UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20162017
oTRANSITION 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 |
| (I.R.S. Employer |
Incorporation or Organization) |
| Identification No.) |
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, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x |
| Accelerated filer o |
|
|
|
Non-accelerated filer o |
| Smaller reporting company o |
(Do not check if a smaller reporting company) |
|
|
Emerging growth company filer o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 96,627,34196,928,294 shares of the Registrant’s Common Stock, $0.0001 par value, outstanding at OctoberJuly 19, 2016.2017.
KAPSTONE PAPER AND PACKAGING CORPORATION
Index to Form 10-Q
ITEM 1. - FINANCIAL STATEMENTS
KAPSTONE PAPER AND PACKAGING CORPORATION
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
|
| September 30, |
| December 31, |
|
| June 30, |
| December 31, |
| ||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||
|
| (unaudited) |
|
|
|
| (unaudited) |
|
|
| ||||
Assets |
|
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 9,449 |
| $ | 6,821 |
|
| $ | 7,456 |
| $ | 29,385 |
|
Trade accounts receivable (Includes $356,945 at September 30, 2016, and $345,372 at December 31, 2015, associated with the receivables credit facility) |
| 388,520 |
| 363,869 |
| |||||||||
Trade accounts receivable (Includes $440,148 at June 30, 2017, and $368,922 at December 31, 2016, associated with the receivables credit facility) |
| 453,320 |
| 392,962 |
| |||||||||
Other receivables |
| 16,398 |
| 18,732 |
|
| 14,565 |
| 13,562 |
| ||||
Inventories |
| 347,450 |
| 335,903 |
|
| 348,784 |
| 322,664 |
| ||||
Prepaid expenses and other current assets |
| 12,911 |
| 28,932 |
|
| 15,871 |
| 10,247 |
| ||||
Total current assets |
| 774,728 |
| 754,257 |
|
| 839,996 |
| 768,820 |
| ||||
Plant, property and equipment, net |
| 1,419,035 |
| 1,406,146 |
|
| 1,473,343 |
| 1,441,557 |
| ||||
Other assets |
| 22,765 |
| 12,532 |
|
| 25,660 |
| 25,468 |
| ||||
Intangible assets, net |
| 321,923 |
| 344,583 |
|
| 312,962 |
| 314,413 |
| ||||
Goodwill |
| 705,617 |
| 704,592 |
|
| 720,611 |
| 705,617 |
| ||||
Total assets |
| $ | 3,244,068 |
| $ | 3,222,110 |
|
| $ | 3,372,572 |
| $ | 3,255,875 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
| ||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Short-term borrowings |
| $ | 11,500 |
| $ | 6,400 |
|
| $ | 22,000 |
| $ | — |
|
Other current borrowings |
| 4,117 |
| — |
| |||||||||
Capital lease obligation |
| 28 |
| — |
| |||||||||
Dividend payable |
| 9,987 |
| 9,862 |
|
| 10,126 |
| 10,052 |
| ||||
Accounts payable |
| 210,987 |
| 196,491 |
|
| 204,545 |
| 189,350 |
| ||||
Accrued expenses |
| 66,501 |
| 73,138 |
|
| 92,824 |
| 76,480 |
| ||||
Accrued compensation costs |
| 48,680 |
| 64,149 |
|
| 50,299 |
| 48,840 |
| ||||
Accrued income taxes |
| 8,052 |
| 15 |
|
| 327 |
| 15,971 |
| ||||
Total current liabilities |
| 355,707 |
| 350,055 |
|
| 384,266 |
| 340,693 |
| ||||
Other liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Long-term debt (Includes $269,503 at September 30, 2016, and $265,614 at December 31, 2015, associated with the receivables credit facility) |
| 1,484,373 |
| 1,543,748 |
| |||||||||
Long-term debt (Includes $298,046 at June 30, 2017, and $269,273 at December 31, 2016, associated with the receivables credit facility) |
| 1,516,266 |
| 1,485,323 |
| |||||||||
Long-term financing obligation |
| 43,633 |
| — |
| |||||||||
Capital lease obligation |
| 4,611 |
| — |
| |||||||||
Pension and postretirement benefits |
| 36,443 |
| 40,510 |
|
| 31,321 |
| 34,207 |
| ||||
Deferred income taxes |
| 420,669 |
| 418,479 |
|
| 407,711 |
| 405,561 |
| ||||
Other liabilities |
| 53,336 |
| 24,038 |
|
| 61,776 |
| 85,761 |
| ||||
Total other liabilities |
| 1,994,821 |
| 2,026,775 |
|
| 2,065,318 |
| 2,010,852 |
| ||||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
| ||||
Preferred stock $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding |
| — |
| — |
| |||||||||
Common stock — $0.0001 par value; 175,000,000 shares authorized; 96,624,550 shares issued and outstanding (excluding 40,000 treasury shares) at September 30, 2016 and 96,327,506 shares issued and outstanding (excluding 40,000 treasury shares) at December 31, 2015 |
| 10 |
| 10 |
| |||||||||
Preferred stock — $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding |
| — |
| — |
| |||||||||
Common stock — $0.0001 par value; 175,000,000 shares authorized; 96,825,765 shares issued and outstanding (excluding 40,000 treasury shares) at June 30, 2017 and 96,639,920 shares issued and outstanding (excluding 40,000 treasury shares) at December 31, 2016 |
| 10 |
| 10 |
| |||||||||
Additional paid-in-capital |
| 274,176 |
| 266,220 |
|
| 286,461 |
| 275,970 |
| ||||
Retained earnings |
| 681,061 |
| 642,306 |
|
| 695,893 |
| 689,668 |
| ||||
Accumulated other comprehensive loss |
| (61,707 | ) | (63,256 | ) |
| (59,376 | ) | (61,318 | ) | ||||
Total stockholders’ equity |
| 893,540 |
| 845,280 |
|
| 922,988 |
| 904,330 |
| ||||
Total liabilities and stockholders’ equity |
| $ | 3,244,068 |
| $ | 3,222,110 |
|
| $ | 3,372,572 |
| $ | 3,255,875 |
|
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)
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net sales |
| $ | 776,636 |
| $ | 807,563 |
| $ | 2,299,762 |
| $ | 2,025,107 |
|
| $ | 822,717 |
| $ | 784,911 |
| $ | 1,588,560 |
| $ | 1,523,126 |
|
Cost of sales, excluding depreciation and amortization |
| 548,811 |
| 569,267 |
| 1,650,919 |
| 1,421,943 |
|
| 592,515 |
| 568,831 |
| 1,153,413 |
| 1,102,108 |
| ||||||||
Depreciation and amortization |
| 44,954 |
| 42,500 |
| 135,528 |
| 114,617 |
|
| 46,054 |
| 46,035 |
| 91,402 |
| 90,574 |
| ||||||||
Freight and distribution expenses |
| 71,750 |
| 70,623 |
| 207,787 |
| 167,941 |
|
| 75,640 |
| 70,978 |
| 148,628 |
| 136,037 |
| ||||||||
Selling, general, and administrative expenses |
| 56,113 |
| 63,577 |
| 172,407 |
| 150,252 |
|
| 67,313 |
| 55,554 |
| 133,798 |
| 116,294 |
| ||||||||
Operating income |
| 55,008 |
| 61,596 |
| 133,121 |
| 170,354 |
|
| 41,195 |
| 43,513 |
| 61,319 |
| 78,113 |
| ||||||||
Foreign exchange loss |
| 543 |
| 766 |
| 1,518 |
| 1,704 |
| |||||||||||||||||
Loss on debt extinguishment |
| 679 |
| 628 |
| 679 |
| 628 |
| |||||||||||||||||
Foreign exchange (gain) / loss |
| (1,004 | ) | 872 |
| (1,086 | ) | 975 |
| |||||||||||||||||
Equity method investments income |
| (29 | ) | — |
| (706 | ) | — |
| |||||||||||||||||
Interest expense, net |
| 10,148 |
| 9,528 |
| 29,965 |
| 24,456 |
|
| 12,311 |
| 10,006 |
| 23,041 |
| 19,817 |
| ||||||||
Income before provision for income taxes |
| 43,638 |
| 50,674 |
| 100,959 |
| 143,566 |
|
| 29,917 |
| 32,635 |
| 40,070 |
| 57,321 |
| ||||||||
Provision for income taxes |
| 12,620 |
| 16,468 |
| 33,045 |
| 49,004 |
|
| 10,141 |
| 11,913 |
| 14,302 |
| 20,425 |
| ||||||||
Net income |
| $ | 31,018 |
| $ | 34,206 |
| $ | 67,914 |
| $ | 94,562 |
|
| $ | 19,776 |
| $ | 20,722 |
| $ | 25,768 |
| $ | 36,896 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Pension and postretirement plan reclassification adjustments: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Amortization (accretion) of prior service costs |
| (104 | ) | 12 |
| (312 | ) | 36 |
| |||||||||||||||||
Other comprehensive income |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Foreign currency translation adjustment |
| 545 |
| — |
| 904 |
| — |
| |||||||||||||||||
Pension and postretirement plan reclassification adjustments, net of tax: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Accretion of prior service costs |
| (117 | ) | (104 | ) | (234 | ) | (208 | ) | |||||||||||||||||
Amortization of net loss |
| 620 |
| 192 |
| 1,861 |
| 574 |
|
| 636 |
| 620 |
| 1,272 |
| 1,241 |
| ||||||||
Other comprehensive income, net of tax |
| 516 |
| 204 |
| 1,549 |
| 610 |
|
| 1,064 |
| 516 |
| 1,942 |
| 1,033 |
| ||||||||
Total comprehensive income |
| $ | 31,534 |
| $ | 34,410 |
| $ | 69,463 |
| $ | 95,172 |
|
| $ | 20,840 |
| $ | 21,238 |
| $ | 27,710 |
| $ | 37,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic |
| 96,581,703 |
| 96,310,998 |
| 96,499,771 |
| 96,235,404 |
|
| 96,801,906 |
| 96,517,357 |
| 96,750,272 |
| 96,458,354 |
| ||||||||
Diluted |
| 97,888,469 |
| 97,629,641 |
| 97,639,370 |
| 97,631,247 |
|
| 98,520,218 |
| 97,629,786 |
| 98,457,450 |
| 97,561,774 |
| ||||||||
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic |
| $ | 0.32 |
| $ | 0.36 |
| $ | 0.70 |
| $ | 0.98 |
|
| $ | 0.20 |
| $ | 0.21 |
| $ | 0.27 |
| $ | 0.38 |
|
Diluted |
| $ | 0.32 |
| $ | 0.35 |
| $ | 0.70 |
| $ | 0.97 |
|
| $ | 0.20 |
| $ | 0.21 |
| $ | 0.26 |
| $ | 0.38 |
|
Dividends declared per common share |
| $ | 0.10 |
| $ | 0.10 |
| $ | 0.30 |
| $ | 0.30 |
|
| $ | 0.10 |
| $ | 0.10 |
| $ | 0.20 |
| $ | 0.20 |
|
See notes to consolidated financial statements.
KAPSTONE PAPER AND PACKAGING CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
|
| Nine Months Ended September 30, |
|
| Six Months Ended June 30, |
| ||||||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||
Operating activities |
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 67,914 |
| $ | 94,562 |
|
| $ | 25,768 |
| $ | 36,896 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
| |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| |||||||||
Depreciation of plant and equipment |
| 110,143 |
| 98,010 |
|
| 75,992 |
| 72,701 |
| ||||
Amortization of intangible assets |
| 25,385 |
| 16,607 |
|
| 15,410 |
| 17,873 |
| ||||
Stock-based compensation expense |
| 7,188 |
| 8,122 |
|
| 10,026 |
| 5,362 |
| ||||
Pension and postretirement |
| (1,588 | ) | (8,379 | ) |
| (1,226 | ) | (1,027 | ) | ||||
Excess tax (deficiency) / benefit from stock-based compensation |
| 150 |
| (1,518 | ) | |||||||||
Excess tax benefit from stock-based compensation |
| — |
| 150 |
| |||||||||
Amortization of debt issuance costs |
| 3,625 |
| 4,364 |
|
| 2,358 |
| 2,375 |
| ||||
Loss on debt extinguishment |
| 679 |
| 628 |
| |||||||||
Loss on disposal of fixed assets |
| 3,156 |
| 5 |
|
| 986 |
| 653 |
| ||||
Deferred income taxes |
| 220 |
| 6,441 |
|
| 1,528 |
| 704 |
| ||||
Change in fair value of contingent consideration liability |
| 4,579 |
| 2,053 |
|
| 3,570 |
| 3,052 |
| ||||
Equity method investments income, net of cash received |
| 108 |
| — |
| |||||||||
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Trade accounts receivable, net |
| (23,010 | ) | (27,022 | ) |
| (57,874 | ) | (51,262 | ) | ||||
Other receivables |
| 1,949 |
| 2,744 |
|
| (875 | ) | 6,137 |
| ||||
Inventories |
| (11,086 | ) | (5,639 | ) |
| (25,282 | ) | 4,261 |
| ||||
Prepaid expenses and other current assets |
| 14,399 |
| (2,595 | ) |
| (5,596 | ) | 12,181 |
| ||||
Other assets |
| (995 | ) | (153 | ) |
| (428 | ) | — |
| ||||
Accounts payable |
| 16,926 |
| (11,005 | ) |
| 12,639 |
| (6,365 | ) | ||||
Accrued expenses and other liabilities |
| (650 | ) | 6,345 |
|
| 2,904 |
| (5,295 | ) | ||||
Accrued compensation costs |
| (15,524 | ) | 912 |
|
| 5,133 |
| (11,934 | ) | ||||
Accrued income taxes |
| 8,927 |
| (7,834 | ) |
| (15,644 | ) | 3,163 |
| ||||
Net cash provided by operating activities |
| 212,387 |
| 176,648 |
|
| 49,497 |
| 89,625 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Investing activities |
|
|
|
|
|
|
|
|
|
| ||||
Capital expenditures |
| (73,778 | ) | (72,373 | ) | |||||||||
Purchase of intangible assets |
| — |
| (1,525 | ) | |||||||||
Acquisition |
| (33,500 | ) | — |
| |||||||||
Proceeds from the sale of assets |
| — |
| 4,856 |
| |||||||||
Equity method investments |
| (11,750 | ) | — |
|
| — |
| (1,250 | ) | ||||
Purchase of intangible assets |
| (2,025 | ) | — |
| |||||||||
Acquisitions, net of cash acquired |
| (15,438 | ) | (617,046 | ) | |||||||||
Capital expenditures |
| (99,246 | ) | (94,895 | ) | |||||||||
Proceeds from the sale of assets |
| 4,881 |
| — |
| |||||||||
Net cash used in investing activities |
| (123,578 | ) | (711,941 | ) |
| (107,278 | ) | (70,292 | ) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Financing activities |
|
|
|
|
|
|
|
|
|
| ||||
Proceeds from revolving credit facility |
| 353,200 |
| 268,200 |
|
| 268,500 |
| 263,700 |
| ||||
Repayments on revolving credit facility |
| (348,100 | ) | (266,200 | ) |
| (246,500 | ) | (254,100 | ) | ||||
Proceeds from receivables credit facility |
| 36,556 |
| 112,961 |
|
| 50,394 |
| 21,094 |
| ||||
Repayments on receivables credit facility |
| (32,667 | ) | (18,449 | ) |
| (21,621 | ) | (27,170 | ) | ||||
Proceeds from long-term debt |
| — |
| 519,763 |
| |||||||||
Repayments on long-term debt |
| (64,687 | ) | (64,688 | ) | |||||||||
Payment of loan amendment fees and debt issuance costs |
| (2,250 | ) | (10,790 | ) | |||||||||
Payment of loan amendment fees |
| (187 | ) | (2,388 | ) | |||||||||
Proceeds from other current borrowings |
| — |
| 6,615 |
|
| 6,214 |
| — |
| ||||
Repayment on other current borrowings |
| — |
| (4,401 | ) | |||||||||
Repayments on other current borrowings |
| (2,059 | ) | — |
| |||||||||
Payments on capital lease |
| (11 | ) | — |
| |||||||||
Cash dividends paid |
| (29,001 | ) | (29,098 | ) |
| (19,343 | ) | (19,348 | ) | ||||
Payment of withholding taxes on vested stock awards |
| (841 | ) | (2,460 | ) |
| (875 | ) | (786 | ) | ||||
Proceeds from exercises of stock options |
| 788 |
| 778 |
|
| 853 |
| 420 |
| ||||
Proceeds from shares issued to ESPP |
| 971 |
| 844 |
|
| 487 |
| 464 |
| ||||
Excess tax (deficiency) / benefit from stock-based compensation |
| (150 | ) | 1,518 |
| |||||||||
Net cash (used in) provided by financing activities |
| (86,181 | ) | 514,593 |
| |||||||||
Excess tax (deficiency) from stock-based compensation |
| — |
| (150 | ) | |||||||||
Net cash provided by (used in) financing activities |
| 35,852 |
| (18,264 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net increase (decrease) in cash and cash equivalents |
| 2,628 |
| (20,700 | ) |
| (21,929 | ) | 1,069 |
| ||||
Cash and cash equivalents-beginning of period |
| 6,821 |
| 28,467 |
|
| 29,385 |
| 6,821 |
| ||||
Cash and cash equivalents-end of period |
| $ | 9,449 |
| $ | 7,767 |
|
| $ | 7,456 |
| $ | 7,890 |
|
|
|
|
|
|
|
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 ninesix months ended SeptemberJune 30, 20162017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.2017. 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, 2015.2016.
