XNYS:KS KapStone Paper And Packaging Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to                    

 

Commission File Number: 001-33494

 

KapStone Paper and Packaging Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

20-2699372

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

KapStone Paper and Packaging Corporation

1101 Skokie Blvd., Suite 300

Northbrook, IL 60062

(Address of Principal Executive Offices, including zip code)

 

Registrant’s Telephone Number, including area code (847) 239-8800

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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 46,714,963 shares of the Registrant’s Common Stock, $0.0001 par value, outstanding at July 24, 2012, excluding 40,000 shares held as treasury shares.

 

 

 



Table of Contents

 

KAPSTONE PAPER AND PACKAGING CORPORATION

Index to Form 10-Q

TABLE OF CONTENTS

 

PART I. — FINANCIAL INFORMATION

 

 

 

 

 

Item 1. — Consolidated Financial Statements (Unaudited) and Notes to Consolidated Financial Statements

1

 

 

 

 

Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

 

 

 

 

Item 3. — Quantitative and Qualitative Disclosures about Market Risk

16

 

 

 

 

Item 4. — Controls and Procedures

16

 

 

 

PART II. — OTHER INFORMATION

 

 

 

 

 

Item 1. — Legal Proceedings

17

 

 

 

 

Item 1A. — Risk Factors

17

 

 

 

 

Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds

17

 

 

 

 

Item 3. — Defaults Upon Senior Securities

17

 

 

 

 

Item 4. — Mine Safety Disclosures

17

 

 

 

 

Item 5. — Other Information

17

 

 

 

 

Item 6. — Exhibits

18

 

 

 

SIGNATURE

19

 

i



PART 1. FINANCIAL INFORMATION

 

ITEM 1. - FINANCIAL STATEMENTS

 

KapStone Paper and Packaging Corporation

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

9,683

 

$

8,062

 

Trade accounts receivable, less allowances of $307 in 2012 and $571 in 2011

 

114,723

 

108,320

 

Other receivables

 

6,721

 

11,247

 

Inventories

 

109,947

 

110,054

 

Prepaid expenses and other current assets

 

6,979

 

4,207

 

Deferred income taxes

 

11,770

 

10,048

 

Total current assets

 

259,823

 

251,938

 

 

 

 

 

 

 

Plant, property and equipment, net

 

566,151

 

567,195

 

Other assets

 

4,209

 

4,313

 

Intangible assets, net

 

59,282

 

63,715

 

Goodwill

 

235,334

 

237,193

 

Total assets

 

$

1,124,799

 

$

1,124,354

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

 

$

6,094

 

Other current borrowings

 

1,552

 

 

Accounts payable

 

84,263

 

81,051

 

Accrued expenses

 

22,579

 

21,217

 

Accrued compensation costs

 

20,136

 

27,445

 

Total current liabilities

 

128,530

 

135,807

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

Long-term debt, net of current portion

 

293,355

 

335,635

 

Pension and post-retirement benefits

 

10,230

 

10,676

 

Deferred income taxes

 

96,687

 

84,316

 

Other liabilities

 

11,157

 

11,642

 

Total other liabilities

 

411,429

 

442,269

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

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; 46,703,892 shares issued and outstanding (40,000 treasury shares outstanding) at June 30, 2012 and 46,449,695 issued and outstanding (40,000 treasury shares outstanding) at December 31, 2011

 

5

 

5

 

Additional paid-in capital

 

235,123

 

230,665

 

Retained earnings

 

352,035

 

318,068

 

Accumulated other comprehensive loss

 

(2,323

)

(2,460

)

Total stockholders’ equity

 

584,840

 

546,278

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,124,799

 

$

1,124,354

 

 

See notes to consolidated financial statements.

 

1



KAPSTONE PAPER AND PACKAGING CORPORATION

Consolidated Statements of Income and Comprehensive Income

(In thousands, except share and per share amounts)

 

(unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

306,259

 

$

214,786

 

$

606,102

 

$

421,524

 

Cost of sales, excluding depreciation and amortization

 

213,335

 

143,143

 

427,409

 

285,794

 

Depreciation and amortization

 

15,327

 

12,778

 

30,503

 

24,569

 

Freight and distribution expenses

 

27,936

 

19,681

 

53,679

 

37,510

 

Selling, general and administrative expenses

 

17,436

 

8,866

 

35,008

 

18,172

 

Other operating income

 

230

 

290

 

428

 

578

 

Operating income

 

32,455

 

30,608

 

59,931

 

56,057

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange (loss)/gain

 

(508

)

45

 

(388

)

335

 

Interest expense, net

 

3,193

 

1,077

 

6,472

 

2,174

 

Income before provision for income taxes

 

28,754

 

29,576

 

53,071

 

54,218

 

Provision for income taxes

 

10,350

 

11,417

 

19,104

 

20,928

 

Net income

 

$

18,404

 

$

18,159

 

$

33,967

 

$

33,290

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income — pension and postretirement plan liability adjustments, net of tax

 

70

 

100

 

137

 

203

 

Total comprehensive income

 

$

18,474

 

$

18,259

 

$

34,104

 

$

33,493

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

46,620,354

 

46,250,362

 

46,555,990

 

46,172,108

 

Diluted

 

47,744,589

 

47,416,400

 

47,792,980

 

47,435,487

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.39

 

$

0.39

 

$

0.73

 

$

0.72

 

Diluted

 

$

0.39

 

$

0.38

 

$

0.71

 

$

0.70

 

 

See notes to consolidated financial statements.

