(16,417
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)
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|
Changes in operating
assets and liabilities:
|
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|
|
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|
Trade accounts
receivable, net
|
|
9,081
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|
(17,367
|
)
|
Other receivables
|
|
(12,100
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)
|
(3,254
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)
|
Inventories
|
|
23,242
|
|
438
|
|
Refundable and prepaid
income taxes
|
|
13,124
|
|
(11,416
|
)
|
Prepaid expenses and
other current assets
|
|
(1,445
|
)
|
(1,683
|
)
|
Other assets
|
|
(1,041
|
)
|
51
|
|
Accounts payable
|
|
(5,102
|
)
|
(3,516
|
)
|
Accrued expenses
|
|
3,386
|
|
13,767
|
|
Accrued compensation
costs
|
|
(4,997
|
)
|
936
|
|
Accrued income taxes
|
|
|
|
(1,477
|
)
|
Net cash provided by
operating activities
|
|
123,790
|
|
28,004
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
CKD acquisition
|
|
1,000
|
|
(470,451
|
)
|
KPB earn-out
|
|
(3,977
|
)
|
|
|
Proceeds from sale of
business
|
|
34,898
|
|
|
|
Restricted cash
|
|
(2,500
|
)
|
|
|
Capital expenditures
|
|
(18,656
|
)
|
(12,714
|
)
|
Net cash provided by
(used in) investing activities
|
|
10,765
|
|
(483,165
|
)
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
Proceeds from revolving
credit facility
|
|
64,300
|
|
71,800
|
|
Repayments on revolving
credit facility
|
|
(76,700
|
)
|
(17,000
|
)
|
Proceeds from long-term
debt and notes
|
|
|
|
455,000
|
|
Repayments of long-term
debt and notes
|
|
(208,093
|
)
|
(71,953
|
)
|
Proceeds from the
exercises of warrants into common stock
|
|
85,217
|
|
15,146
|
|
Debt issuance costs
|
|
(370
|
)
|
(12,593
|
)
|
Net cash (used in)
provided by financing activities
|
|
(135,646
|
)
|
440,400
|
|
|
|
|
|
|
|
Net decrease in cash
and cash equivalents
|
|
(1,091
|
)
|
(14,761
|
)
|
Cash and cash
equivalents-beginning of period
|
|
4,165
|
|
56,635
|
|
Cash and cash
equivalents-end of period
|
|
$
|
3,074
|
|
$
|
41,874
|
|
See notes to consolidated financial statements
3
Table of
Contents
KAPSTONE PAPER AND PACKAGING
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per
share amounts)
(Unaudited)
1.
Financial Statements
The accompanying
unaudited consolidated financial statements of KapStone Paper and Packaging
Corporation (the Company, we, us, our or KapStone) have been prepared
in accordance with U.S. generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of a normal recurring nature) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended September 30,
2009 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2009. For further information, refer to the
consolidated financial statements and related footnotes included in our Annual
Report on Form 10-K for the year ended December 31, 2008.
2.
Reclassification
Receivables from sales of
shaft horsepower of $2.9 million as of December 31, 2008 have been
reclassified from prepaid and other current assets to trade account receivables
to conform to the current period presentation.
3.
Accounting Pronouncements
The Accounting Standards
Codification (ASC) has become the source of authoritative U.S. generally
accepted accounting principles (U.S. GAAP). The ASC only changes the
referencing of financial accounting standards and does not change or alter
existing U.S. GAAP.
The Company adopted a new
accounting standard included in ASC 855, Subsequent Events which establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued. This statement became effective for
interim and annual periods ending after June 15, 2009.
The Company has evaluated
subsequent events after the balance sheet date of September 30, 2009
through November 4, 2009, which is the date of the accompanying financial
statements were issued. Refer to Note 16 for the required disclosure.
The Company adopted a new
accounting standard included in ASC 820, Fair Value Measurements and Disclosures
which provide additional guidance for estimating fair value when the volume and
level of activity for the asset or liability have significantly decreased. This
standard also includes guidance on identifying circumstances that indicate a
transaction is not orderly. This standard emphasizes that even if there has
been a significant decrease in the volume and level of activity for the asset
or liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. Fair value is the price
that would be received upon sale of an asset or paid to transfer a liability in
an orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market
conditions. This standard became effective for interim and annual reporting
periods ending after June 15, 2009, and is applied prospectively. The
adoption of this standard did not have an effect on the consolidated financial
statements.
The Company adopted a new
accounting standard included in ASC 825, Financial Instruments requiring disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. This standard became effective for interim
and annual reporting periods ending after June 15, 2009. The adoption of
this standard did not have an effect on the consolidated financial statements.
4
4. Sale of Dunnage Bag Business
On March 31, 2009
the Company consummated the sale of its dunnage bag business to Illinois Tool
Works Inc. for $36.0 million less working capital adjustments. The Company
considered the sale an opportunity to lower its debt and focus on its core
business. As a condition of sale, $2.5 million of the sale proceeds are being
held in escrow until September 30, 2010 to be available to satisfy any
losses or indemnity claims that may arise against the Company in connection
with the sale. The Company realized a gain on the sale of the dunnage bag
business as follows (in thousands):
Sale
price
|
|
$
|
36,000
|
|
Working
capital adjustments
|
|
(1,091
|
)
|
|
|
34,909
|
|
Transaction
costs
|
|
(100
|
)
|
Net
assets of dunnage bag business
|
|
(18,392
|
)
|
Gain
on sale
|
|
$
|
16,417
|
|
The following table shows
the major categories of net assets of the dunnage bag business as of March 31,
2009 and December 31, 2008, respectively (in thousands):
|
|
(unaudited)
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Trade
accounts receivable, net
|
|
$
|
2,793
|
|
$
|
2,742
|
|
Inventories
|
|
4,850
|
|
5,281
|
|
Plant,
property and equipment
|
|
2,261
|
|
2,318
|
|
Intangible
assets
|
|
5,701
|
|
5,727
|
|
Goodwill
|
|
3,934
|
|
1,064
|
|
Accounts
payable and accrued expenses
|
|
(1,147
|
)
|
(2,522
|
)
|
Total
net assets
|
|
$
|
18,392
|
|
$
|
14,610
|
|
As a result of the sale,
the Company incurred an earn-out liability of $4.0 million in accordance with
the Kraft Paper Business (KPB) asset purchase agreement dated June 23,
2006 with International Paper Company (IP). The terms of the KPB asset
purchase agreement include a contingent earn-out payment due in 2012 (the fifth
anniversary of the acquisition); however, in the event of a sale of the dunnage
bag business prior to that date, a percentage of the earn-out becomes due and
payable within 30 days following the sale provided certain criteria are met.
The earn-out was paid on April 30, 2009.
The terms of the dunnage
bag sale agreement include a contingency for certain slow-moving inventory
items, which were excluded from the working capital adjustment calculated at
closing. In the quarter ended September 30, 2009, the Company incurred
approximately $0.3 million for working capital adjustments related to this contingency.
For
segment reporting purposes, the dunnage bag business is included in all other.
5.
Alternative Fuel Mixture 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 mixture 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 2009, the
Internal Revenue Service approved the Companys registration as an alternative
fuel mixer. The Company generated refund claims totaling $121.9 million for the
first nine months of 2009 covering fuel used at its Charleston mill from January 29
th
through September 30
th
and at its
Roanoke Rapids mill from February 14
th
through September 30
th
. At September 30,
2009, $14.4 million of the credit was included as a reduction to finished goods
inventory. For the three and nine month periods ended September 30, 2009,
$53.5 million and $107.5 million, respectively, of the alternate fuel mixture
tax credits were recorded as a reduction to cost of sales.
5
Table of
Contents
The alternate fuel
mixture tax credit is scheduled to expire on December 31, 2009.
