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 September 30, 20172018
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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “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 |
| ||
|
|
|
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 96,956,61897,950,763 shares of the Registrant’s Common Stock, $0.0001 par value, outstanding at October 19, 2017.17, 2018.
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, |
|
| September 30, |
| December 31, |
| ||||
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| ||||
|
| (unaudited) |
|
|
|
| (unaudited) |
|
|
| ||||
Assets |
|
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 11,294 |
| $ | 29,385 |
|
| $ | 22,431 |
| $ | 28,065 |
|
Trade accounts receivable (Includes $444,516 at September 30, 2017, and $368,922 at December 31, 2016, associated with the receivables credit facility) |
| 468,630 |
| 392,962 |
| |||||||||
Trade accounts receivable (Includes $464,310 at September 30, 2018, and $425,216 at December 31, 2017, associated with the receivables credit facility) |
| 488,007 |
| 443,462 |
| |||||||||
Other receivables |
| 15,625 |
| 13,562 |
|
| 17,218 |
| 23,289 |
| ||||
Inventories |
| 333,606 |
| 322,664 |
|
| 348,432 |
| 315,575 |
| ||||
Prepaid expenses and other current assets |
| 14,810 |
| 10,247 |
|
| 18,177 |
| 17,470 |
| ||||
Total current assets |
| 843,965 |
| 768,820 |
|
| 894,265 |
| 827,861 |
| ||||
Plant, property and equipment, net |
| 1,472,369 |
| 1,441,557 |
|
| 1,456,648 |
| 1,453,607 |
| ||||
Other assets |
| 25,113 |
| 25,468 |
|
| 27,760 |
| 24,431 |
| ||||
Intangible assets, net |
| 305,219 |
| 314,413 |
|
| 274,243 |
| 297,475 |
| ||||
Goodwill |
| 720,611 |
| 705,617 |
|
| 720,611 |
| 720,611 |
| ||||
Total assets |
| $ | 3,367,277 |
| $ | 3,255,875 |
|
| $ | 3,373,527 |
| $ | 3,323,985 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
| ||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Short-term borrowings |
| $ | 2,500 |
| $ | — |
| |||||||
Other current borrowings |
| 2,084 |
| — |
|
| 2,272 |
| — |
| ||||
Short-term financing obligations |
| 1,090 |
| — |
| |||||||||
Capital lease obligation |
| 29 |
| — |
|
| 33 |
| 30 |
| ||||
Dividend payable |
| 10,215 |
| 10,052 |
|
| 10,392 |
| 10,302 |
| ||||
Accounts payable |
| 220,147 |
| 189,350 |
|
| 210,098 |
| 199,574 |
| ||||
Accrued expenses |
| 101,531 |
| 76,480 |
|
| 85,948 |
| 105,951 |
| ||||
Accrued compensation costs |
| 60,597 |
| 48,840 |
|
| 82,457 |
| 75,215 |
| ||||
Accrued income taxes |
| 9,983 |
| 15,971 |
|
| 528 |
| 31,458 |
| ||||
Total current liabilities |
| 407,086 |
| 340,693 |
|
| 392,818 |
| 422,530 |
| ||||
Other liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Long-term debt (Includes $317,846 at September 30, 2017, and $269,273 at December 31, 2016, associated with the receivables credit facility) |
| 1,461,595 |
| 1,485,323 |
| |||||||||
Long-term debt (Includes $314,986 at September 30, 2018, and $308,849 at December 31, 2017, associated with the receivables credit facility) |
| 1,309,486 |
| 1,374,502 |
| |||||||||
Long-term financing obligations |
| 85,840 |
| — |
|
| 91,794 |
| 82,199 |
| ||||
Capital lease obligation |
| 4,603 |
| — |
|
| 4,570 |
| 4,595 |
| ||||
Pension and postretirement benefits |
| 29,746 |
| 34,207 |
|
| 5,574 |
| 14,196 |
| ||||
Deferred income taxes |
| 400,254 |
| 405,561 |
|
| 254,968 |
| 252,101 |
| ||||
Other liabilities |
| 32,148 |
| 85,761 |
|
| 32,471 |
| 36,848 |
| ||||
Total other liabilities |
| 2,014,186 |
| 2,010,852 |
|
| 1,698,863 |
| 1,764,441 |
| ||||
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; 96,956,618 shares issued and outstanding (excluding 40,000 treasury shares) at September 30, 2017 and 96,639,920 shares issued and outstanding (excluding 40,000 treasury shares) at December 31, 2016 |
| 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; 97,929,278 shares issued and outstanding (excluding 40,000 treasury shares) at September 30, 2018 and 97,043,750 shares issued and outstanding (excluding 40,000 treasury shares) at December 31, 2017 |
| 10 |
| 10 |
| |||||||||
Additional paid-in-capital |
| 288,788 |
| 275,970 |
|
| 306,711 |
| 291,629 |
| ||||
Retained earnings |
| 716,139 |
| 689,668 |
|
| 1,022,942 |
| 894,061 |
| ||||
Accumulated other comprehensive loss |
| (58,932 | ) | (61,318 | ) |
| (47,817 | ) | (48,686 | ) | ||||
Total stockholders’ equity |
| 946,005 |
| 904,330 |
|
| 1,281,846 |
| 1,137,014 |
| ||||
Total liabilities and stockholders’ equity |
| $ | 3,367,277 |
| $ | 3,255,875 |
|
| $ | 3,373,527 |
| $ | 3,323,985 |
|
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 September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net sales |
| $ | 868,418 |
| $ | 776,636 |
| $ | 2,456,978 |
| $ | 2,299,762 |
|
| $ | 893,595 |
| $ | 868,418 |
| $ | 2,605,526 |
| $ | 2,456,978 |
|
Cost of sales, excluding depreciation and amortization |
| 621,401 |
| 548,811 |
| 1,774,814 |
| 1,650,919 |
|
| 593,231 |
| 622,964 |
| 1,783,493 |
| 1,779,503 |
| ||||||||
Depreciation and amortization |
| 47,462 |
| 44,954 |
| 138,864 |
| 135,528 |
|
| 45,129 |
| 47,462 |
| 138,823 |
| 138,864 |
| ||||||||
Freight and distribution expenses |
| 77,043 |
| 71,750 |
| 225,671 |
| 207,787 |
|
| 82,158 |
| 77,043 |
| 236,997 |
| 225,671 |
| ||||||||
Selling, general, and administrative expenses |
| 62,767 |
| 56,113 |
| 196,565 |
| 172,407 |
|
| 61,721 |
| 62,767 |
| 192,826 |
| 196,565 |
| ||||||||
Merger expenses |
| 4,590 |
| — |
| 20,490 |
| — |
| |||||||||||||||||
Gain on sale of property |
| (680 | ) | — |
| (8,133 | ) | — |
| |||||||||||||||||
Operating income |
| 59,745 |
| 55,008 |
| 121,064 |
| 133,121 |
|
| 107,446 |
| 58,182 |
| 241,030 |
| 116,375 |
| ||||||||
Foreign exchange (gain) / loss |
| (415 | ) | 543 |
| (1,501 | ) | 1,518 |
| |||||||||||||||||
Foreign exchange loss / (gain) |
| (187 | ) | (415 | ) | 760 |
| (1,501 | ) | |||||||||||||||||
Pension and postretirement income |
| (3,092 | ) | (1,563 | ) | (9,275 | ) | (4,689 | ) | |||||||||||||||||
Loss on debt extinguishment |
| 631 |
| 679 |
| 631 |
| 679 |
|
| 456 |
| 631 |
| 456 |
| 631 |
| ||||||||
Equity method investments (income) / loss |
| (671 | ) | — |
| (1,377 | ) | — |
| |||||||||||||||||
Equity method investments income |
| (311 | ) | (671 | ) | (1,551 | ) | (1,377 | ) | |||||||||||||||||
Interest expense, net |
| 15,164 |
| 10,148 |
| 38,205 |
| 29,965 |
|
| 15,865 |
| 15,164 |
| 45,921 |
| 38,205 |
| ||||||||
Income before provision for income taxes |
| 45,036 |
| 43,638 |
| 85,106 |
| 100,959 |
|
| 94,715 |
| 45,036 |
| 204,719 |
| 85,106 |
| ||||||||
Provision for income taxes |
| 15,010 |
| 12,620 |
| 29,312 |
| 33,045 |
|
| 22,204 |
| 15,010 |
| 46,284 |
| 29,312 |
| ||||||||
Net income |
| $ | 30,026 |
| $ | 31,018 |
| $ | 55,794 |
| $ | 67,914 |
|
| $ | 72,511 |
| $ | 30,026 |
| $ | 158,435 |
| $ | 55,794 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Foreign currency translation adjustment |
| (74 | ) | — |
| 830 |
| — |
|
| 307 |
| (74 | ) | 131 |
| 830 |
| ||||||||
Pension and postretirement plan reclassification adjustments, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Accretion of prior service costs |
| (117 | ) | (104 | ) | (351 | ) | (312 | ) |
| (48 | ) | (117 | ) | (144 | ) | (351 | ) | ||||||||
Amortization of net loss |
| 635 |
| 620 |
| 1,907 |
| 1,861 |
|
| 294 |
| 635 |
| 882 |
| 1,907 |
| ||||||||
Other comprehensive income, net of tax |
| 444 |
| 516 |
| 2,386 |
| 1,549 |
|
| 553 |
| 444 |
| 869 |
| 2,386 |
| ||||||||
Total comprehensive income |
| $ | 30,470 |
| $ | 31,534 |
| $ | 58,180 |
| $ | 69,463 |
|
| $ | 73,064 |
| $ | 30,470 |
| $ | 159,304 |
| $ | 58,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic |
| 96,931,315 |
| 96,581,703 |
| 96,811,060 |
| 96,499,771 |
|
| 97,874,258 |
| 96,931,315 |
| 97,665,114 |
| 96,811,060 |
| ||||||||
Diluted |
| 98,707,395 |
| 97,888,469 |
| 98,521,491 |
| 97,639,370 |
|
| 100,135,846 |
| 98,707,395 |
| 99,955,448 |
| 98,521,491 |
| ||||||||
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic |
| $ | 0.31 |
| $ | 0.32 |
| $ | 0.58 |
| $ | 0.70 |
|
| $ | 0.74 |
| $ | 0.31 |
| $ | 1.62 |
| $ | 0.58 |
|
Diluted |
| $ | 0.30 |
| $ | 0.32 |
| $ | 0.57 |
| $ | 0.70 |
|
| $ | 0.72 |
| $ | 0.30 |
| $ | 1.59 |
| $ | 0.57 |
|
Dividends declared per common share |
| $ | 0.10 |
| $ | 0.10 |
| $ | 0.30 |
| $ | 0.30 |
|
| $ | 0.10 |
| $ | 0.10 |
| $ | 0.30 |
| $ | 0.30 |
|
See notes to consolidated financial statements.
KAPSTONE PAPER AND PACKAGING CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
|
| Nine Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| ||||
Operating activities |
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 55,794 |
| $ | 67,914 |
|
| $ | 158,435 |
| $ | 55,794 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
| ||||
Depreciation of plant and equipment |
| 115,710 |
| 110,143 |
|
| 115,591 |
| 115,710 |
| ||||
Amortization of intangible assets |
| 23,154 |
| 25,385 |
|
| 23,232 |
| 23,154 |
| ||||
Stock-based compensation expense |
| 12,676 |
| 7,188 |
|
| 7,176 |
| 12,676 |
| ||||
Pension and postretirement |
| (1,971 | ) | (1,588 | ) |
| (7,650 | ) | (1,971 | ) | ||||
Excess tax benefit from stock-based compensation |
| — |
| 150 |
| |||||||||
Amortization of debt issuance costs |
| 3,557 |
| 3,625 |
|
| 3,553 |
| 3,557 |
| ||||
Loss on debt extinguishment |
| 631 |
| 679 |
|
| 456 |
| 631 |
| ||||
Loss on disposal of assets |
| 3,785 |
| 3,156 |
|
| 1,499 |
| 3,785 |
| ||||
Deferred income taxes |
| (6,240 | ) | 220 |
|
| 2,633 |
| (6,240 | ) | ||||
Change in fair value of contingent consideration liability |
| (340 | ) | 4,579 |
|
| 518 |
| (340 | ) | ||||
Equity method investments income, net of cash received |
| 473 |
| — |
|
| 455 |
| 473 |
| ||||
Plant closure costs |
| 8,043 |
| — |
|
| 793 |
| 8,043 |
| ||||
Provision for bad debt expense |
|
| 2,926 |
| — |
|
| 1,180 |
| 2,926 |
| |||
Multiemployer pension plan withdrawl expense |
| 226 |
| — |
| |||||||||
Gain on sale of property |
| (8,133 | ) | — |
| |||||||||
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Trade accounts receivable, net |
| (76,110 | ) | (23,010 | ) |
| (45,725 | ) | (76,110 | ) | ||||
Other receivables |
| (1,510 | ) | 1,949 |
|
| 3,267 |
| (1,510 | ) | ||||
Inventories |
| (11,177 | ) | (11,086 | ) |
| (32,857 | ) | (11,177 | ) | ||||
Prepaid expenses and other current assets |
| (4,535 | ) | 14,399 |
|
| (8,325 | ) | (4,535 | ) | ||||
Other assets |
| (671 | ) | (995 | ) |
| (980 | ) | (671 | ) | ||||
Accounts payable |
| 24,443 |
| 16,926 |
|
| 6,263 |
| 24,443 |
| ||||
Accrued expenses and other liabilities |
| 18,824 |
| (650 | ) |
| (9,132 | ) | 18,824 |
| ||||
Accrued compensation costs |
| 14,445 |
| (15,524 | ) |
| 7,351 |
| 14,445 |
| ||||
Accrued income taxes |
| (5,988 | ) | 8,927 |
|
| (30,930 | ) | (5,988 | ) | ||||
Net cash provided by operating activities |
| 175,919 |
| 212,387 |
|
| 188,896 |
| 175,919 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Investing activities |
|
|
|
|
|
|
|
|
|
| ||||
Capital expenditures |
| (108,012 | ) | (99,246 | ) |
| (111,739 | ) | (108,012 | ) | ||||
Purchase of intangible assets |
| — |
| (2,025 | ) | |||||||||
Acquisition, net of cash acquired |
| (33,500 | ) | (15,438 | ) |
| — |
| (33,500 | ) | ||||
Proceeds from the sale of assets |
| — |
| 4,881 |
| |||||||||
Equity method investments |
| — |
| (11,750 | ) | |||||||||
Proceeds from the sale of property |
| 15,720 |
| — |
| |||||||||
Net cash used in investing activities |
| (141,512 | ) | (123,578 | ) |
| (96,019 | ) | (141,512 | ) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Financing activities |
|
|
|
|
|
|
|
|
|
| ||||
Proceeds from revolving credit facility |
| 347,500 |
| 353,200 |
|
| 270,000 |
| 347,500 |
| ||||
Repayments on revolving credit facility |
| (345,000 | ) | (348,100 | ) |
| (270,000 | ) | (345,000 | ) | ||||
Proceeds from receivables credit facility |
| 75,248 |
| 36,556 |
|
| 45,599 |
| 75,248 |
| ||||
Repayments on receivables credit facility |
| (26,676 | ) | (32,667 | ) |
| (39,461 | ) | (26,676 | ) | ||||
Repayments on long-term debt |
| (75,000 | ) | (64,687 | ) |
| (75,000 | ) | (75,000 | ) | ||||
Repayments on long-term financing obligations |
| (263 | ) | — |
| |||||||||
Payment of loan amendment fees |
| (1,488 | ) | (2,250 | ) | |||||||||
Payment of loan amendment fee |
| (162 | ) | (1,488 | ) | |||||||||
Proceeds from other current borrowings |
| 6,214 |
| — |
|
| 6,767 |
| 6,214 |
| ||||
Repayments on other current borrowings |
| (4,130 | ) | — |
|
| (4,495 | ) | (4,130 | ) | ||||
Repayments on capital lease |
| (19 | ) | — |
| |||||||||
Repayments on long-term financing obligations |
| (785 | ) | (263 | ) | |||||||||
Repayments on capital lease obligation |
| (27 | ) | (19 | ) | |||||||||
Cash dividends paid |
| (29,026 | ) | (29,001 | ) |
| (29,253 | ) | (29,026 | ) | ||||
Payment of withholding taxes on vested stock awards |
| (1,871 | ) | (841 | ) |
| (1,957 | ) | (1,871 | ) | ||||
Proceeds from exercises of stock options |
| 1,041 |
| 788 |
|
| 8,927 |
| 1,041 |
| ||||
Proceeds from shares issued to ESPP |
| 972 |
| 971 |
|
| 936 |
| 972 |
| ||||
Excess tax (deficiency) from stock-based compensation |
| — |
| (150 | ) | |||||||||
Payment of Victory contingent consideration |
| (9,600 | ) | — |
| |||||||||
Net cash used in financing activities |
| (52,498 | ) | (86,181 | ) |
| (98,511 | ) | (52,498 | ) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net increase (decrease) in cash and cash equivalents |
| (18,091 | ) | 2,628 |
| |||||||||
Net decrease in cash and cash equivalents |
| (5,634 | ) | (18,091 | ) | |||||||||
Cash and cash equivalents-beginning of period |
| 29,385 |
| 6,821 |
|
| 28,065 |
| 29,385 |
| ||||
Cash and cash equivalents-end of period |
| $ | 11,294 |
| $ | 9,449 |
|
| $ | 22,431 |
| $ | 11,294 |
|
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 nine months ended September 30, 20172018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2018. 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, 2016.2017, as updated in our Current Report on Form 8-K filed on May 4, 2018 (“May 8-K”).
