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, 2015March 31, 2016

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)

KapStone Paper and Packaging Corporation

1101 Skokie Blvd., Suite 300

Northbrook, IL 60062

(Address of Principal Executive Offices including zip code)

Registrant’s 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 Securities Exchange Act of 1934 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 x  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):

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 96,314,98396,509,838 shares of the Registrant’s Common Stock, $0.0001 par value, outstanding at OctoberApril 22, 2015.2016.

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)

See notes to consolidated financial statements.

KAPSTONE PAPER AND PACKAGING CORPORATION

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(unaudited)

See notes to consolidated financial statements.

KAPSTONE PAPER AND PACKAGING CORPORATION

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

See notes to consolidated financial statements.

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 (“GAAP”) 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 notes required by GAAP 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 ninethree months ended September 30, 2015March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.2016. For further information, refer to the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2014.2015.

We report our operating results in two reportable segments: Paper and Packaging and Distribution. Our Paper and Packaging segment manufactures and sells a wide variety of container board, corrugated products and specialty paper for industrial and consumer markets. The Distribution segment was established June 1, 2015 throughconcurrent with the acquisition of Victory Packaging, L.P. and its subsidiaries (“Victory”), a North American distributor of packaging materials.  See Note 3, Victory Packaging Acquisition, for further detail.Packaging.  For more information about our segments, see Note 12,11, Segment Information.

In these consolidated financial statements, certain amounts in prior periods’ consolidated financial statements have been reclassified to conform with the current period presentation. In accordance with Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” we recast 2015 and 2014 segment information to conform with the current year presentation. For more information see Note 12,11, Segment Information.  In addition, amortization of intangible assets is now separately identified in the Statement of Cash Flows and 2015 was recast to conform to the current year presentation.  None of the reclassifications affected our results of operations, financial position, or cash flows.

2.                                      Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB’) issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers”. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The guidance in this update supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition”, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, this update supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts”. For a public entity, the amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In July 2015, the FASB approved a one-year deferral of the effective date for its new revenue standard for public and nonpublic entities reporting under GAAP. The standard will be effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods therein. Additionally the FASB approved the option to early adopt up to the original effective date (fiscal years beginning after December 15, 2016). We are currently evaluating the impact that the adoption of ASU 2014-09 will have on our financial condition, results of operations and disclosures.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ItThe Company has adopted ASU 2015-03 and it had no material impact on its financial statements.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which is effectiveintended to simplify the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost and net realizable value test.  The guidance applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method.  Application of the standard, which should be applied prospectively, is required for the annual reportingand interim periods beginning after December 15, 2016.  Early adoption is permitted.  The new guidance will be applied retrospectively to each prior period presented. The Company does not expectWe are currently evaluating the impact that the adoption of this standard toASU 2015-11 will have a material impact on its consolidated balance sheets.our financial condition, results of operations and disclosures.

In August 2015, the FASB issued an ASU 2015-15, “Interest — Imputation of Interest” which relates to the presentation of debt issuance costs. This standard clarifies the guidance set forth in FASB ASU 2015-03, which required that debt issuance costs related to a recognized debt liability be presented on the balance sheet as

a direct deduction from the debt liability rather than as an asset. The new pronouncement clarifies that debt issuance costs related to line-of-credit arrangements could continue to be presented as an asset and be subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. The Company does not expect the adoption of this standard to have a material impact on its consolidated balance sheets.

In September 2015,February 2016, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying2016-02 “Leases”. This guidance revises existing practice related to accounting for leases under Accounting Standards Codification Topic 840 Leases (ASC 840) for both lessees and lessors. The new guidance in ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the Accountingdefinition of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of-use asset will be based on the lease liability, subject to adjustment such as for Measurement-Period Adjustments”initial direct costs. For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating or finance. For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded

expense pattern (similar to current accounting by lessees for capital leases under ASC 840). While the new standard maintains similar accounting for lessors as under ASC 840, the new standard reflects updates to, among other things, align with certain changes to the lessee model. The guidance is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted for all entities. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our financial condition, results of operations and disclosures.