6. Inventories
Inventories consist of
the following at September 30, 2009, and December 31, 2008,
respectively (in thousands):
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Raw materials
|
|
$
|
13,702
|
|
$
|
19,877
|
|
Work in process
|
|
1,155
|
|
2,070
|
|
Finished goods
|
|
27,576
|
|
49,804
|
|
Replacement parts and
supplies
|
|
19,167
|
|
17,941
|
|
Total inventories
|
|
$
|
61,600
|
|
$
|
89,692
|
|
7. Accrued Expenses
Accrued expenses consist
of the following at September 30, 2009, and December 31, 2008,
respectively (in thousands):
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Accrued interest
|
|
$
|
115
|
|
$
|
7,024
|
|
Accrued taxes other
than income
|
|
4,166
|
|
6,896
|
|
Accrued energy costs
|
|
4,301
|
|
5,453
|
|
Other accuals
|
|
8,025
|
|
11,089
|
|
Total accued expenses
|
|
$
|
16,607
|
|
$
|
30,462
|
|
8. Long-Term Debt
Long-term debt and notes
at September 30, 2009 and December 31, 2008, are summarized as
follows (in thousands):
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Term A loan with interest payable monthly at LIBOR
plus 2.625%
|
|
$
|
206,650
|
|
$
|
364,616
|
|
Term B loan with interest payable monthly at LIBOR
plus 3.5%
|
|
13,247
|
|
23,373
|
|
Senior Notes with interest payable quarterly at
8.3%
|
|
|
|
40,000
|
|
Revolving credit facility (4.75% at
December 31, 2008)
|
|
|
|
12,400
|
|
Sub-total
|
|
219,897
|
|
440,389
|
|
Less current portion of long-term debt and notes
|
|
(25,960
|
)
|
(40,556
|
)
|
Less unamortized debt issuance costs
|
|
(6,878
|
)
|
(10,459
|
)
|
|
|
|
|
|
|
|
|
Total long-term debt and notes, net
|
|
$
|
187,059
|
|
$
|
389,374
|
|
In accordance with the
Companys Senior Credit Agreement, $85.2 million of mandatory prepayments were
made as a result of exercises of common stock warrants in the quarter ended September 30,
2009. In addition, the Company made voluntary prepayments of $30.2 million. In
connection with the mandatory and voluntary prepayments, the Company amortized
an additional $1.2 million of debt issuance costs in the quarter ended September 30,
2009.
In the quarter ended September 30,
2009, the Company extinguished the remaining $33.6 million of its senior notes
in addition to a scheduled principal payment of $3.0 million. In connection
with the extinguishment the Company amortized an additional $0.6 million of
debt issuance costs.
6
At September 30,
2009, $13.0 million of letters of credit were outstanding under the Senior
Credit Agreement.
9.
Income Taxes
The Companys U.S.
federal statutory income tax rate is 35.0% for 2009 and 2008. The Companys
effective tax rate for the nine months ended September 30, 2009 and 2008
was 39.0% and 39.3%, respectively.
During the three months
ended September 30, 2009, the Company established a $41.3 million liability for
unrecognized tax benefits related to the tax position taken regarding the
alternative fuel mixture tax credits all of which would impact the effective
tax rate if recognized. It is reasonably possible that the total amount of
unrecognized tax benefit relating to the tax position taken regarding the
alternative fuel mixture tax credits will increase by approximately $27.7
million within the next twelve months.
In the normal course of
business, we are subject to examination by taxing authorities. The Companys
open tax years are 2006 through 2008. The Companys 2007 and 2008 federal
income tax returns are currently under examination by the Internal Revenue
Service (IRS).
10. Net Income Per Share
Basic and diluted net
income per share is calculated as follows (in thousands except for share and
per share data):
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net income as reported
|
|
$
|
25,672
|
|
$
|
2,305
|
|
$
|
54,896
|
|
$
|
17,786
|
|
Weighted-average number
of common shares for basic net income per share
|
|
36,548,515
|
|
26,904,070
|
|
31,096,354
|
|
25,859,149
|
|
Incremental effect of
dilutive common stock equivalents:
|
|
|
|
|
|
|
|
|
|
Common stock warrants
|
|
|
|
10,734,412
|
|
|
|
10,331,418
|
|
Underwriters purchase
option
|
|
|
|
243,280
|
|
|
|
120,111
|
|
Unvested stock options
|
|
92,083
|
|
|
|
30,694
|
|
|
|
Unvested restricted
stock awards
|
|
300,175
|
|
130,873
|
|
228,737
|
|
119,215
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number
of shares for diluted net income
|
|
36,940,773
|
|
38,012,635
|
|
31,355,785
|
|
36,429,893
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
basic
|
|
$
|
0.70
|
|
$
|
0.09
|
|
$
|
1.77
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
diluted
|
|
$
|
0.69
|
|
$
|
0.06
|
|
$
|
1.75
|
|
$
|
0.49
|
|
Common stock warrants
were not included in the calculation of diluted earnings per share for the
three and nine months ended September 30, 2009 since the weighted average
share price per share of common stock was $4.96 and $3.42, respectively,
compared to the warrants conversion price of $5.00 and the effect would be
anti-dilutive.
Stock option grants
totaling 2.1 million and 2.2 million were outstanding during the three and nine
months ended September 30, 2009, respectively, but were not included in
the computation of diluted earnings per share because the effect of including
the stock option grants would be anti-dilutive. Stock option grants totaling
1.3 million were outstanding during the three and nine months ended September 30,
2008, but were not included in the computation of diluted earnings per share
because the effect of including the stock option grants would be anti-dilutive.
Underwriters purchase
option with respect to 1,000,000 Units was outstanding during the three and
nine months ended September 30, 2009, but such Units were not included in
the computation of diluted earnings per share because the effect of including
the underwriters option would be anti-dilutive.
7
Table of
Contents
11.
Pension plan and post retirement benefits
Defined
Benefit Plan
The KapStone Paper and
Packaging Corporation Defined Benefit Plan (Plan) provides benefits for
approximately 1,000 union employees.
As part of the July 1,
2008 Charleston Kraft Division acquisition, approximately 615 union employees
were added to the Companys Plan. As a consequence of the sale of the dunnage
bag business approximately 124 union employees ceased earning benefits under
the Plan as of March 31, 2009.
Net pension cost
recognized for the three and nine months ended September 30, 2009 and 2008
for the Companys pension plan, is as follows (in thousands):
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Service cost for
benefits earned during the year
|
|
$
|
703
|
|
$
|
694
|
|
$
|
2,145
|
|
$
|
1,306
|
|
Interest cost on projected
benefit obligation
|
|
93
|
|
60
|
|
280
|
|
138
|
|
Expected return on plan
assets
|
|
(38
|
)
|
(7
|
)
|
(115
|
)
|
(19
|
)
|
Net pension cost
|
|
$
|
758
|
|
$
|
747
|
|
$
|
2,310
|
|
$
|
1,425
|
|
KapStone funds its Plan
according to IRS funding requirements. Based on those requirements, the Company
funded $3.8 million to the Plan for the nine months ended September 30,
2009. An additional $1.7 million is planned to be funded prior to December 31,
2009.
Other
Post-Retirement Benefits
Net post-retirement cost
recognized for the three and nine months ended September 30, 2009 and 2008
for the Companys retiree medical and life insurance plan was less than $0.1
million.
Defined
Contribution Plans
The KapStone Defined
Contribution Plan (Contribution Plan) covers all eligible employees. Company
contributions to the Contribution Plan are based on matching of employee
contributions, vest immediately for salaried and non-bargained hourly employees
and vest after three years for union employees. For the three months ended September 30,
2009 and 2008, the Company recognized expense of $0.4 million and $0.8 million,
respectively, for matching contributions. For the nine months ended September 30,
2009 and 2008, the Company recognized expense of $1.6 million and $1.5 million,
respectively, for matching contributions.
The Companys Retirement
Savings Plan, which covers all eligible salaried and non-bargained hourly
employees, provides for an annual contribution based on an employees salary
and age. The Company contributions vest 100% after three years. For the
three months ended September 30, 2009 and 2008, the Company recognized
expense of $0 and $0.5 million, respectively. For the nine months ended September 30,
2009 and 2008, the Company recognized expense of $0 and $0.8 million,
respectively.