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, through Victory Packaging, L.P. (“Victory”), a North American distributor of packaging materials, with more than 60 distribution centers located in the United States, Mexico and Canada, provides packaging materials and related products to a wide variety of customers. For more information about our segments, see Note 14, Segment Information.
In these consolidated financial statements, certain amounts in prior periods have been reclassified to conform to the current period presentation. Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2017-07, “Compensation — Retirement Benefits”. As discussed in our May 8-K, this reclassification did not affect the Company’s net income, earnings per share, financial position, or cash flows.
2. Recently Adopted and New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
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. ASU 2015-11 was adopted during the interim period ended March 31, 2017, and it had no material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows 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. ASU 2016-09 was adopted prospectively during the interim period ended March 31, 2017. The adoption of this ASU decreased the Company’s provision for incomes taxes by $0.1 million for the three months ended September 30, 2017 and increased the Company’s provision for income taxes by $0.4 million for the nine months September 30, 2017. The Company has elected to continue recognizing estimated forfeitures over the vesting term of the awards.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standard’s Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The guidance in this update supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition”, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, this update supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts”. 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 have completedEffective January 1, 2018, the diagnostic phaseCompany adopted the requirements of evaluating the overall impact of ASU 2014-09 as it relates to significant contracts and are currently evaluating non-significant contracts that may impact the Company’s financial position or results of operations in the aggregate. The Company has determined that it will adopt this standard utilizingASC Topic 606, “Revenue from Contracts with Customers,” using the modified retrospective method, which will result inrequires 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. The adoption of ASC Topic 606 did not result in the recognition of a cumulative adjustment to opening retained earnings under the modified retrospective approach, nor did it have a material effect on the Company’s financial position or results of operations. The adoption of this topic did result in the addition of required disclosures within the notes to the consolidated financial statements, as disclosed in Note 3, “Revenue”.
Our implementation team consistingconsisted of senior leadership from finance, legal, sales and operations continues to report itswith periodic progress reporting to management and to the audit committee of our board of directors ondirectors. Implementation consisted of a periodic basis. This team has continued to understand the impactreview of the standard on our revenueCompany’s significant contracts and is reviewing existing accounting practices to identify necessary changes to policies and procedures that will result from the applicationan evaluation of the new standard. We have completed the significant contract review phase of the assessment and are assessing updates to our systems and control environment to support additional disclosures under the new standard.standard, as well as updates to policies and procedures.
During our assessment, the Company considered whether the adoption would require a transition from point-in-time revenue recognition to an over-time approach for products produced by the Company without an alternative use, which would result in acceleration of revenue. The Company concluded that based on its enforceable rights included in its contracts or prevailing terms and conditions, an enforceable right of payment that includes a reasonable profit throughout the duration of the contract does not exist. Therefore, the Company will remain at a point-in-time approach and record revenue at the point control transfers to the customer.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash 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. Effective January 1, 2018, the Company adopted ASU 2016-15. During the first quarter of 2018, the Company paid $20.7 million of contingent consideration to the former owners of Victory based on achieving certain financial performance criteria for the thirty month period following the acquisition of Victory. Accordingly, the portion of the cash payment up to the acquisition date fair value of the contingent consideration liability of $9.6 million was classified as a financing outflow, while the amounts paid in excess of the acquisition date fair value, or $11.1 million, was classified as an operating outflow in the Company’s Consolidated Statements of Cash Flows.
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). Effective January 1, 2018, the Company adopted ASU 2017-07 applying the allowable practical expedient by using the amounts disclosed in the pension and other postretirement benefit plan footnote for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements to the period presented. This resulted in a $1.6 million and $4.7 million reclassification between cost of sales, excluding depreciation and amortization, and pension and postretirement income in the Company’s Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017, respectively. This reclassification did not affect the Company’s net income, earnings per share, financial position, or cash flows.
New Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, “Leases”. This guidance revises existing practice related to accounting for leases under ASC Topic 840 Leases 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 standardit 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.
The Company does havehas a significant number of leases for both property and equipment. As such, the Company expects that there will be a material impact on our financial position and disclosures upon the adoption of ASU 2016-02. Our implementation team, consisting of senior leadership from finance, legal, IT and operations, reports its progress to management and to the audit committee of our board of directors on a
periodic basis. We have completed the process of abstracting data from known leases and have completed our procedures to validate and test the completeness and accuracy of this data. We have also completed our evaluation of a stratified discount rate model and have begun implementing new and/or updated systems necessary to support additional disclosures under the new standard. The Company will provide additional disclosure as the implementation progresses.
In AugustJune 2016, the FASB issued ASU 2016-15, “StatementNo. 2016-13, Financial Instruments—Credit Losses (Topic 326) Measurement of Cash Flows: ClassificationCredit Losses on Financial Instruments. This standard replaces the incurred loss methodology previously employed to measure credit losses for most financial assets and requires the use of Certain Cash Receiptsa forward-looking expected loss model. Current accounting delays the recognition of credit losses until it is probable a loss has been incurred, while the update will require financial assets to be measured at amortized costs less a reserve and Cash Payments”, which clarifiesequal to 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 cannotnet amount expected to be separated, classificationcollected. This standard will depend on the predominant source or use. This update isbe effective for annual periods beginning after December 15, 2017, and2019, including interim periods within those fiscal years, withthat reporting period, and early adoption permitted, including adoption in an interim period.application is permitted. The Company is currently evaluating the new guidance to determine the impact that the adoption of ASU 2016-15it will have on our cash flows and related disclosures.its consolidated financial statements.
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,February 2018, the FASB issued ASU No. 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). Under existing GAAP, the Presentationeffects of Net Periodic Pension Costchanges in tax rates 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 typeslaws on deferred tax balances are recorded as a component of benefits accounted for under Topic 715, Compensation — Retirement Benefits. The ASU requires that an employer report the service cost componentincome tax expense in the same line item orperiod in which the law was enacted. When deferred tax balances related to items asoriginally recorded in accumulated other compensation costs arisingcomprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from services rendered by the pertinent employees during the period. Theaccumulated other components of net benefit cost are requiredcomprehensive income to be presented in the income statement separatelyretained earnings for stranded tax effects resulting from the service cost component2017 Tax Cuts 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 usedJobs Act. The amendments in the income statement to present the other components of net benefit cost must be disclosed. Thethis 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 ASUrequire certain disclosures about stranded tax effects. The guidance is effective for annual reporting periodsfiscal years beginning after December 15, 2017, including2018, and interim periods within those annual periods.fiscal years. Early adoption in any period is permitted aspermitted. The Company’s provisional adjustments recorded in 2017 to account for the impact of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance.2017 Tax Cuts and Jobs Act resulted in stranded tax effects. The Company is currently evaluating the effect thattiming and impact of adopting ASU No. 2017-072018-02.
In August 2018, the FASB issued ASU 2018-13, which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. The new guidance is effective for all entities for fiscal years beginning after December 2019 and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements and related disclosures.statements.
3. API AcquisitionRevenue
Adoption of ASC Topic 606, “Revenue from Contracts with Customers”
On FebruaryJanuary 1, 2017,2018, the Company acquiredadopted ASC Topic 606 using the assetsmodified retrospective method applied to those contracts which were not completed as of Associated Packaging, Inc. and Fast Pak, LLC (together, “API”) with operations located in Greer, South Carolina for $33.5 million.January 1, 2018. The acquisition was funded from borrowingsadoption of ASC Topic 606 did not have a material effect on the Company’s revolving credit facility (“Revolver”)financial position or results of operations.
Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The table below disaggregates our external revenue by major source (in thousands). API providesFor additional revenue detail relating to key Paper and Packaging product lines, see Note 14, Segment Information.
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Paper and packaging |
| $ | 611,110 |
| $ | 594,699 |
| $ | 1,781,269 |
| $ | 1,660,036 |
|
Distribution |
| 261,189 |
| 251,163 |
| 757,500 |
| 730,162 |
| ||||
Other |
| 21,296 |
| 22,556 |
| 66,757 |
| 66,780 |
| ||||
Net sales |
| $ | 893,595 |
| $ | 868,418 |
| $ | 2,605,526 |
| $ | 2,456,978 |
|
Paper and Packaging Revenue
Paper and Packaging includes containerboard, corrugated packagingproducts and digital production needs servingspecialty paper products manufactured at our facilities located in the United States. Sales to customers are initiated through a diversepurchase order and are governed by our standard terms and conditions, written agreements or both. Revenue is recognized when performance obligations under the terms of a contract with a customer base, includingare satisfied; generally, this occurs with the transfer of control of our products. Transfer of control occurs at a specific point-in-time. Based on the enforceable rights included in our contracts or prevailing terms and conditions, products produced by the Company without an emphasisalternative use are not protected by an enforceable right of payment that includes a reasonable profit throughout the duration of the contract. Sales with terms f.o.b. (free on fulfillment and kitting forboard) shipping point are recognized at the automotive and consumer products industries. The Company has allocatedtime of shipment. For sales transactions with terms f.o.b. destination, revenue is recorded when the purchase priceproduct is delivered to the assets acquired and liabilities assumed,customer’s site. Consignment sales are recognized in revenue at the earlier of which $14.0 millionthe period that the goods are consumed or after a period of time subsequent to receipt by the customer as specified by contract terms, provided control of the promised goods or services has been allocated to intangible assets, $2.8 million to plant, property and equipment, $1.7 million to net working capital and $15.0 million to goodwill (which is deductible for tax purposes). The purchase price allocation is final.transferred.
Transaction feesRevenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales, value add, and expensesother taxes we collect concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. Certain customers may receive cash-based incentives (rebates or credits), which are accounted for as variable consideration. We estimate these amounts based on the API acquisition relatedexpected amount to due diligence, advisorybe provided to customers and legal services have been expensed as incurred. These expenses were $0.4 million forreduce revenues recognized. For the three and nine month periodsmonths ended September 30, 2018 and 2017, respectively,paper and were recorded as selling, generalpackaging customer incentives totaled $6.1 million and administrative expenses in the Consolidated Statements of Comprehensive Income.
This 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$6.2 million, respectively. For the nine months ended September 30, 2018 and 2017, paper and packaging customer incentives totaled $16.4 million and $19.7 million, respectively. As of September 30, 2018 and 2017, a reserve for estimated unpaid rebates of $5.7 million and $6.0 million, respectively, is included in accrued expenses on the Company’s Consolidated Balance Sheets.
Upfront consideration paid to a customer associated with the execution of a master agreement (“prebate”) is capitalized and amortized as a reduction in transaction prices over the expected sales impacted by the agreement. As of September 30, 2018, unamortized prebates totaled $0.7 million. If we determined our obligations under a warranty claim are probable and subject to reasonable determination, an estimation of our liability is recorded as an offset against revenue at that time. As of September 30, 2018 and 2017, reserves for warranty claims were not material. The adoption of ASC Topic 606 did not have a significant impact on our estimates for variable consideration.
Freight charged to customers is recognized in net sales.
Distribution Revenue
Our distribution operations distribute corrugated packaging materials and other specialty packaging products to customers in the United States, Canada and Mexico. Sales to customers are initiated through a purchase order and are governed by standard terms and conditions, written agreements or both.
Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied; generally, this occurs with the transfer of control of our products at a specific point-in-time. While the distribution business makes wide use of stocking arrangements with customers to ensure consistent on-time
delivery, based on the enforceable rights included in our contracts or prevailing terms and conditions, products without an alternative use are not protected by an enforceable right of payment that includes $17.3a reasonable profit throughout the duration of the contract. As such, revenue is recorded when the product is delivered to the customer’s site. If goods are not purchased by a customer after a period of time specified by the contract terms, customers may be billed and goods are shipped. Certain customers may request that Victory hold the goods after billing for an additional period specified in the contract terms. In such circumstances, the Company recognizes revenue as control of the goods transfers to the customer. Consignment sales are recognized in revenue at the earlier of the period that the goods are consumed or after a period of time subsequent to receipt by the customer as specified by contract terms, provided control of the promised goods or services has transferred.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. Certain customers may receive cash-based incentives (rebates or credits), which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. For the three months ended September 30, 2018 and 2017, distribution customer incentives totaled $2.3 million and $2.7 million, respectively. For the nine months ended September 30, 2018 and 2017, distribution customer incentives totaled $7.2 million and $8.0 million, respectively. As of September 30, 2018 and 2017, a reserve for estimated unpaid rebates of $3.4 million and $2.8 million, respectively, is included in accrued expenses on the Company’s Consolidated Balance Sheets.