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which eliminateswill require all income tax effects of awards to be recognized in the requirementincome statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than it can today for an acquirer intax withholding purposes without triggering liability accounting and to make a business combinationpolicy election to account for measurement-period adjustments retrospectively.  Instead, acquirers must recognize measurement-period adjustments during the period in whichforfeitures as they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date.occur.  The ASUguidance is effective for public business entities for fiscal years beginning after 15 December 2015,2016, and interim periods within those fiscal years. Early adoption is permitted.  The Company does not expectWe are currently evaluating the impact that the adoption of this standard toASU 2016-9 will have a material impact on itsour financial condition, results of operations or cash flows.and disclosures.

3.Victory Packaging Acquisition

On June 1, 2015, the Company purchased all of the partnership interests in Victory Packaging, L.P. and its subsidiaries (“Victory”) for $615 million in cash and $2.0 million for working capital adjustments.  $40.0 million of the purchase price was placed into escrow to fund certain limited indemnity obligations of Victory. Victory, headquartered in Houston, TX, is a North American distributor of packaging materials. 

The Company will also be obligated to pay up to an additional $25.0 million of contingent consideration in cash to the former owners of Victory if certain financial performance criteria are satisfied during the thirty month period following the closing. The Company used a present value analysis to determine the fair value of the contingent consideration of $11.7 million as of September 30, 2015, which included an increase of $1.2 million during the third quarter due to revised Company estimates. The contingent consideration is included in other non-current liabilities on the Company’s Consolidated Balance Sheets and its fair value is a categorized as Level 3 within the fair value hierarchy. This analysis considers, among other items, the financial forecasts of future operating results of Victory, the probability of reaching the forecast, and the associated discount rate.

In the quarter ended September 30, 2015, the Company paid an additional $0.5 million related to post-closing working capital adjustments.  The total acquisition consideration is $617.0 million, net of cash acquired (excluding any future contingent consideration that may be payable). The purchase price allocation is preliminary and subject to final review.

The following table summarizes the preliminary allocation of the Victory acquisition consideration to the fair value of the assets acquired and liabilities assumed at the date of acquisition, as well as adjustments made during quarter ended September 30, 2015 (referred to as “measurement period adjustments”):

(1) Preliminary allocation of Victory acquisition consideration to the fair value of the assets acquired and liabilities assumed at the date of acquisition.

(2) The measurement period adjustments include the following:

· Property, plant and equipment were adjusted downward by $0.8 million as accounting policies were aligned accross the Company.

· Trade accounts receivable and inventory were adjusted by $0.4 million and $0.3 million, respectively, resulting from minor adjustment to management estimates.

· Certain liability amounts have been reclassified to conform to current presentation.

Transaction fees and expenses for the Victory acquisition related to due diligence, advisory and legal services have been expensed as incurred. These expenses were $1.9 million and $4.5 million, respectively, for the three and nine month periods ended September 30, 2015 and were recorded as selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income.

Since the June 1, 2015 acquisition date, the Company’s consolidated statement of comprehensive income for the nine months ended September 30, 2015 includes $341.5 million of net sales and $12.9 million of operating income from the Victory operations.

The following unaudited pro forma consolidated results of operations assume that the acquisition of Victory occurred as of January 1, 2014. The unaudited pro forma consolidated results include the accounting effects of the business combination, including the application of the Company’s accounting policies, amortization of intangible assets and depreciation of equipment related to preliminary fair value adjustments, interest expense on acquisition related debt, elimination of intercompany sales and income tax effects of the adjustments.  The pro forma adjustments are directly attributable to the Victory acquisition, factually supportable and are expected to have a continuing impact on the Company’s combined results. Unaudited pro forma data is based on historical information and does not necessarily reflect the actual results that would have occurred, nor is it indicative of future results of operations.

4.                                      Planned Maintenance Outages

Planned maintenance outage costs for the three months ended September 30,March 31, 2016 and 2015 and 2014 totaled $4.4$6.6 million and $5.2$8.6 million, respectively, and are included in cost of sales.  As a result of the 2015 outage, production tons were reduced by 2,400 tons.