The Company temporarily
suspended these benefits for salaried and non-bargained hourly employees in the
first quarter of 2009 due to economic conditions.
12. Stock-Based Compensation
On December 29,
2006, stockholders approved the 2006 Incentive Plan (2006 Plan). A
maximum of 3.0 million shares of our common stock, available for issuance
pursuant to stock options, restricted stock awards or stock appreciation rights
(collectively called Awards), may be granted under the 2006 Plan. If any
Award is forfeited or expires without being exercised, or if restricted stock
is repurchased by the Company, the shares of stock subject to the Award shall
be available for additional grants under the 2006 Plan. Awards may be granted
to employees, officers and directors of, and consultants or advisors to, the
Company and any subsidiary corporations. Options intended to qualify, under the
standards set forth in certain federal
tax rules, as incentive stock options (ISOs) may be granted only to
employees.
8
Table of
Contents
The Company accounts for
stock awards under ASC 718,
Compensation
- Stock Compensation, which requires that the cost resulting from all
share-based payment transactions be recognized as compensation cost over the
vesting period based on the fair value of the instrument on the date of grant.
The Company recognized $0.6 million and $1.7 million of compensation cost for
the three and nine months ended September 30, 2009, respectively, and $0.5
million and $1.2 million for the three and nine months ended September 30,
2008, respectively.
Stock
Options
In May 2009, the
Companys Compensation Committee granted 829,702 stock options to directors,
executive officers and employees of the Company. The stock options vest as follows: 50% after
two years and the remaining 50% after three years. The stock options
awarded in 2009 have a contractual term of ten years. The stock options are
subject to forfeiture should the recipient terminate his or her employment with
the Company for certain reasons prior to vesting in their awards, or the
occurrence of certain other events such as termination with cause. The exercise
price of these stock options is based on the closing market price of our common
stock on the date of grant (May 13, 2009 for the 2009 awards) and
compensation expense is recorded on an accelerated basis over the awards
vesting periods.
The fair value of the
KapStone stock options granted in May 2009 was $1.79. The fair value was
calculated using the Black-Scholes-Merton option-pricing model based on the
market price at the grant date and the weighted average assumptions specific to
the underlying options. The expected volatility assumption is based on
volatility of related industry stocks. The Company uses the simplified method,
defined in SEC Staff Accounting Bulletin (SAB) No. 110, to determine the
expected life assumption for all of its options. The Company uses the simplified
method, as permitted by SAB No. 110, as it does not have historical
exercise data to provide a reasonable basis upon which to estimate expected
life due to the limited time its equity shares have been publicly traded.
The risk-free interest rate was selected
based upon yields of U.S. Treasury issues with a term similar to the expected
life of the stock options.
The assumptions utilized
for stock options during the period are as follows:
|
|
Nine Months
Ended
September 30,
|
|
|
|
2009
|
|
KapStone Stock
Options Black-Scholes-Merton assumptions (weighted average):
|
|
|
|
Expected
volatility
|
|
47.0
|
%
|
Expected
life (years)
|
|
6.25
|
|
Risk-free
interest rate
|
|
2.3
|
%
|
Expected
dividend yield
|
|
|
%
|
A summary
of information related to stock options is as follows:
|
|
Options
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Life (Years)
|
|
Intrinsic
Value (dollars
in Thousands)
|
|
Outstanding
at January 1, 2009
|
|
1,346,347
|
|
$
|
6.87
|
|
7.7
|
|
$
|
(6,045
|
)
|
Granted
|
|
829,702
|
|
3.70
|
|
9.7
|
|
3,684
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Lapsed (forfeited or
canceled)
|
|
(9,522
|
)
|
6.85
|
|
|
|
|
|
Outstanding
at September 30, 2009
|
|
2,166,527
|
|
$
|
5.66
|
|
7.9
|
|
$
|
5,381
|
|
Exercisable
at September 30, 2009
|
|
308,525
|
|
$
|
6.76
|
|
4.6
|
|
$
|
852
|
|
Total stock-based
compensation related to the stock option grants was $0.4 million and $1.0
million for the three and nine months ended September 30, 2009,
respectively, and $0.3 million and $0.7 million for the three and nine months
ended September 30, 2008, respectively.
9
Table of
Contents
As of September 30,
2009 and 2008, there was $1.9 million and $1.8 million, respectively, of total
unrecognized compensation cost related to non-vested stock options. The cost is
expected to be recognized over a weighted average period of two years.
Restricted
Stock
In May 2009, the
Companys Compensation Committee granted 219,864 restricted stock units to
executive officers and employees as compensation for service. These restricted
stock units are restricted as to transferability until they vest three years
from the grant date. These restricted stock units are subject to forfeiture
should these employees terminate their employment with the Company for certain
reasons prior to vesting in their awards, or the occurrence of certain other
events. The value of these restricted stock units is based on the closing
market price of our common stock on the date of grant and compensation expense
is recorded on a straight-line basis over the awards vesting periods.
The following table
summarizes our restricted stock amounts and activity:
|
|
Units/
Shares
|
|
Weighted
Average
Grant Price
|
|
Outstanding
at January 1, 2009
|
|
368,903
|
|
$
|
6.88
|
|
Granted
|
|
219,864
|
|
3.70
|
|
Vested
|
|
|
|
|
|
Forfeited
|
|
(3,098
|
)
|
6.84
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2009
|
|
585,669
|
|
$
|
5.68
|
|
Total stock-based
compensation related to the restricted stock awards was $0.3 million and $0.7
million for the three and nine months ended September 30, 2009,
respectively, and $0.2 million and $0.5 million for the three and nine months
ended September 30, 2008, respectively.
As of September 30,
2009 and 2008, there was $1.5 million and $1.6 million, respectively, of total
unrecognized compensation cost related to the restricted stock which will be
recognized over the remaining vesting period of approximately two years. No
restricted stock awards were vested as of September 30, 2009.
13. Stockholders
Equity
In connection with the
Companys initial public offering, on August 19, 2005, the Company sold 20,000,000
units (Units) for a gross price of $6.00 per Unit. Each Unit consists of one
share of the Companys common stock, $0.0001 par value, and two warrants. Each
warrant entitled the holder to purchase from the Company one share of common
stock at an exercise price of $5.00 with an expiration date of August 17,
2009. For the three and nine months ended September 30, 2009, 17,043,376
common stock warrants were exercised with proceeds totaling $85.2 million. On August 17,
2009, the 19,371,454 remaining warrants expired.
For the three and nine
months ended September 30, 2008, 2,810,615 and 3,029,180, respectively,
common stock warrants were exercised with proceeds totaling $14.1 million and
$15.1 million, respectively.
14. Annual Planned Maintenance Outage
Cost of sales for the
three and nine month periods ended September 30, 2008 included
approximately $6.0 million for the annual planned maintenance outage for the
Companys North Carolina unbleached kraft paper facility. The annual planned
maintenance outage in 2009 occurred in October 2009.
10
Table of
Contents
15. Segment Information
The Company has two
reportable segments, unbleached kraft and all other. The unbleached kraft
segment consists of the Companys paper mills in Roanoke Rapids, North Carolina
and North Charleston, South Carolina, which produce unbleached kraft paper,
linerboard, unbleached kraft board and saturating kraft. These products are
sold to customers who convert our products into end-market finished products.
The unbleached kraft segment also includes a lumber mill, based in Summerville,
South Carolina, which produces dimensional softwood board lumber that is sold
primarily to regional and local retailers, wood treating operations and
industrial customers. The all other segment consisted of the Companys former
dunnage bag business, based in Fordyce, Arkansas, which converted unbleached
kraft paper and film into inflatable dunnage bags.
The Companys reportable
and operating segments are based on financial information regularly evaluated
by the chief operating decision maker in determining resource allocation and
assessing performance, in accordance with ASC 280, Segment Reporting. In
the third quarter 2009 the Company revised its reporting structure and as a
result the lumber mill operation is now included in the unbleached kraft
segment.