Upfront consideration paid to a customer associated with the execution of a master agreement (“prebate”) is capitalized and amortized as a reduction in transaction prices over the expected sales impacted by the agreement. As of September 30, 2018 and 2017, unamortized prebates totaled $3.2 million and $1.1 million, respectively. If we determined our obligations under a warranty claim are probable and subject to reasonable determination, an estimation of our liability is recorded as an offset against revenue at that time. As of September 30, 2018 and 2017, reserves for warranty claims were not material. The adoption of ASC Topic 606 did not have a significant impact on our estimates for variable consideration.
Freight charged to customers is recognized in net sales.
Other Revenue
Lumber — The Company generates revenue from the sale of lumber produced at its Summerville, South Carolina lumber mill. Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally, this occurs with the transfer of control of our lumber products upon delivery to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense.
Power — The Company generates revenue from power generation at its North Charleston and Longview Mills. Power revenue at the North Charleston mill is recognized from the sale of shaft horsepower generated by a cogeneration facility. The supply of shaft horsepower is recognized as revenue over-time as energy is produced and delivered (output measure). Power revenue at the Longview mill is recognized from the sale of electricity and is recognized over time as electricity is generated and is delivered to the customer.
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period is one year or less. These costs are recorded within selling, general and $1.0administrative expense.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
4.Merger
On January 28, 2018, KapStone, WestRock Company (“WestRock”), Whiskey Holdco, Inc., a wholly-owned subsidiary of WestRock (“Holdco”), Kola Merger Sub, Inc., a wholly-owned subsidiary of Holdco (“KapStone Merger Sub”), and Whiskey Merger Sub, Inc., a wholly-owned subsidiary of Holdco (“WestRock Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, and subject to the terms and conditions thereof, WestRock will acquire all of the outstanding shares of KapStone through a transaction in which: (i) WestRock Merger Sub will merge with and into WestRock, with WestRock surviving such merger (the “WestRock Merger”) as a wholly-owned subsidiary of Holdco and (ii) KapStone Merger Sub will merge with and into KapStone, with KapStone surviving such merger as a wholly-owned subsidiary of Holdco (the “Merger”).
Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the WestRock Merger and the Merger (the “Effective Time”): (i) each share of common stock, par value $0.0001 per share, of KapStone (the “KapStone Common Stock”) issued and outstanding immediately prior to the Effective Time (excluding any shares of KapStone Common Stock that are held (a) in treasury or (b) by any KapStone stockholder who is entitled to exercise, and properly exercises, appraisal rights with respect to such shares of KapStone Common Stock) will be converted into the right to receive, at the election of the stockholder (subject to proration as described below): (a) $35.00 in cash, without interest (the “Cash Consideration”), or (b) 0.4981 shares of common stock (the “Holdco Common Stock”), par value $0.01 per share, of Holdco (the “Stock Consideration” and, together with the Cash Consideration, the “Merger Consideration”); and (ii) each share of common stock, par value $0.01 per share, of WestRock issued and outstanding immediately prior to the Effective Time will be converted into one share of Holdco Common Stock.
KapStone stockholders were entitled to make an election to receive the Stock Consideration by submitting an election form by the previously announced election deadline on September 5, 2018. Any KapStone stockholder that did not make an election to receive the Stock Consideration will receive the Cash Consideration.
The completion of the Merger is subject to customary conditions, including, without limitation the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. As of the date of this Quarterly Report on Form 10-Q, the parties have received all antitrust clearances that are a condition to the Merger other than Hart-Scott-Rodino clearance. The parties are targeting completing the Merger by the end of the calendar year 2018, subject to satisfaction or waiver of the closing conditions in the Merger Agreement. It is possible that factors outside the control of KapStone or WestRock could result in the Merger being completed at a later time or not at all.
To assist the Company in its sale process, the Company retained two financial advisors to advise the board of directors and executive management and to render customary “fairness opinions” to the Company and the board of directors regarding the Merger Consideration to be paid upon consummation of the Merger. As of September 30, 2018, the financial advisors had been paid $10.2 million in the aggregate for their services (paid in the first quarter of operating income from this acquired business.2018). Upon consummation of the Merger, the Company is obligated to pay the two firms an additional $34.1 million in the aggregate. For the three and nine months ended September 30, 2018, the Company incurred $4.6 million and $20.5 million, respectively, of Merger-related expenses in total.
In conjunctionconnection with the API acquisition,Merger, KapStone has entered into retention agreements or change in control severance agreements (“Severance Agreements”) with certain employees, and intends to enter into success bonus agreements with certain employees. Payment under any such agreement is or will be contingent upon the Company signed a 25-year lease agreement with a total commitment of approximately $14.7 million. The Company estimated the fair valueconsummation of the leaseMerger. KapStone has entered into Severance Agreements with each of our non-director executive officers, each providing for severance payments in an amount equal to be $4.7a fixed amount not to exceed two times the sum of such executive officer’s annual base salary plus target bonus, as well as certain continuing health insurance benefits. The success bonus agreements have not been made final and remain subject to KapStone’s discretion (subject to a $3.0 million basedlimitation on an assessment ofaggregate success bonus payments for all KapStone employees pursuant to 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 more than 90 percent of the fair value of the property. Amortization of the asset under this capital lease obligation is included in depreciation expense.Merger Agreement).
4.5. Plant Closure
On August 1, 2017, the Company approved and announced the closing of its Paper and Packaging segment box plant located in Oakland, California. All operating activities ceased at this location in October 2017. As of September 30, 2017,For the quarter ended March 31, 2018, the Company recorded additional charges of $6.0$0.9 million for
impaired property, plant and equipment, $1.1$0.6 million of other costs and $0.3 million for inventorythe dismantling of equipment, related to this plant closing. No additional costs were incurred during the second quarter of 2018.
On February 1, 2018, the Company sold the land and $0.9building in Oakland, California for $14.7 million for severance associated with the plant closure.after fees, taxes and commissions and recorded a gain of $7.5 million.
5.6. Planned Maintenance Outages
Planned maintenance outage costs for the three months ended September 30, 2018 and 2017 and 2016 totaled $13.0$9.2 million and $3.8$13.0 million, respectively, and are included in cost of sales. The $9.2$3.8 million increasedecrease in planned maintenance outage costs for the quarter2018 is primarily due to planned outages at the Company’s North Charleston, South Carolina (“Charleston”)deferral of two projects into the fourth quarter of 2018, partially offset by the Longview, Washington’s cold mill outage. The cold mill outage lasted 4 days with a cost of $7.5 million and a lost paper mill.production of approximately 13,000 tons.
Planned maintenance outage costs for the nine months ended September 30, 2018 and 2017 and 2016 totaled $36.8$45.0 million and $29.4$36.8 million, respectively, and are included in cost of sales. The $7.4$8.2 million increase in planned maintenance outage costs in 2018 is primarily due to planned outagesa boiler upgrade at the Company’sNorth Charleston, South Carolina paper mill.mill with a cost of $16.0 million and lost paper production of approximately 30,000 tons, partially offset by timing of other projects.
6.7. Inventories
Inventories consist of the following at September 30, 20172018 and December 31, 2016,2017, respectively:
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|
|
| (unaudited) |
|
|
| ||||
|
| September 30, |
| December 31, |
|
| September 30, |
| December 31, |
| ||||
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| ||||
Raw materials |
| $ | 80,819 |
| $ | 79,377 |
|
| $ | 95,553 |
| $ | 75,616 |
|
Work in process |
| 5,516 |
| 6,371 |
|
| 4,000 |
| 4,144 |
| ||||
Finished goods |
| 155,327 |
| 151,497 |
|
| 154,756 |
| 145,652 |
| ||||
Replacement parts and supplies |
| 92,964 |
| 85,857 |
|
| 98,193 |
| 93,043 |
| ||||
Inventory at FIFO costs |
| 334,626 |
| 323,102 |
|
| 352,502 |
| 318,455 |
| ||||
LIFO inventory reserves |
| (1,020 | ) | (438 | ) |
| (4,070 | ) | (2,880 | ) | ||||
Inventories |
| $ | 333,606 |
| $ | 322,664 |
|
| $ | 348,432 |
| $ | 315,575 |
|
7.8. Short-term Borrowings and Long-term Debt
Short-term Borrowings and Long-term Debt
As of September 30, 2017,2018, the Company had $2.5 million of short-term borrowingsno amounts outstanding under the Revolver, with a weighted average interest rate of 5.25 percent.
As of September 30, 2017, the Company has available borrowing capacity of $483.4its $500 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 31, 2017. As of September 30, 2017, there was $2.1 million outstanding under the current agreement.
Long-term Debt
Long-term debt consists of the following at September 30, 2017 and December 31, 2016, respectively:
|
| (unaudited) |
|
|
| ||
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Term loan A-1 under Credit Agreement with interest payable monthly at LIBOR of 1.23% plus 2.00% at September 30, 2017 |
| $ | 706,437 |
| $ | 775,500 |
|
Term loan A-2 under Credit Agreement with interest payable monthly at LIBOR of 1.23% plus 2.125% at September 30, 2017 |
| 452,438 |
| 458,375 |
| ||
Receivable Credit Facility with interest payable monthly at LIBOR of 1.23% plus 0.75% at September 30, 2017 |
| 317,846 |
| 269,273 |
| ||
Total long-term debt |
| 1,476,721 |
| 1,503,148 |
| ||
Less unamortized debt issuance costs |
| (15,126 | ) | (17,825 | ) | ||
Long-term debt, net of debt issuance costs |
| $ | 1,461,595 |
| $ | 1,485,323 |
|
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 securedrevolving credit facility (the “Credit Facility”“Revolver”), and had borrowing availability 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 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).
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, 2017, 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.
The Company paid approximately $1.3 million of loan amendment fees associated with the Third Amendment, which are being amortized over the remaining term of the Credit Agreement using the effective interest method.$484.4 million.
In September 2017,2018, the Company made a voluntary prepayment on its term loans under the Credit Facility of $75.0$75 million and, as a result, $0.6$0.5 million of unamortized debt issuance costs were written-off as a loss on debt extinguishment.
Other Borrowing
In January 2018, the Company entered into a short-term financing agreement of $6.8 million at an annual interest rate of 2.9 percent for its annual property insurance premiums. The agreement requires the Company to make three payments through the term of the financing agreement ending on December 31, 2018. As of September 30, 2018, there was $2.3 million outstanding under the current agreement.
Receivables Credit Facility
Effective as of June 1, 2017,2018, the Company entered into Amendment No. 34 to the Receivables Purchase Agreement (the “Amendment”) amending its Receivables Purchase Agreement dated as of September 26, 2014 (as amended from time to time, the “Receivables Purchase Agreement”), which is part of anour trade accounts receivable securitization program (the “Securitization Program”) of the Company and certain of its subsidiaries.
The Amendment included the following changes to the Receivables Purchase Agreement:
· the aggregate commitment of the Purchasers (as defined in the Receivables Purchase Agreement) under the Receivables Purchase Agreement was increased from $275.0 million to $325.0 million;
·extended the “Facility Termination Date” (as defined in the Receivables Purchase Agreement) was extended from June 6, 20171, 2018 to June 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.
The Company paid approximately $0.2 million of loan amendment fees associated with this Amendment, which are being amortized over the remaining term using the effective interest method.
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”.May 31, 2019.
Under our Securitization Program, the Company and its subsidiaries that participate in the Securitization Program (the “Originators”) sell, on an ongoing basis without recourse, certain trade receivables to KapStone Receivables, LLC (“KAR”), which is considered a wholly-owned, bankruptcy-remote variable interest entity (“VIE”). The Company has the authority to direct the activities of the VIE and, as a result, we have concluded that we maintain control of the VIE, are the primary beneficiary (as defined by accounting guidance) and, therefore, consolidate the account balances of KAR. As of September 30, 2017, $444.52018, $464.3 million of our trade accounts receivables were sold to KAR. KAR in turn assigns a collateral interest in these receivables to a group of financial institutions under a one-year $325 million facility (the “Receivables Credit Facility”) for proceeds of $317.8$315.0 million. The assets of KAR are not available to the Company until all obligations of KAR are satisfied in the event of bankruptcy or insolvency proceedings.
The Company included the Receivables Credit Facility in Long-term debt on the Consolidated Balance Sheets based on management’s intent to continue to refinance outstanding amounts under the Securitization Program until the maturity of the Term loan A-l which is June 1, 2020. Term loan A-1 and Term loan A-2 (with $611.9 million and $392.0 million outstanding as of September 30, 2018, respectively), together with the Revolver, comprise our credit facility (the “Credit Facility”) under our Second Amended and Restated Credit Agreement, as amended (the “Credit Agreement”). The Company also has the ability to refinance the short-term obligations under the Receivables Credit Facility on a long-term basis using its Revolver. Provided the Company complies with its covenants under the Credit Agreement, there are no additional requirements as to when borrowings under the Revolver would need to be repaid other than the maturity date of June 1, 2020.
Debt Covenants
Our Credit Agreement governing our Credit Facility contains, among other provisions, covenants with which we must comply. The covenants limit our ability to, among other things, incur indebtedness, create additional liens on our assets, make investments, engage in mergers and acquisitions and sell any assets outside the normal course of business.
As of September 30, 2017,2018, the Company was in compliance with all applicable covenants in the Credit Agreement.
Fair Value of Debt
As of September 30, 2017,2018, the fair value of the Company’s debt approximates the carrying value of $1.5$1.3 billion as the variable interest rates re-price frequently at current market rates. Our weighted-average cost of borrowings was 3.03.6 percent and 2.153.0 percent for the nine months ended September 30, 20172018 and 2016, respectively.
8.Long-term Financing Obligations
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 Charleston and Roanoke Rapids 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 evaluates 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, $43.7 million is now reflected as a long-term financing obligation.
In September 2017, the Charleston paper mill completed this project and did not meet the ‘sale-leaseback’ criteria. As such, $42.4 million is now reflected as a long-term financing obligation.
The Company incurred $1.5 million and $1.8 million of implicit interest expense on these long-term financing obligations for three and nine month periods ending September 30, 2017, respectively.
9. Income Taxes
The Company’s effective income tax rate for the three and nine months ended September 30, 20172018 was 23.4 percent and 22.6 percent, respectively, compared to 33.3 percent and 34.4 percent, respectively, compared to 28.9 percent and 32.7 percent for the three and nine months ended September 30, 2016.2017, respectively. The higher effective income tax rate in the three months ended September 30, 2017 is due to the state of Illinois enacting legislation increasing the corporate income tax rate as of July 1, 2017. Accordingly the Company re-measured its deferred tax liabilities and recorded a charge of $0.5 million.
Cash taxes paid, net of refunds for the three and nine months ended September 30, 2018, is lower due to the 21 percent federal statutory tax rate beginning in 2018 instituted by the Tax Cuts and Jobs Act (the “Act”).
The Act, among other things, reduced the US federal corporate income tax rate from 35 percent to 21 percent and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. The Act also created new taxes starting in 2018 on certain foreign sourced earnings. The Company applied the guidance in SAB 118 and at December 31, 2017 recorded provisional estimates to re-measure our deferred taxes using the new 21 percent rate ($144.7 million tax benefit) and to record an estimated transition tax ($0.3 million expense).
During the nine months ended September 30, 2018, we have not recorded any measurement period adjustments to the provisional estimates recorded at December 31, 2017. Final accounting for these impacts is expected in the fourth quarter of 2018, subsequent to the Company’s completion of 2017 tax returns.