Planned maintenance outage costs for the nine months ended September 30, 2015 and 2014 totaled $24.1 million and $25.1 million, respectively.  As a result of these outages, production tons were reduced by 14,800 tons and 19,700 tons, respectively.  Outage costs for the nine months ended September 30, 2015 included an annual planned maintenance outage at the Company’s paper mill in Roanoke Rapids, North Carolina in April 2015.  The outage lasted approximately 8 days with a cost of approximately $8.0 million and a 10,400 reduction in tons produced.  In 2014, the Roanoke Rapids, North Carolina paper mill planned outage occurred in October over a similar number of days and at a similar cost.

5.4.                                      Inventories

Inventories consist of the following at September 30, 2015March 31, 2016 and December 31, 2014,2015, respectively:

As of September 30, 2015, finished goods inventory included $81.2 million related to Victory.

6.5.                                      Short-term Borrowings and Long-term Debt

Long-term debt consists of the following at September 30, 2015 and December 31, 2014, respectively:

KapStone and certain of our subsidiaries are parties to a Second Amended and Restated Credit Agreement dated June 1, 2015 (the(as amended from time to time, the “Credit Agreement”), which provided for a senior secured credit facility (the “Credit Facility”) of $1.95$1.915 billion, consisting of a Term Loan A-1 in the aggregate amount of $940 million and a Term Loan A-2 in the aggregate amount of $475 million and a $500 million revolving credit facility (the “Revolver”), which. The Credit Facility also includes an accordion feature that provides for,allows the Company, subject to certain significant conditions, to obtain additional commitments from our existing or new lenders in an amount up to $600 million without further approvals of additional commitments.any existing lenders thereunder.

Annual principal repayments

On February 8, 2016, the Company entered into the First Amendment (“First Amendment”) to the Credit Agreement. The First Amendment modified, among other things, the financial covenant in the Credit Agreement related to maintenance of a maximum total leverage ratio by increasing the permitted total leverage ratio for fiscal quarters ending on or prior to June 30, 2018, and it modified certain defined terms used in the calculation of the financial covenants in a manner favorable to the Company. The First Amendment also modified the pricing grid applicable to interest rates and the unused commitment fee under the Credit Facility, paidAgreement in quarterly installments, are as follows:order to provide for an additional pricing level based on the total leverage ratio of the Company.

In 2015, theThe Company incurredpaid approximately $10.6$2.3 million of debt issuance costsloan amendment fees associated with the Credit Agreement,First Amendment, which are being amortized over the term of the Credit Agreement using the effective interest method.

In September 2015, the Company made a voluntary prepayment on its term loans under the Credit Facility of $51.8 million and as a result, $0.6 million of unamortized debt issuance costs were written-off as a loss on debt extinguishment.

Short-term Borrowings

As of September 30, 2015,March 31, 2016, the Company had $2.0$10.0 million of short-term borrowings with a baseoutstanding which bear interest rate of 4.0at 4.25 percent under its Revolver.

As of March 31, 2016, the Revolver and $479.8Company has available borrowings of $472.9 million available for additional borrowings.under the Revolver.

Receivables Credit Facility

Under our Securitization Program,accounts receivable securitization program (the “Securitization Program”), we sell, on an ongoing basis without recourse, certain trade receivables to KapStone Receivables, LLC (“KAR”), which is considered a wholly-owned, bankruptcy-remote variable interest entity (“VIE”). The Company has the authority to direct the activities of the VIE and, as a result, we have concluded that we maintain control of the VIE, are the primary beneficiary (as defined by accounting guidance) and, therefore, consolidate the account balances of KAR.  As of September 30, 2015, $379.7March 31, 2016, $341.3 million of our trade accounts receivables were sold to KAR.  KAR in turn assigns a collateral interest in these receivables to a financial institution under a one-year $275 million facility (the “Receivables Credit Facility”) for proceeds of $261.5 million under a $275 million facility.$247.6 million.  The assets of KAR are not available to us until all obligations of KAR are satisfied in the event of bankruptcy or insolvency proceedings.