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 containerboard, corrugated products and specialty paper for industrial and consumer markets. The Distribution segment, was established June 1, 2015 concurrentthrough Victory, a North American distributor of packaging materials, with more than 60 distribution centers located in the acquisitionUnited States, Mexico and Canada, provides packaging materials and related products to a wide variety of Victory Packaging, L.P. and its subsidiaries (“Victory”).customers. For more information about our segments, see Note 12,13, Segment Information.
In 2016, the Company entered into two joint venture agreements that are accounted for using the equity method.
In these consolidated financial statements, certain amounts in prior periods’ consolidated financial statements have been reclassified to conform to the current period presentation. Amortization of intangible assets and the fair value of the contingent consideration liability are now separately identified in the Statement of Cash Flows and the presentation of Cash Flows for 2015 has been recast to conform to the current year presentation. These reclassifications did not affect our results of operations, financial position, or cash flows.
2. Recent Accounting Pronouncements
In May 2014, the Financial Accounting StandardsStandard’s Board (“FASB’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”. 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). The Company did not elect to early adopt this standard.
We are nearing completion of the diagnostic phase of evaluating the overall impact of ASU 2014-09. The Company has determined that it will adopt this standard utilizing the modified retrospective method, which will result in the recognition of the cumulative effect of initially applying the standard (if any) as an adjustment to opening retained earnings for the fiscal year beginning January 1, 2018.
We have established an implementation team consisting of senior leadership from finance, legal, sales and operations that reports its progress to management and to the audit committee of our board of directors on a periodic basis. This team is working to understand the impact of the standard on our revenue contracts and is reviewing existing accounting practices to identify necessary changes to policies and procedures that will result from the application of the new standard. We have identified our significant revenue streams within each reportable segment and are working to review all existing contracts with customers and to identify any necessary changes to our systems and control environment to support additional disclosures under the new standard. We currently evaluatinganticipate completing our assessment by September 30, 2017.
We will provide additional disclosure as the implementation plan progresses during 2017, including on-going evaluation of the impact that the adoption of ASU 2014-09this standard will have on ourthe Company’s financial position, results of operations and related 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. ASU 2015-03 was adopted during the interim period ended March 31, 2016, and it had no material impact on our financial statements.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”, which is intended 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 and interim periods beginning after December
15, 2016. Early adoption is permitted. The Company does not expectASU 2015-11 was adopted during the adoption of this standard to have ainterim period ended March 31, 2017, and it had no material impact on itsthe Company’s consolidated balance sheets.financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases”. This guidance revises existing practice related to accounting for leases under Accounting Standards CodificationASC 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 definition 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 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 evaluatingThe Company does have a significant number of leases for both property and equipment. As such, the impactCompany expects that the adoption of ASU 2016-02there will havebe a material impact on our financial position, results of operations and disclosures.disclosures upon the adoption of ASU 2016-02. The Company will provide additional disclosure as the implementation progresses.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which will require all income tax effects of awards to be recognized in the income 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 tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluatingASU 2016-09 was adopted prospectively during the impact that theinterim period ended March 31, 2017. The adoption of this ASU 2016-09 will have on our financial position, resultsdecreased the Company’s provision for incomes taxes by $0.1 million for the three months ended June 30, 2017 and increased the Company’s provision for income taxes by $0.4 million for the six months June 30, 2017. The Company has elected to continue recognizing estimated forfeitures over the vesting term of operations and disclosures.the awards.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230):Flows: Classification of Certain Cash Receipts and Cash Payments”, which clarifies the treatment of several cash flow categories. In addition, ASU 2016-15 clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted, including adoption in an interim period. We areThe Company is currently evaluating the impact that the adoption of ASU 2016-15 will have on our cash flows and related disclosures.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment”, which amends the guidance in ASC Topic 350, “Intangibles-Goodwill and Other”. The ASU eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The ASU is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The ASU will be applied prospectively. The Company currently does not expect that the adoption of these provisions will have a material effect on our consolidated financial statements and related disclosures, but will simplify the measurement of any impairment loss should goodwill be impaired in the future.
In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business”, which amends the guidance in ASC Topic 805, “Business Combinations”. The ASU changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If it is not met, the entity then evaluates whether the set meets the requirements that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to
create outputs. The ASU defines an output as “the result of inputs and processes applied to those inputs that provide goods or services to customers, investment income (such as dividends or interest), or other revenues.” The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods, and early adoption is permitted. The ASU will be applied prospectively to any transactions occurring within the period of adoption. The Company currently does not expect that the adoption of these provisions will have a material effect on our consolidated financial statements.
In March, 2017, the FASB issued ASU No. 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU applies to all employers that offer to their employees defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715, Compensation — Retirement Benefits. The ASU requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The ASU also allows only the service cost component to be eligible for capitalization when applicable (e.g., as a cost of internally manufactured inventory or a self-constructed asset). This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company is currently evaluating the effect that ASU No. 2017-07 will have on its consolidated financial statements and related disclosures.
3. API Acquisition and Equity Method Investments
Acquisition
On JulyFebruary 1, 2016,2017, the Company acquired 100 percent of the common stock of Central Florida Box Corporation (“CFB”), a corrugated products manufacturer located near Orlando, Florida, for $15.4 million, net of cash acquired. Sales and total assets of CFB are not material to KapStone. Operating results of theAssociated Packaging, Inc. and Fast Pak, LLC (together, “API”) with operations located in Greer, South Carolina for $33.5 million. The acquisition since July 1, 2016 are included inwas funded from borrowings on the Company’s Paper$500 million revolving credit facility (“Revolver”). API provides corrugated packaging and Packaging segment operating results.digital production needs serving a diverse customer base, including an emphasis on fulfillment and kitting for the automotive and consumer products industries. The Company has allocated the purchase price to the assets acquired and liabilities assumed, of which $10.5$14.0 million has been allocated to intangible assets, $2.8 million to plant, property and equipment, $1.7 million to net working capital $1.0and $15.0 million to goodwill (which is deductible for tax purposes) and $2.2 million to customer relationships (to be amortized over a life of 10 years). The purchase price allocation is preliminary pending further review by management of the fair value assigned to long-lived assets.final.
Transaction fees and expenses for the CFBAPI acquisition related to due diligence, advisory and legal services have been expensed as incurred. These expenses were $0.6 million and $0.8$0.4 million for the three and nine month periodssix months ended SeptemberJune 30, 2016, respectively,2017, and were recorded as selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income.
Equity Method InvestmentsThis acquisition further strengthens the Company’s goal of increasing mill integration.
Operating results of the acquisition since February 1, 2017 are included in the Company’s Paper and Packaging segment. The Company’s consolidated statement of comprehensive income for the six months ended June 30, 2017 includes $10.8 million of net sales and $0.8 million of operating income from this acquired business.
In September of 2016,conjunction with the Company made a $10.5 million investment for a 49 percent equity interest in a sheet feeder operation located in Florida. In April of 2016,API acquisition, the Company made a $1.25 million investment for a 20 percent equity interest in a sheet feeder operation located in California. These investments are expected to increase the Company’s vertical integration by over 60,000 tons per year and will ramp up to that level over eighteen months.
New Plant Start-up
In May of 2016, the Company began building a new sheet plant in Ontario, California with a total estimated cost of approximately $14.0 million. The Company signed a 10 year25-year lease agreement with a total commitment of approximately $9.0$14.7 million. The new sheet plant is expectedCompany estimated the fair value of the lease to be manufacturing boxes by January 2017$4.7 million based on an assessment of the market values of comparable properties. The lease was capitalized as a long-term building asset and long-term liability as the present value of the payments is intended to primarily supplymore than 90% of the Company’s Victory Packaging operationsfair value of the property. Amortization of the asset under this capital lease obligation is included in Southern California as well as other KapStone customers.depreciation expense.
4. Planned Maintenance Outages
Planned maintenance outage costs for the three months ended SeptemberJune 30, 2017 and 2016 and 2015 totaled $3.8$17.6 million and $4.4$19.0 million, respectively, and are included in cost of sales.
Planned maintenance outage Outage costs for the ninethree months ended SeptemberJune 30, 2017 and 2016 and 2015 totaled $29.4 million and $24.1 million, respectively, and areeach included in cost of sales. Included in the outage costs for the nine months ended September 30, 2016 and 2015 was thean annual planned maintenance outage at the Company’s paper
mill in Roanoke Rapids, North Carolina. In 2017, the outage lasted approximately 9 days with a cost of $8.7 million, primarily for annual maintenance and inspections, and the unabsorbed fixed cost impact associated with lost paper production of 11,600 tons. In 2016, the outage lasted approximately 9 days with a cost of approximately $8.4 million and resulted in an 11,700 reduction in tons produced. In 2015, the outage lasted approximately 8 days, with a cost of approximately $8.0 million, and resulted in a 10,400 reduction in tons produced. In addition, the Longview, Washington paper mill incurred $11.9 million of
Planned maintenance outage costs for the ninesix months ended SeptemberJune 30, 2017 and 2016 compared to $9.8totaled $23.8 million for the nine months ended September 30, 2015.and $25.6 million, respectively, and are included in cost of sales.
5. Inventories
Inventories consist of the following at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively:
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| September 30, |
| December 31, |
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| June 30, |
| December 31, |
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| 2016 |
| 2015 |
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| 2017 |
| 2016 |
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Raw materials |
| $ | 100,048 |
| $ | 101,250 |
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| $ | 88,545 |
| $ | 79,377 |
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Work in process |
| 7,022 |
| 6,165 |
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| 4,691 |
| 6,371 |
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Finished goods |
| 155,545 |
| 149,774 |
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| 165,653 |
| 151,497 |
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Replacement parts and supplies |
| 84,815 |
| 79,717 |
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| 90,915 |
| 85,857 |
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Inventory at FIFO costs |
| 347,430 |
| 336,906 |
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| 349,804 |
| 323,102 |
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LIFO inventory reserves |
| 20 |
| (1,003 | ) |
| (1,020 | ) | (438 | ) | ||||
Inventories |
| $ | 347,450 |
| $ | 335,903 |
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| $ | 348,784 |
| $ | 322,664 |
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6. Short-term Borrowings and Long-term Debt
Short-term Borrowings
As of June 30, 2017, the Company had $22.0 million of short-term borrowings outstanding under the Revolver, with a weighted average interest rate of 2.92 percent.
As of June 30, 2017, the Company has available borrowing capacity of $462.5 million under the Revolver.
Other Borrowing
In January 2017, the Company entered into a short-term financing agreement of $6.2 million at an annual interest rate of 2.4 percent for its annual property insurance premiums. The agreement requires the Company to pay three payments through the term of the financing agreement ending on December 1, 2017. As of June 30, 2017, there was $4.2 million outstanding under the current agreement.