Cash taxes, net of tax refunds, paid in the three and nine months ended September 30, 2018 were $19.7 million and $74.7 million, respectively, compared to $12.8 million and $40.3 million, respectively, compared to $6.6 million and $5.8 million for the three and nine months ended September 30, 2016,2017, respectively.
In the normal course of business, the Company is subject to examination by taxing authorities. The Company’s open federal tax years are 2014, 2015 and 2016. The Company has open tax years for state and foreign income tax filings generally starting in 2013.2014.
10. Net Income per Share
The Company’s basic and diluted net income per share for the three and nine months ended September 30, 20172018 and 20162017 is calculated as follows:
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||
Net income |
| $ | 30,026 |
| $ | 31,018 |
| $ | 55,794 |
| $ | 67,914 |
|
| $ | 72,511 |
| $ | 30,026 |
| $ | 158,435 |
| $ | 55,794 |
|
Weighted-average number of common shares for basic net income per share |
| 96,931,315 |
| 96,581,703 |
| 96,811,060 |
| 96,499,771 |
|
| 97,874,258 |
| 96,931,315 |
| 97,665,114 |
| 96,811,060 |
| ||||||||
Incremental effect of dilutive common stock equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Unexercised stock options |
| 1,279,371 |
| 942,090 |
| 1,253,819 |
| 840,281 |
|
| 1,739,437 |
| 1,279,371 |
| 1,771,153 |
| 1,253,819 |
| ||||||||
Unvested restricted stock awards |
| 496,709 |
| 364,676 |
| 456,612 |
| 299,318 |
|
| 522,151 |
| 496,709 |
| 519,181 |
| 456,612 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Weighted-average number of shares for diluted net income per share |
| 98,707,395 |
| 97,888,469 |
| 98,521,491 |
| 97,639,370 |
|
| 100,135,846 |
| 98,707,395 |
| 99,955,448 |
| 98,521,491 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income per share - basic |
| $ | 0.31 |
| $ | 0.32 |
| $ | 0.58 |
| $ | 0.70 |
|
| $ | 0.74 |
| $ | 0.31 |
| $ | 1.62 |
| $ | 0.58 |
|
Net income per share - diluted |
| $ | 0.30 |
| $ | 0.32 |
| $ | 0.57 |
| $ | 0.70 |
|
| $ | 0.72 |
| $ | 0.30 |
| $ | 1.59 |
| $ | 0.57 |
|
There were no anti-dilutive weighted average unexercised stock options outstanding for the three and nine month periods ended September 30, 2018.
A total of 1,604,202 and 1,105,4201,620,967 weighted average unexercised stock options were outstanding for the three month periods ended September 30, 2017 and 2016, respectively, but were not included in the computation of diluted net income per share because the awards were anti-dilutive.
A total of 1,620,967 and 1,809,906 weighted average unexercised stock options were outstanding for the nine month periods ended September 30, 2017, and 2016, respectively, but were not included in the computation of diluted net income per share because the awards were anti-dilutive.
11. Pension Plan and Post-Retirement Benefits
Defined Benefit Plans
Net pension cost (benefit)benefit recognized for the three and nine months ended September 30, 20172018 and 20162017 for the Company’s defined benefit plan (the “Pension Plan”) is as follows:
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||
Service cost for benefits earned during the period |
| $ | 1,077 |
| $ | 1,125 |
| 3,231 |
| $ | 3,374 |
|
| $ | 783 |
| $ | 1,077 |
| $ | 2,349 |
| $ | 3,231 |
| |
Interest cost on projected benefit obligations |
| 6,567 |
| 7,079 |
| 19,701 |
| 21,236 |
|
| 6,176 |
| 6,567 |
| 18,528 |
| 19,701 |
| ||||||||
Expected return on plan assets |
| (9,031 | ) | (9,340 | ) | (27,094 | ) | (28,020 | ) |
| (9,648 | ) | (9,031 | ) | (28,944 | ) | (27,094 | ) | ||||||||
Amortization of net loss |
| 1,197 |
| 1,157 |
| 3,591 |
| 3,471 |
|
| 527 |
| 1,197 |
| 1,581 |
| 3,591 |
| ||||||||
Amortization of prior service cost |
| 4 |
| 24 |
| 12 |
| 72 |
|
| 127 |
| 4 |
| 381 |
| 12 |
| ||||||||
Net pension cost (benefit) |
| $ | (186 | ) | $ | 45 |
| $ | (559 | ) | $ | 133 |
| |||||||||||||
Net pension benefit |
| $ | (2,035 | ) | $ | (186 | ) | $ | (6,105 | ) | $ | (559 | ) |
Effective January 1, 2018, the Company adopted ASU 2017-07. The ASU requires that the service cost component be reported 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. As a result, $0.8 million and $2.3 million of service cost is included in cost of sales, excluding depreciation and amortization, for the three and nine months ended September 30, 2018. $(2.8) million and $(8.5) million was recorded as pension and postretirement income in the Company’s Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018, respectively. In addition, $(0.3) million and $(0.9) million was recorded as pension and postretirement income in the Company’s Consolidated Statements of Comprehensive Income related to the Company’s other postretirement benefits for the three and nine months ended September 30, 2018, respectively.
The adoption of this ASU retrospectively, utilizing the allowable practical expedient, resulted in a $(1.6) million and $(4.7) million reclassification between cost of sales, excluding depreciation and amortization, and pension income in the Company’s Consolidated Statements of Comprehensive Income for three and nine months ended September 30, 2017, respectively.
The Company currently does not anticipate making any Pension Plan contributions in 2017.2018. 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 Fibre Paper and Packaging, Inc. (“Longview”) subsidiary and their dependents. The Company makes contributions to its postretirement plan as claims are submitted.
In March 2017, the union employees at the 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.
In July 2017, the union employees at the Roanoke Rapids paper mill ratified a new 4 year collective bargaining agreement which puts in place a high deductible health care plan beginning January 1, 2018, and changes 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 September 30, 20172018 and 2016,2017, the Company recognized expense of $6.4$6.7 million and $2.5$6.4 million, respectively, for matching contributions. For the nine months ended September 30, 20172018 and 2016,2017, the Company recognized expense of $18.6$21.2 million and $8.5$18.6 million, respectively, for matching contributions.
In 2017, the Company restored matching contributions to its Contribution Plans for certain employees that were previously suspended during 2016. As a result, contributions were $3.9 million higher in the quarter ended September 30, 2017, and $10.1 million higher for the nine months ended September 30, 2017, compared to the same periods in 2016.
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 plan trustee of its withdrawal from the plan and cessation of plan contributions effective December 31, 2016. Accordingly, the Company recorded an estimated withdrawal liability of approximately $6.4 million, based 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 facts available to management; however, the withdrawal liability will ultimately be determined by the plan trustee.
12. Stock-Based Compensation
The Company accounts for stock-based awards in accordance with ASC 718, “Compensation“Compensation — Stock Compensation,,” which requires that the cost resulting from all share-based payment transactions be recognized as compensation cost over the vesting period based on the fair value of the instrument on the date of grant.
Total stock-based compensation expense related to the stock option and restricted stock unit grants for the three and nine months ended September 30, 20172018 and 20162017 is as follows:
|
| (unaudited) |
|
|
|
|
| |||||||||||||||||||
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||
Stock option compensation expense |
| $ | 1,304 |
| $ | 928 |
| $ | 4,991 |
| $ | 3,669 |
|
| $ | 640 |
| $ | 1,304 |
| $ | 2,231 |
| $ | 4,991 |
|
Restricted stock unit compensation expense |
| 1,346 |
| 898 |
| 7,685 |
| 3,519 |
|
| 1,371 |
| 1,346 |
| 4,945 |
| 7,685 |
| ||||||||
Total stock-based compensation expense |
| $ | 2,650 |
| $ | 1,826 |
| $ | 12,676 |
| $ | 7,188 |
|
| $ | 2,011 |
| $ | 2,650 |
| $ | 7,176 |
| $ | 12,676 |
|
Total unrecognized stock-based compensation cost related to the stock options and restricted stock units as of September 30, 20172018 and December 31, 20162017 is as follows:
|
| (unaudited) |
|
|
|
| (unaudited) |
|
|
| ||||
|
| September 30, |
| December 31, |
|
| September 30, |
| December 31, |
| ||||
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| ||||
Unrecognized stock option compensation expense |
| $ | 5,839 |
| $ | 3,849 |
|
| $ | 2,147 |
| $ | 4,709 |
|
Unrecognized restricted stock unit compensation expense |
| 7,052 |
| 4,899 |
|
| 10,291 |
| 5,891 |
| ||||
Total unrecognized stock-based compensation expense |
| $ | 12,891 |
| $ | 8,748 |
|
| $ | 12,438 |
| $ | 10,600 |
|
As of September 30, 2017,2018, 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 2.11.4 years and 2.02.1 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, 2017 |
| 4,293,081 |
| $ | 14.61 |
|
|
|
|
| ||||||||||||
Outstanding at January 1, 2018 |
| 4,928,581 |
| $ | 16.07 |
|
|
|
|
| ||||||||||||
Granted |
| 972,414 |
| 22.21 |
|
|
|
|
|
| — |
|
|
|
|
|
|
| ||||
Exercised |
| (107,340 | ) | 12.07 |
|
|
|
|
|
| (781,730 | ) | 14.59 |
|
|
|
|
| ||||
Lapsed (forfeited or cancelled) |
| (137,993 | ) | 22.38 |
|
|
|
|
|
| (82,415 | ) | 19.57 |
|
|
|
|
| ||||
Outstanding at September 30, 2017 |
| 5,020,162 |
| $ | 15.94 |
|
|
|
|
| ||||||||||||
Exercisable at September 30, 2017 |
| 2,642,130 |
| $ | 13.40 |
| 4.2 |
| $ | 27,350 |
| |||||||||||
Outstanding at September 30, 2018 |
| 4,064,436 |
| $ | 16.35 |
|
|
|
|
| ||||||||||||
Exercisable at September 30, 2018 |
| 2,677,990 |
| $ | 15.08 |
| 4.5 |
| $ | 50,425 |
|
For the three and nine months ended September 30, 2018, cash proceeds from the exercise of stock options totaled $1.8 million and $8.9 million, respectively. For the three and nine months ended September 30, 2017, cash proceeds from the exercise of stock options totaled $0.1 million and $1.0 million, respectively. For the three and nine months ended September 30, 2016, cash proceeds from the exercise of stock options totaled $0.4 million and $0.8 million, respectively.
Restricted Stock Units
Restricted stock units for executive officers and certain employees are restricted as to transferability until they vest, generally vest three years from the grant date or upon a grantee of such restricted stock units attaining the age 65.65 and retiring from service with the Company. Restricted stock units forgranted to directors are restricted as to transferability until theyduring 2017 and thereafter generally vest one year from the grant date or upon a grantee of such restricted stock units attaining the age of 65.65 and retiring from service with the Company. Restricted stock units granted to directors prior to 2017 generally vest three years from the grant date. 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.
In accordance with the Merger Agreement, employees whose employment is terminated without “cause” or who resign their employment for “good reason” after consummation of the Merger will have their unvested options and RSUs (other than their 2018 annual equity grants) immediately vest in full as of the date of such termination or resignation. With respect to KapStone’s 2018 annual equity grants (which consisted entirely of RSUs), two-thirds of each award would automatically vest upon termination of the award holder’s employment without “cause” or resignation for “good reason” after consummation of the Merger, and the remainder would be forfeited upon any termination of employment prior to the normal vesting date. These automatic vesting provisions will apply indefinitely after consummation of the Merger and are not subject to a limited duration protection period. The 2018 grants also include the retirement-related vesting provisions included in past KapStone grants.
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, 2017 |
| 691,720 |
| $ | 20.93 |
| ||||||
Outstanding at January 1, 2018 |
| 862,926 |
| $ | 20.11 |
| ||||||
Granted |
| 474,299 |
| 22.43 |
|
| 285,036 |
| 34.74 |
| ||
Vested |
| (258,013 | ) | 26.44 |
|
| (204,940 | ) | 28.33 |
| ||
Forfeited |
| (39,715 | ) | 20.50 |
|
| (26,851 | ) | 22.63 |
| ||
Outstanding at September 30, 2017 |
| 868,291 |
| $ | 20.15 |
| ||||||
Outstanding at September 30, 2018 |
| 916,171 |
| $ | 22.80 |
|
13. Commitments and Contingencies
Legal Claims
The 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 we can 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). Any 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 or any of its subsidiaries, particularly those described below that cannot be assessed due to their preliminary nature. It is possible that any of the investigations, claims and proceedings against the Company or its subsidiaries, including those described below, could be decided unfavorably against the Company or any of its 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 and financial condition.
The Company’s Longview subsidiary 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 percent) for the selected remedy are $342 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.claims by parties allegedly affected by the contamination at the Site. The Company has received notice from the Elliot Bay Trustee Council regarding the Company’s potential liability for natural resource damages arising from the Site. Neither the Company nor Longview has received a specific monetary demand regarding its potential liability for the Site. In addition, Longview is a participant with approximately 45 other potentially responsible parties 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 2019.2020. 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,Site, including any liability for the Company received a Notice of Alleged Violation fromcurrent or any future third-party claims associated with 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. To the Company’s knowledge, 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 March 31, 2017; thus the Company currently does not expect that the result of those discussions will be material to the results of operations, cash flows or financial condition.Site.
In January 2017, the Company received a letter from the state of Washington Department of Ecology (“WDOE”) 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.WDOE. Upon expiration of the 1998 agreement, groundwater monitoring continued. In June 2017, the WDOE further notified the Company that WDOE determined Longview is a potentially liable party related to the release or threatened release of petroleum at the site. The Company has responded to the notice.notices and has been engaged in discussions with the WDOE and other potentially liable parties. Based upon the information available to the Company at this time, the Company cannot reasonably estimate its potential liability if any.for this matter.
There have been no material changes in any of our legal proceedings for the nine months ended September 30, 2017.
Contingent Consideration
The Company’s contingent consideration obligation relates to the acquisition of Victory on June 1, 2015 and is considered a Level 3 liability. The fair value of the obligation as of September 30, 2017 and
December 31, 2016 was $14.6 million and $14.9 million, respectively. The fair value of the contingent consideration is estimated based on the probability of reaching the performance measures through 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 with an estimated payout between $14 million and $17 million. The Company expects to settle this obligation in the first quarter of 2018.