 

2



Table of Contents

 

KAPSTONE PAPER AND PACKAGING CORPORATION

Consolidated Statements of Cash Flows

(In thousands)

 

(unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

Operating activities

 

 

 

 

 

Net income

 

$

33,967

 

$

33,290

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

30,503

 

24,569

 

Stock-based compensation expense

 

3,577

 

2,521

 

Excess tax benefits from stock-based compensation

 

(1,496

)

(758

)

Amortization of debt issuance costs

 

1,803

 

848

 

Loss on disposal of fixed assets

 

591

 

182

 

Deferred income taxes

 

14,728

 

14,291

 

Changes in operating assets and liabilities:

 

 

 

 

 

Trade accounts receivable, net

 

(6,027

)

(14,762

)

Other receivables

 

4,526

 

(247

)

Inventories

 

(237

)

(2,160

)

Prepaid expenses and other current assets

 

(2,772

)

(675

)

Other assets

 

41

 

(253

)

Accounts payable

 

3,622

 

(3,091

)

Accrued expenses and other

 

1,218

 

(1,505

)

Accrued compensation costs

 

(7,044

)

(2,288

)

Accrued income taxes

 

 

3,130

 

Net cash provided by operating activities

 

77,000

 

53,092

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

USC acquisition

 

(314

)

 

KPB acquisition earn-out payment

 

 

(49,700

)

Capital expenditures

 

(27,454

)

(12,914

)

Net cash used in investing activities

 

(27,768

)

(62,614

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from revolving credit facility

 

39,400

 

7,600

 

Repayments on revolving credit facility

 

(39,400

)

(7,600

)

Repayments of long-term debt

 

(50,000

)

(9,418

)

Proceeds from other current borrowings

 

3,398

 

2,273

 

Repayments on other current borrowings

 

(1,846

)

(1,235

)

Payment of withholding taxes on vested restricted stock awards

 

(1,179

)

(866

)

Proceeds from the exercises of stock options

 

475

 

621

 

Proceeds from issuance of shares to ESPP

 

90

 

97

 

Loan amendment costs

 

(45

)

(244

)

Excess tax benefits from stock-based compensation

 

1,496

 

758

 

Net cash used in financing activities

 

(47,611

)

(8,014

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

1,621

 

(17,536

)

Cash and cash equivalents-beginning of period

 

8,062

 

67,358

 

Cash and cash equivalents-end of period

 

$

9,683

 

$

49,822

 

 

 See notes to consolidated financial statements.

 

3



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 footnotes 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 three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

2.                                      Recent Accounting Pronouncements

 

Intangibles — Goodwill and Other

 

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-08, “Intangibles — Goodwill and Other.” This guidance provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20-35-4. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will adopt the provisions of this guidance in conjunction with its annual impairment testing in the fourth quarter of 2012.

 

Comprehensive Income

 

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which revises the manner in which entities should present comprehensive income in their financial statements. The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted the provisions of this guidance in using the continuous statement approach in 2012 on a retrospective basis for all periods presented.

 

Fair Value Measurements

 

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop converged guidance on how to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP; however, it expands existing disclosure requirements for fair value measurements and makes other amendments, many of which eliminate unnecessary wording differences between U.S. GAAP and IFRS. This ASU is effective for interim and annual periods beginning after December 15, 2011. The application of the requirements of this guidance did not have a material effect on the consolidated financial statements.

 

4



Table of Contents

 

3.                                      USC Acquisition

 

On October 31, 2011, the Company consummated the acquisition of U.S. Corrugated Inc. (“USC”) from its stockholders by merger for $330.0 million in cash plus $1.6 million of working capital adjustments. On March 9, 2012, KapStone reached an agreement with USC on the final calculation of Merger Consideration and paid an additional $0.3 million which was allocated to acquisition consideration.

 

The following table summarizes the acquisition consideration:

 

Purchase price, net of cash acquired

 

$

330,000

 

Working capital adjustments

 

1,946

 

Total acquisition consideration

 

$

331,946

 

 

The USC acquisition was accounted for in accordance with the provisions of ASC 805, “Business Combinations,” and the accompanying consolidated financial statements include the results of USC since October 31, 2011. The Company estimated the fair value of the assets and liabilities of USC at the time of acquisition and used third-party appraisals to determine the fair market value for tangible and intangible assets. The excess of the purchase price over the aggregate estimated fair value of net assets acquired was allocated to goodwill. The allocation is not final as the review of the fair value of deferred income tax assets and liabilities and certain other acquired assets and liabilities is in process.