Segment disclosures have
been revised to conform to the current presentation for all reporting periods.
On March 31, 2009
the Company consummated the sale of its dunnage bag business to Illinois Tool
Works Inc.
Corporate expenses that
benefit the entire organization are not charged to the operating segments.
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
Operating
Segment (in thousands)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Unbleached kraft
|
|
$
|
170,335
|
|
$
|
199,601
|
|
$
|
461,384
|
|
$
|
320,506
|
|
All other
|
|
|
|
8,906
|
|
6,927
|
|
25,703
|
|
Intersegment sales
|
|
|
|
(836
|
)
|
(899
|
)
|
(3,247
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
170,335
|
|
$
|
207,671
|
|
$
|
467,412
|
|
$
|
342,962
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external
customers:
|
|
|
|
|
|
|
|
|
|
Unbleached kraft
|
|
$
|
170,335
|
|
$
|
198,765
|
|
$
|
460,485
|
|
$
|
317,259
|
|
All other
|
|
|
|
8,906
|
|
6,927
|
|
25,703
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
170,335
|
|
$
|
207,671
|
|
$
|
467,412
|
|
$
|
342,962
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income/(loss):
|
|
|
|
|
|
|
|
|
|
Unbleached kraft
|
|
$
|
51,952
|
|
$
|
19,608
|
|
$
|
105,245
|
|
$
|
50,087
|
|
All other
|
|
|
|
1,608
|
|
748
|
|
4,209
|
|
Gain/(loss) on sale of
business
|
|
(278
|
)
|
|
|
16,417
|
|
|
|
Corporate
|
|
(5,175
|
)
|
(7,070
|
)
|
(16,306
|
)
|
(15,279
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,499
|
|
$
|
14,146
|
|
$
|
106,104
|
|
$
|
39,017
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
|
Operating
Segment (in thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
Unbleached kraft
|
|
$
|
640,147
|
|
$
|
679,606
|
|
|
|
|
|
All other
|
|
|
|
17,132
|
|
|
|
|
|
Corporate
|
|
20,414
|
|
30,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
660,561
|
|
$
|
727,190
|
|
|
|
|
|
16. Subsequent Event
Subsequent
to the balance sheet date of September 30, 2009, the Company made a $25.0
million voluntary prepayment on its long-term debt.
11
Table of
Contents
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q
includes forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and
unknown risks, uncertainties and assumptions about us that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as may,
should, could, would, expect, plan, anticipate, believe, estimate,
continue, or the negative of such terms or other similar expressions. Factors
that might cause or contribute to such a discrepancy include, but are not
limited to, those described in Part II Item 1A in this Form 10-Q, in Part I
Item 1A of our Form 10-K for the fiscal year ended December 31, 2008
and in our other Securities and Exchange Commission filings. The
information contained in this Form 10-Q represents our best judgment at
the date of this report based on information currently available. In
providing forward-looking statements, KapStone does not intend, and does not
undertake any duty or obligations, to update its statements as a result of new
information, future events or otherwise.
The following discussion
should be read in conjunction with our Consolidated Financial Statements and
related Notes thereto included elsewhere in this report.
Overview
We were formed on April 15,
2005 to serve as a vehicle to effect a merger, capital stock exchange, asset
acquisition or other similar business combination with an operating business in
the paper, packaging, forest products and related industries.
On January 2, 2007,
the Company purchased substantially all of the assets and assumed certain
liabilities of the Kraft Papers Business ( KPB), a division of International
Paper Company, consisting of an unbleached kraft paper manufacturing facility
in Roanoke Rapids, North Carolina and Ride Rite® Converting, an inflatable
dunnage bag manufacturer located in Fordyce, Arkansas, for a purchase price of
$155 million in cash, less certain post-closing adjustments of $7.8 million,
plus two contingent earn-out payments of up to $55 million (in aggregate and
adjusted for the 2009 sale of Ride Rite® Converting), based on KPBs annual
earnings before interest, income taxes, depreciation and amortization, or
EBITDA, during the five years immediately following the acquisition.
On July 1, 2008, the
Company purchased substantially all of
the assets and assumed certain liabilities of the Charleston Kraft
Division (CKD), a division of MeadWestvaco Corporation (MWV), consisting of
an unbleached kraft paper manufacturing facility in North Charleston, South
Carolina, including a cogeneration facility, chip mills located in Elgin,
Hampton, Andrews and Kinards, South Carolina and a lumber mill located in
Summerville, South Carolina, for a purchase price of $485 million less certain
adjustments of $14.0 million.
The results reported
below do not reflect any actual or pro forma adjustments related to the acquisition
prior to the consummation of the acquisition on July 1, 2008. The results
reported below include the results of CKD since the date of acquisition, July 1,
2008.
On March 31, 2009,
the Company consummated the sale of its dunnage bag business for $36.0 million
less certain working capital adjustments to Illinois Tool Works Inc. (ITW).
The results of operations for the dunnage bag business are included in the all
other segment until the date of the sale. In conjunction with the sale, the
Company signed a long-term supply agreement with ITW pursuant to which the
Company sells kraft paper to ITW.
12
Table of
Contents
Comparison
of Results of Operations for the Three Months Ended September 30, 2009 and
the Three Months Ended September 30, 2008
|
|
Three
Months Ended September 30,
|
|
Increase/
|
|
%
Increase/
|
|
(In
thousands)
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
(Decrease)
|
|
Net sales
|
|
$
|
170,335
|
|
$
|
207,671
|
|
$
|
(37,336
|
)
|
-18.0
|
%
|
Cost of sales,
excluding depreciation and amortization
|
|
86,812
|
|
151,064
|
|
(64,252
|
)
|
-42.5
|
%
|
Freight and
distribution expenses
|
|
16,262
|
|
19,969
|
|
(3,707
|
)
|
-18.6
|
%
|
Selling, general and
administrative expenses
|
|
7,105
|
|
9,757
|
|
(2,652
|
)
|
-27.2
|
%
|
Depreciation and
amortization
|
|
13,664
|
|
12,953
|
|
711
|
|
5.5
|
%
|
Loss on sale of
business
|
|
(278
|
)
|
|
|
(278
|
)
|
N/A
|
|
Other operating income
|
|
285
|
|
218
|
|
67
|
|
30.7
|
%
|
Operating income
|
|
46,499
|
|
14,146
|
|
32,353
|
|
228.7
|
%
|
Foreign exchange
gain/(loss)
|
|
175
|
|
(607
|
)
|
782
|
|
128.8
|
%
|
Interest income
|
|
|
|
51
|
|
(51
|
)
|
-100.0
|
%
|
Interest expense
|
|
5,353
|
|
8,772
|
|
(3,419
|
)
|
-39.0
|
%
|
Income before provision
for income taxes
|
|
41,321
|
|
4,818
|
|
36,503
|
|
757.6
|
%
|
Provision for income
taxes
|
|
15,649
|
|
2,513
|
|
13,136
|
|
522.7
|
%
|
Net income
|
|
$
|
25,672
|
|
$
|
2,305
|
|
$
|
23,367
|
|
1013.8
|
%
|
Net sales for the quarter
ended September 30, 2009, were $170.3 million compared to $207.7 million
for the third quarter of 2008, a decrease of $37.4 million or 18.0%. The
decrease in net sales was primarily due to $28.0 million of lower average
revenue per ton and $11.8 million of a less favorable product mix due to a
higher percentage of linerboard sales, which has a lower average selling price
than other products, offset by $11.3 million of higher sales volume. In
addition, the sale of the dunnage bag business in the first quarter of 2009
contributed $8.9 million of the decrease.
Cost of sales for the
quarter ended September 30, 2009, was $86.8 million compared to $151.1
million for the third quarter of 2008, a decrease of $64.3 million, or 42.5%.