14. 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 method investments, foreign exchange (gain)gain / loss,(loss), loss on debt extinguishment, net interest expense and income taxes.
|
| Net Sales |
| Operating |
| Depreciation |
| Capital |
| Total |
| |||||||||||
Three Months Ended September 30, 2017 |
| Trade |
| Intersegment |
| Total |
| (Loss) |
| Amortization |
| Expenditures |
| Assets |
| |||||||
Paper and Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Containerboard / Corrugated products |
| $ | 404,492 |
| $ | 21,234 |
| $ | 425,726 |
|
|
|
|
|
|
|
|
| ||||
Specialty paper |
| 190,207 |
| — |
| 190,207 |
|
|
|
|
|
|
|
|
| |||||||
Other |
| 22,556 |
| — |
| 22,556 |
|
|
|
|
|
|
|
|
| |||||||
Paper and Packaging |
| $ | 617,255 |
| $ | 21,234 |
| $ | 638,489 |
| $ | 63,434 |
| $ | 39,727 |
| $ | 32,154 |
| $ | 2,647,034 |
|
Distribution |
| 251,163 |
| — |
| 251,163 |
| 5,776 |
| 5,864 |
| 118 |
| 684,740 |
| |||||||
Corporate |
| — |
| — |
| — |
| (9,465 | ) | 1,871 |
| 1,962 |
| 35,503 |
| |||||||
Intersegment eliminations |
| — |
| (21,234 | ) | (21,234 | ) | — |
| — |
| — |
| — |
| |||||||
|
| $ | 868,418 |
| $ | — |
| $ | 868,418 |
| $ | 59,745 |
| $ | 47,462 |
| $ | 34,234 |
| $ | 3,367,277 |
|
|
| Net Sales |
| Operating |
| Depreciation |
| Capital |
| Total |
| |||||||||||
Three Months Ended September 30, 2016 |
| Trade |
| Intersegment |
| Total |
| (Loss) |
| Amortization |
| Expenditures |
| Assets |
| |||||||
Paper and Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Containerboard / Corrugated products |
| $ | 342,386 |
| $ | 18,674 |
| $ | 361,060 |
|
|
|
|
|
|
|
|
| ||||
Specialty paper |
| 169,331 |
| — |
| 169,331 |
|
|
|
|
|
|
|
|
| |||||||
Other |
| 21,845 |
| — |
| 21,845 |
|
|
|
|
|
|
|
|
| |||||||
Paper and Packaging |
| $ | 533,562 |
| $ | 18,674 |
| $ | 552,236 |
| $ | 57,731 |
| $ | 37,491 |
| $ | 24,900 |
| $ | 2,526,342 |
|
Distribution |
| 243,074 |
| — |
| 243,074 |
| 8,230 |
| 5,795 |
| 936 |
| 676,350 |
| |||||||
Corporate |
| — |
| — |
| — |
| (10,953 | ) | 1,668 |
| 1,037 |
| 41,376 |
| |||||||
Intersegment eliminations |
| — |
| (18,674 | ) | (18,674 | ) | — |
| — |
| — |
| — |
| |||||||
|
| $ | 776,636 |
| $ | — |
| $ | 776,636 |
| $ | 55,008 |
| $ | 44,954 |
| $ | 26,873 |
| $ | 3,244,068 |
|
|
| Net Sales |
| Operating |
| Depreciation |
| Capital |
| ||||||||||
Nine Months Ended September 30, 2017 |
| Trade |
| Intersegment |
| Total |
| (Loss) |
| Amortization |
| Expenditures |
| ||||||
Paper and Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Containerboard / Corrugated products |
| $ | 1,130,610 |
| $ | 68,112 |
| $ | 1,198,722 |
|
|
|
|
|
|
| |||
Specialty paper |
| 529,426 |
| — |
| 529,426 |
|
|
|
|
|
|
| ||||||
Other |
| 66,780 |
| — |
| 66,780 |
|
|
|
|
|
|
| ||||||
Paper and Packaging |
| $ | 1,726,816 |
| $ | 68,112 |
| $ | 1,794,928 |
| $ | 142,009 |
| $ | 115,325 |
| $ | 101,695 |
|
Distribution |
| 730,162 |
| — |
| 730,162 |
| 19,158 |
| 17,814 |
| 1,861 |
| ||||||
Corporate |
| — |
| — |
| — |
| (40,103 | ) | 5,725 |
| 4,456 |
| ||||||
Intersegment eliminations |
| — |
| (68,112 | ) | (68,112 | ) | — |
| — |
| — |
| ||||||
|
| $ | 2,456,978 |
| $ | — |
| $ | 2,456,978 |
| $ | 121,064 |
| $ | 138,864 |
| $ | 108,012 |
|
|
| Net Sales |
| Operating |
| Depreciation |
| Capital |
|
| Net Sales |
| Operating |
| Depreciation |
| Capital |
|
|
| ||||||||||||||||||||||
Nine Months Ended September 30, 2016 |
| Trade |
| Intersegment |
| Total |
| (Loss) |
| Amortization |
| Expenditures |
| |||||||||||||||||||||||||||||
Three Months Ended September 30, 2018 |
| Trade |
| Intersegment |
| Total |
| (Loss) |
| Amortization |
| Expenditures |
| Total Assets |
| |||||||||||||||||||||||||||
Paper and Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Containerboard / Corrugated products |
| $ | 1,002,995 |
| $ | 55,667 |
| $ | 1,058,662 |
|
|
|
|
|
|
|
| $ | 412,452 |
| $ | 20,201 |
| $ | 432,653 |
|
|
|
|
|
|
|
|
| ||||||||
Specialty paper |
| 517,977 |
| — |
| 517,977 |
|
|
|
|
|
|
|
| 198,658 |
| — |
| 198,658 |
|
|
|
|
|
|
|
|
| ||||||||||||||
Other |
| 65,201 |
| — |
| 65,201 |
|
|
|
|
|
|
|
| 21,296 |
| — |
| 21,296 |
|
|
|
|
|
|
|
|
| ||||||||||||||
Paper and Packaging |
| $ | 1,586,173 |
| $ | 55,667 |
| $ | 1,641,840 |
| $ | 145,054 |
| $ | 112,790 |
| $ | 91,520 |
|
| $ | 632,406 |
| $ | 20,201 |
| $ | 652,607 |
| $ | 109,695 |
| $ | 37,880 |
| $ | 32,586 |
| $ | 2,657,300 |
| |
Distribution |
| 713,589 |
| — |
| 713,589 |
| 21,947 |
| 17,158 |
| 3,934 |
|
| 261,189 |
| — |
| 261,189 |
| 11,793 |
| 5,757 |
| 67 |
| 672,321 |
| ||||||||||||||
Corporate |
| — |
| — |
| — |
| (33,880 | ) | 5,580 |
| 3,792 |
|
| — |
| — |
| — |
| (14,042 | ) | 1,492 |
| 681 |
| 43,906 |
| ||||||||||||||
Intersegment eliminations |
| — |
| (55,667 | ) | (55,667 | ) | — |
| — |
| — |
|
| — |
| (20,201 | ) | (20,201 | ) | — |
| — |
| — |
| — |
| ||||||||||||||
|
| $ | 2,299,762 |
| $ | — |
| $ | 2,299,762 |
| $ | 133,121 |
| $ | 135,528 |
| $ | 99,246 |
|
| $ | 893,595 |
| $ | — |
| $ | 893,595 |
| $ | 107,446 |
| $ | 45,129 |
| $ | 33,334 |
| $ | 3,373,527 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
|
| Net Sales |
| Operating |
| Depreciation |
| Capital |
|
|
| |||||||||||||||||||||||||||||||
Three Months Ended September 30, 2017 |
| Trade |
| Intersegment |
| Total |
| (Loss) |
| Amortization |
| Expenditures |
| Total Assets |
| |||||||||||||||||||||||||||
Paper and Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Containerboard / Corrugated products |
| $ | 404,492 |
| $ | 21,234 |
| $ | 425,726 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Specialty paper |
| 190,207 |
| — |
| 190,207 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Other |
| 22,556 |
| — |
| 22,556 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Paper and Packaging |
| $ | 617,255 |
| $ | 21,234 |
| $ | 638,489 |
| $ | 61,871 |
| $ | 39,727 |
| $ | 32,154 |
| $ | 2,647,034 |
| ||||||||||||||||||||
Distribution |
| 251,163 |
| — |
| 251,163 |
| 5,776 |
| 5,864 |
| 118 |
| 684,740 |
| |||||||||||||||||||||||||||
Corporate |
| — |
| — |
| — |
| (9,465 | ) | 1,871 |
| 1,962 |
| 35,503 |
| |||||||||||||||||||||||||||
Intersegment eliminations |
| — |
| (21,234 | ) | (21,234 | ) | — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||
|
| $ | 868,418 |
| $ | — |
| $ | 868,418 |
| $ | 58,182 |
| $ | 47,462 |
| $ | 34,234 |
| $ | 3,367,277 |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
|
| Net Sales |
| Operating |
| Depreciation |
| Capital |
|
|
| |||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2018 |
| Trade |
| Intersegment |
| Total |
| (Loss) |
| Amortization |
| Expenditures |
|
|
| |||||||||||||||||||||||||||
Paper and Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Containerboard / Corrugated products |
| $ | 1,218,022 |
| $ | 59,819 |
| $ | 1,277,841 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Specialty paper |
| 563,247 |
|
|
| 563,247 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Other |
| 66,757 |
| — |
| 66,757 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Paper and Packaging |
| $ | 1,848,026 |
| $ | 59,819 |
| $ | 1,907,845 |
| $ | 268,545 |
| $ | 116,356 |
| $ | 107,376 |
|
|
|
| ||||||||||||||||||||
Distribution |
| 757,500 |
| — |
| 757,500 |
| 27,082 |
| 17,575 |
| 973 |
|
|
| |||||||||||||||||||||||||||
Corporate |
| — |
| — |
| — |
| (54,597 | ) | 4,892 |
| 3,390 |
|
|
|
| ||||||||||||||||||||||||||
Intersegment eliminations |
| — |
| (59,819 | ) | (59,819 | ) |
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
|
| $ | 2,605,526 |
| $ | — |
| $ | 2,605,526 |
| $ | 241,030 |
| $ | 138,823 |
| $ | 111,739 |
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
|
| Net Sales |
| Operating |
| Depreciation |
| Capital |
|
|
| |||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2017 |
| Trade |
| Intersegment |
| Total |
| (Loss) |
| Amortization |
| Expenditures |
|
|
| |||||||||||||||||||||||||||
Paper and Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Containerboard / Corrugated products |
| $ | 1,130,610 |
| $ | 68,112 |
| $ | 1,198,722 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Specialty paper |
| 529,426 |
| — |
| 529,426 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Other |
| 66,780 |
| — |
| 66,780 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Paper and Packaging |
| $ | 1,726,816 |
| $ | 68,112 |
| $ | 1,794,928 |
| $ | 137,320 |
| $ | 115,325 |
| $ | 101,695 |
|
|
|
| ||||||||||||||||||||
Distribution |
| 730,162 |
| — |
| 730,162 |
| 19,158 |
| 17,814 |
| 1,861 |
|
|
| |||||||||||||||||||||||||||
Corporate |
| — |
| — |
| — |
| (40,103 | ) | 5,725 |
| 4,456 |
|
|
|
| ||||||||||||||||||||||||||
Intersegment eliminations |
| — |
| (68,112 | ) | (68,112 | ) | — |
| — |
| — |
|
|
| |||||||||||||||||||||||||||
|
| $ | 2,456,978 |
| $ | — |
| $ | 2,456,978 |
| $ | 116,375 |
| $ | 138,864 |
| $ | 108,012 |
|
|
|
|
15.Other Expenses
The following occurred during the quarter ended September 30, 2017, and are included in the Company’s Statement of Comprehensive Income:
· In July 2017, the union employees at the Roanoke Rapids 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 a defined contribution plan for certain employees. The costs incurred to ratify this agreement were $0.9 million and is recorded in cost of sales for the quarter ended September 30, 2017.
· In August 2017, the Company recorded a $1.6 million bad debt charge as a result of a customer filing for bankruptcy in the Distribution segment.
· In August 2017, the Charleston and Longview paper mills had unplanned boiler downtime resulting in $4.1 million of total expenses and lost paper production of 9,065 tons.
· In September 2017, the Company ceased operations at the Clatskanie, Washington chipping facility. Company owned equipment at the site was disposed of, resulting in a loss on disposal of $0.6 million.
· In September 2017, the Company recorded a $1.3 million loss on asset disposal in the Distribution segment.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 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-lookingForward-looking statements oninclude statements about our current expectations regarding our future operating and projections about future events.performance results, earnings, expenditures and financial condition and liquidity. 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 impliedoften identified by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,the words “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “expect,” “intend,” “estimate,” “continue,“hope,” or the negative of such terms or other similar expressions. FactorsThese statements reflect management’s current views with respect to future events and are subject to risks and uncertainties. There are important factors that mightcould cause or contributeactual results to such a discrepancydiffer materially from those in forward-looking statements, many of which are beyond our control. These factors, risks and uncertainties 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, 20162017 and in our other Securities and Exchange Commission filings. The information containedfilings, as well as various factors related to the Merger, including but not limited to: the ability of KapStone and WestRock to receive the required regulatory approvals for the Merger (and the risk that such approvals may result in this Form 10-Q representsthe imposition of conditions that could adversely affect the combined company or the expected benefits of the Merger) and to satisfy the other conditions to the closing of the Merger on a timely basis or at all; the occurrence of events that may give rise to a right of one or both of the parties to terminate the Merger Agreement; negative effects of the announcement or the consummation of the Merger on the market price of WestRock’s or KapStone’s common stock and/or on their respective businesses, financial conditions, results of operations and financial performance; risks relating to the value of the Holdco Common Stock that may be issued in the Merger, significant transaction costs and/or unknown liabilities; the possibility that the anticipated benefits from the Merger cannot be realized in full or at all or may take longer to realize than expected; risks associated with third party contracts containing consent and/or other provisions that may be triggered by the Merger; risks associated with transaction-related litigation; the possibility that costs or difficulties related to the integration of KapStone’s operations with those of WestRock will be greater than expected; the outcome of legally required consultation with employees or other employee representatives; and the ability of KapStone and the combined company to retain and hire key personnel. There can be no assurance that the Merger or any other transaction described above will in fact be consummated in the manner described or at all.
We face additional risks and uncertainties not presently known to us or that we currently believe to be immaterial. Should any known or unknown risks and uncertainties develop into actual events, these developments could have a material adverse effect on our best judgment atbusiness, results of operations, financial condition or liquidity.
Our actual results, performance, financial condition, liquidity, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what impact they will have on our business, results of operations, financial condition or liquidity. In view of these uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We expressly disclaim any obligation to publicly revise any forward looking statements that have been made to reflect the occurrence of events after the date of this report based on information currently available. In providing forward-looking statements, KapStone does not intend, and does not undertake any dutyhereof, except as required by law or obligation, to update its statements as a result of new information, future events or otherwise.regulation.
The following discussion should be read in conjunction with our Consolidated Financial Statements and related Notes thereto included elsewhere in this report.
Executive Summary
Industry and Business Conditions
Trade publications reported that industry-wide corrugated products total box shipments increased 0.91.7 percent during the third quarter of 2017, compared to the same quarter in 2016. Reportedwhile industry mill containerboard production increased 2.52.0 percent for the nine months of 2018 compared to the third quarter of 2016, and reportedsame period in 2017. Reported industry containerboard inventories as of September 30, 20172018 were approximately 2,378.9 million2,588 thousand tons, down 0.6up 0.9% percent compared to the same time period in 2016.2017. Reported containerboard export shipments decreased 5.9increased 1.3 percent compared to the third quarter of 2016. Published containerboard prices increased in April 2017 by $50 per ton for linerboard andsame time period ended September 30, 2017.
corrugating medium. In July and August 2017, trade publications reported a further increase of $10 per ton for each month for corrugating medium.