Long-term Debt
Long-term debt consists of the following at June 30, 2017 and December 31, 2016, respectively:
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| December 31, |
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| 2017 |
| 2016 |
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Term loan A-1 under Credit Agreement with interest payable monthly at LIBOR of 1.23% plus 1.75% at June 30, 2017 |
| $ | 775,500 |
| $ | 775,500 |
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Term loan A-2 under Credit Agreement with interest payable monthly at LIBOR of 1.23% plus 1.875% at June 30, 2017 |
| 458,375 |
| 458,375 |
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Receivable Credit Facility with interest payable monthly at LIBOR of 1.23% plus 0.75% at June 30, 2017 |
| 298,046 |
| 269,273 |
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Total long-term debt |
| 1,531,921 |
| 1,503,148 |
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Less unamortized debt issuance costs |
| (15,655 | ) | (17,825 | ) | ||
Long-term debt, net of debt issuance costs |
| $ | 1,516,266 |
| $ | 1,485,323 |
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KapStone and certain of our subsidiaries are parties to a Second Amended and Restated Credit Agreement dated June 1, 2015 (as amended from time to time, the “Credit Agreement”), which provides for a senior secured credit facility (the “Credit Facility”) of $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”).the Revolver. In addition, the Credit Facility also includes an uncommitted accordion feature that allows the Company, subject to certain significant conditions, to request additional commitments from our existing or new lenders under the Credit Facility without further approvals of any existing lenders thereunder. The aggregate amount of such increases in potential commitments (and potential borrowings) is limited to $600 million, unless the Company would maintain a pro forma total leverage ratio of 2.5 to 1.0 or less after giving effect to the increase in potential commitments (and potential borrowings).
On February 9, 2016,March 27, 2017, the Company entered into the FirstSecond 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 itwhich 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 Agreement in order to provide for an additional pricing level based on the total leverage ratio of the Company.
The Company paid approximately $2.3 million of loan amendment fees associated with the First Amendment, which are being amortized over the term of the Credit Agreement using the effective interest method.
In September of 2016, the Company made a voluntary prepayment on its term loans under the Credit Facility of $64.7 million and as a result, $0.7 million of unamortized debt issuance costs were written-off as a loss on debt extinguishment.
Short-term Borrowings
As of September 30, 2016, the Company had $11.5 million of short-term borrowings outstanding under the Revolver, which bear interest at 4.25 percent.
As of September 30, 2016, the Company has available borrowing capacity of $471.3 million under the Revolver.
Receivables Credit Facility
OnEffective as of June 8, 2016,1, 2017, the Company entered into Amendment No. 23 to the Receivables Purchase Agreement (the “Amendment to Receivables Purchase Agreement”“Amendment”) amending its Receivables Purchase Agreement dated as of September 26, 2014 (as previously amended from time to time, the “Receivables Purchase Agreement”). In addition, the Company, KapStone Receivables, LLC (“KAR”), KapStone Kraft Paper Corporation, KapStone Container Corporation, KapStone Charleston Kraft LLC, Longview Fibre Paper and Packaging, Inc. and Victory (collectively, the “Originators”), entered into Amendment No. 2 to the Receivables Sales Agreement (the “Amendment to Receivables Sales Agreement” and, together with the Amendment to Receivables Purchase Agreement, the “Amendment”). The Receivables Purchase Agreement and Receivables Sales Agreement, as amended by the Amendment, establishes the primary terms and conditionswhich is part of an accounts receivable securitization program (the “Securitization Program”). of the Company and certain of its subsidiaries. The Amendment extendedincluded the following changes to the Receivable Purchase Agreement:
· the aggregate commitment of the Purchasers under the Receivables Purchase Agreement was increased from $275.0 million to $325.0 million
· the “Facility Termination Date” (as defined in the ReceivableReceivables Purchase Agreement) was extended from June 8, 20166, 2017 to June 6, 2017.1, 2018 and
· certain definitions used to determine the maximum amount that may be outstanding under the Securitization Program were added or modified, as applicable, in a manner favorable to the Company.
On February 21, 2017, the Company entered into Amendment No. 3 to the Receivables Sale Agreement amending its Receivables Sale Agreement dated as of September 26, 2014, which is part of the Securitization Program. All accounts receivable purchased from API and all accounts receivable generated from facilities acquired from API that are not paid to an eligible bank account are designated as “Excluded Receivables”.
Under our Securitization Program, the OriginatorsCompany and its subsidiaries that participate in the Securitization Program (the “Originators”) sell, on an ongoing basis without recourse, certain trade receivables to KAR,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 SeptemberJune 30, 2016, $356.92017, $440.1 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$325 million facility (the “Receivables Credit Facility”) for proceeds of $269.5$298.0 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.
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 SeptemberJune 30, 2016,2017, the Company was in compliance with all applicable covenants in the Credit Agreement.
Fair Value of Debt
As of SeptemberJune 30, 2016,2017, the fair value of the Company’s debt approximates the carrying value of $1.5 billion as the variable interest rates re-price frequently at current market rates. Our weighted-average cost of borrowings was 2.152.8 percent and 1.822.1 percent for the ninesix months ended SeptemberJune 30, 20162017 and September 30, 2015,2016, respectively.
7.Long-term Financing Obligation
In 2015, the Company signed non-cancellable contracts with a third party to construct facilities to produce wood chips for the use at the Company’s North Charleston, South Carolina and Roanoke Rapids, North Carolina paper mills for twenty years, with an annual purchase obligation of approximately $12.5 million. The Company has evaluated these agreements and concluded that they represent in-substance leases under ASC 840, Leases. In accordance with the special provisions discussed in ASC 840-40-55-15, language within the contracts result in the Company assuming a certain level of construction risk, and as such, we are considered the accounting owner of the assets during the construction period, even though these facilities are being constructed and financed entirely by the third party. Accordingly, as the third-party incurs the construction project costs, the assets and corresponding financial obligation are recorded in plant, property and equipment, net and other liabilities in the Company’s consolidated balance sheets.
Upon completion of each project, the Company will evaluate if the in-substance leases meet certain ‘sale-leaseback’ criteria under ASC 840. If the contract does not meet such requirements, which is the expectation for each of these contracts, the amount recognized during the construction phase will be recorded as a financing liability. Payments under the contract will then be allocated between a reduction of the lease obligation and interest expense, utilizing an imputed interest rate in accordance with ASC 840.
In June 2017, the Roanoke Rapids paper mill completed Phase I of this project and did not meet the ‘sale-leaseback’ criteria. As such, $43.6 million is now reflected as a long-term financing liability.
8. Income Taxes
The Company’s effective income tax rate for the three and ninesix months ended SeptemberJune 30, 20162017 was 28.933.9 percent and 32.735.7 percent, respectively, compared to 32.536.5 percent and 34.135.6 percent for the three and ninesix months ended SeptemberJune 30, 2015.2016. The lower effective income tax rate in the three months ended September June 30, 2017 is due to the absence of an unfavorable state examination adjustment in 2016.
Cash taxes paid in the three and six months ended June 30, 2017 were $6.5 million and $27.5 million, respectively, compared to $10.6 million and a net refund of $0.9 million for the three and six months ended June 30, 2016, is driven by a favorable $1.4 million return-to-provision adjustment from the Company’s recently filed 2015 federal income tax return.respectively.
In the normal course of business, the Company is subject to examination by taxing authorities. The Company’s open federal tax years are 2013, 2014 and 2014.2015. The Company has open tax years for state and foreign income tax filings generally starting in 2012.
8.9. Net Income per Share
The Company’s basic and diluted net income per share for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 is calculated as follows:
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| Nine Months Ended September 30, |
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| Three Months Ended June 30, |
| Six Months Ended June 30, |
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| 2016 |
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| 2016 |
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Net income |
| $ | 31,018 |
| $ | 34,206 |
| $ | 67,914 |
| $ | 94,562 |
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| $ | 19,776 |
| $ | 20,722 |
| $ | 25,768 |
| $ | 36,896 |
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Weighted-average number of common shares for basic net income per share |
| 96,581,703 |
| 96,310,998 |
| 96,499,771 |
| 96,235,404 |
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| 96,801,906 |
| 96,517,357 |
| 96,750,272 |
| 96,458,354 |
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Incremental effect of dilutive common stock equivalents: |
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Unexercised stock options |
| 942,090 |
| 1,030,234 |
| 840,281 |
| 1,112,767 |
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| 1,220,934 |
| 840,386 |
| 1,254,266 |
| 813,369 |
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Unvested restricted stock awards |
| 364,676 |
| 288,409 |
| 299,318 |
| 283,076 |
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| 497,378 |
| 272,043 |
| 452,912 |
| 290,051 |
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Weighted-average number of shares for diluted net income per share |
| 97,888,469 |
| 97,629,641 |
| 97,639,370 |
| 97,631,247 |
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| 98,520,218 |
| 97,629,786 |
| 98,457,450 |
| 97,561,774 |
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Net income per share - basic |
| $ | 0.32 |
| $ | 0.36 |
| $ | 0.70 |
| $ | 0.98 |
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| $ | 0.20 |
| $ | 0.21 |
| $ | 0.27 |
| $ | 0.38 |
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Net income per share - diluted |
| $ | 0.32 |
| $ | 0.35 |
| $ | 0.70 |
| $ | 0.97 |
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| $ | 0.20 |
| $ | 0.21 |
| $ | 0.26 |
| $ | 0.38 |
|
Approximately 1,100,000A total of 1,978,510 and 2,076,832 weighted average unexercised stock options were outstanding for both of the three month periods ended SeptemberJune 30, 20162017 and 2015,2016, respectively, but were not included in the computation of diluted earningsnet income per share because the optionsawards were anti-dilutive.
Approximately 1,809,000A total of 1,518,317 and 900,000 of1,798,249 weighted average unexercised stock options were outstanding for the ninesix month periods ended SeptemberJune 30, 20162017 and 2015,2016, respectively, but were not included in the computation of diluted earningsnet income per share because the optionsawards were anti-dilutive.
9.10. Pension Plan and Post-Retirement Benefits
Defined Benefit Plan
Net pension cost (benefit) recognized for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 for the Company’s defined benefit plan (the “Pension Plan”) is as follows:
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||
Service cost for benefits earned during the quarter |
| $ | 1,125 |
| $ | 1,215 |
| $ | 3,374 |
| $ | 3,645 |
|
Interest cost on projected benefit obligations |
| 7,079 |
| 6,900 |
| 21,236 |
| 20,701 |
| ||||
Expected return on plan assets |
| (9,340 | ) | (10,236 | ) | (28,020 | ) | (30,708 | ) | ||||
Amortization of net loss |
| 1,157 |
| 533 |
| 3,471 |
| 1,601 |
| ||||
Amortization of prior service cost |
| 24 |
| 69 |
| 72 |
| 207 |
| ||||
Net pension cost (benefit) |
| $ | 45 |
| $ | (1,519 | ) | $ | 133 |
| $ | (4,554 | ) |
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Service cost for benefits earned during the quarter |
| $ | 1,077 |
| $ | 1,124 |
| $ | 2,154 |
| $ | 2,249 |
|
Interest cost on projected benefit obligations |
| 6,567 |
| 7,078 |
| 13,134 |
| 14,157 |
| ||||
Expected return on plan assets |
| (9,031 | ) | (9,340 | ) | (18,063 | ) | (18,680 | ) | ||||
Amortization of net loss |
| 1,197 |
| 1,157 |
| 2,395 |
| 2,314 |
| ||||
Amortization of prior service cost |
| 4 |
| 24 |
| 7 |
| 48 |
| ||||
Net pension cost (benefit) |
| $ | (186 | ) | $ | 43 |
| $ | (373 | ) | $ | 88 |
|
The Company currently does not anticipate making any Pension Plan contributions in 2016.2017. This estimate is based on current tax laws, plan asset performance, and liability assumptions, which are subject to change.
The Company provides postretirement health care insurance benefits through an indemnity plan for certain salary and non-salary employees of its subsidiary Longview employeesFibre Paper and Packaging, Inc. (“Longview”) and their dependents. The Company anticipates making contributions to its’its postretirement plans in 20162017 as claims are submitted.
In March 2017, the union employees at the North Charleston paper mill ratified new collective bargaining agreements which changed the defined pension benefit plan to a defined contribution plan for certain employees. The overall impact on the Company’s Pension Plan is deemed immaterial.
Defined Contribution Plan
The Company offers 401(k) Defined Contribution Plans (“Contribution 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 SeptemberJune 30, 20162017 and 2015,2016, the Company recognized expense of $2.5$6.0 million and $5.5$2.4 million, respectively, for matching contributions. For the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, the Company recognized expense of $8.5$12.2 million and $15.5$6.0 million, respectively, for matching contributions.
In March 2016,2017, the Company suspendedrestored matching contributions to its Contribution Plans for certain employees.employees that were previously suspended during 2016. As a result, contributions were $3.2$3.6 million lowerhigher in the quarter ended SeptemberJune 30, 2016,2017, and $8.5$6.2 million lowerhigher for the ninesix months ended SeptemberJune 30, 2016,2017, compared to the same periodperiods in 2015. This was partially offset by an increase attributable2016.
Multiemployer Pension Plan
In conjunction with the Company’s Longview and U.S. Corrugated acquisitions, we assumed participation in the GCIU-Employer Retirement Fund for approximately 300 hourly employees at four corrugated products manufacturing plants. On October 31, 2016, the Company provided formal notification to the inclusionplan trustee of Victory underits withdrawal from the Contribution Plansplan and cessation of $0.2plan contributions effective December 31, 2016. Accordingly, the Company recorded an estimated withdrawal liability of approximately $6.4 million, forbased on annual payments of approximately $0.4 million over 20 years, discounted at a credit adjusted risk-free rate return of approximately 3.6 percent. This liability is based on an analysis of the quarter ended September 30, 2016, and $1.5 million forfacts available to management; however, the nine months ended September 30, 2016 compared to 2015.withdrawal liability will ultimately be determined by the plan trustee.
10.11. Stock-Based Compensation
In April 2017, the compensation committee of the board of directors granted 126,976 restricted stock units to certain Company employees for retention purposes. The total value of the awards was $2.9 million of which $2.8 million was expensed in the quarter ended June 30, 2017, with the balance to be expensed in the second half of 2017. The restricted stock units awarded to certain executive officers vest one year from the date of the grant, while the non-executive officers’ awards vest 90 days from the date of the grant.