The decrease in cost of sales was mainly due to $53.5 million of alternative
fuel mixture tax credits, $6.0 million as a result of a change in the timing of
the annual planned maintenance outage from the third quarter in 2008 to the
fourth quarter in 2009, $6.3 million due to the sale of the dunnage bag
business, $4.7 million of deflation on energy and raw materials and $2.1
million of temporary salary and benefit curtailments, partially offset by $9.2
million of higher volume and product mix.
Freight and distribution
expenses for the quarter ended September 30, 2009, totaled $16.3 million
compared to $20.0 million for the third quarter of 2008. The decrease of $3.7
million was mainly due to $2.6 million reflecting a higher percentage of 2009
shipments being comprised of exports where the customer pays for the freight
and $2.4 million of lower fuel oil surcharges and lower costs due to favorable
freight contract negotiations, offset by higher volume.
Selling, general and administrative
expenses for the quarter ended September 30, 2009, totaled $7.1 million
compared to $9.8 million for the third quarter of 2008. The decrease of $2.7
million reflects $0.8 million of lower compensation and benefit expenses as the
Company temporarily suspended certain benefits as a result of economic
conditions, $0.5 million of lower transitional services provided by MWV and
$1.5 million of lower CKD acquisition start-up expenses. As a percent of net
sales, selling, general and administrative expenses dropped from 4.7% in 2008
to 4.2% in 2009.
Depreciation and
amortization for the quarter ended September 30, 2009, totaled $13.7
million compared to $13.0 million for the third quarter of 2008. The increase
of $0.7 million is primarily due to higher capital expenditures.
The loss on sale of
business of $0.3 million is the result of working capital adjustments in
connection with the sale of the dunnage bag business. The dunnage bag business
was sold in March 2009.
13
Table of Contents
Foreign
exchange gains for the quarter ended September 30, 2009 increased by $0.8
million compared to the same period in 2008. The increase reflects the
weakening of the U.S. dollar in the third quarter of 2009 of approximately 4%,
compared to the strengthening of the U.S. dollar in the third quarter of 2008
of approximately 8%.
Interest
income for the quarter ended September 30, 2009 decreased by $0.1 million
compared with the same period in 2008. Due to lower interest rates in 2009, the
Company used its excess cash to pay down principal balances on its long-term
debt rather than investing.
Interest
expense for the quarters ended September 30, 2009 and 2008 was $5.4
million and $8.8 million, respectively. Interest expense reflects interest on
the Companys long-term debt and amortization of debt issuance costs. Interest
expense was $3.4 million lower in the quarter ended September 30, 2009
primarily due to lower debt levels and lower interest rates. Amortization of
debt issuance costs for the quarters ended September 30, 2009 and 2008 was
$2.5 million and $0.8 million, respectively. The increase of $1.7 million is
primarily due to $1.9 million of accelerated amortization expense in connection
with mandatory and voluntary debt prepayments during the three months ended September 30,
2009.
Provision
for income taxes for the quarters ended September 30, 2009 and 2008 was
$15.6 million and $2.5 million, respectively. The increase of $13.1 million is
a result of $36.5 million of higher pre-tax income. The effective tax rate for
the quarter ended September 30, 2009 was 37.9% compared to 52.2% for the
similar period in 2008.
The effective tax rate for the quarter ended September 30, 2009 decreased
from the same period in 2008 due to a higher expected benefit from the federal
domestic manufacturing deduction.
Segment
Results
The following table
presents a reconciliation of consolidated net sales and operating income to
amounts reported by operating segment:
|
|
Three
Months Ended September 30,
|
|
Operating
Segment (in thousands)
|
|
2009
|
|
2008
|
|
Consolidated net sales:
|
|
|
|
|
|
Unbleached kraft
|
|
$
|
170,335
|
|
$
|
199,601
|
|
All other
|
|
|
|
8,906
|
|
Intersegment sales
|
|
|
|
(836
|
)
|
|
|
|
|
|
|
Total net sales
|
|
$
|
170,335
|
|
$
|
207,671
|
|
|
|
|
|
|
|
Operating
income/(loss):
|
|
|
|
|
|
Unbleached kraft
|
|
$
|
51,952
|
|
$
|
19,608
|
|
All other
|
|
|
|
1,608
|
|
Loss on sale of
business
|
|
(278
|
)
|
|
|
Corporate
|
|
(5,175
|
)
|
(7,070
|
)
|
|
|
|
|
|
|
Total operating income
|
|
$
|
46,499
|
|
$
|
14,146
|
|
The following represents
analysis and commentary for results of operations for the Companys two
operating segments: unbleached kraft and all other.
14
Table of
Contents
Unbleached Kraft
|
|
Three
Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
Net sales
|
|
$
|
170,335
|
|
$
|
199,601
|
|
Operating income
|
|
51,952
|
|
19,608
|
|
Operating income % of
net sales
|
|
30.5
|
%
|
9.8
|
%
|
|
|
|
|
|
|
Average revenue per ton
|
|
$
|
495
|
|
$
|
605
|
|
Tons of paper sold
|
|
331,879
|
|
321,792
|
|
For the three months
ended September 30, 2009, unbleached kraft segment net sales decreased by
$29.3 million, or 14.7%, to $170.3 million compared to
$199.6 million for the three months ended September 30, 2008. The decrease
in net sales was primarily due to $28.0 million of lower average revenue per
ton, as per ton prices decreased from $605 per ton in 2008 to $495 per ton in
the third quarter of 2009, or a reduction of $110 per ton, reflecting the
impact of market driven price reductions, and $11.8 million of a less favorable
product mix, as shipments of linerboard accounted for a higher percentage of
tons of paper sold, offset by $10.5 million of higher sales volume.
Unbleached kraft segment
operating income increased by $32.4 million, or 165.3%, to
$52.0 million for the three months ended September 30, 2009 compared
to $19.6 million for the three months ended September 30, 2008.
Operating income increased by $53.5 million due to alternate fuel mixture tax
credits, $6.0 million as a result of a change in the annual planned maintenance
outage from the third quarter in 2008 to the fourth quarter in 2009, $7.1
million of deflation on energy and raw materials, $5.5 million due to an increase
in volume and $2.4 million of temporary salary and benefit curtailments,
partially offset by $28.0 million of lower average revenue per ton, $11.5
million of a less favorable product mix and $2.5 million due to an unplanned
outage, which includes $1.1 million of lost alternative fuel mixture tax
credits. Included in operating income, for both quarters in 2009 and 2008, is
$2.4 million of amortization for an intangible asset, acquired as part of the
CKD acquisition, consisting of a coal contract with favorable prices. The coal contract will terminate on December 31,
2009.
For the quarter ended September 30,
2009, operating income as a percentage of net sales increased to 30.5% from
9.8% for the third quarter of 2008 due to alternative fuel mixture tax credits
and the change in timing of the annual planned maintenance outage, partially
offset by lower margins on sales.
All Other
|
|
Three
Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
Net sales
|
|
$
|
|
|
$
|
8,906
|
|
Operating income
|
|
|
|
1,608
|
|
Operating income % of
net sales
|
|
|
|
18.1
|
%
|
|
|
|
|
|
|
|
|
The dunnage bag business
was sold March 31, 2009.
Corporate
Corporate expenses for
the three months ended September 30, 2009 totaled $5.2 million
compared to $7.1 million for the three months ended September 30,
2008. The decrease of $1.9 million is primarily due to $1.5 million of
lower start-up expenses related to the CKD acquisition, $0.5 million of lower
compensation and benefit expenses as the Company temporarily suspended certain
benefits as a result of economic conditions and $0.5 million of lower
transitional services provided by MWV, partially offset by other expense
increases of $0.6 million.