In connection with the Victory acquisition, in June 2015 the Company amended its Securitization Program.  The Company incurred approximately $0.2 million of debt issuance costs associated with the amendment, which is being amortized using the effective interest method.

In 2014, we used proceeds from the Receivables Credit Facility to prepay $175.0 million of the term loans under our Credit Facility and, as a result, $3.0 million of unamortized debt issuance costs were written-off as a loss on debt extinguishment.

Debt Covenants

Our Credit Agreement governing our Credit Facility contains, among other provisions, covenants with which we must comply. The covenants limit our ability to, among other things, incur indebtedness, create additional liens on our assets, make investments, engage in mergers and acquisitions and sell any assets outside the normal course of business.

As of September 30, 2015,March 31, 2016, the Company was in compliance with all applicable covenants in the Credit Agreement.

Fair Value of Debt

As of September 30, 2015,March 31, 2016, the fair value of the Company’s debt approximates the carrying value of $1.6 billion as the variable interest rates re-price frequently at current market rates. The debt was valued using Level 2 inputs in the fair value hierarchy which are significant observable inputs including quoted prices for debt of similar terms and maturities.  Our weighted-average cost of borrowings was 1.822.08 percent and 2.001.82 percent for the ninethree months ended September 30,March 31, 2016 and March 31, 2015, and September 30, 2014, respectively.

Other Borrowing

In 2015 and 2014, the Company entered into short-term financing agreements of $6.6 million and $6.3 million, respectively, at an annual interest rate of 1.70 percent and 1.69 percent, respectively, for its annual property insurance premiums. The 2015 agreement requires the Company to pay three quarterly payments through the term of the financing agreement ending on December 31, 2015.  As of September 30, 2015 and 2014, there was $2.2 million and $1.2 million, respectively, outstanding under these agreements which is included in “Other current borrowings” on the Consolidated Balance Sheets.

7.6.Income Taxes

The Company’s effective income tax rate for the three and nine months ended September 30,March 31, 2016 and 2015 was 32.534.5 percent and 34.134.8 percent, respectively, compared to 33.9 percent for both the three and nine months ended September 30, 2014.respectively.  Our tax rate is affected by recurring items such as state income taxes, as well as discrete items that may occur in any given period but are not consistent from period to period. In addition to state income taxes, the domestic manufacturing deduction had the most significant impact on the difference between our statutory U.S. federal income tax rate of 35 percent and our effective income tax rate for both periods.

The 2015 third quarter provision for income taxes includes a net $1.1 million favorable discrete adjustment, mainly due to tax legislation enacted during the quarter. The nine months ended September 30, 2015 includes $0.7 million in net favorable discrete adjustments, mainly relating to tax legislation and the Victory Packaging acquisition. The 2014 third quarter provision for income taxes includes a $0.5 million favorable discrete adjustment and the nine months ended September 30, 2014 includes $1.3 million of net favorable discrete adjustments from the resolution of tax audits, the effects from tax legislation and a favorable tax return filing adjustment.

In the normal course of business, the Company is subject to examination by taxing authorities. The Company’s open federal tax years are 2013 and 2014.  The Company has open tax years for state income tax filings generally starting in 2011.2012.

8.7.Net Income per Share

The Company’s basic and diluted net income per share is calculated as follows:

Approximately 900,0001,463,000 and 42,000374,000 of unexercised stock options were outstanding at September 30,March 31, 2016 and 2015, and 2014, respectively, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.

9.8.                                      Pension Plan and Post-Retirement Benefits

Defined Benefit Plan

Net pension benefitcost (benefit) recognized for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 for the Company’s defined benefit plan (the “Pension Plan”) areis as follows:

KapStone funds theThe Company currently does not anticipate making any Pension Plan accordingcontributions in 2016. This estimate is based on current tax laws, plan asset performance, and liability assumptions, which are subject to IRS funding requirements. Based on those requirements, KapStone funded $1.1 millionchange.

The Company provides postretirement health care insurance benefits through an indemnity plan and a health maintenance organization plan for the nine months ended September 30, 2015. No additional funding is required for the balance of 2015.certain salary and non-salary Longview employees and their dependents.  The Company anticipates making contributions to its postretirement plans in 2016 as claims are submitted.