Results of Operations for the Quarter Ended September 30, 20172018
Consolidated net sales for the quarter ended September 30, 20172018 were $868.4$893.6 million compared to $776.6$868.4 million for the third quarter of 2016,2017, an increase of $91.8$25.2 million, or 11.82.9 percent, primarily due to $70.3$40.8 million of higher prices and a more favorable product mix and $21.0higher Distribution segment sales of $10.0 million, partially offset by lower sales volume of higher sales volumes.$25.6 million.
Consolidated net income for the quarter ended September 30, 20172018 was $30.0$72.5 million, or $0.30$0.72 per diluted share, compared with $31.0$30.0 million, or $0.32$0.30 per diluted share, for the same period in 2016.2017.
Paper and Packaging segment operating income for the current quarter increased $5.7$47.8 million to $63.4$109.7 million, primarily due to $40.8 million of higher prices and a more favorable price mix, $14.2 million of lower recycled fiber costs, $9.0 million of 2017 costs related to the closure of the Oakland, California box plant and $3.8 million of lower planned maintenance outage costs. These costs were partially offset by higher production$7.1 million of inflation on virgin fiber, labor and other materials, $6.3 million of costs due to inflation, maintenanceHurricane Florence and downtime.$6.0 million of higher management incentives.
Distribution Segmentsegment operating income for the current quarter decreased $2.5increased $6.0 million to $11.8 million, primarily due to a $1.6 million bad debt charge due to a customer bankruptcymargin improvement from higher prices and a $1.3 million loss on asset disposal,lower management incentives, partially offset by lower incentive compensationnon-corrugated sales and 401k match expense.higher distribution costs.
Corporate operating expenses decreasedincreased by $1.5$4.6 million to $9.5$14.0 million for the quarter ended September 30, 20172018 compared to 2016,2017, primarily due to a $5.4merger expenses of $4.6 million and 2017’s $3.9 million decrease in expense related to the fair value of the Victory Packaging contingent consideration liability as a result ofdue to lower earnings, partially offset by $2.6lower other costs of $2.9 million, of higher management incentives and benefits, $0.8 million of professional fees and an $0.8 million increase inlower stock compensation expense.expense of $0.6 million and lower depreciation expense of $0.4 million.
Results of Operations for the Nine Months Endedended September 30, 20172018
Consolidated net sales for the nine months ended September 30, 20172018 were $2,457.0$2,605.5 million compared to $2,299.8$2,457.0 million for the first nine months of 2016,2017, an increase of $157.2$148.5 million, or 6.86.0 percent, primarily due to $120.1$147.6 million of higher prices and a more favorable product mix and $36.1 millionhigher Distribution segment sales of higher sales volumes.$27.3 million.
Consolidated net income for the nine months ended September 30, 20172018 was $55.8$158.4 million, or $0.57$1.59 per diluted share, compared with $67.9$55.8 million, or $0.70$0.57 per diluted share, for the same period in 2016.2017.
Paper and Packaging segment operating income for the nine months ended September 30, 2017 decreased $3.02018 increased $131.2 million to $142.0$268.5 million, primarily due higher production costs due to inflation, maintenance and downtime, partially offset by$147.6 million of higher prices and a more favorable product mix.price mix, $31.4 million of lower recycled fiber costs, $9.0 million of 2017 costs related to the closure of the Oakland, California box plant, $8.1 million on the gain on sale of property and $5.0 million due to the absence of the Charleston mill’s 2017 union ratification costs. These increases were partially offset by $36.8 million of inflation for virgin fiber, labor and other materials, $18.1 million of higher management incentives, $8.2 million of higher planned maintenance outage costs and $6.3 million of costs due to Hurricane Florence.
Distribution Segmentsegment operating income for the nine months ended September 30, 2017 decreased $2.82018 increased $7.9 million to $19.2$27.1 million, primarily due to higher bad debt charges due a customer bankruptcy, loss on asset disposal and inflation on rent, fuel and labor costs, partially offset by margin improvement from higher prices, lower incentive compensationpartially offset by higher freight and 401k match expense.distribution costs.
Corporate operating expenses increased by $6.2$14.5 million to $40.1$54.6 million for the nine months ended September 30, 20172018 compared to 2016,2017, primarily due a $5.5to merger expenses of $20.5 million increase in stock compensation expense, $4.4and $3.7 million of higher management incentives, and benefits, $0.8 million professional fees and $0.4 million for
API acquisition expenses. These increases in expense were partially offset by a $4.9lower stock compensation expense of $5.5 million decrease in expense related to the fair valueand lower other costs of the Victory contingent consideration liability due to lower earnings.$2.9 million.
Results of Operations
Comparison of Results of Operations for the Three Months Ended September 30, 20172018 and 20162017
(In thousands)
|
| Three Months Ended September 30, |
| Increase/ |
| % of Net Sales |
| |||||||||||||||||||||
|
| Three Months Ended September 30, |
| Increase/ |
| % of Net Sales |
|
| 2018 |
| 2017 |
| (Decrease) |
| 2018 |
| 2017 |
| ||||||||||
|
| 2017 |
| 2016 |
| (Decrease) |
| 2017 |
| 2016 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Paper and packaging |
| $ | 638,489 |
| $ | 552,236 |
| $ | 86,253 |
| 73.5 | % | 71.1 | % |
| $ | 652,607 |
| $ | 638,489 |
| $ | 14,118 |
| 73.0 | % | 73.5 | % |
Distribution |
| 251,163 |
| 243,074 |
| 8,089 |
| 28.9 | % | 31.3 | % |
| 261,189 |
| 251,163 |
| 10,026 |
| 29.3 | % | 28.9 | % | ||||||
Intersegment Eliminations |
| (21,234 | ) | (18,674 | ) | (2,560 | ) | (2.4 | )% | (2.4 | )% | |||||||||||||||||
Intersegment eliminations |
| (20,201 | ) | (21,234 | ) | 1,033 |
| (2.3 | )% | (2.4 | )% | |||||||||||||||||
Net sales |
| $ | 868,418 |
| $ | 776,636 |
| $ | 91,782 |
| 100.0 | % | 100.0 | % |
| $ | 893,595 |
| $ | 868,418 |
| $ | 25,177 |
| 100.0 | % | 100.0 | % |
Cost of sales, excluding depreciation and amortization |
| 621,401 |
| 548,811 |
| 72,590 |
| 71.6 | % | 70.7 | % |
| 593,231 |
| 622,964 |
| (29,733 | ) | 66.4 | % | 71.7 | % | ||||||
Depreciation and amortization |
| 47,462 |
| 44,954 |
| 2,508 |
| 5.5 | % | 5.8 | % |
| 45,129 |
| 47,462 |
| (2,333 | ) | 5.1 | % | 5.5 | % | ||||||
Freight and distribution expenses |
| 77,043 |
| 71,750 |
| 5,293 |
| 8.9 | % | 9.2 | % |
| 82,158 |
| 77,043 |
| 5,115 |
| 9.2 | % | 8.9 | % | ||||||
Selling, general, and administrative expenses |
| 62,767 |
| 56,113 |
| 6,654 |
| 7.2 | % | 7.2 | % |
| 61,721 |
| 62,767 |
| (1,046 | ) | 6.9 | % | 7.2 | % | ||||||
Merger expenses |
| 4,590 |
| — |
| 4,590 |
| 0.5 | % | 0.0 | % | |||||||||||||||||
Gain on sale of property |
| (680 | ) | — |
| (680 | ) | (0.1 | )% | 0.0 | % | |||||||||||||||||
Operating income |
| $ | 59,745 |
| $ | 55,008 |
| $ | 4,737 |
| 6.9 | % | 7.1 | % |
| $ | 107,446 |
| $ | 58,182 |
| $ | 49,264 |
| 12.0 | % | 6.7 | % |
Foreign exchange (gain) / loss |
| (415 | ) | 543 |
| (958 | ) | 0.0 | % | 0.1 | % |
| (187 | ) | (415 | ) | 228 |
| 0.0 | % | 0.0 | % | ||||||
Pension and postretirement income |
| (3,092 | ) | (1,563 | ) | (1,529 | ) | (0.3 | )% | (0.2 | )% | |||||||||||||||||
Loss on debt extinguishment |
| 631 |
| 679 |
| (48 | ) | 0.1 | % | 0.1 | % |
| 456 |
| 631 |
| (175 | ) | 0.1 | % | 0.1 | % | ||||||
Equity method investments income |
| (671 | ) | — |
| (671 | ) | (0.1 | )% | — | % |
| (311 | ) | (671 | ) | 360 |
| 0.0 | % | (0.1 | )% | ||||||
Interest expense, net |
| 15,164 |
| 10,148 |
| 5,016 |
| 1.7 | % | 1.3 | % |
| 15,865 |
| 15,164 |
| 701 |
| 1.8 | % | 1.7 | % | ||||||
Income before provision for income taxes |
| 45,036 |
| 43,638 |
| 1,398 |
| 5.2 | % | 5.6 | % |
| 94,715 |
| 45,036 |
| 49,679 |
| 10.6 | % | 5.2 | % | ||||||
Provision for income taxes |
| 15,010 |
| 12,620 |
| 2,390 |
| 1.7 | % | 1.6 | % |
| 22,204 |
| 15,010 |
| 7,194 |
| 2.5 | % | 1.7 | % | ||||||
Net income |
| $ | 30,026 |
| $ | 31,018 |
| $ | (992 | ) | 3.5 | % | 4.0 | % |
| $ | 72,511 |
| $ | 30,026 |
| $ | 42,485 |
| 8.1 | % | 3.5 | % |
Paper and Packaging segment net sales increased by $86.3$14.1 million to $638.5$652.6 million for the quarter ended September 30, 20172018 due to $57.2$40.8 million of higher prices and a more favorable product mix, $25.8partially offset by $25.6 million of higherlower sales volume and $2.6$1.0 million of increaseddecreased intersegment sales to the Distribution segment. Average mill selling price per ton for the quarter ended September 30, 20172018 was $698$756 compared to $626$698 for the prior year’s quarter, reflecting higher containerboard and specialty paper prices and a more favorable product mix.
In September 2017,July 2018, the Company announced a $40 per ton price increase on Kraftpak®, effective August 6, 2018.
In August 2018, the Company announced a $50 per ton price increase for all North American extensible, multiwall, converting and specialty paper grades.on its DuraSorb® grades effective September 10, 2018.
Distribution segment net sales increased by $8.1$10.0 million to $251.2$261.2 million for the quarter ended September 30, 20172018 compared to 2016,2017 due to higher prices related to the pass thru of higher containerboard costs, partially offset by lower sales volume.
Paper and Packaging segment sales by product line for the quarterquarters ended September 30, 20172018 and 20162017 were as follows:
|
| Three Months Ended September 30, |
| |||||||||||||||||
|
| Net Sales (in thousands) |
| Increase/ |
|
|
| Tons Sold |
| Increase/ |
|
|
| |||||||
Product Line Tons: |
| 2017 |
| 2016 |
| (Decrease) |
| % |
| 2017 |
| 2016 |
| (Decrease) |
| % |
| |||
Containerboard / Corrugated products |
| $ | 425,726 |
| $ | 361,060 |
| $ | 64,666 |
| 17.9 | % | 475,121 |
| 450,924 |
| 24,197 |
| 5.4 | % |
Specialty paper |
| 190,207 |
| 169,331 |
| 20,876 |
| 12.3 | % | 259,938 |
| 248,862 |
| 11,076 |
| 4.5 | % | |||
Other |
| 22,556 |
| 21,845 |
| 711 |
| 3.3 | % | — |
| — |
| — |
| — | % | |||
Product sold |
| $ | 638,489 |
| $ | 552,236 |
| $ | 86,253 |
| 15.6 | % | 735,059 |
| 699,786 |
| 35,273 |
| 5.0 | % |
|
| Three Months Ended September 30, |
| |||||||||||||||||
|
| Net Sales (in thousands) |
| Increase/ |
|
|
| Tons Sold |
| Increase/ |
|
|
| |||||||
Product Line Tons: |
| 2018 |
| 2017 |
| (Decrease) |
| % |
| 2018 |
| 2017 |
| (Decrease) |
| % |
| |||
Containerboard / Corrugated products |
| $ | 432,653 |
| $ | 425,726 |
| $ | 6,927 |
| 1.6 | % | 450,285 |
| 475,121 |
| (24,836 | ) | (5.2 | )% |
Specialty paper |
| 198,658 |
| 190,207 |
| 8,451 |
| 4.4 | % | 252,293 |
| 259,938 |
| (7,645 | ) | (2.9 | )% | |||
Other |
| 21,296 |
| 22,556 |
| (1,260 | ) | (5.6 | )% | — |
| — |
| — |
| — | % | |||
Product sold |
| $ | 652,607 |
| $ | 638,489 |
| $ | 14,118 |
| 2.2 | % | 702,578 |
| 735,059 |
| (32,481 | ) | (4.4 | )% |
Tons of product sold for the Paper and Packaging segment for the quarter ended September 30, 20172018 were 735,059702,578 tons compared to 699,786735,059 tons for the quarter ended September 30, 2016, an increase2017, a decrease of 35,27332,481 tons, or 5.04.4 percent, as follows:
· Shipments of Containerboard / Corrugated products increaseddecreased by 24,19724,836 tons, primarily due to higherlower domestic and export containerboard shipments of 26,362 tons. These increases were partially offset by a decrease in corrugated product shipments of 1,724 tons. Shipments to Victory in the quarter were 22,15911,690 tons and were flat compared to the same period in 2016.13,796 tons, respectively.
· Specialty paper increase inshipped decreased by 7,645 tons, sold was primarily due to higher DuraSorb®lower DuraSorb® shipments of 28,60319,687 tons, partially offset by lowerhigher pulp shipments of 12,2989,796 tons.
Cost of sales, excluding depreciation and amortization expense, for the quarter ended September 30, 20172018 was $621.4$593.2 million compared to $548.8$623.0 million for the third quarter of 2016, an increase2017, a decrease of $72.6$29.8 million, or 13.24.8 percent. The increasedecrease in cost of sales was mainly due to $18.3$18.1 million due to higherof lower sales volume, $14.2 million of other inflationary costs, $9.9 million of higher OCC costs, $9.2 million of higher planned maintenance outagelower recycled fiber costs, $9.0 million forof 2017 costs related to the closure of the Oakland, California box plant, $7.5 million of favorable productivity due to higher mill production, $4.1 million for the Company’s Charleston and Longview paper mills unplanned boiler downtime and $3.7$3.8 million of lower planned maintenance outage costs. These cost decreases were partially offset by $9.6 million of inflation on virgin fiber, labor and other materials, $6.3 million of costs due to Hurricane Florence and $3.9 million of higher management incentivesincentives. Cost of sales, excluding depreciation and employee benefits.amortization expense, for the Distribution segment increased by $7.1 million, primarily due to an increase in containerboard costs. Planned maintenance outage costs of approximately $13.0$9.2 million and $3.8$13.0 million are included in cost of sales for the quarters ended September 30, 20172018 and 2016,2017, respectively.
Depreciation and amortization expense for the quarter ended September 30, 20172018 totaled $47.5$45.1 million compared to $45.0$47.5 million for the quarter ended September 30, 2016. The increase of $2.5 million includes $1.5 million of accelerated depreciation expense.2017.