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 ninesix months ended SeptemberJune 30, 20162017 and 20152016 is as follows:
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||||||
Stock option compensation expense |
| $ | 928 |
| $ | 826 |
| $ | 3,669 |
| $ | 4,048 |
|
| $ | 1,071 |
| $ | 952 |
| $ | 3,687 |
| $ | 2,741 |
|
Restricted stock unit compensation expense |
| 898 |
| 759 |
| 3,519 |
| 4,074 |
|
| 3,690 |
| 989 |
| 6,339 |
| 2,621 |
| ||||||||
Total stock-based compensation expense |
| $ | 1,826 |
| $ | 1,585 |
| $ | 7,188 |
| $ | 8,122 |
|
| $ | 4,761 |
| $ | 1,941 |
| $ | 10,026 |
| $ | 5,362 |
|
Total unrecognized stock-based compensation cost related to the stock options and restricted stock units as of SeptemberJune 30, 20162017 and December 31, 20152016 is as follows:
|
| September 30, |
| December 31, |
| ||
|
| 2016 |
| 2015 |
| ||
Unrecognized stock option compensation expense |
| $ | 4,791 |
| $ | 4,217 |
|
Unrecognized restricted stock unit compensation expense |
| 5,819 |
| 5,094 |
| ||
Total unrecognized stock-based compensation expense |
| $ | 10,610 |
| $ | 9,311 |
|
|
| June 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Unrecognized stock option compensation expense |
| $ | 7,116 |
| $ | 3,849 |
|
Unrecognized restricted stock unit compensation expense |
| 8,392 |
| 4,899 |
| ||
Total unrecognized stock-based compensation expense |
| $ | 15,508 |
| $ | 8,748 |
|
As of SeptemberJune 30, 2016,2017, 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 2.12.3 years and 2.02.2 years, respectively.
Stock Options
The following table summarizes stock options amounts and activity:
|
|
|
| Weighted |
| Weighted |
| Intrinsic |
|
|
|
| Weighted |
| Weighted |
| Intrinsic |
| ||||
|
|
|
| Average |
| Average |
| Value |
|
|
|
| Average |
| Average |
| Value |
| ||||
|
|
|
| Exercise |
| Remaining |
| (dollars in |
|
|
|
| Exercise |
| Remaining |
| (dollars in |
| ||||
|
| Options |
| Price |
| Life (Years) |
| thousands) |
|
| Options |
| Price |
| Life (Years) |
| thousands) |
| ||||
Outstanding at January 1, 2016 |
| 3,265,900 |
| $ | 15.45 |
|
|
|
|
| ||||||||||||
Outstanding at January 1, 2017 |
| 4,293,081 |
| $ | 14.61 |
|
|
|
|
| ||||||||||||
Granted |
| 1,263,078 |
| 12.77 |
|
|
|
|
|
| 957,270 |
| 22.20 |
|
|
|
|
| ||||
Exercised |
| (107,194 | ) | 9.77 |
|
|
|
|
|
| (75,067 | ) | 12.33 |
|
|
|
|
| ||||
Lapsed (forfeited or cancelled) |
| (95,897 | ) | 22.80 |
|
|
|
|
|
| (110,861 | ) | 21.90 |
|
|
|
|
| ||||
Outstanding at September 30, 2016 |
| 4,325,887 |
| $ | 14.64 |
|
|
|
|
| ||||||||||||
Outstanding at June 30, 2017 |
| 5,064,423 |
| $ | 15.93 |
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Exercisable at September 30, 2016 |
| 2,321,008 |
| $ | 10.20 |
| 4.7 |
| $ | 23,002 |
| |||||||||||
Exercisable at June 30, 2017 |
| 2,643,817 |
| $ | 13.38 |
| 4.5 |
| $ | 25,779 |
|
For the three and ninesix months ended SeptemberJune 30, 2016,2017, cash proceeds from the exercise of stock options totaled $0.4 million and $0.8$0.9 million, respectively. No options were exercised inFor the three and six months ended SeptemberJune 30, 2015. For the nine months ended September 30, 2015,2016, cash proceeds from the exercise of stock options totaled $0.8 million.$0.2 million and $0.4 million, respectively.
Restricted Stock
Restricted stock units for executive officers and certain employees are restricted as to transferability until they generally vest three years from the grant date or upon a grantee of such restricted stock units attaining the age 65. Restricted stock units for directors are restricted as to transferability until they generally vest one year from the grant date or upon a grantee of such restricted stock units attaining the age of 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 average 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:
|
|
|
| Weighted |
|
|
|
| Weighted |
| ||
|
|
|
| Average |
|
|
|
| Average |
| ||
|
|
|
| Grant |
|
|
|
| Grant |
| ||
|
| Units |
| Price |
|
| Units |
| Price |
| ||
Outstanding at January 1, 2016 |
| 550,009 |
| $ | 24.60 |
| ||||||
Outstanding at January 1, 2017 |
| 691,720 |
| $ | 20.93 |
| ||||||
Granted |
| 392,696 |
| 12.68 |
|
| 469,240 |
| 22.42 |
| ||
Vested |
| (210,988 | ) | 14.87 |
|
| (129,504 | ) | 30.20 |
| ||
Forfeited |
| (31,006 | ) | 23.49 |
|
| (34,232 | ) | 20.61 |
| ||
Outstanding at September 30, 2016 |
| 700,711 |
| $ | 20.89 |
| ||||||
Outstanding at June 30, 2017 |
| 997,224 |
| $ | 20.46 |
|
11.12. Commitments and Contingencies
Legal Claims
WeThe Company and its subsidiaries are from time to time subject to various administrative and legal investigations, claims and proceedings incidental to our business, including environmental and occupational, health and safety matters, labor and employment matters, personal injury and property damage claims, contractual, commercial and other disputes and taxes. We establish reserves for investigations, claims and proceedings when it is probable that liabilities exist and where reasonable estimateswe can be made.reasonably estimate the amount of such liabilities (including any losses, costs and expenses). 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 anyAny investigation, claim or proceeding has an element of uncertainty, and we cannot predict or assure the outcome of any investigation, claim or proceeding involving the Company we believe the outcomeor any of any pending or threatened claim or proceeding (other thanits subsidiaries, particularly those described below that cannot be assessed due to their preliminary nature),nature. It is possible that any of the investigations, claims and proceedings against the Company or allits subsidiaries, including those described below, could be decided unfavorably against the Company or any of them combined, will notits subsidiaries involved in such matters and could also result in losses, costs or expenses in excess of any reserve we have established. Accordingly, it is possible that an adverse outcome from any investigation, claim or proceeding (including associated penalties, costs and expenses) could exceed any reserve we may have accrued in an amount that could have a material adverse effect on our consolidated results of operations, cash flows orand financial condition.
The Company’s subsidiary, Longview Fibre Paper and Packaging, Inc. (“Longview”), is a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) with respect to the Lower Duwamish Waterway Superfund Site in the State of Washington (the “Site”). The U.S. Environmental Protection Agency (“EPA”) asserts that the Site is contaminated as a result of discharges from various businesses and government entities located along 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%) for the selected remedy are $342 million.million, although many uncertainties remain that could result in increased remedial costs. This estimate does not include actual costs already incurred to date for remedial investigation and feasibility studies or potential natural resource damage claims. Neither the Company nor Longview has received a specific monetary demand regarding its potential liability for the Site. In addition, Longview is a participant in a non-judicial allocation process with respect to the Site. Pursuant to the non-judicial allocation process, Longview and other participating parties will seek to allocate certain costs, including but not limited to the costs necessary to perform the work under the ROD. The non-judicial allocation process is not scheduled to be completed until 2019. Based upon the information available to the Company at this time, the Company cannot reasonably estimate its potential liability for this Site.
In October 2016, the Company received a Notice of Alleged Violation from the South Carolina Department of Health and Environmental Control (“DHEC”) in which DHEC made several allegations related to air regulatory requirements. Several of the allegations related to recordkeeping/reporting, monitoring or paperwork requirements which did not implicate actual emissions (and which have been corrected); however, three of the allegations related to periodic compliance monitoring of particulates from operating equipment sources that are considered to be serious under DHEC guidelines. No emissions from the monitoring resulted in any impact to the environment or human health, and no annual limits were exceeded because this allegation involved spare equipment that is operated only a limited number of days each year. Discussions with DHEC regarding the alleged violations are ongoing, and the resolution of the matters raised in this notice is uncertain at this time. However, no capital expenditure is required and all repairs and corrective actions have been performed resulting in full compliance as of June 30, 2017; thus the Company currently does not expect that the result of those discussions will be material to the our results of operations, cash flows or financial condition.
In January 2017, the Company received a letter from the state of Washington Department of Ecology contending that the Company is, along with several other companies, responsible for investigation and cleanup of an allegedly contaminated site where the named companies, including Longview, may store or have stored petroleum products. The letter concerns the possible release of petroleum products into the environment. In 1998, Longview (before it was acquired by the Company) and certain other companies who owned or operated underground storage tanks and pipes entered into an agreement for investigating and remediating the area independently of (but in consultation with) the Washington Department of Ecology. Upon expiration of the 1998 agreement, groundwater monitoring continued. The Company has responded to the notice. Based upon the information available to the Company at this time, the Company cannot reasonably estimate its potential liability, if any.
There have been no material changes in any of our legal proceedings for the ninesix months ended SeptemberJune 30, 2016.2017.
Contingent Consideration
The Company’s contingent consideration obligation relates to the acquisition of Victory acquisition that was consummatedPackaging, L.P. (“Victory”) on June 1, 2015 and is considered a Level 3 liability. The fair value of the obligation as of September June
30, 20162017 and December 31, 20152016 was $17.9$18.5 million and $13.3$14.9 million, respectively. The fair value of the contingent consideration is driven byestimated based on the probability of reaching the performance measures through December 1, 2017 required by the purchase agreement and the associated discount rate.November 30, 2017. The probability is estimated by reviewing financial forecasts and assessing the likelihood of reaching the required performance measures based on factors specific to the Victory acquisition. The discount rate is determined by applying a risk premium to a risk-free interest rate. The total potential payout under this obligation is $25.0 million.million with the actual payout to be incurred in the first quarter of 2018.
12.13. Segment Information
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, with more than 60 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 income from equity investments, foreign exchange gains / (losses), loss on debt extinguishment, net interest expense and income taxes.