Defined Contribution Plan

We offer a 401(k) Defined Contribution PlanPlans (“Contribution Plan”Plans”) to eligible employees.  The Company’s monthly contributions are based on the matching of certain employee contributions or based on a union negotiated formula. For the three months ended September 30,March 31, 2016 and 2015, and 2014, the Company recognized expense of $5.5$3.6 million and $3.6$5.0 million, respectively, for the Company contributions to the Contribution Plan.  For the nine months ended September 30, 2015 and 2014,Plans.

In March 2016, the Company recognized expensesuspended contributions for certain employees.  As a result, contributions were $2.2 million lower in the quarter ended March 31, 2016.  This was partially offset by an increase of $15.5 million and $11.8 million, respectively, for the Company contributions to the Contribution Plan.  The amounts for the three and nine month periods ended September 30, 2015 include $0.5 million and $0.8 million attributable to Victory, respectively.  Effective in 2015, Longview Fibre Paper and Packaging, Inc. (“Longview”) salaried personnel received a 401(k) contribution, under the Contribution Plan, rather than a cash balance plan contribution which was included in net pension benefit for the three and nine months ended September 30, 2014.Victory.

10.9.                                      Stock-Based Compensation

In the quarter ended March 2015,31, 2016, the Company’s compensation committee of the board of directors approved stock-based awards to executive officers, certain employees, and directors. In total, 555,451The 2016 awards consisted of the grant of 1,237,455 stock options, and 181,590384,572 restricted stock units were awarded.

In May, 2015, the Company’s compensation committee of the board of directors approved new stock awards for certain employees.  In total, 7,494 stock options and 2,346 restricted stock units were awarded.units.

The Company accounts for stock-based awards in accordance with 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.

Total stock-based compensation expense related to the stock option and restricted stock unit grants for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 is as follows:

Total unrecognized stock-based compensation cost related to the stock options and restricted stock units as of September 30, 2015March 31, 2016 and December 31, 20142015 is as follows:

As of September 30, 2015,March 31, 2016, total unrecognized compensation cost related to non-vested stock options and restricted stock units is expected to be recognized over a weighted average period of 2.1 years.2.5 years and 2.4 years, respectively.

Stock Options

Stock option awards vest as follows: 50% after two years and the remaining 50% upon the earlier of after three years or upon a grantee of such stock options attaining the age 65. The stock options awarded in 20152016 have a contractual term of ten years and are subject to forfeiture should the recipient terminate his or her employment with the Company for certain reasons prior to vesting in his or her awards, or the occurrence of certain other events, such as termination with cause. The exercise price of these stock options is based on the closingaverage market price of our common stock on the date of grant ($31.8912.72 for March 2015the 2016 awards and $27.44 for May 2015 awards)described above) and compensation expense is recorded on an accelerated basis over the awards’ vesting periods.

The weighted average fair value of the stock options granted in MayMarch 2016 and 2015 March 2015was $3.79 and March 2014 was $8.59, $10.08, and $10.36, respectively. The fair value was calculated using the Black-Scholes option-pricing model based on the market price at the grant date and the weighted average assumptions specific to the underlying options. The expected term used by the Company is based on the historical average life of stock option awards.  The expected volatility assumption is based on the volatility of our common stock from the same time period as the expected term of the stock options. 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 expected dividend yield is calculated as the annual dividend per share amount divided by the average market price of the common stock on the date of the grant.

The assumptions utilized for calculating the fair value of stock options during the period are as follows:

The following table summarizes stock options amounts and activity:

There were no options exercised inFor the three months ended September 30, 2015.  For the nine months ended September 30,March 31, 2016 and 2015, cash proceeds from the exercise of stock options totaled $0.8 million.  For the three

and nine months ended September 30, 2014, cash proceeds from the exercise of stock options totaled $0.2 million and $0.6$0.5 million, respectively.