Freight and distribution expenses for the quarter ended September 30, 20172018 totaled $77.0$82.2 million compared to $71.8$77.0 million for the quarter ended September 30, 2016.2017. The increase of $5.2 million was primarily due to inflation on operating costs.
Selling, general and administrative expenses for the quarter ended September 30, 2018 totaled $61.7 million compared to $62.8 million for the quarter ended September 30, 2017. The decrease of $1.1 million, or 1.8 percent, was primarily due to $3.0 million of lower Distribution segment operating costs and $0.6 million of lower stock compensation expense, partially offset by $2.2 million of higher management incentives. For the quarter ended September 30, 2018, selling, general and administrative expenses as a percentage of net sales was 6.9 percent compared to 7.2 percent in the quarter ended September 30, 2017.
Merger expenses for the quarter ended September 30, 2018 totaled $4.6 million mainly for legal fees.
Loss on debt extinguishment for the quarters ended September 30, 2018 and 2017 totaled $0.5 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, 2018 and 2017 was $15.9 million and $15.2 million, respectively. Interest expense was $0.7 million higher for the quarter ended September 30, 2018 due to $0.4 million of implicit interest on long-term financing obligations and $0.3 million related to higher interest rates, partially offset by lower term loan outstanding balances.
Provision for income taxes for the quarters ended September 30, 2018 and 2017 was $22.2 million and $15.0 million, respectively, reflecting an effective income tax rate of 23.4 percent for the quarter ended September 30, 2018, compared to 33.3 percent for the similar period in 2017. The lower effective income tax rate in the three months ended September 30, 2018 reflects the 21 percent federal statutory tax rate beginning in 2018 instituted by the Tax Cuts and Jobs. The higher provision for income taxes in 2018 reflects higher pre-tax income of $49.7 million partially offset by the lower effective income tax rate.
Comparison of Results of Operations for the Nine Months Ended September 30, 2018 and 2017
(In thousands)
|
| Nine Months Ended September 30, |
| Increase/ |
| % of Net Sales |
| |||||||
|
| 2018 |
| 2017 |
| (Decrease) |
| 2018 |
| 2017 |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Paper and packaging |
| $ | 1,907,845 |
| $ | 1,794,928 |
| $ | 112,917 |
| 73.2 | % | 73.1 | % |
Distribution |
| 757,500 |
| 730,162 |
| 27,338 |
| 29.1 | % | 29.7 | % | |||
Intersegment eliminations |
| (59,819 | ) | (68,112 | ) | 8,293 |
| (2.3 | )% | (2.8 | )% | |||
Net sales |
| $ | 2,605,526 |
| $ | 2,456,978 |
| $ | 148,548 |
| 100.0 | % | 100.0 | % |
Cost of sales, excluding depreciation and amortization |
| 1,783,493 |
| 1,779,503 |
| 3,990 |
| 68.5 | % | 72.4 | % | |||
Depreciation and amortization |
| 138,823 |
| 138,864 |
| (41 | ) | 5.3 | % | 5.7 | % | |||
Freight and distribution expenses |
| 236,997 |
| 225,671 |
| 11,326 |
| 9.1 | % | 9.2 | % | |||
Selling, general, and administrative expenses |
| 192,826 |
| 196,565 |
| (3,739 | ) | 7.4 | % | 8.0 | % | |||
Merger expenses |
| 20,490 |
| — |
| 20,490 |
| 0.8 | % | 0.0 | % | |||
Gain on sale of property |
| (8,133 | ) | — |
| (8,133 | ) | (0.3 | )% | 0.0 | % | |||
Operating income |
| $ | 241,030 |
| $ | 116,375 |
| $ | 124,655 |
| 9.2 | % | 4.7 | % |
Foreign exchange (gain) / loss |
| 760 |
| (1,501 | ) | 2,261 |
| 0.0 | % | (0.1 | )% | |||
Pension and postretirement income |
| (9,275 | ) | (4,689 | ) | (4,586 | ) | (0.4 | )% | (0.2 | )% | |||
Loss on debt extinguishemnt |
| 456 |
| 631 |
| (175 | ) | 0.0 | % | 0.0 | % | |||
Equity method investments income |
| (1,551 | ) | (1,377 | ) | (174 | ) | (0.1 | )% | (0.1 | )% | |||
Interest expense, net |
| 45,921 |
| 38,205 |
| 7,716 |
| 1.8 | % | 1.6 | % | |||
Income before provision for income taxes |
| 204,719 |
| 85,106 |
| 119,613 |
| 7.9 | % | 3.5 | % | |||
Provision for income taxes |
| 46,284 |
| 29,312 |
| 16,972 |
| 1.8 | % | 1.2 | % | |||
Net income |
| $ | 158,435 |
| $ | 55,794 |
| $ | 102,641 |
| 6.1 | % | 2.3 | % |
Paper and Packaging segment net sales increased by $112.9 million to $1,907.8 million for the nine months ended September 30, 2018 due to $147.6 million of higher prices and a more favorable product mix, partially offset by $25.6 million of lower sales volume and $8.3 million of decreased intersegment sales to the Distribution segment. Average mill selling price per ton for the nine months ended September 30, 2018 was $737 compared to $670 for the prior year’s period, reflecting higher containerboard and specialty paper prices and a more favorable product mix.
In January 2018, the Company announced a $50 per ton price increase for North American containerboard shipments beginning March 1, 2018.
In May 2018, the Company announced a $50 per ton price increase on kraft paper grades, effective June 4, 2018.
In July 2018, the Company announced a $40 per ton price increase on Kraftpak®, effective August 6, 2018.
In August 2018, the Company announced a $50 per ton price increase on its DuraSorb® grades effective September 10, 2018.
Distribution segment net sales increased by $27.3 million to $757.5 million for the nine months ended September 30, 2018 compared to 2017 due to higher prices related to the pass thru of higher containerboard costs, which were partially offset by lower sales volume.
Paper and Packaging segment sales by product line for the nine months ended September 30, 2018 and 2017 were as follows:
|
| Nine Months Ended September 30, |
| |||||||||||||||||
|
| Net Sales (in thousands) |
| Increase/ |
|
|
| Tons Sold |
| Increase/ |
|
|
| |||||||
Product Line Tons: |
| 2018 | �� | 2017 |
| (Decrease) |
| % |
| 2018 |
| 2017 |
| (Decrease) |
| % |
| |||
Containerboard / Corrugated products |
| $ | 1,277,841 |
| $ | 1,198,722 |
| $ | 79,119 |
| 6.6 | % | 1,383,441 |
| 1,385,240 |
| (1,799 | ) | (0.1 | )% |
Specialty paper |
| 563,247 |
| 529,426 |
| 33,821 |
| 6.4 | % | 724,049 |
| 747,749 |
| (23,700 | ) | (3.2 | )% | |||
Other |
| 66,757 |
| 66,780 |
| (23 | ) | (0.0 | )% | — |
| — |
| — |
| — | % | |||
Product sold |
| $ | 1,907,845 |
| $ | 1,794,928 |
| $ | 112,917 |
| 6.3 | % | 2,107,490 |
| 2,132,989 |
| (25,499 | ) | (1.2 | )% |
Tons of product sold for the Paper and Packaging segment for the nine months ended September 30, 2018 were 2,107,490 tons compared to 2,132,989 tons for the nine months ended September 30, 2017, a decrease of 25,499 tons, or 1.2 percent, as follows:
· Shipments of Containerboard / Corrugated products decreased by 1,799 tons, primarily due to lower export containerboard shipments of 13,234 tons and lower corrugated products shipments of 4,366 tons. This decrease was partially offset by an increase in domestic containerboard shipments of 15,783 tons.
· Specialty paper decrease in tons sold was primarily due to lower kraft paper shipments of 21,853 tons and a decrease in DuraSorb® shipments of 16,970 tons. This decrease was partially offset by an increase in Kraftpak® shipments of 10,039 tons and an increase in pulp shipments of 5,084 tons.
Cost of sales, excluding depreciation and amortization expense, for the nine months ended September 30, 2018 was $1,783.5 million compared to $1,779.5 million for the nine months of 2017, an increase of $4.0 million, or 0.2 percent. The increase in cost of sales was mainly due to $36.8 million of inflation on virgin fiber, labor and other materials, $8.2 million of higher planned maintenance outage costs, $10.0 million of higher management incentives and $6.3 million of costs due to Hurricane Florence. These cost increases were partially offset by $31.4 million of lower recycled fiber costs, $16.0 million of productivity gains, $10.7 million due to lower sales volume, $8.1 million for the Company’s Charleston and Longview paper mill’s 2017 unplanned boiler downtime, $7.5 million for the closure of the Oakland, California box plant, $5.0 million decrease union ratification costs and $2.0 million for the Longview paper mill hazardous piping inspection settlement not incurred in 2018. Cost of sales, excluding depreciation and amortization expense, for the Distribution segment increased by $23.4 million, primarily due to an increase in containerboard costs. Planned maintenance outage costs of approximately $45.0 million and $36.8 million are included in cost of sales for the nine months ended September 30, 2018 and 2017, respectively.
Depreciation and amortization expense for the nine months ended September 30, 2018 totaled $138.8 million compared to $138.9 million for the nine months ended September 30, 2017.
Freight and distribution expenses for the nine months ended September 30, 2018 totaled $237.0 million compared to $225.7 million for the nine months ended September 30, 2017. The increase of $11.3 million was primarily due to a higher percentage of domestic shipments and higher operating costs.
Selling, general and administrative expenses for the quarternine months ended September 30, 20172018 totaled $62.8$192.8 million compared to $56.1$196.6 million for the quarternine months ended September 30, 2016.2017. The increasedecrease of $6.7$3.8 million, or 11.91.9 percent, was primarily due to $7.7$5.5 million of lower stock compensation expense, $5.2 million of lower Distribution segment operating costs and $4.8 million of lower professional fees and other, partially offset by $11.7 million of higher management incentives and employee benefits, $1.9 million of higher Distribution segment operating costs, $1.2 million from strategic investments, $0.8 million increase in stock compensation expense, and $0.8 million of higher professional fees. These increases were partially offset by a $5.4 million decrease in the fair value of the Victory contingent consideration expense due to lower earnings.incentives. For the quarternine months ended September 30, 2017,2018, selling, general and administrative expenses as a percentage of net sales was 7.27.4 percent or flat compared to the quarter ended September 30, 2016.
Foreign exchange (gain) / loss for the quarter ended September 30, 2017 totaled $(0.4) million compared to $0.5 million for the quarter ended September 30, 2016, primarily due to the weakening of the U.S. dollar compared to the euro.
Equity method investments (income) for the quarter ended September 30, 2017 totaled $(0.7) million due to the Company’s 2016 strategic investments.
Loss on debt extinguishment for the quarters ended September 30, 2017 and 2016 totaled $0.6 million and $0.7 million, respectively, due to repayments on the term loans under the Credit Facility.
Net interest expense for the quarters ended September 30, 2017 and 2016 was $15.2 million and $10.1 million, respectively. Interest expense was $5.1 million higher8.0 percent in the quarter ended September 30, 2017 due to $3.6 million related to higher interest rates and $1.5 million due to implicit interest on long-term financing obligations.
Provision for income taxes for the quarters ended September 30, 2017 and 2016 was $15.0 million and $12.6 million, respectively, reflecting an effective income tax rate of 33.3 percent for the quarter ended September 30, 2017, compared to 28.9 percent for the similar period in 2016. The higher effective tax rate in the three months ended September 30, 2017 is due to the state of Illinois enacting legislation increasing the corporate income tax rate as of July 1, 2017. Accordingly the Company re-measured its deferred tax liabilities and recorded a charge of $0.5 million.
Comparison of Results of Operations for the Nine Months Ended September 30, 2017 and 2016
(In thousands)
|
| Nine Months Ended September 30, |
| Increase/ |
| % of Net Sales |
| ||||||||
|
| 2017 |
| 2016 |
| (Decrease) |
| 2017 |
| 2016 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Paper and packaging |
| $ | 1,794,928 |
| $ | 1,641,840 |
| $ | 153,088 |
| 73.1 | % | 71.4 | % | |
Distribution |
| 730,162 |
| 713,589 |
| 16,573 |
| 29.7 | % | 31.0 | % | ||||
Intersegment Eliminations |
| (68,112 | ) | (55,667 | ) | (12,445 | ) | (2.8 | )% | (2.4 | )% | ||||
Net sales |
| $ | 2,456,978 |
| $ | 2,299,762 |
| $ | 157,216 |
| 100.0 | % | 100.0 | % | |
Cost of sales, excluding depreciation and amortization |
| 1,774,814 |
| 1,650,919 |
| 123,895 |
| 72.2 | % | 71.8 | % | ||||
Depreciation and amortization |
| 138,864 |
| 135,528 |
| 3,336 |
| 5.7 | % | 5.9 | % | ||||
Freight and distribution expenses |
| 225,671 |
| 207,787 |
| 17,884 |
| 9.2 | % | 9.0 | % | ||||
Selling, general, and administrative expenses |
| 196,565 |
| 172,407 |
| 24,158 |
| 8.0 | % | 7.5 | % | ||||
Operating income |
| $ | 121,064 |
| $ | 133,121 |
| $ | (12,057 | ) | 4.9 | % | 5.8 | % | |
Foreign exchange (gain) / loss |
| (1,501 | ) | 1,518 |
| (3,019 | ) | (0.1 | )% | 0.1 | % | ||||
Loss on debt extinguishment |
| 631 |
| 679 |
| (48 | ) | 0.0 | % | — | % | ||||
Equity method investments income |
| (1,377 | ) | — |
| (1,377 | ) | (0.1 | )% | — | % | ||||
Interest expense, net |
| 38,205 |
| 29,965 |
| 8,240 |
| 1.6 | % | 1.3 | % | ||||
Income before provision for income taxes |
| 85,106 |
| 100,959 |
| (15,853 | ) | 3.5 | % | 4.4 | % | ||||
Provision for income taxes |
| 29,312 |
| 33,045 |
| (3,733 | ) | 1.2 | % | 1.4 | % | ||||
Net income |
| $ | 55,794 |
| $ | 67,914 |
| $ | (12,120 | ) | 2.3 | % | 3.0 | % | |
Paper and Packaging segment net sales increased by $153.1 million to $1,794.9 million for the nine months ended September 30, 2017 due to $97.5 million of higher prices and a more favorable product mix, $41.8 million of higher sales volume and $12.5 million of increased intersegment sales to the Distribution segment. Average mill selling price per ton for the nine months ended September 30, 2017 was $670 compared to $625 for the prior year’s period, reflecting higher containerboard prices and a more favorable product mix.2017.
In the third quarter of 2016, the Company implemented a $40 per ton price increase for North American containerboard effective for shipments beginning October 1, 2016 and an 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 $16.6 million to $730.2 million for the nine months ended September 30, 2017 compared to 2016, due to higher prices related to the pass thru of higher containerboard costs, partially offset by lower sales volume.