15
Table of
Contents
Comparison
of Results of Operations for the Nine Months Ended September 30, 2009 and
the Nine Months Ended September 30, 2008
|
|
Nine
Months Ended September 30,
|
|
Increase/
|
|
%
Increase/
|
|
(In
thousands)
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
(Decrease)
|
|
Net sales
|
|
$
|
467,412
|
|
$
|
342,962
|
|
$
|
124,450
|
|
36.3
|
%
|
Cost of sales,
excluding depreciation and amortization
|
|
271,650
|
|
233,422
|
|
38,228
|
|
16.4
|
%
|
Freight and
distribution expenses
|
|
42,755
|
|
33,480
|
|
9,275
|
|
27.7
|
%
|
Selling, general and
administrative expenses
|
|
23,292
|
|
19,251
|
|
4,041
|
|
21.0
|
%
|
Depreciation and
amortization
|
|
40,761
|
|
18,381
|
|
22,380
|
|
121.8
|
%
|
Gain on sale of
business
|
|
16,417
|
|
|
|
16,417
|
|
N/A
|
|
Other operating income
|
|
733
|
|
589
|
|
144
|
|
24.4
|
%
|
Operating income
|
|
106,104
|
|
39,017
|
|
67,087
|
|
171.9
|
%
|
Foreign exchange
gain/(loss)
|
|
48
|
|
(607
|
)
|
655
|
|
107.9
|
%
|
Interest income
|
|
1
|
|
891
|
|
(890
|
)
|
-99.9
|
%
|
Interest expense
|
|
16,097
|
|
9,985
|
|
6,112
|
|
61.2
|
%
|
Income before provision
for income taxes
|
|
90,056
|
|
29,316
|
|
60,740
|
|
207.2
|
%
|
Provision for income
taxes
|
|
35,160
|
|
11,530
|
|
23,630
|
|
204.9
|
%
|
Net income
|
|
$
|
54,896
|
|
$
|
17,786
|
|
$
|
37,110
|
|
208.6
|
%
|
Net sales for the nine
months ended September 30, 2009, were $467.4 million compared to $343.0
million for the first nine months of 2008, an increase of $124.4 million or
36.3%. The increase in net sales was due to nine months of sales in 2009 for
CKD (acquisition consummated on July 1, 2008) compared to three months for
the same period in 2008, which increased sales by $188.2 million. Excluding the
additional six months of CKDs results, net sales were lower in the first nine
months of 2009, compared to the same period in 2008 by $63.8 million of which
$18.8 million is a result of the sale of the dunnage bag business on March 31,
2009. In addition, net sales decreased by $34.7 million due to lower average
revenue per ton and $14.2 million due to a less favorable product mix, as the
Company had a higher percentage of linerboard sales, which has a lower average
selling price than other products, offset by an increase of $3.9 million of
volume.
Cost of sales for the
nine months ended September 30, 2009, was $271.7 million compared to
$233.4 million for the first nine months of 2008, an increase of $38.3 million,
or 16.4%. Excluding $130.7 million for the additional six months of CKDs
results, cost of sales decreased by $92.4 million due to $73.3 million of
alternative fuel mixture tax credits and $13.2 million due to the sale of the
dunnage bag business in the first quarter of 2009. Cost of sales also decreased
by $6.0 million as a result of a change in the timing of the annual maintenance
outage from the third quarter in 2008 to the fourth quarter in 2009. In
addition, deflation on energy and raw materials decreased costs by $3.7 million
and temporary salary and benefit curtailments decreased costs by $2.7 million,
partially offset by $5.0 million of additional costs due to product mix and
volume.
The total amount of
alternative fuel mixture tax credits recorded as a reduction in cost of sales
for the first nine months of 2009 was $107.5 million of which $34.2 million is
included in the additional six months of CKDs results.
Freight and distribution
expenses for the nine months ended September 30, 2009, totaled $42.8
million compared to $33.5 million for the nine months ended September 30,
2008, an increase of $9.3 million.
Excluding $15.9 million for the additional six months of CKDs results
and $1.0 million for the sale of the dunnage bag business, freight and
distribution expenses were $5.6 million lower in 2009, mainly due to $3.0
million reflecting a higher percentage of 2009 shipments being comprised of
exports where the customer pays for the freight and $3.7 million of lower fuel
oil surcharges and lower costs due to favorable freight contract negotiations,
offset by higher volume.
Selling, general and
administrative expenses for the nine months ended September 30, 2009,
totaled $23.3 million compared to $19.3 million for the similar period in 2008.
The increase of $4.0 million reflects $4.2
16
Table of
Contents
million for an additional
six months of
CKDs results, $2.4 million of
transitional services provided by MWV, $1.7 million of professional fees and
services and
$0.7 million of bad debt expenses for three customer
bankruptcies,
partially offset
by $2.3
million of lower compensation and benefit expenses as the Company temporarily
suspended certain benefits as a result of economic conditions and $1.6 million
of lower start-up expenses related to the CKD acquisition. As a percent of net
sales, selling, general and administrative expenses dropped from 5.6% in 2008
to 5.0% in 2009.
Depreciation and
amortization for the nine months ended September 30, 2009, totaled $40.8
million compared to $18.4 million for the nine month period ended September 30,
2008. The increase of $22.4 million was mainly due to the additional six months
of CKDs results, which added an additional $14.3 million of depreciation and
$6.7 million of amortization of intangibles, including $4.9 million of
amortization for the intangible asset related to an acquired coal contract with
below market prices at July 1, 2008. The acquired coal contract expires December 31,
2009. Excluding the additional six months of CKD results, depreciation and
amortization increased by $1.4 million primarily due to an upgrade to the
Companys Enterprise Resource Planning (ERP) system and other capital
expenditures.
The $16.4 million gain on
sale of business is the result of the sale of the dunnage bag business to
Illinois Tool Works Inc. on March 31, 2009.
Foreign
exchange gains for the nine months ended September 30, 2009 increased by
$0.7 million compared to the same period in 2008. The increase reflects the
weakening of the U.S. dollar of approximately 4% in the first nine months of
2009, compared to a strengthening of the U.S. dollar of approximately 8% for
the period of July 1, 2008 through September 30, 2008. As a result of the CKD acquisition on July 1,
2008 the Company acquired certain European customers which are invoiced in
euros.
Interest
income for the nine months ended September 30, 2009 decreased by $0.9
million compared with the same period in 2008. Due to lower interest rates in
2009 the Company used its excess cash to pay down principal balances on its
long-term debt rather than investing.
Interest
expense for the nine months ended September 30, 2009 and 2008 was $16.1
million and $10.0 million, respectively. Interest expense reflects interest on
the Companys long-term debt and amortization of debt issuance costs. Interest
expense was $6.1 million higher in the nine months ended September 30,
2009 primarily due to higher debt levels relating to the CKD acquisition,
partially offset by lower interest rates, and $1.9 million of accelerated
amortization expense related to mandatory and voluntary debt prepayments.
Amortization of debt issuance costs for the period ended September 30,
2009 was $4.2 million compared to $0.9 million for the same period in 2008.
Provision
for income taxes for the nine months ended September 30, 2009 and 2008 was
$35.2 million and $11.5 million, respectively, reflecting an effective tax rate
of 39.0% compared to 39.3% for the similar period in 2008. The $23.7 million
increase is a result of $60.7 million of higher pre-tax income.
17
Table of
Contents
Segment
Results
The following table
presents a reconciliation of consolidated net sales and operating income to
amounts reported by operating segment:
|
|
Nine
Months Ended September 30,
|
|
Operating Segment (in thousands)
|
|
2009
|
|
2008
|
|
Consolidated net sales:
|
|
|
|
|
|
Unbleached kraft
|
|
$
|
461,384
|
|
$
|
320,506
|
|
All other
|
|
6,927
|
|
25,703
|
|
Intersegment sales
|
|
(899
|
)
|
(3,247
|
)
|
|
|
|
|
|
|
Total net sales
|
|
$
|
467,412
|
|
$
|
342,962
|
|
|
|
|
|
|
|
Operating
income/(loss):
|
|
|
|
|
|
Unbleached kraft
|
|
$
|
105,245
|
|
$
|
50,087
|
|
All other
|
|
748
|
|
4,209
|
|
Gain on sale of
business
|
|
16,417
|
|
|
|
Corporate
|
|
(16,306
|
)
|
(15,279
|
)
|
|
|
|
|
|
|
Total operating income
|
|
$
|
106,104
|
|
$
|
39,017
|
|
The following represents
analysis and commentary for results of operations for the Companys two
operating segments: unbleached kraft and all other.