|
| Net Sales |
| Operating |
| Depreciation |
| Capital |
|
|
|
| Net Sales |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Three Months Ended September 30, 2016 |
| Trade |
| Intersegment |
| Total |
| (Loss) |
| Amortization |
| Expenditures |
| Assets |
| |||||||||||||||||||||||||||||
Three Months Ended June 30, 2017 |
| Trade |
| Inter- |
| Total |
| Operating |
| Depreciation |
| Capital |
| Assets |
| |||||||||||||||||||||||||||||
Paper and Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Containerboard / Corrugated products |
| $ | 342,386 |
| $ | 18,674 |
| $ | 361,060 |
|
|
|
|
|
|
|
|
|
| $ | 380,776 |
| $ | 25,681 |
| $ | 406,457 |
|
|
|
|
|
|
|
|
| ||||||||
Specialty paper |
| 169,331 |
| — |
| 169,331 |
|
|
|
|
|
|
|
|
|
| 158,871 |
| — |
| 158,871 |
|
|
|
|
|
|
|
|
| ||||||||||||||
Other |
| 21,845 |
| — |
| 21,845 |
|
|
|
|
|
|
|
|
|
| 22,270 |
| — |
| 22,270 |
|
|
|
|
|
|
|
|
| ||||||||||||||
Paper and Packaging |
| $ | 533,562 |
| $ | 18,674 |
| $ | 552,236 |
| $ | 57,731 |
| $ | 37,491 |
| $ | 24,900 |
| $ | 2,526,342 |
|
| $ | 561,917 |
| $ | 25,681 |
| $ | 587,598 |
| $ | 44,260 |
| $ | 38,192 |
| $ | 33,703 |
| $ | 2,642,143 |
|
Distribution* |
| 243,074 |
| — |
| 243,074 |
| 8,230 |
| 5,795 |
| 936 |
| 676,350 |
| |||||||||||||||||||||||||||||
Distribution |
| 260,800 |
| — |
| 260,800 |
| 10,785 |
| 5,972 |
| 1,064 |
| 694,099 |
| |||||||||||||||||||||||||||||
Corporate |
| — |
| — |
| — |
| (10,953 | ) | 1,668 |
| 1,037 |
| 41,376 |
|
| — |
| — |
| — |
| (13,850 | ) | 1,890 |
| 342 |
| 36,330 |
| ||||||||||||||
Intersegment eliminations |
| — |
| (18,674 | ) | (18,674 | ) | — |
| — |
| — |
| — |
|
| — |
| (25,681 | ) | (25,681 | ) | — |
| — |
| — |
| — |
| ||||||||||||||
|
| $ | 776,636 |
| $ | — |
| $ | 776,636 |
| $ | 55,008 |
| $ | 44,954 |
| $ | 26,873 |
| $ | 3,244,068 |
|
| $ | 822,717 |
| $ | — |
| $ | 822,717 |
| $ | 41,195 |
| $ | 46,054 |
| $ | 35,109 |
| $ | 3,372,572 |
|
|
| Net Sales |
| Operating |
| Depreciation |
| Capital |
|
|
|
| Net Sales |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Three Months Ended September 30, 2015 |
| Trade |
| Intersegment |
| Total |
| (Loss) |
| Amortization |
| Expenditures |
| Assets |
| |||||||||||||||||||||||||||||
Three Months Ended June 30, 2016 |
| Trade |
| Inter- |
| Total |
| Operating |
| Depreciation |
| Capital |
| Assets |
| |||||||||||||||||||||||||||||
Paper and Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Containerboard / Corrugated products |
| $ | 358,216 |
| $ | 7,628 |
| $ | 365,844 |
|
|
|
|
|
|
|
|
|
| $ | 336,300 |
| $ | 20,524 |
| $ | 356,824 |
|
|
|
|
|
|
|
|
| ||||||||
Specialty paper |
| 179,451 |
| — |
| 179,451 |
|
|
|
|
|
|
|
|
|
| 174,209 |
| — |
| 174,209 |
|
|
|
|
|
|
|
|
| ||||||||||||||
Other |
| 21,768 |
| — |
| 21,768 |
|
|
|
|
|
|
|
|
|
| 22,062 |
| — |
| 22,062 |
|
|
|
|
|
|
|
|
| ||||||||||||||
Paper and Packaging |
| $ | 559,435 |
| $ | 7,628 |
| $ | 567,063 |
| $ | 60,185 |
| $ | 36,059 |
| $ | 25,448 |
| $ | 2,524,562 |
|
| $ | 532,571 |
| $ | 20,524 |
| $ | 553,095 |
| $ | 41,082 |
| $ | 38,163 |
| $ | 34,265 |
| $ | 2,507,161 |
|
Distribution * |
| 248,128 |
| — |
| 248,128 |
| 11,139 |
| 5,522 |
| 1,283 |
| 683,555 |
| |||||||||||||||||||||||||||||
Distribution |
| 252,340 |
| — |
| 252,340 |
| 12,336 |
| 5,702 |
| 932 |
| 686,997 |
| |||||||||||||||||||||||||||||
Corporate |
| — |
| — |
| — |
| (9,728 | ) | 919 |
| 4,453 |
| 41,818 |
|
| — |
| — |
| — |
| (9,905 | ) | 2,170 |
| 1,013 |
| 42,292 |
| ||||||||||||||
Intersegment eliminations |
| — |
| (7,628 | ) | (7,628 | ) | — |
| — |
| — |
| — |
|
| — |
| (20,524 | ) | (20,524 | ) | — |
| — |
| — |
| — |
| ||||||||||||||
|
| $ | 807,563 |
| $ | — |
| $ | 807,563 |
| $ | 61,596 |
| $ | 42,500 |
| $ | 31,184 |
| $ | 3,249,935 |
|
| $ | 784,911 |
| $ | — |
| $ | 784,911 |
| $ | 43,513 |
| $ | 46,035 |
| $ | 36,210 |
| $ | 3,236,450 |
|
|
|
|
|
|
|
|
| Operating |
| Depreciation |
|
|
|
|
|
| Net Sales |
|
|
|
|
|
|
| ||||||||||||||||
|
| Net Sales |
| Income |
| and |
| Capital |
|
|
| |||||||||||||||||||||||||||||
Nine Months Ended September 30, 2016 |
| Trade |
| Intersegment |
| Total |
| (Loss) |
| Amortization |
| Expenditures |
|
|
| |||||||||||||||||||||||||
Six Months Ended June 30, 2017 |
| Trade |
| Inter- |
| Total |
| Operating |
| Depreciation |
| Capital |
| |||||||||||||||||||||||||||
Paper and Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Containerboard / Corrugated products |
| $ | 1,002,995 |
| $ | 55,667 |
| $ | 1,058,662 |
|
|
|
|
|
|
|
|
|
| $ | 726,118 |
| $ | 46,878 |
| $ | 772,996 |
|
|
|
|
|
|
| ||||||
Specialty paper |
| 517,977 |
| — |
| 517,977 |
|
|
|
|
|
|
|
|
|
| 339,219 |
| — |
| 339,219 |
|
|
|
|
|
|
| ||||||||||||
Other |
| 65,201 |
| — |
| 65,201 |
|
|
|
|
|
|
|
|
|
| 44,224 |
| — |
| 44,224 |
|
|
|
|
|
|
| ||||||||||||
Paper and Packaging |
| $ | 1,586,173 |
| $ | 55,667 |
| $ | 1,641,840 |
| $ | 145,054 |
| $ | 112,790 |
| $ | 91,520 |
|
|
|
| $ | 1,109,561 |
| $ | 46,878 |
| $ | 1,156,439 |
| $ | 78,575 |
| $ | 75,598 |
| $ | 71,408 |
|
Distribution * |
| 713,589 |
| — |
| 713,589 |
| 21,947 |
| 17,158 |
| 3,934 |
|
|
| |||||||||||||||||||||||||
Distribution |
| 478,999 |
| — |
| 478,999 |
| 13,382 |
| 11,950 |
| 1,743 |
| |||||||||||||||||||||||||||
Corporate |
| — |
| — |
| — |
| (33,880 | ) | 5,580 |
| 3,792 |
|
|
|
| — |
| — |
| — |
| (30,638 | ) | 3,854 |
| 627 |
| ||||||||||||
Intersegment eliminations |
| — |
| (55,667 | ) | (55,667 | ) | — |
| — |
| — |
|
|
|
| — |
| (46,878 | ) | (46,878 | ) | — |
| — |
| — |
| ||||||||||||
|
| $ | 2,299,762 |
| $ | — |
| $ | 2,299,762 |
| $ | 133,121 |
| $ | 135,528 |
| $ | 99,246 |
|
|
|
| $ | 1,588,560 |
| $ | — |
| $ | 1,588,560 |
| $ | 61,319 |
| $ | 91,402 |
| $ | 73,778 |
|
|
| Net Sales |
| Operating |
| Depreciation |
| Capital |
|
|
| ||||||||||
Nine Months Ended September 30, 2015 |
| Trade |
| Intersegment |
| Total |
| (Loss) |
| Amortization |
| Expenditures |
|
|
| ||||||
Paper and Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Containerboard / Corrugated products |
| $ | 1,068,315 |
| $ | 8,416 |
| $ | 1,076,731 |
|
|
|
|
|
|
|
|
| |||
Specialty paper |
| 548,157 |
| — |
| 548,157 |
|
|
|
|
|
|
|
|
| ||||||
Other |
| 67,109 |
| — |
| 67,109 |
|
|
|
|
|
|
|
|
| ||||||
Paper and Packaging |
| $ | 1,683,581 |
| $ | 8,416 |
| $ | 1,691,997 |
| $ | 190,321 |
| $ | 104,723 |
| $ | 81,954 |
|
|
|
Distribution * |
| 341,526 |
| — |
| 341,526 |
| 12,859 |
| 7,467 |
| 1,526 |
|
|
| ||||||
Corporate |
| — |
| — |
| — |
| (32,826 | ) | 2,427 |
| 11,415 |
|
|
| ||||||
Intersegment eliminations |
| — |
| (8,416 | ) | (8,416 | ) | — |
| — |
| — |
|
|
| ||||||
|
| $ | 2,025,107 |
| $ | — |
| $ | 2,025,107 |
| $ | 170,354 |
| $ | 114,617 |
| $ | 94,895 |
|
|
|
* Reflects acquisition of Victory Packaging on June 1, 2015.
|
| Net Sales |
|
|
|
|
|
|
| ||||||||||
Six Months Ended June 30, 2016 |
| Trade |
| Inter- |
| Total |
| Operating |
| Depreciation |
| Capital |
| ||||||
Paper and Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Containerboard / Corrugated products |
| $ | 660,590 |
| $ | 36,993 |
| $ | 697,583 |
|
|
|
|
|
|
| |||
Specialty paper |
| 348,647 |
| — |
| 348,647 |
|
|
|
|
|
|
| ||||||
Other |
| 43,374 |
| — |
| 43,374 |
|
|
|
|
|
|
| ||||||
Paper and Packaging |
| $ | 1,052,611 |
| $ | 36,993 |
| $ | 1,089,604 |
| $ | 87,323 |
| $ | 75,299 |
| $ | 66,620 |
|
Distribution |
| 470,515 |
| — |
| 470,515 |
| 13,717 |
| 11,363 |
| 2,998 |
| ||||||
Corporate |
| — |
| — |
| — |
| (22,927 | ) | 3,912 |
| 2,755 |
| ||||||
Intersegment eliminations |
| — |
| (36,993 | ) | (36,993 | ) | — |
| — |
| — |
| ||||||
|
| $ | 1,523,126 |
| $ | — |
| $ | 1,523,126 |
| $ | 78,113 |
| $ | 90,574 |
| $ | 72,373 |
|
13.14. Subsequent EventOther Operating Expenses
On Thursday October 6th,The following occurred during the Company began to prepare for Hurricane Matthew atquarter ended June 30, 2017, and are considered unusual and are included in the Company’s cost of sales in the period:
· In April 2017, the Company’s North Charleston South Carolinapaper mill withhad an orderly shutdown of the paper machines with only essential positions on staff at the mill. The storm made landfall on Saturday, October 8th. The mill began starting the machines back up on Sunday, October 9th and was in full operation by Tuesday, October 11th. In total, the mill was idle for a total of 4 daysunplanned boiler outage with a paper production loss of approximately 10,0006,300 tons withand an approximate cost of $4.0 million.
· In May 2017, the Company entered into an agreement to inspect certain piping at the Longview, Washington paper mill over a period not to exceed five years at an estimated overall unfavorable impactcost of $2.0 million.
15. Subsequent Events
In July 2017, the union employees at the Roanoke Rapids, North Carolina paper mill ratified a new 4 year collective bargaining agreement covering 315 employees. The agreement puts in place a high deductible health care plan beginning January 1, 2018, and changes the defined pension benefit plan to operating incomea defined contribution plan for certain employees. The costs incurred to ratify this agreement were $0.8 million and will be recorded in cost of approximately $5.0 million.sales for the quarter ended September 30, 2017.
In July 2017, the Company entered into the Third Amendment (“Third Amendment”) to the Credit Agreement. The Third Amendment modified 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 September 30 and December 31, 2017 and March 31, 2018, and modified certain defined terms used in the calculation of the financial covenants in a manner favorable to the Company.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and 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 I Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 20152016 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 obligation, 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.
Executive Summary
Results of Operations for the Quarter Ended June 30, 2017
Consolidated net sales for the quarter ended SeptemberJune 30, 20162017 were $776.6$822.7 million compared to $807.6$784.9 million for the thirdsecond quarter of 2015, a decrease2016, an increase of $31.0$37.8 million, or 3.84.8 percent, primarily due to index-driven lower domestic containerboard prices, lower export containerboard and kraft paper$34.2 million of higher prices and a lessmore favorable product mix.mix and $3.6 million of higher sales volumes.
Consolidated net income for the quarter ended SeptemberJune 30, 20162017 was $31.0$19.8 million, or $0.32$0.20 per diluted share, compared with $34.2$20.7 million, or $.035$0.21 per diluted share, for the same period in 2015. Earnings per share2016.
Paper and Packaging segment operating income for the current quarter includedincreased $3.2 million to $44.3 million, primarily due to $25.7 million of higher prices and a chargemore favorable product mix, and $3.0 million of $0.01 per diluted sharelower severance expense. These factors were partially offset by $11.9 million higher old corrugated container (“OCC”) costs, $4.0 million for market downtime.an unplanned boiler outage at the North Charleston paper mill, $3.2 million of higher freight costs due to a higher percentage of domestic shipments for which the Company is responsible, $2.5 million due to the restoration of certain employee benefits, $2.3 million of higher management incentives due to higher earnings and $2.0 million for a hazardous piping inspection settlement at the Longview, Washington paper mill.
Paper and PackagingDistribution Segment operating income results for the current quarter decreased $2.5$1.6 million to $10.8 million, primarily due to $31.0inflation on rent, fuel and labor costs, partially offset by margin improvement from higher selling prices.
Corporate operating expenses increased by $3.9 million to $13.9 million for the quarter ended June 30, 2017 compared to 2016, primarily due a $2.8 million increase in stock compensation expense, $0.8 million of lowerhigher management incentives due to higher earnings and $0.3 million due to the restoration of certain employee benefits.
Results of Operations for the Six Months Ended June 30, 2017
Consolidated net sales for the six months ended June 30, 2017 were $1,588.6 million compared to $1,523.1 million for the first six months of 2016, an increase of $65.5 million, or 4.3 percent, primarily due to $49.8 million of higher prices and lessa more favorable product mix and $1.9$15.1 million of market downtime. These decreases were partially offset by $14.1 million due to the Longview mill work stoppage in 2015, $3.6 million of savings due to the suspension of certain employee benefits, $2.9 million of lower management incentives due to lower earnings, $6.1 million of productivity gains, $1.5 million of lower severance expenses and $0.6 million of lower planned outage costs.higher sales volumes.
Distribution operatingConsolidated net income results for the current quarter decreased $2.9 million, primarily due to a $3.1 million decrease in supplier rebate income due to timing and $1.3 million lower sales volume, partially offset by the 2015 purchase accounting inventory step-up adjustment of $1.9 million.
During the first ninesix months of 2016, consolidated net sales were $2,299.8 million compared to $2,025.1 million for the nine months of 2015, an increase of $274.7ended June 30, 2017 was $25.8 million, or 13.6 percent. The increase in net sales was driven by the Victory acquisition. Victory accounted for approximately $377.1 million of the net
sales increase, which was partially offset by the Paper and Packaging segment’s decrease in net sales for the period.
During the first nine months of 2016, consolidated net income was $67.9 million, or $0.70$0.26 per diluted share, compared with $94.6$36.9 million, or $0.97$0.38 per diluted share, for the same period of 2015.in 2016.
PaperPaper and Packaging segment operating income results for the ninesix months ended SeptemberJune 30, 2016,2017 decreased $45.3$8.7 million to $78.6 million, primarily due to $83.3$22.4 million of lowerhigher OCC costs, $9.5 million of higher freight costs primarily due to higher percentage of domestic shipments, $5.0 million for Charleston’s union contract ratification costs, $4.1 million due to the restoration of certain employee benefits, $4.0 million for an unplanned boiler outage at the Charleston paper mill, $2.9 million of higher management incentives and $2.0 million for a Longview paper mill hazardous piping inspection settlement. These decreases in operating income were partially offset by $40.3 million of higher prices and lessa more favorable product mix and $5.3 million of higher planned maintenance outagelower severance charges.
Distribution Segment operating income for the six months ended June 30, 2017 decreased $0.3 million to $13.4 million, primarily due to inflation on rent, fuel and labor costs, partially offset by $10.3margin improvement from higher prices.
Corporate operating expenses increased by $7.7 million to $30.6 million for the six months ended June 30, 2017 compared to 2016, primarily due a $4.6 million increase in stock compensation expense, $1.2 million of savingshigher management incentives, $0.5 million due to the suspensionrestoration of certain employee benefits, $9.2a $0.5 million of lower management incentives due to lower earnings, and $14.1 million due to the Longview mill work stoppage in 2015.
Distribution operating income results for the nine months ended September 30, 2016, increased $9.1 million. The increase in operating income was primarily driven byexpense associated with the benefit of owning Victory for nine months in 2016 as compared to four months in 2015. This benefit accounted for $5.7 millionfair value of the increase as well as the 2015 purchase accounting inventory step-up adjustment of $5.8 million.contingent consideration liability and $0.4 million for API acquisition expenses.