Restricted Stock

Restricted stock units are restricted as to transferability until the earlier of their vestingthey vest three years from the grant date or upon a grantee of such restricted stock units attaining the age 65. These restricted stock units are subject to forfeiture should applicable 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 unvested restricted stock units amounts and activity:

11.10.                               Commitments and Contingencies

Legal Claims

We are from time to time subject to various administrative and legal investigations, claims and proceedings incidental to our business, including environmental and safety matters, labor and employmentsemployment matters, personal injury claims, contractual disputes and taxes. We establish reserves for claims and proceedings when it is probable that liabilities exist and where reasonable estimates can be made. We also maintain insurance that may limit our financial exposure for defense costs, as well as liability, if any, for claims covered by the insurance (subject also to deductibles and self-insurance amounts). While any investigation, claim or proceeding has an element of uncertainty, and we cannot predict or assure the outcome of any claim or proceeding involving the Company, we believe the outcome of any pending or threatened claim or proceeding (other than those that cannot be assessed due to their preliminary nature), or all of them combined, will not have a material adverse effect on our results of operations, cash flows or financial condition.

There have been no material changes in any of our legal proceedings since Decemberfor the three months ended March 31, 2014.2016.

Environment ClaimContingent Consideration

The Company’s subsidiary, Longview, is a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act with respectCompany's contingent consideration obligation relates to the Lower Duwamish Waterway Superfund Site inVictory acquisition that was consummated on June 1, 2015 and is considered a Level 3 liability. The fair value of the Stateobligation of Washington (the “Site”).$15.8 million and $13.3 million at March 31, 2016 and December 31, 2015, respectively, is driven by the probability of reaching the performance measures through December 1, 2017 required by the purchase agreement and the associated discount rate.  The U.S. Environmental Protection Agency (“EPA”) asserts thatprobability is estimated by reviewing financial forecasts and assessing the Site is contaminated as a resultlikelihood of discharges from various businesses and government entities located alongreaching the Lower Duwamish Waterway, including a corrugated converting plant owned and operated by Longview. In November 2014, the EPA issued a Record of Decision (“ROD”) for the Site. The ROD includes a selected remedy for the Site. In the ROD, EPA states that the total estimated net present value costs (discounted at 2.3 percent) for the selected remedy are $342 million. At least 40 potentially responsible parties, including Longview, have entered into an Allocation Agreement. Pursuantrequired performance measures based on factors specific to the Allocation Agreement, the parties will attemptacquisition.  The discount rate is determined by applying a risk premium to determine each party’s portion of the cost to remediate the site.a risk-free interest rate.  The allocation process in not expected to be completed until 2017. Based on available information provided to the Company to date, the Company cannot reasonably estimate itstotal potential liability with respect to the site.

Longview Union Contract Status and Work Stoppage

The union contract covering approximately 760 employees at the Longview paper mill expired in June 2014.  From July 2014 through early June 2015 the Company negotiated a new contract with the union, but

could not agree on terms.  On June 12, 2015, the union provided a “10 Day Notice,” which made it possible for union employees to go out on legal strike at any time after June 22, 2015.

On August 27, 2015, KapStone received a notice of a work stoppage at the Longview mill from the union.  The work stoppage lasted 12 days with a production loss of approximately 29,000 tons.  During the 12 day work stoppage, the Company performed certain maintenance work and thereafter commenced operating certain paper machines prior to the union workers return to work.  There has been no additional work stoppage since September 7, 2015.

The Longview mill continues to operate without an agreement with the union.payout under this obligation is $25.0 million.

12.11.                               Segment Information

Prior to the acquisition of Victory on June 1, 2015, we manufactured and sold packaging products and reported the Company’s consolidated results as one reportable segment. In connection with the acquisition, we began reporting in two reportable segments: Paper and Packaging and Distribution. These segments represent distinct businesses that are managed separately because of differing products and services. Each of these businesses requires distinct operating and marketing strategies.

Paper and Packaging:  This segment manufactures and sells a wide variety of container board, corrugated products and specialty paper for industrial and consumer markets.

Distribution: Through Victory, a North American distributor of packaging materials, and its approximately 70 distribution centers located in the United States, Mexico and Canada, the Company provides packaging materials and related products to a wide variety of customers.

Each segment’s profits and losses are measured on operating profits before foreign exchange gains / (losses), net interest expense and income taxes.