Unbleached Kraft
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
Net sales
|
|
$
|
461,384
|
|
$
|
320,506
|
|
Operating income
|
|
105,245
|
|
50,087
|
|
Operating income % of
net sales
|
|
22.8
|
%
|
15.6
|
%
|
|
|
|
|
|
|
Average revenue per ton
|
|
$
|
533
|
|
$
|
594
|
|
Tons of paper sold
|
|
833,805
|
|
531,573
|
|
For the nine months ended
September 30, 2009, unbleached kraft segment net sales increased by
$140.9 million, or 44.0%, to $461.4 million compared to
$320.5 million for the nine months ended September 30, 2008. The
increase in net sales was due to nine months of sales in 2009 for CKD compared
to three months for the same period in 2008, as the acquisition occurred on July 1,
2008, which increased sales by $188.2 million. Excluding the additional six
months of CKDs results, net sales were lower by $47.3 million in the first
nine months of 2009 compared to the first nine months of 2008, mainly due to
$34.7 million of lower average revenue per ton and $14.2 million of a less
favorable product mix, as the Company had a higher percentage of linerboard
sales, offset by an increase in volume of $1.5 million. Average revenue
per ton in the first nine months of 2009 was $533 per ton, or $61 per ton lower
than average revenue per ton in the first nine months of 2008.
Unbleached kraft segment
operating income increased by $55.1 million, or 110.0%, to
$105.2 million for the nine months ended September 30, 2009 compared
to $50.1 million for the nine months ended September 30, 2008. Operating income increased by $16.3 million
due to the additional six months of CKDs results, $73.3 million due to
alternate fuel mixture tax credits, $6.0 million as a result of a change in the
timing of the annual planned maintenance outage from the third quarter in 2008
to the fourth quarter in 2009, $7.4 million of
18
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deflation on energy and
raw materials and $3.0 million of salary and benefit curtailments, partially
offset by $34.7 million of lower average revenue per ton, $13.6 million of a
less favorable product mix and $2.5 million due to an unplanned outage, which
includes $1.1 million of lost alternative fuel mixture tax credits. Included in
operating income for the nine months ended September 30, 2009, is $7.3
million of amortization for an intangible asset, acquired as part of the CKD
acquisition, consisting of a coal contract with favorable prices. The coal
contract will terminate on December 31, 2009.
The total amount of the
alternative fuel mixture tax credits recorded in operating income for the first
nine months of 2009 was $107.5 million of which $34.2 million is included in
the additional six months of CKDs results.
For the nine months ended
September 30, 2009, operating income as a percentage of net sales increased
to 22.8% from 15.6% for the first nine months of 2008 mainly due to alternative
fuel mixture tax credits, lower costs for energy and raw materials and change
in the timing of the annual planned maintenance outage partially offset by
lower margins on sales.
All Other
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
Net sales
|
|
$
|
6,927
|
|
$
|
25,703
|
|
Operating income
|
|
748
|
|
4,209
|
|
Operating income % of
net sales
|
|
10.8
|
%
|
16.4
|
%
|
|
|
|
|
|
|
|
|
For the nine months ended
September 30, 2009, net sales and operating income decreased due to the
sale of the dunnage bag business on March 31, 2009.
Corporate
Corporate expenses for
the nine months ended September 30, 2009, totaled $16.3 million compared
to $15.3 million for the nine months ended September 30, 2008. The
increase of $1.0 million is primarily due to $2.4 million reflecting nine
months of transitional
services provided by MWV
in 2009 compared to three months in 2008, $1.7 million of professional and
other services, partially offset by
$2.0 million of lower compensation
and benefit expenses as the Company temporarily suspended certain benefits as a
result of economic conditions and $1.6 million of lower start-up expenses
related to the CKD acquisition.
Liquidity
and Capital Resources
Senior Credit Agreement and Senior Notes
KapStone entered into a
Senior Credit Agreement dated June 12, 2008. The Senior Credit Agreement
provides for an aggregate of up to $515 million of borrowing capacity
consisting of a $390 million term A loan,
a $25 million term B loan and a $100 million revolving credit facility
(including a letter of credit subfacility). Borrowings under the Senior
Credit Agreement are guaranteed by KapStone and our other domestic subsidiaries
and are secured by substantially all of our consolidated assets, including all
the capital stock of KapStone Kraft, the capital stock of our guarantor
subsidiaries and up to 66% of the capital stock of our foreign subsidiaries.
In addition, $40 million
of 8.3% seven year senior notes were issued in July 2008 as part of the
financing for the CKD acquisition.
At September 30,
2009, $13.0 million of letters of credit were outstanding under the Senior
Credit Agreement.
At September 30,
2009, the Company had no outstanding borrowings under the revolving credit
facility.
Debt Covenants
Under the financial
covenants of the Senior Credit Agreement, KapStone must comply on a quarterly
basis with a maximum permitted leverage ratio that is currently 3.5 to 1. The
Senior Credit agreement also includes a
19
Table of Contents
financial covenant
requiring a minimum fixed charge coverage ratio that is 1.1 to 1. At September 30,
2009 the Company was in compliance with the Senior Credit Agreement with a
leverage ratio of 1.42 to 1.00 and a fixed charge coverage ratio of 2.89 to
1.00. The maximum permitted leverage
ratios for the quarters ending September 30, 2009 and December 31,
2009 are 3.5 to1. and 3.0 to 1, respectively. The minimum fixed charge coverage
ratio for the quarters ending September 30, 2009 and December 31,
2009 is 1.1 to 1.
At September 30,
2009, the Company was in compliance with all other applicable covenants in the
Senior Credit Agreement.
Alternative Fuel Mixture Tax Credit
On March 31, 2009,
the Company received approval from the Internal Revenue Service for its
registration as an alternative fuel mixer, which provides for a refund of $0.50
per gallon of alternate fuel used in the Companys pulp making process. As a
result, for the nine months ended September 30, 2009, the Company received
refunds of $109.7 million. The Company expects credits for the fourth
quarter of 2009 to exceed $50.0 million.
The alternative fuel
mixture tax credit expires on December 31, 2009. If this tax credit were
to be terminated or materially changed prior to December 31, 2009, it may
have a material effect on cash flows and results of operations.
Sale of Dunnage Bag Business
On March 31, 2009,
the Company sold its dunnage bag business to Illinois Tool Works Inc. for $36.0
million. Of the net cash proceeds, $32.8 million was required to pay down the
Companys long-term debt and notes under the terms of the Senior Credit
Agreement. As a condition of sale, $2.5 million of the sale proceeds are
being held in escrow until September 30, 2010 to be available to satisfy
any losses or indemnity claims that may arise against the Company in connection
with the sale.
As a result of the sale,
the Company incurred an earn-out liability of $4.0 million in accordance with
the asset purchase agreement dated June 23, 2006 with International Paper
Company (IP). The terms of the asset purchase agreement include a contingent
earn-out payment on the fifth anniversary of the acquisition; however, in the
event of a sale of the dunnage bag business prior to that date, a percentage of
the earn-out became due and payable within 30 days following the sale provided
certain criteria is met. The earn-out was paid on April 30, 2009.
Income Taxes
For the nine months ended
September 30, 2009, the Company received $13.1 million of federal income
tax refunds. No additional refunds are expected for 2009.
For 2010, the Company is
evaluating two additional tax benefits that it may qualify for directly, or
indirectly. The first is a tax credit under Section 40(b)(6) of $1.01
per gallon tax credit for cellulosic biofuel producers. The second is a subsidy
of up to $45 per dry ton under the Biomass Crop Assistance Program (BCAP) for
suppliers of biomass who sell to approved facilities, which will convert
biomass to energy. Both KapStones mills
are approved facilities, and the Company is researching how it can indirectly
benefit from this subsidy in the form of lower raw material costs.