Results of Operations
Comparison of Results of Operations for the Three Months Ended SeptemberJune 30, 20162017 and 20152016
(In thousands)
|
| Three Months Ended September 30, |
| Increase/ |
| % of Net Sales |
|
| Three Months Ended June 30, |
| Increase/ |
| % of Net Sales |
| ||||||||||||||
|
| 2016 |
| 2015 |
| (Decrease) |
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| (Decrease) |
| 2017 |
| 2016 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Paper and packaging |
| $ | 552,236 |
| $ | 567,063 |
| $ | (14,827 | ) | 71.1 | % | 70.2 | % |
| $ | 587,598 |
| $ | 553,095 |
| $ | 34,503 |
| 71.4 | % | 70.5 | % |
Distribution |
| 243,074 |
| 248,128 |
| (5,054 | ) | 31.2 | % | 30.7 | % |
| 260,800 |
| 252,340 |
| 8,460 |
| 31.7 | % | 32.1 | % | ||||||
Intersegment Eliminations |
| (18,674 | ) | (7,628 | ) | (11,046 | ) | (2.4 | )% | (0.9 | )% |
| (25,681 | ) | (20,524 | ) | (5,157 | ) | (3.1 | )% | (2.6 | )% | ||||||
Net sales |
| $ | 776,636 |
| $ | 807,563 |
| $ | (30,927 | ) | 100.0 | % | 100.0 | % |
| $ | 822,717 |
| $ | 784,911 |
| $ | 37,806 |
| 100.0 | % | 100.0 | % |
Cost of sales, excluding depreciation and amortization |
| 548,811 |
| 569,267 |
| (20,456 | ) | 70.7 | % | 70.5 | % |
| 592,515 |
| 568,831 |
| 23,684 |
| 72.0 | % | 72.5 | % | ||||||
Depreciation and amortization |
| 44,954 |
| 42,500 |
| 2,454 |
| 5.8 | % | 5.3 | % |
| 46,054 |
| 46,035 |
| 19 |
| 5.6 | % | 5.9 | % | ||||||
Freight and distribution expenses |
| 71,750 |
| 70,623 |
| 1,127 |
| 9.2 | % | 8.7 | % |
| 75,640 |
| 70,978 |
| 4,662 |
| 9.2 | % | 9.0 | % | ||||||
Selling, general, and administrative expenses |
| 56,113 |
| 63,577 |
| (7,464 | ) | 7.2 | % | 7.9 | % |
| 67,313 |
| 55,554 |
| 11,759 |
| 8.2 | % | 7.1 | % | ||||||
Operating income |
| $ | 55,008 |
| $ | 61,596 |
| $ | (6,588 | ) | 7.1 | % | 7.6 | % |
| $ | 41,195 |
| $ | 43,513 |
| $ | (2,318 | ) | 5.0 | % | 5.5 | % |
Foreign exchange loss |
| 543 |
| 766 |
| (223 | ) | 0.1 | % | 0.1 | % | |||||||||||||||||
Loss on debt extinguishment |
| 679 |
| 628 |
| 51 |
| 0.1 | % | 0.1 | % | |||||||||||||||||
Foreign exchange (gain) / loss |
| (1,004 | ) | 872 |
| (1,876 | ) | (0.1 | )% | 0.1 | % | |||||||||||||||||
Equity method investments income |
| (29 | ) | — |
| (29 | ) | — | % | — | % | |||||||||||||||||
Interest expense, net |
| 10,148 |
| 9,528 |
| 620 |
| 1.3 | % | 1.2 | % |
| 12,311 |
| 10,006 |
| 2,305 |
| 1.5 | % | 1.3 | % | ||||||
Income before provision for income taxes |
| 43,638 |
| 50,674 |
| (7,036 | ) | 5.6 | % | 6.3 | % |
| 29,917 |
| 32,635 |
| (2,718 | ) | 3.6 | % | 4.1 | % | ||||||
Provision for income taxes |
| 12,620 |
| 16,468 |
| (3,848 | ) | 1.6 | % | 2.0 | % |
| 10,141 |
| 11,913 |
| (1,772 | ) | 1.2 | % | 1.5 | % | ||||||
Net income |
| $ | 31,018 |
| $ | 34,206 |
| $ | (3,188 | ) | 4.0 | % | 4.2 | % |
| $ | 19,776 |
| $ | 20,722 |
| $ | (946 | ) | 2.4 | % | 2.6 | % |
Paper and Packaging segment net sales decreasedincreased by $14.8$34.5 million to $552.2$587.6 million for the quarter ended SeptemberJune 30, 20162017 due to $31.0$25.7 million of lowerhigher prices and lessa more favorable product mix, partially offset by $11.0$3.6 million of higher sales volume and $5.2 million of increased intersegment sales to Victory and $5.4 million of higher volume, primarily containerboard.the Distribution segment. Average mill selling price per ton for the quarter ended SeptemberJune 30, 20162017 was $626$661 compared to $671$624 for the prior year’s quarter, reflecting index driven lower domestichigher containerboard prices and lower prices for export containerbard and export kraft paper prices and a lessmore favorable product mix.
Distribution segment net sales decreasedincreased by $5.1$8.5 million to $243.1$260.8 million for the quarter ended SeptemberJune 30, 2017 compared to 2016, due to higher prices, related to the pass thru of higher containerboard cost, partially offset by lower sales volume.
Paper and Packaging segment sales by product line for the quarter ended June 30, 2017 and 2016 were as follows:
|
| Three Months Ended June 30, |
| |||||||||||||||||
|
| Net Sales (in thousands) |
| Increase/ |
|
|
| Tons Sold |
| Increase/ |
|
|
| |||||||
Product Line Tons: |
| 2017 |
| 2016 |
| (Decrease) |
| % |
| 2017 |
| 2016 |
| (Decrease) |
| % |
| |||
Containerboard / Corrugated products |
| $ | 406,457 |
| $ | 356,824 |
| $ | 49,633 |
| 13.9 | % | 475,739 |
| 446,691 |
| 29,048 |
| 6.5 | % |
Specialty paper |
| 158,871 |
| 174,209 |
| (15,338 | ) | (8.8 | )% | 223,425 |
| 256,758 |
| (33,333 | ) | (13.0 | )% | |||
Other |
| 22,270 |
| 22,062 |
| 208 |
| 0.9 | % | — |
| — |
| — |
| — | % | |||
Product sold |
| $ | 587,598 |
| $ | 553,095 |
| $ | 34,503 |
| 6.2 | % | 699,164 |
| 703,449 |
| (4,285 | ) | (0.6 | )% |
Tons of product sold for the Paper and Packaging segment for the quarter ended June 30, 2017 was 699,164 tons compared to 703,449 tons for the quarter ended June 30, 2016, a decrease of 4,285 tons, or 0.6 percent, as follows:
· Shipments of Containerboard / Corrugated products increased by 29,048 tons, primarily due to higher domestic containerboard shipments of 34,110 tons and higher corrugated products sales volume of 11,886 tons. These increases were partially offset by lower export shipments of 16,948 tons. Shipments to Victory in the quarter were 28,018 tons, which was 3,368 tons higher than second quarter of 2016.
· Specialty paper decrease in tons sold was primarily due to lower kraft paper shipments of 25,417 tons and lower pulp shipments of 8,177 tons.
Cost of sales, excluding depreciation and amortization expense, for the quarter ended June 30, 2017 was $592.5 million compared to $568.8 million for the second quarter of 2016, an increase of $23.7 million, or 4.2 percent. The increase in cost of sales was mainly due to $11.9 million of higher OCC costs, $3.9 million of higher manufacturing costs, $4.0 million for the North Charleston paper mill unplanned boiler outage, $2.0 million for a Longview paper mill hazardous piping inspection settlement, $1.1 million due to the restoration of certain employee benefits and $0.9 million of higher management incentives due to higher earnings. Planned maintenance outage costs of approximately $17.6 million and $19.0 million are included in cost of sales for the quarters ended June 30, 2017 and 2016, respectively.
Depreciation and amortization expense for the quarter ended June 30, 2017 totaled $46.1 million compared to $46.0 million for the quarter ended June 30, 2016.
Freight and distribution expenses for the quarter ended June 30, 2017 totaled $75.6 million compared to $71.0 million for the quarter ended June 30, 2016. The increase of $4.6 million was primarily due to a higher percentage of domestic shipments and higher operating costs.
Selling, general and administrative expenses for the quarter ended June 30, 2017 totaled $67.3 million compared to $55.6 million for the quarter ended June 30, 2016. The increase of $11.7 million, or 21.0 percent, was primarily due to a $2.8 million increase in stock compensation expense, $2.2 million of higher management incentives due to higher earnings, $2.0 million increase in compensation and benefit expense, $1.8 million due to the restoration of certain employee benefits, $1.5 million of higher Distribution segment operating costs, $1.1 million from strategic investments and $1.0 million of higher integration costs. For the quarter ended June 30, 2017, selling, general and administrative expenses as a resultpercentage of net sales increased to 8.2 percent from 7.1 percent in the quarter ended June 30, 2016.
Net interest expense for the quarters ended June 30, 2017 and 2016 was $12.3 million and $10.0 million, respectively. Interest expense was $2.3 million higher in the quarter ended June 30, 2017 due to higher interest rates and debt levels.
Provision for income taxes for the quarters ended June 30, 2017 and 2016 was $10.1 million and $11.9 million, respectively, reflecting an effective income tax rate of 33.9 percent for the quarter ended June 30, 2017, compared to 36.5 percent for the similar period in 2016. The lower volume.provision for income taxes in 2017 primarily reflects lower pre-tax income of $2.7 million. The lower effective tax rate in the three months ended June 30, 2017 is due to the absence of an unfavorable state examination adjustment in 2016.
Comparison of Results of Operations for the Six Months Ended June 30, 2017 and 2016
(In thousands)
|
| Six Months Ended June 30, |
| Increase/ |
| % of Net Sales |
| |||||||
|
| 2017 |
| 2016 |
| (Decrease) |
| 2017 |
| 2016 |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Paper and packaging |
| $ | 1,156,439 |
| $ | 1,089,604 |
| $ | 66,835 |
| 72.8 | % | 71.5 | % |
Distribution |
| 478,999 |
| 470,515 |
| 8,484 |
| 30.2 | % | 30.9 | % | |||
Intersegment Eliminations |
| (46,878 | ) | (36,993 | ) | (9,885 | ) | (3.0 | )% | (2.4 | )% | |||
Net sales |
| $ | 1,588,560 |
| $ | 1,523,126 |
| $ | 65,434 |
| 100.0 | % | 100.0 | % |
Cost of sales, excluding depreciation and amortization |
| 1,153,413 |
| 1,102,108 |
| 51,305 |
| 72.6 | % | 72.4 | % | |||
Depreciation and amortization |
| 91,402 |
| 90,574 |
| 828 |
| 5.8 | % | 5.9 | % | |||
Freight and distribution expenses |
| 148,628 |
| 136,037 |
| 12,591 |
| 9.3 | % | 8.9 | % | |||
Selling, general, and administrative expenses |
| 133,798 |
| 116,294 |
| 17,504 |
| 8.4 | % | 7.6 | % | |||
Operating income |
| $ | 61,319 |
| $ | 78,113 |
| $ | (16,794 | ) | 3.9 | % | 5.2 | % |
Foreign exchange loss |
| (1,086 | ) | 975 |
| (2,061 | ) | (0.1 | )% | 0.1 | % | |||
Equity method investments income |
| (706 | ) | — |
| (706 | ) | — | % | — | % | |||
Interest expense, net |
| 23,041 |
| 19,817 |
| 3,224 |
| 1.5 | % | 1.3 | % | |||
Income before provision for income taxes |
| 40,070 |
| 57,321 |
| (17,251 | ) | 2.5 | % | 3.8 | % | |||
Provision for income taxes |
| 14,302 |
| 20,425 |
| (6,123 | ) | 0.9 | % | 1.3 | % | |||
Net income |
| $ | 25,768 |
| $ | 36,896 |
| $ | (11,128 | ) | 1.622 | % | 2.5 | % |
Paper and Packaging segment net sales increased by $66.8 million to $1,156.4 million for the six months ended June 30, 2017 due to $40.3 million of higher prices and a more favorable product mix, $16.0 million of higher sales volume and $9.9 million of increased intersegment sales to the Distribution segment. Average mill selling price per ton for the six months ended June 30, 2017 was $654 compared to $624 for the prior year’s period, reflecting higher containerboard prices and a more favorable product mix.
In the third quarter of 2016, the Company announcedimplemented a $50$40 per ton price increase for North American containerboard effective for shipments beginning October 1, 2016 and aan 8 to 10 percent increase for corrugated products effective for shipments beginning November 1, 2016.
In the first quarter of 2017, the Company announced a $50 per ton price increase for all North America containerboard products effective for shipments beginning March 13, 2017 and a 10 to 12 percent price increase for all corrugated products.
Distribution segment net sales increased $8.5 million to $479.0 million for the six months ended June 30, 2017 compared to 2016, due to higher prices related to the pass thru of higher containerboard cost, partially offset by lower sales volume.