Paper and Packaging segment sales by product line for the nine months ended September 30, 2017 and 2016 were as follows:
|
| Nine Months Ended September 30, |
| |||||||||||||||||
|
| Net Sales (in thousands) |
| Increase/ |
|
|
| Tons Sold |
| Increase/ |
|
|
| |||||||
Product Line Tons: |
| 2017 |
| 2016 |
| (Decrease) |
| % |
| 2017 |
| 2016 |
| (Decrease) |
| % |
| |||
Containerboard / Corrugated products |
| $ | 1,198,722 |
| $ | 1,058,662 |
| $ | 140,060 |
| 13.2 | % | 1,385,240 |
| 1,331,613 |
| 53,627 |
| 4.0 | % |
Specialty paper |
| 529,426 |
| 517,977 |
| 11,449 |
| 2.2 | % | 747,749 |
| 764,099 |
| (16,350 | ) | (2.1 | )% | |||
Other |
| 66,780 |
| 65,201 |
| 1,579 |
| 2.4 | % | — |
| — |
| — |
| — | % | |||
Product sold |
| $ | 1,794,928 |
| $ | 1,641,840 |
| $ | 153,088 |
| 9.3 | % | 2,132,989 |
| 2,095,712 |
| 37,277 |
| 1.8 | % |
Tons of product sold for the Paper and Packaging segment for the nine months ended September 30, 2017 were 2.1 million tons, an increase of 1.8 percent compared to 2016 due to:
· Shipments of Containerboard / Corrugated products increased by 53,627 tons, primarily due to higher domestic containerboard shipments of 80,956 tons and higher corrugated products sales volume of 23,962 tons. These increases were partially offset by the decrease in export shipments of 51,290 tons. Shipments to Victory in the first nine months of 2017 were 74,108 tons compared to 65,996 for the first nine months of 2016.
· Specialty paper decrease in tons sold was primarily due to lower pulp shipments of 25,339 tons and kraft paper shipments of 21,266 tons, partially offset by higher DuraSorb® shipments of 36,621 tons.
Cost of sales, excluding depreciation and amortization expense, for the nine months ended September 30, 2017 was $1,774.8 million compared to $1,650.9 million for the nine months of 2016, an increase of $123.9 million, or 7.5 percent. The increase in cost of sales was mainly due to $32.3 million of higher OCC costs, $29.4 million of higher manufacturing costs, $18.3 million due to higher sales volume, $9.0 million for the closure of the Oakland, California box plant, $8.1 million for the Company’s Charleston and Longview paper mills unplanned boiler downtime, $7.4 million of higher planned maintenance outage costs, $6.5 million of higher management incentives and benefits, $5.9 million for union contract ratification costs, $4.2 million unfavorable productivity, and $2.0 million for a Longview paper mill hazardous piping inspection settlement. Planned maintenance outage costs of approximately $36.8 million and $29.4 million are included in cost of sales for the nine months ended September 30, 2017 and 2016, respectively.
Depreciation and amortization expense for the nine months ended September 30, 2017 totaled $138.9 million compared to $135.5 million for the nine months ended September 30, 2016. The increase of $3.4 million was primarily due to $5.6 million of higher depreciation expense including $3.0 million of accelerated depreciation, partially offset by $2.2 million of lower amortization expense.
Freight and distributionMerger expenses for the nine months ended September 30, 20172018 totaled $225.7$20.5 million, compared to $207.8including $10.2 million for the nine months ended September 30, 2016. The increase of $17.9 million was primarily due to a higher percentage of domestic container board shipments and higher operating costs.
Selling, general and administrative expenses for the nine months ended September 30, 2017 totaled $196.6 million compared to $172.4 million for the nine months ended September 30, 2016. The increase of $24.2 million, or 14.0 percent, was primarily due to $14.0 million of higher management incentives and benefits, a $5.5 million increase in stock compensation expense, $3.1 million related to strategic investments, $2.6 million of higher Distribution segment operating costs, $2.1 million increase in compensation and benefit expenses, $0.8 million of higher professional fees and $0.4 million of API acquisition related expenses. These expenses were offset by a $4.9 million decrease in expense related to the decrease in fair value of the Victory contingent consideration liability. For the nine months ended September 30, 2017, selling, general and administrative expenses as a percentage of net sales increased to 8.0 percent from 7.5 percent in the nine months ended September 30, 2016.
Foreign exchange (gain) / loss for the nine months ended September 30, 2017 totaled $(1.5) million compared to $1.5$10.3 million for the nine months ended September 30, 2016, primarily due to the weakening of the U.S. dollar compared to the euro.legal fees and other costs.
Equity method investments (income) for the nine months ended September 30, 2017 totaled $(1.4) million due to the Company’s 2016 strategic investments.
Loss on debt extinguishment for the nine months ended September 30, 2018 and 2017 and 2016 totaled $0.6$0.5 million and $0.7$0.6 million, respectively, due to repayments on the term loans under the Credit Facility.
Net interest expense for the nine months ended September 30, 2018 and 2017 and 2016 was $38.2$45.9 million and $30.0$38.2 million, respectively. Interest expense was $8.2$7.7 million higher for the nine months ended September 30, 2017,2018 due to $6.4$4.1 million of implicit interest on long-term financing obligations and $3.6 million related to higher interest rates, and $1.8 million due to implicit interest on long-term financing obligations.partially offset by lower term loan outstanding balances.
Provision for income taxes for the nine months ended September 30, 2018 and 2017 and 2016 was $29.3$46.3 million and $33.0$29.3 million, respectively, reflecting an effective income tax rate of 34.422.6 percent for the nine months ended September 30, 2017,2018, compared to 32.734.4 percent for the similar period in 2016.2017. The lower effective income tax rate in the nine months ended September 30, 2018 reflects the 21 percent federal statutory tax rate beginning in 2018 instituted by the Tax Cuts and Jobs Act. The higher provision for income taxes in 2017 primarily2018 reflects lowerhigher pre-tax income of $15.9 million. The nine months’ tax rate in 2017 reflects $0.4$119.6 million, in tax expense frompartially offset by 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 and the state of Illinois enacting legislation increasing the corporatelower effective income tax rate as of July 1, 2017. Accordingly the Company re-measured its deferred tax liabilities and recorded a charge of $0.5 million.rate.
Liquidity and Capital Resources
Credit Facility
The Company had $483.4$484.4 million available to borrow under the Revolver at September 30, 2017.2018. 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, 2017 to 4.50 to 1.00, 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
Effective as of June 1, 2017,2018, the Company entered into Amendment No. 3 to the Receivables Purchase Agreement amendingamended its Receivables Purchase Agreement, which is part of the Company’sits Securitization Program, of the Company and certain of its subsidiaries. The Amendment included the following changes to the Receivables Purchase Agreement:
· the aggregate commitment of the Purchasers (as defined in the Receivables Purchase Agreement) under the Receivables Purchase Agreement was increased from $275.0 million to $325.0 million;
·extend the “Facility Termination Date” (as defined in the Receivables Purchase Agreement) was extended from June 6, 20171, 2018 to June 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.”May 31, 2019.
As of September 30, 2017,2018, the Company had $317.8$315.0 million of outstanding borrowings under its $325.0 million Receivables Credit Facility with an interest rate of 1.983.0 percent.
Debt Covenants
As of September 30, 2017, underUnder 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 $150 million by its rolling twelve month total earnings before interest expense, taxes, depreciation and amortization after accounting for allowable adjustments. The maximum permitted leverage ratio declines over the life of the Credit Agreement. As of September 30, 2017,2018, the Company was in compliance with a leverage ratio of 3.872.33 to 1.00 compared to a maximum permitted leverage ratio of 4.503.75 to 1.00.
The Credit Agreement also includes a financial covenant requiring a minimum interest coverage ratio. This ratio is calculated by dividing the Company’s trailing twelve month total earnings before interest expense, taxes, depreciation and amortization after accounting for allowable adjustments by the sum of our net cash interest payments during the twelve month period. For the quarter ended September 30, 2017, the interest coverage ratio was required to be at least 3.00 to 1.00. On September 30, 2017,2018, the Company was in compliance with the Credit Agreement with an interest coverage ratio of 8.8510.03 to 1.00.1.00 compared to a minimum required ratio of 3:00 to 1:00.
As of September 30, 2017,2018, KapStone was also in compliance with all other covenants in the Credit Agreement.
Income taxes
The Company’s effective income tax rate, excluding discrete items for 2017,2018, is projected to be 33.623.7 percent. The Company’s cash tax rate on earnings for 20172018 is projected to be 30.028 percent.
Sources and Uses of Cash
Nine months ended September 30 ($ in thousands) |
| 2017 |
| 2016 |
| Incr / (Dcr) |
|
| 2018 |
| 2017 |
| Incr / (Dcr) |
| ||||||
Operating activities |
| $ | 175,919 |
| $ | 212,387 |
| $ | (36,468 | ) |
| $ | 188,896 |
| $ | 175,919 |
| $ | 12,977 |
|
Investing activities |
| (141,512 | ) | (123,578 | ) | (17,934 | ) |
| (96,019 | ) | (141,512 | ) | 45,493 |
| ||||||
Financing activities |
| (52,498 | ) | (86,181 | ) | 33,683 |
|
| (98,511 | ) | (52,498 | ) | (46,013 | ) | ||||||
Total change in cash and cash equivalents |
| $ | (18,091 | ) | $ | 2,628 |
| $ | (20,719 | ) |
| $ | (5,634 | ) | $ | (18,091 | ) | $ | 12,457 |
|
Cash and cash equivalents decreased by $18.1$5.6 million from December 31, 2016,2017, reflecting $175.9$188.9 million provided by operating activities, $141.5$96.0 million used in investing activities and $52.5$98.5 million used in financing activities in the first nine months of 2017.2018.
Net cash provided by operating activities was $175.9$188.9 million, comprised of net income for the first nine months of $55.8$158.4 million and non-cash charges of $162.4$141.5 million. Changes in operating assets and liabilities used $42.3$111.0 million of cash. Net cash provided by operating activities decreasedincreased by $36.5$13.0 million in the nine months ended September 30, 2017,2018, compared to the nine months ended September 30, 2016,2017, mainly due tohigher net income of $102.6 million, partially offset by a $33.3$68.8 million increase in cash used for working capital and $12.1$20.8 million of lower net income, partially offset by higher non-cash charges of $8.9 million.charges. The increase in cash used for working capital in the nine months ended September 30, 20172018 compared to 20162017 is primarily due to higher trade receivables reflecting an 11.8 percent increase in net sales,the payment of management incentive compensation, the Victory contingent consideration payment, higher inventory levels primarily in the Distribution segment, and the timing ofhigher trade accounts receivables and higher income tax payments, partially offset by higher accounts payable.payments.
Net cash used in investing activities was $141.5$96.0 million and includes $108.0$111.7 million for capital expenditures and $33.5proceeds of $15.7 million forfrom the API acquisition.sale of property. Net cash used in investing activities increaseddecreased by $17.9$45.5 million in the nine months ended September 30, 2017,2018, compared to the nine months ended September 30, 2016,
2017, primarily due to the API acquisition of Associated Packaging, Inc. and higher capital spendingFast Pak, LLC in 2017 partially offset byand the strategic investment activity in 2016.proceeds from the sale of property.
Net cash used in financing activities was $52.5$98.5 million and reflects a $75.0 million prepayment of the term loans under the Credit Facility, $29.0$29.3 million of quarterly dividend payments and the $9.6 million contingent consideration payment to the former owners of Victory, partially offset by $48.6$7.9 million of net proceeds from share transactions, $6.1 million of borrowings under the Receivable Credit Facility and $2.5$2.3 million net short-term borrowings under the Revolver.of other current borrowings. Net cash used in financing activities decreasedincreased by $33.7$46.0 million in the nine months ended September 30 2017,2018, compared to the nine months ended September 30, 2016,2017, primarily due to higherthe Victory contingent consideration payment and lower net borrowings in 2017 which were partially offset by a higher prepayment of the term loans under the Credit Facility in 2017.2018.
Future Cash Needs
The Company expects that cash generated from operating activities will be sufficient to meet its remaining 20172018 cash needs. The cash needs consist of approximately $9.7$34.1 million of payments to financial advisors contingent upon the consummation of the Merger, $9.8 million for thea cash dividend paymentpaid on October 12, 2017,11, 2018, $5.0 million due for contingent consideration upon the consummation of the Merger and any additional working capital needs. CapitalIn addition, capital expenditures for the full year 2017fourth quarter are estimated to be $136.0$35.0 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 September 30, 2017,2018, the Company had $2.5 million of borrowingsno amounts outstanding under the Revolver and $483.4$484.4 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 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.
Changes to Critical Accounting Policies
Revenue Recognition
During the first quarter ended March 31, 2018, the Company adopted the provisions of ASC 606, “Revenue from Contracts with Customers”. Refer to Note 2, Recently Adopted and New Accounting Pronouncements and Note 3, Revenue, in the footnotes to the financial statements, related to the impact of the adoption on the Company’s financial statements and accounting policies.
Pension and Postretirement Benefits
During the first quarter ended March 31, 2018, the Company adopted the provisions of ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. Refer to Note 2, Recently Adopted and New Accounting Pronouncements and Note 11, Pension Plan and Postretirement Benefits, in the footnotes to the financial statements, related to the impact of the adoption on the Company’s financial statements and accounting policies.
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 September 30, 2017,2018, our Credit Facility consisted of two term loans totaling approximately $1.2$1.0 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 September 30, 20172018 the weighted average interest rate of the term loans was 3.33.8 percent.
Under our Receivables Credit Facility, at September 30, 2017,2018, we had $317.8$315.0 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 September 30, 20172018 the interest rate on outstanding amounts under the Receivables Credit Facility was 1.983.0 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 percent), our annual interest expense
would change by approximately $15.0$13.4 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, 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, 2017 and contracts to2018. Contracts for the purchase of natural gas at fixed prices through December 2020.have been layered in for various terms and quantities, with the shortest terms ending in 2019 and the longest terms ending in 2022.
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.Pesos and certain Canadian customers in Canadian Dollars. The Company did not use forward contracts to reduce the impact of currency fluctuations during the quarter ended September 30, 2017.2018. No such contracts were outstanding at September 30, 2017.2018.
CONTROLS AND PROCEDURES
As of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2017.2018.
There were no changes in our internal control over financial reporting during the nine months ended September 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
LEGAL PROCEEDINGS
See “Legal Claims” under Note 13, 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, 2016.2017.
RISK FACTORS
There have been no material changes from the Risk Factors described in our Form 10-K for the year ended December 31, 2016.2017.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
DEFAULTS UPON SENIOR SECURITIES
None.
MINE SAFETY DISCLOSURES
None.
OTHER INFORMATION
None.
EXHIBITS
The following Exhibits are filed as part of this report.
Exhibit |
| Description |
| ||
10.30 |
| |
10.31 | ||
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|
31.1 |
| |
|
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|
31.2 |
| |
|
|
|
32.1 |
| |
|
|
|
32.2 |
| |
|
|
|
101.INS |
| XBRL Instance Document. |
|
|
|
101.SCH |
| XBRL Taxonomy Extension Schema. |
|
|
|
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase. |
|
|
|
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase. |
|
|
|
101.LAB |
| XBRL Taxonomy Extension Label Linkbase. |
|
|
|
101.PRE |
| XBRL Extension Presentation Linkbase. |
Pursuant 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 | |
|
| |
|
| |
October | By: | /s/ Andrea K. Tarbox |
|
| Andrea K. Tarbox |
|
| Executive Vice President and Chief Financial Officer |
|