Early
Extinguishment of Senior Notes
In July 2009, the
Company extinguished its remaining balance of senior notes totaling $33.6
million.
Exercises
of warrants into common stock
In August 2009, the
Company received $85.2 million from exercises of warrants into common stock.
The entire proceeds were used to make mandatory prepayments on the Companys
long-term loans in accordance with the Senior Credit Agreement. On August 17,
2009, the remaining balance of approximately 19 million warrants expired.
20
Table of
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Sources and Uses of Cash
Nine months ended
September 30 (in thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
123,790
|
|
$
|
28,004
|
|
Investing
activities
|
|
10,765
|
|
(483,165
|
)
|
Financing
activities
|
|
(135,646
|
)
|
(440,400
|
)
|
|
|
|
|
|
|
|
|
Cash flow from all
activities during the nine months ended September 30, 2009 decreased cash
by $1.1 million from December 31, 2008, reflecting cash provided by
operations of $123.8 million, cash provided by investing activities of $10.8
million offset by cash used in financing activities of $135.6 million.
Cash provided by
operating activities was $123.8 million due to $54.9 million of net income for
the first nine months of 2009 and $61.2 million of non-cash charges offset by
the gain on sale of the dunnage bag business of $16.4 million. Changes in
operating assets and liabilities provided $24.1 million.
Cash provided by
investing activities was $10.8 million reflecting proceeds from the sale of the
dunnage bag business of $34.9 million and a $1.0 million working capital
adjustment related to the CKD acquisition offset by $18.7 million of capital
expenditures, $4.0 million for the KPB earn-out related to the sale of the
dunnage bag business and $2.5 million of proceeds from the sale of the dunnage
bag business held in escrow. For the nine months ended September 30, 2009,
capital expenditures include $16.5 million for the unbleached kraft segment for
equipment upgrades, IT projects and replacements at the paper mills. In
addition, $2.2 million was spent on an upgrade to the Corporate ERP system.
Cash used in financing
activities totaled $135.6 million during the nine months ended September 30,
2009, and reflects $284.8 million of repayments on long-term debt, notes and
revolver offset by borrowings under the revolving credit facility of $64.3
million and $85.2 million of proceeds from the exercises of common stock
warrants.
Future Cash Needs
We expect that cash
generated from operating activities, and if needed, the ability to draw from
our revolving credit facility will be sufficient to meet anticipated cash
needs.
Subsequent
to the balance sheet date of September 30, 2009, the Company made a $25.0
million voluntary prepayment on its long-term debt.
The Company expects to
spend an additional $11.6 million on capital expenditures in 2009. In addition,
the Company has $6.3 million of required long-term debt repayments for the
remainder of 2009 and expects to fund $1.7 million to its Defined Benefit Plan
by December 31, 2009.
Off-Balance
Sheet Arrangements
We have not entered into
any off-balance sheet financing arrangements and have not established any
special purpose entities. We have not guaranteed any debt or commitments of
other entities or entered into any options on non-financial assets.
21
Table of
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market risk is the
sensitivity of income to changes in interest rates, commodity prices, equity
prices, and other market-driven rates or prices.
Under KapStones new
Senior Credit Facilities, we have two term loans totaling $219.9 million
outstanding at September 30, 2009. The maturity date is the earlier
of: (a) June 12, 2013 with respect to the term A loan facility
and the revolving credit facility, and June 12, 2015 with respect to the
term B loan facility, and (b) the date which is 90 days prior to the date
on which any earn-out, obligations to IP will become (or are reasonably
expected to become) due, excluding the earn-out as a result of the sale of the
dunnage bag business; provided that the maturity date will not be so
accelerated if, among other things, the total leverage ratio as of the end of
the then most recent fiscal quarter, is less than 3.5 to 1.0.
Changes in market rates
may impact the base rate in our Senior Credit Agreement. For instance, if the
banks LIBOR rate was to increase or decrease by one percentage point (1.0%),
our annual interest expense would change by approximately $2.1 million based
upon our existing repayment schedule.
We are exposed to price
fluctuations of certain commodities used in production. Key raw materials and
energy used in the production process include roundwood and woodchips, fuel
oil, electricity and caustic soda. We purchase these raw materials and
energy at market prices, and do not use forward contracts or other financial
instruments to hedge our exposure to price risk related to these
commodities. We have two contracts to purchase coal at fixed prices that
expire on December 31, 2009.
We are exposed to
currency fluctuations as we invoice certain European customers in euros. At
times, the Company has used forward contracts to reduce the impact of currency
fluctuations. No such contracts were outstanding at September 30, 2009.
Item 4. CONTROLS AND PROCEDURES
As of the end of the
period covered by this report, our Chief Executive Officer and our Chief
Financial Officer carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures, as required by Rule 13a-15(b) under
the Securities Exchange Act of 1934. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of September 30, 2009.
There were no changes in
our internal control over financial reporting during the three months ended September 30,
2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
22
Table of
Contents
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are party to various
legal proceedings arising from our operations. We establish reserves for claims
and proceedings when it is probable that liabilities exist and where reasonable
estimates of such liabilities can be made. While it is not possible to predict
the outcome of any of these matters, based on our assessment of the facts and
circumstances now known, we do not believe that any of these matters,
individually or in the aggregate, will have a material adverse effect on our
financial position. However, actual outcomes may be different from those
expected and could have a material effect on our results of operations or cash
flows in a particular period.
Item 1A. RISK FACTORS
With the exception of the
following updates to the risk factors relating to the alternative fuel mixture
tax credit and the Companys union contract in South Carolina, there have been
no material changes from the Risk Factors described in our Form 10-K for
the year ended December 31, 2008 (Form 10-K). The Risk Factor
below should be read in conjunction with the Risk Factors and information
disclosed in our Form 10-K.
The alternative fuel
mixture tax credit provided by the U.S. government is being challenged in
Congress and may be amended in a manner that eliminates or reduces the benefits
of the tax credit for pulp and paper companies.
The U.S. government
provides an excise tax credit to taxpayers for the use of alternative fuel
mixtures. The alternative fuel mixture tax credit, as it relates to
liquid fuel derived from biomass, is scheduled to expire on December 31,
2009. In recent months, certain members of Congress and others have
indicated their opposition to pulp and paper companies receiving the tax
credit. They have called for the amendment of the tax credit in a
manner that would eliminate or reduce its benefits for pulp and paper
companies. In response, other members of Congress and interested parties
have voiced their support for maintaining the tax credit and its availability
to all taxpayers, including pulp and paper companies. We do not know
whether the U.S. government will amend the tax credit to eliminate or reduce
its benefits for pulp and paper companies, but there is the possibility that
such action may be taken. Any such amendment of the tax credit could
have a material adverse effect on our financial condition and results of
operations.
A three year union
contract, which represents approximately 600 employees in South Carolina,
expired on June 30, 2009. The Company is in negotiations with the union
and there have been no slow-downs or work stoppages since the contract
expired. Although the ultimate outcome of negotiations cannot be predicted with
certainty, the Company fully expects to come to an agreement with the union and
does not expect any future slow-downs or work stoppages.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
23
Table of
Contents
PART II. OTHER INFORMATION
Item 6. EXHIBITS
The following Exhibits
are filed as part of this report.
Exhibit
No.
|
|
Description
|
|
|
|
3.3
|
|
Amended and Restated
By-Laws. (1)
|
|
|
|
31.1
|
|
Certification of Chief
Executive Officer Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification of Chief
Financial Officer Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification of Chief
Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification of Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
(1)
|
|
Incorporated by
reference to the Registrants Current Report on Form 8-K filed on October 5, 2009
|
24
Table of
Contents
SIGNATURE
In
accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
KAPSTONE PAPER AND
PACKAGING CORPORATION
|
|
|
|
|
November 4, 2009
|
By:
|
/s/ Andrea K. Tarbox
|
|
Andrea K. Tarbox
|
|
Vice President and
Chief Financial Officer
|
25
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