Paper and Packaging segment sales by product line for the quartersix months ended SeptemberJune 30, 20162017 and 20152016 were as follows:
|
| Six Months Ended June 30, |
| |||||||||||||||||
|
| Net Sales (in thousands) |
| Increase/ |
|
|
| Tons Sold |
| Increase/ |
|
|
| |||||||
Product Line Tons: |
| 2017 |
| 2016 |
| (Decrease) |
| % |
| 2017 |
| 2016 |
| (Decrease) |
| % |
| |||
Containerboard / Corrugated products |
| $ | 772,996 |
| $ | 697,583 |
| $ | 75,413 |
| 10.8 | % | 910,119 |
| 880,692 |
| 29,427 |
| 3.3 | % |
Specialty paper |
| 339,219 |
| 348,647 |
| (9,428 | ) | (2.7 | )% | 487,811 |
| 515,237 |
| (27,426 | ) | (5.3 | )% | |||
Other |
| 44,224 |
| 43,374 |
| 850 |
| 2.0 | % | — |
| — |
| — |
| — | % | |||
Product sold |
| $ | 1,156,439 |
| $ | 1,089,604 |
| $ | 66,835 |
| 6.1 | % | 1,397,930 |
| 1,395,929 |
| 2,001 |
| 0.1 | % |
|
| Net Sales (in thousands) |
| Increase/ |
|
|
| Tons Sold |
| Increase/ |
|
|
| |||||||
Product Line Tons: |
| 2016 |
| 2015 |
| (Decrease) |
| % |
| 2016 |
| 2015 |
| (Decrease) |
| % |
| |||
Containerboard / Corrugated products |
| $ | 361,060 |
| $ | 365,844 |
| $ | (4,784 | ) | (1.3 | )% | 450,924 |
| 434,192 |
| 16,732 |
| 3.9 | % |
Specialty paper |
| 169,331 |
| 179,451 |
| (10,120 | ) | (5.6 | )% | 248,862 |
| 253,051 |
| (4,189 | ) | (1.7 | )% | |||
Other |
| 21,845 |
| 21,768 |
| 77 |
| 0.4 | % | — |
| — |
| — |
|
|
| |||
Product sold |
| $ | 552,236 |
| $ | 567,063 |
| $ | (14,827 | ) | (2.6 | )% | 699,786 |
| 687,243 |
| 12,543 |
| 1.8 | % |
Tons of product sold for the Paper and Packaging segment quarter ended September 30, 2016 was 699,786 tons compared to 687,243 tons for the quarter ended September 30, 2015, an increase of 12,543 tons, or 1.8 percent, as follows:
· Containerboard / Corrugated products for the quarter increased 16,732 tons primarily due to an increase in domestic and export containerboard shipments of 12,113 tons and 7,201 tons, respectively. This was partially offset by a decrease in corrugated product shipments of 2,582 tons. Total tons includes shipments to the distribution segment of 22,101 tons in the current quarter.
· Specialty paper decrease in tons sold for the quarter was primarily due to a decrease in DuraSorb shipments of 18,351 tons partially offset by an increase in kraft paper shipments of 7,499 tons and higher pulp shipments of 7,285.
Cost of sales, excluding depreciation and amortization expense, for the quarter ended September 30, 2016 was $548.8 million compared to $569.3 million for the third quarter of 2015, a decrease of $20.5 million, or 3.6 percent. The decrease in cost of sales was mainly due to $14.1 million of 2015 Longview mill work stoppage costs not incurred in 2016, $4.2 million of productivity gains, $1.4 million of savings due to the suspension of certain employee benefits, $0.6 million of lower management incentives due to lower earnings and $0.6 million lower planned outage costs. These cost decreases were partially offset by $1.9 million of market downtime. Planned maintenance outage costs of approximately $3.8 million and $4.4 million are included in cost of sales for the quarters ended September 30, 2016 and 2015, respectively.
Depreciation and amortization expense for the quarter ended September 30, 2016 totaled $45.0 million compared to $42.5 million for the quarter ended September 30, 2015. The increase of $2.5 million was primarily due to higher capital spending.
Freight and distribution expenses for the quarter ended September 30, 2016 totaled $71.8 million compared to $70.6 million for the quarter ended September 30, 2015. The increase of $1.2 million was primarily due to higher sales volume, partially offset by lower fuel costs and customer mix.
Selling, general and administrative expenses for the quarter ended September 30, 2016 totaled $56.1 million compared to $63.6 million for the quarter ended September 30, 2015. The decrease of $7.5 million, or 11.8 percent, was primarily due to $3.0 million of lower management incentives due to lower earnings and $2.4 million due the suspension of certain employee benefits. These decreases in expense were partially offset by a $1.2 million increase for the long-term incentive plan related to the Victory acquisition and $0.6 million of CFB acquisition related expenses. For the quarter ended September 30, 2016, selling, general and administrative expenses as a percentage of net sales decreased to 7.2 percent from 7.9 percent in the quarter ended September 30, 2015.
Loss on debt extinguishment for the quarters ended September 30, 2016 and 2015 totaled $0.7 million and $0.6 million, respectively, due to repayments on the term loans under the Credit Facility.
Net interest expense for the quarters ended September 30, 2016 and 2015 was $10.1 million and $9.5 million, respectively. Interest expense reflects interest on the outstanding borrowings under the Credit Facility
and the Receivables Credit Facility and amortization of debt issuance costs. Interest expense was $0.6 million higher in the quarter ended September 30, 2016, primarily due to higher interest rates.
Provision for income taxes for the quarters ended September 30, 2016 and 2015 was $12.6 million and $16.5 million, respectively, reflecting an effective income tax rate of 28.9 percent for the quarter ended September 30, 2016, compared to 32.5 percent for the similar period in 2015. The lower provision for income taxes in 2016 primarily reflects lower pre-tax income of $7.0 million and a $1.4 million favorable return to provision adjustment in the current quarter.
Comparison of Results of Operations for the Nine Months Ended September 30, 2016 and 2015
(In thousands)
|
| Nine Months Ended September 30, |
| Increase/ |
| % of Net Sales |
| |||||||
|
| 2016 |
| 2015 |
| (Decrease) |
| 2016 |
| 2015 |
| |||
Paper and packaging |
| $ | 1,641,840 |
| $ | 1,691,997 |
| $ | (50,157 | ) | 71.4 | % | 83.6 | % |
Distribution |
| 713,589 |
| 341,526 |
| 372,063 |
| 31.0 | % | 16.9 | % | |||
Intersegment Eliminations |
| (55,667 | ) | (8,416 | ) | (47,251 | ) | (2.4 | )% | (0.4 | )% | |||
Net sales |
| $ | 2,299,762 |
| $ | 2,025,107 |
| $ | 274,655 |
| 100.0 | % | 100.0 | % |
Cost of sales, excluding depreciation and amortization |
| 1,650,919 |
| 1,421,943 |
| 228,976 |
| 71.8 | % | 70.2 | % | |||
Depreciation and amortization |
| 135,528 |
| 114,617 |
| 20,911 |
| 5.9 | % | 5.7 | % | |||
Freight and distribution expenses |
| 207,787 |
| 167,941 |
| 39,846 |
| 9.0 | % | 8.3 | % | |||
Selling, general, and administrative expenses |
| 172,407 |
| 150,252 |
| 22,155 |
| 7.5 | % | 7.4 | % | |||
Operating income |
| $ | 133,121 |
| $ | 170,354 |
| $ | (37,233 | ) | 5.8 | % | 8.4 | % |
Foreign exchange loss |
| 1,518 |
| 1,704 |
| (186 | ) | 0.1 | % | 0.1 | % | |||
Loss on debt extinguishment |
| 679 |
| 628 |
| 51 |
| 0.0 | % | 0.0 | % | |||
Interest expense, net |
| 29,965 |
| 24,456 |
| 5,509 |
| 1.3 | % | 1.2 | % | |||
Income before provision for income taxes |
| 100,959 |
| 143,566 |
| (42,607 | ) | 4.4 | % | 7.1 | % | |||
Provision for income taxes |
| 33,045 |
| 49,004 |
| (15,959 | ) | 1.4 | % | 2.4 | % | |||
Net income |
| $ | 67,914 |
| $ | 94,562 |
| $ | (26,648 | ) | 3.0 | % | 4.7 | % |
Paper and Packaging segment net sales for the nine months ended September 30, 2016 decreased by $50.2 million to $1,641.8 million due to $83.3 million of lower prices and a less favorable product mix and $13.0 million of lower domestic sales volumes, partially offset by $47.3 million of increased intersegment sales to Victory and higher export volumes. Average mill selling price per ton for the nine months ended September 30, 2016 was $625 compared to $673 for the prior year’s period, reflecting index driven lower containerboard prices and export kraft paper prices and a less favorable product mix.
Distribution segment net sales for the nine months ended September 30, 2016 increased by $372.1 million to $713.6 million. The increase in net sales was primarily driven by the benefit of owning Victory for the nine months in 2016 as compared to four months in 2015. This benefit accounted for approximately $377.1 million of the increase. This increase was partially offset by $5.1 million of lower volume.
Paper and Packaging segment sales to customers by product line were as follows:
|
| Net Sales (in thousands) |
| Increase/ |
|
|
| Tons Sold |
| Increase/ |
|
|
| |||||||
Product Line Tons: |
| 2016 |
| 2015 |
| (Decrease) |
| % |
| 2016 |
| 2015 |
| (Decrease) |
| % |
| |||
Containerboard / Corrugated products |
| $ | 1,058,662 |
| $ | 1,076,731 |
| $ | (18,069 | ) | (1.7 | )% | 1,331,613 |
| 1,290,921 |
| 40,692 |
| 3.2 | % |
Specialty paper |
| 517,977 |
| 548,157 |
| (30,180 | ) | (5.5 | )% | 764,099 |
| 767,688 |
| (3,589 | ) | (0.5 | )% | |||
Other |
| 65,201 |
| 67,109 |
| (1,908 | ) | (2.8 | )% | — |
| — |
| — |
|
|
| |||
Product sold |
| $ | 1,641,840 |
| $ | 1,691,997 |
| $ | (50,157 | ) | (3.0 | )% | 2,095,712 |
| 2,058,609 |
| 37,103 |
| 1.8 | % |
Tons of product sold for the Paper and Packaging segment for the ninesix months ended SeptemberJune 30, 20162017 was 2,095,7121,397,930 tons compared to 2,058,6091,395,929 tons for the ninesix months ended SeptemberJune 30, 2015,2016, an increase of 37,1032,001 tons, or 1.80.1 percent, as follows:
· Shipments of Containerboard sales/ Corrugated products increased by 40,692 tons to 1,331,61329,427 tons, primarily due to an increase in export containerboard shipments of 40,604 tons and an increase in corrugated products sales of 5,014 tons. This was partially offset by a decrease inhigher domestic containerboard shipments of 4,92654,594 tons and higher corrugated products sales volume of 25,684 tons. This includesThese increases were partially offset by the decrease in export shipments of 50,851 tons. Shipments to Victory in the distribution segmentfirst six months of 65,9962017 were 51,949 tons compared to 43,895 for the ninefirst six months ended September 30,of 2016.
· Specialty paper sales volume decreased by 3,589decrease in tons to 764,099 tons,sold was primarily due to lower DuraSorb® shipments of 42,394 tons. This was partially offset by an increase in kraft paper shipments of 21,36518,836 tons and lower pulp shipments of 15,478 tons and Kraftpak® shipments of 1,96213,041 tons.
Cost of sales, excluding depreciation and amortization expense, for the ninesix months ended SeptemberJune 30, 20162017 was $1,650.9$1,153.4 million compared to $1,421.9$1,102.1 million for the ninesix months of 2015,2016, an increase of $229.0$51.3 million, or 16.14.7 percent. The increase in cost of sales was mainly due to the $270.1 million impact of the Victory acquisition. Excluding the Victory acquisition, cost of sales decreased by $41.1 million, or 2.9 percent, due to $14.1$22.4 million of the 2015 Longview mill work stoppagehigher OCC costs, not incurred in 2016, $11.0$15.2 million of productivity gains, $11.4higher manufacturing costs, $5.0 million of lower sales volume,for the North Charleston paper mill union ratification costs, $4.0 million for the North Charleston mill unplanned boiler outage, $2.0 million for a Longview paper mill hazardous piping inspection settlement, $1.9 million due to the suspensionrestoration of certain employee benefits $1.3 million of lower management incentives due to lower earnings and $2.6 million of deflation on material costs. These cost decreases were partially offset by $5.3$0.9 million of higher planned maintenance outage costs.management incentives. Planned maintenance outage costs of approximately $29.4$23.8 million and $24.1$25.6 million are included in cost of sales for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively.
Depreciation and amortization expense for the ninesix months ended SeptemberJune 30, 20162017 totaled $135.5$91.4 million compared to $114.6$90.6 million for the ninesix months ended SeptemberJune 30, 2015.2016. The increase of $20.9$0.8 million was primarily due to $11.5$3.3 million fromhigher depreciation expense due to higher capital spending, and $9.4 million from the Victory acquisition, including $7.9partially offset by $2.5 million of lower amortization expense for acquired intangible assets.expense.
Freight and distribution expenses for the ninesix months ended SeptemberJune 30, 20162017 totaled $207.8$148.6 million compared to $167.9$136.0 million for the ninesix months ended SeptemberJune 30, 2015.2016. The increase of $39.9$12.6 million was primarily due to $39.0 million attributable to the Victory acquisition.a higher percentage of domestic shipments and higher operating costs.
Selling, general and administrative expenses for the ninesix months ended SeptemberJune 30, 20162017 totaled $172.4$133.8 million compared to $150.3$116.3 million for the ninesix months ended SeptemberJune 30, 2015.2016. The increase of $22.1$17.5 million, or 14.715.0 percent, was primarily due to Victory’s direct selling and administrative expenses of $46.0 million. Excluding the impact of the Victory acquisition, selling, general and administrative expenses decreased by $23.9 million, or 15.9 percent. The decrease in selling, general and administrative expenses was primarily due to $9.7$3.3 million of lowerhigher management incentives, due to lower earnings, $6.8$3.0 million of savings due to the suspensionrestoration of certain employee benefits, $2.7a $4.7 million of Victory acquisition related expenses not incurredincrease in 2016, $0.9 million of lower stock compensation expense, a $1.9 million increase in compensation and $1.8benefit expenses, $1.9 million of lower integration expenses relatingrelated to Longview. These decreases in expense were partially offset by $2.8strategic investments, a $0.5 million increase for the change in fair value of thea contingent consideration liability related to the Victory acquisition, $1.9and $0.4 million of severance expense, $1.2 million for the long-term incentive plan related to the Victory acquisition and $0.8 million of CFBAPI acquisition related expenses. For the ninesix months ended SeptemberJune 30, 2016,2017, selling, general and administrative expenses as a percentage of net sales increased to 7.58.4 percent from 7.47.6 percent in the ninesix months ended SeptemberJune 30, 2015.
Loss on debt extinguishment for the nine months ended September 30, 2016 and 2015 totaled $0.7 million and $0.6 million, respectively, due to repayments on the term loans under the Credit Facility.2016.
Net interest expense for the ninesix months ended SeptemberJune 30, 2017 and 2016 and 2015 was $30.0$23.0 million and $24.5$19.8 million, respectively. Interest expense reflects interest on the outstanding borrowings under the Credit Facility and the Receivables Credit Facility and amortization of debt issuance costs. Interest expense was $5.5$3.2 million higher in the nine monthsquarter ended SeptemberJune 30, 2016, primarily2017, due to higher term loan balances associated with the Victory acquisitioninterest rates and higher interest rates.debt levels.
Provision for income taxes for the ninesix months ended SeptemberJune 30, 2017 and 2016 and 2015 was $33.0$14.3 million and $49.0$20.4 million, respectively, reflecting an effective income tax rate of 32.735.7 percent for the ninesix months
ended SeptemberJune 30, 2016,2017, compared to 34.135.6 percent for the similar period in 2015.2016. The lower provision for income taxes in 20162017 primarily reflects lower pre-tax income of $42.6$17.2 million. The six months’ tax rate in 2017 reflects $0.5 million and a $1.4
in tax expense from the Company’s adoption of ASU 2016-09 which requires the tax impact of elements of stock compensation to be recorded in the provision for income taxes. The six months’ tax rate in 2016 included $0.7 million favorable return to provision adjustment partially offset byfor an unfavorable state taxexamination adjustment.
Liquidity and Capital Resources
Credit Facility
The Company had $471.3$462.5 million available to borrow under the Revolver at SeptemberJune 30, 2016.2017. In addition, the Credit Facility also includes an uncommitted accordion feature that allows the Company, subject to certain significant conditions, to request additional commitments from our existing or new lenders under the Credit Facility without further approvals of any existing lenders thereunder. The aggregate amount of such increases in potential commitments (and potential borrowings) is limited to $600 million, unless the Company would maintain a pro forma total leverage ratio of 2.5 to 1.0 or less after giving effect to the increase in potential commitments (and potential borrowings).
Effective July 2017, the Company entered into the Third Amendment to the Credit Agreement. The Third Amendment modified 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 September 30 to 4.50 to 1.00 and December 31, 2017 to 4.50 to 1.00 and March 31, 2018 to 4.25 to 1.00, and modified certain terms used in the calculation of the financial covenants in a manner favorable to the Company.
Receivables Credit Facility
OnEffective as of June 8, 2016,1, 2017, the Company entered into Amendment No. 23 to the Receivables Purchase Agreement (the “Amendment to Receivables Purchase Agreement”) amending its Receivables Purchase Agreement dated as of September 26, 2014, (as previously amended, the “Receivables Purchase Agreement”). In addition, the Company, KapStone Receivables, LLC (“KAR”), KapStone Kraft Paper Corporation, KapStone Container Corporation, KapStone Charleston Kraft LLC, Longview Fibre Paper and Packaging, Inc. and Victory (collectively, the “Originators”), entered into Amendment No. 2 to the Receivables Sales Agreement (the “Amendment to Receivables Sales Agreement” and together with the Amendment to Receivables Purchase Agreement, the “Amendment”). The Receivables Purchase Agreement and Receivables Sales Agreement, as amended by the Amendment, establishes the primary terms and conditionswhich is part of an accounts receivable securitization program (the “Securitization Program”).of the Company and certain of its subsidiaries. The Amendment extendedincluded the “Facility Termination Date” (as defined infollowing changes to the Receivable Purchase Agreement)Agreement:
· the aggregate commitment of the Purchasers under the Receivables Purchase Agreement was increased from $275.0 million to $325.0 million
· the Facility Termination Date was extended from June 8, 20166, 2017 to June 6, 2017.1, 2018 and
· certain definitions used to determine the maximum amount that may be outstanding under the Securitization Program were added or modified, as applicable, in a manner favorable to the Company.
On February 21, 2017, the Company entered into Amendment No. 3 to the Receivables Sale Agreement amending its Receivables Sale Agreement dated as of September 26, 2014, which is part of the Securitization Program. All accounts receivable purchased from API and all accounts receivable generated from facilities acquired from API that are not paid to an eligible bank account are designated as “Excluded Receivables”.
As of SeptemberJune 30, 2016,2017, the Company had $269.5$298.0 million of outstanding borrowings under its $275.0$325.0 million Receivables Credit Facility with an interest rate of 1.31.97 percent.
Debt Covenants
As of SeptemberJune 30, 2016,2017, under the financial covenants of the Credit Agreement, the Company must comply on a quarterly basis with a maximum permitted leverage ratio as of the end of each quarter. The leverage ratio is calculated by dividing the Company’s debt net of available cash up to $150 million by its rolling twelve month total earnings before interest expense, taxes, depreciation and amortization after accounting for allowable adjustments. The maximum permitted leverage ratio declines over the life of the Credit Agreement. On SeptemberJune 30, 2016,2017, the maximum permitted leverage ratio was 4.50 to 1.00. On SeptemberJune 30, 2016,2017, the Company was in compliance with a leverage ratio of 3.984.17 to 1.00.
The Credit Agreement also includes a financial covenant requiring a minimum interest coverage ratio. This ratio is calculated by dividing the Company’s trailing twelve month total earnings before interest expense, taxes, depreciation and amortization after accounting for allowable adjustments by the sum of our net cash
interest payments during the twelve month period. For the quarter ended SeptemberJune 30, 2016,2017, the interest coverage ratio was required to be at least 3.00 to 1.00. On SeptemberJune 30, 2016,2017, the Company was in compliance with the Credit Agreement with an interest coverage ratio of 11.099.81 to 1.00.
As of SeptemberJune 30, 2016,2017, KapStone was also in compliance with all other covenants in the Credit Agreement.
Income taxes
The Company’s effective income tax rate, excluding discrete items for 2016,2017, is projected to be 33.534.3 percent. The Company’s cash tax rate for 20162017 is projected to be less than the book rate due to timing and extent of estimated tax payments.28.0 percent.
Sources and Uses of Cash
Nine months ended September 30 ($ in thousands) |
| 2016 |
| 2015 |
| Incr / (Dcr) |
| |||||||||||||
Six months ended June 30 ($ in thousands) |
| 2017 |
| 2016 |
| Incr / (Dcr) |
| |||||||||||||
Operating activities |
| $ | 212,387 |
| $ | 176,648 |
| $ | 35,739 |
|
| $ | 49,497 |
| $ | 89,625 |
| $ | (40,128 | ) |
Investing activities |
| (123,578 | ) | (711,941 | ) | 588,363 |
|
| (107,278 | ) | (70,292 | ) | (36,986 | ) | ||||||
Financing activities |
| (86,181 | ) | 514,593 |
| (600,774 | ) |
| 35,852 |
| (18,264 | ) | 54,116 |
| ||||||
Total change in cash and cash equivalents |
| $ | 2,628 |
| $ | (20,700 | ) | $ | 23,328 |
|
| $ | (21,929 | ) | $ | 1,069 |
| $ | (22,998 | ) |
Cash and cash equivalents increaseddecreased by $2.6$21.9 million from December 31, 2015,2016, reflecting $212.4$49.5 million of net cash provided by operating activities, $123.6$107.3 million of net cash used in investing activities and $86.2$35.9 million of net cash used inprovided by financing activities in the first ninesix months of 2016.2017.
Net cash provided by operating activities was $212.4$49.5 million, comprised primarily of net income for the first ninesix months of $67.9$25.8 million and non-cash charges of $153.6$108.7 million. Changes in operating assets and liabilities used $9.1$85.0 million of cash. Net cash provided by operating activities increaseddecreased by $35.7$40.1 million in the ninesix months ended SeptemberJune 30, 2016,2017, compared to the ninesix months ended SeptemberJune 30, 2015,2016, mainly due to a $35.1$35.9 million decreaseincrease in cash used for working capital and $11.1 million of lower net income, partially offset by higher non-cash charges of $27.3 million, partially offset by $26.7 million of lower net income.$6.9 million. The decreaseincrease in cash used for working capital in the ninesix months ended SeptemberJune 30, 20162017 compared to 20152016 is primarily due to lowerhigher trade receivables, higher inventory levels and the timing of income tax payments, partially offset by higher accounts payable.
Net cash used in investing activities was $107.3 million and includes $99.2$73.8 million for capital expenditures $15.4and $33.5 million for the CFB acquisition and $11.8 million of equity method investments, partially offset by $4.9 million of proceeds from asset sales.API acquisition. Net cash used byin investing activities decreasedincreased by $588.4$37.0 million in the ninesix months ended SeptemberJune 30, 2016,2017, compared to the ninesix months ended SeptemberJune 30, 2015,2016, primarily due to the API acquisition of Victory in 2015, partially offset byand higher capital spending in 2016 and the strategic investment activities.2017.
Net cash used inprovided by financing activities was $86.2$35.9 million and reflects a $64.7 million prepayment of the term loans under the Credit Facility, $29.0 million of quarterly dividend payments and $2.3 million of loan amendment fees, partially offset by $5.1 million of net short-term borrowings under the Revolver and $3.9$28.8 million of net borrowings under the Receivables Credit Facility.Facility, $22.0 million of net short-term borrowings from the Revolver and $4.2 million of other current borrowings. This net increase in borrowings was partially offset by $19.3 million of quarterly dividend payments. Net cash provided by financing activities decreasedincreased by $600.8$54.1 million in the ninesix months ended SeptemberJune 30, 2016,2017, compared to the ninesix months ended SeptemberJune 30, 2015,2016, primarily due to higher net borrowings in 2015 to fund the Victory acquisition.2017.
Future Cash Needs
The Company expects that cash generated from operating activities will be sufficient to meet its remaining 20162017 cash needs. The cash needs consist of approximately $9.7$20.0 million for the payment of cash dividend payment on October 13, 2016,dividends, if and when declared by our board of directors, and any additional working capital needs. In addition, capitalCapital expenditures for the full year 2017 are estimated to be $130.0$136.0 million.
Should the need arise, we have the ability to draw from our $500.0 million Revolver. In addition, if available and subject to specified significant conditions, we may have the ability to request additional commitments from our existing or new lenders and borrow up to $600.0 million under the accordion provision of our Credit Facility without further approvals of any existing lenders thereunder. As of SeptemberJune 30, 2016,2017, the Company had $11.5$22.0 million of borrowings under the Revolver and $471.3$462.5 million of remaining Revolver availability, net of outstanding letters of credit.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet financing arrangements. The Company established KAR,maintains a special purpose entity, in connection with the Receivables Credit Facility, which is consolidated as part of our financial statements. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
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 our Credit Agreement, at SeptemberJune 30, 2016 we have a2017, our Credit Facility consistingconsisted of two term loans totaling approximately $1.2 billion outstanding and the Revolver that provides for borrowing of up to $500 million. Depending on the type of borrowing, the applicable interest rate under the Credit Facility is calculated at a per annum rate equal to (a) LIBOR plus an applicable margin or (b) the base rate that is calculated as (i) the greatest of (x) the prime rate, (y) the federal funds effective rate plus 0.50% or (z) a daily rate equal to one month LIBOR plus 1% plus (ii) an applicable margin. The unused portion of the Revolver is also subject to an unused fee that is calculated at a per annum rate (the “Unused Fee Rate”).
The applicable margin for borrowings under the Credit Facility and the Unused Fee Rate is determined by reference to the pricing grid based on the Company’s total leverage ratio. Under such pricing grid, the applicable margins for Term Loan A-1 and Revolver ranges from 1.00% to 2.00% for Eurodollar loans and from 0.0% to 1.00% for base rate loans and the Unused Fee Rate ranges from 0.20% to 0.325%. The applicable margins for Term Loan A-2 ranges from 1.125% to 2.125% for Eurodollar loans and from 0.125% to 1.125% for base rate loans. At SeptemberJune 30, 20162017 the weighted average interest rate of the term loans was 2.33.0 percent.
Under our Receivables Credit Facility, at SeptemberJune 30, 20162017, we have $269.5had $298.0 million of outstanding borrowings. The outstanding capital of each investment in the receivable interests accrues yield for each day at a rate per annum equal to the sum of (a) for any day, the one-month Eurodollar rate for U.S. dollar deposits plus (b) the applicable margin. At SeptemberJune 30, 20162017 the interest rate on outstanding amounts under the Receivables Credit Facility was 1.31.97 percent.
Changes in market rates may impact the base or LIBOR rate under all borrowings. For instance, if the LIBOR rate was to increase or decrease by one percentage point (1.0%), our annual interest expense would change by approximately $15.1$15.5 million based upon our expected future monthly term loan balances per our existing repayment schedule and the Receivables Credit Facility.
We are exposed to price fluctuations of certain commodities used in production and distribution. Key materials and energy used in the production process include roundwood and woodchips, recycled fiber (OCC),OCC, containerboard, electricity, coal, natural gas and caustic soda. Diesel fuel prices have a direct impact on our Distribution segment. We generally purchase these commodities in each of our segments 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 one contract to purchase coal at fixed prices through December 31, 20162017 and contracts to purchase natural gas at fixed prices through December 2020.
We are exposed to price fluctuations in the price of our finished goods. The prices we charge for our products are primarily based on market conditions.
We are exposed to currency fluctuations as we invoice certain European customers in Euros and Mexican customers in Pesos. The Company did not use forward contracts to reduce the impact of currency fluctuations during the quarter ended SeptemberJune 30, 2016.2017. No such contracts were outstanding at SeptemberJune 30, 2016.2017.
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 SeptemberJune 30, 2016.2017.
There were no changes in our internal control over financial reporting during the threesix months ended SeptemberJune 30, 20162017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
See “Legal Claims” under Note 12, Commitments and Contingencies. There have been no material changes in the legal proceedings described in our Form 10-K for the year ended December 31, 2015.2016.
There have been no material changes from the Risk Factors described in our Form 10-K for the year ended December 31, 2015.2016.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
DEFAULTS UPON SENIOR SECURITIES
None.
None.
None.In July 2017, the Company entered into the Third Amendment to the Credit Agreement. The Third Amendment modified 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 September 30 and December 31, 2017 and March 31, 2018, and it modified certain terms used in the calculation of the financial covenants in a manner favorable to the Company.
The following Exhibits are filed as part of this report.
Exhibit | ||
| Description | |
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10.21 |
| Amendment No. 3 to |
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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. |
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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. |
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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. |
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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. |
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101.INS |
| XBRL Instance Document. |
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101.SCH |
| XBRL Taxonomy Extension Schema. |
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101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase. |
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase. |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase. |
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101.PRE |
| XBRL Extension Presentation Linkbase. |
In accordance withPursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| KAPSTONE PAPER AND PACKAGING CORPORATION | ||
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| By: | /s/ Andrea K. Tarbox | |
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| Andrea K. Tarbox | |
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| Executive Vice President and Chief Financial Officer |