 

The following table summarizes the preliminary allocation of acquisition consideration to the fair value of the assets acquired and the liabilities assumed at the date of acquisition:

 

Trade accounts receivable

 

$

38,377

 

Other receivables

 

5,745

 

Inventories

 

32,859

 

Prepaid expenses and other current assets

 

754

 

Plant, property and equipment

 

106,082

 

Other assets

 

634

 

Intangible assets

 

45,000

 

Goodwill

 

180,823

 

Deferred income tax asset

 

5,126

 

Accounts payable

 

(34,116

)

Accrued expenses

 

(3,660

)

Accrued compensation costs

 

(5,526

)

Deferred income taxes

 

(36,045

)

Other liabilities

 

(4,107

)

Total acquisition consideration

 

$

331,946

 

 

4.                                      Annual Planned Maintenance Outage

 

Annual planned maintenance outage costs for the three months ended June 30, 2012 and 2011 totaled $3.8 million and $3.0 million, respectively. In addition, planned maintenance outage costs for the six months ended June 30, 2012 and 2011 totaled $4.6 million and $3.4 million, respectively.

 

5.                                      Inventories

 

Inventories consist of the following at June 30, 2012 and December 31, 2011, respectively:

 

 

 

(Unaudited)

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Raw materials

 

$

43,504

 

$

46,926

 

Work in process

 

2,042

 

1,780

 

Finished goods

 

38,730

 

36,747

 

Replacement parts and supplies

 

25,671

 

24,601

 

Inventories

 

$

109,947

 

$

110,054

 

 

5



6.                                      Debt

 

Amendment to Credit Agreement

 

On May 10, 2012, the Company entered into a First Amendment to Credit Agreement (the “First Amendment”), by and among Kapstone Kraft Paper Corporation, as Borrower (the “Borrower”), the Company and certain subsidiaries of the Company as Guarantors, the lenders party thereto, and Bank of America N.A., as Administrative Agent, which amends the Credit Agreement, dated as of October 31, 2011 (collectively, the “Credit Agreement”). The First Amendment, among other things, expands the “accordion” feature under the Credit Agreement, removes certain mandatory prepayment events, and modifies the calculation methodology of the financial covenants. The “accordion” feature in the Credit Agreement now permits KapStone, subject to certain terms and conditions, to request an increase in the revolving commitments and/or additional term loans in an aggregate principal amount of up to $450.0 million.

 

Voluntary Prepayment

 

On June 29, 2012, the Company made a $50.0 million voluntary prepayment on its term loan under the Credit Agreement using cash generated from operations.

 

Debt Covenants

 

The Company’s Credit Agreement contains, among other provisions, covenants with which we must comply while the agreement is in force. The covenants limit our ability to, among other things, incur indebtedness, create additional liens on our assets, make investments, engage in mergers and acquisitions, pay dividends and sell any assets outside the normal course of business. As of June 30, 2012, the Company was in compliance with all applicable covenants in the Credit Agreement.

 

Other Current Borrowings

 

In 2012 and 2011, the Company entered into financing agreements of $3.4 million and $2.3 million, respectively, at an annual interest rate of 2.00 and 1.75 percent, respectively, for its annual property insurance premiums. The agreements required the Company to pay consecutive monthly payments through the term of each financing agreement ending on December 1st. As of June 30, 2012, there was $1.6 million outstanding under the current agreement which is included in “Other current borrowings” on the Consolidated Balance Sheets.

 

Interest Paid

 

Interest paid was $2.4 million and $0.6 million for the three months ended June 30, 2012 and 2011, respectively. In addition, interest paid was $4.7 million and $1.3 million for the six months ended June 30, 2012 and 2011, respectively. The increase in interest paid reflects a higher term loan balance resulting from the USC acquisition.

 

Fair Value of Debt

 

At June 30, 2012 the fair value of the Company’s debt approximates the carrying value of $293.4 million as the variable interest rates re-price frequently at current market rates. The debt was valued using Level 2 inputs in the fair value hierarchy which are significant observable inputs including quoted prices for debt of similar terms and maturities.

 

7.                                      Income Taxes

 

The Company’s effective tax rate for the six months ended June 30, 2012 and 2011 was 36.0 percent and 38.6 percent, respectively. The effective tax rate decreased in 2012 due to a higher expected benefit from the domestic manufacturing deduction. The differences between the effective tax rate and the federal statutory tax rate for the periods ended June 30, 2012 and 2011 are due to the impact of state tax, net of the federal benefit and the domestic manufacturing deduction.

 

The gross unrecognized tax benefits, including interest, as of June 30, 2012 is $5.0 million and is unchanged from December 31, 2011. Unrecognized tax benefits of $5.0 million are included in “Other liabilities” on the Consolidated Balance Sheets.

 

6



In the normal course of business, the Company is subject to examination by taxing authorities. The Company’s open tax year is 2010.

 

Income taxes paid net of refunds were $4.0 million and $0.1 million for the three months ended June 30, 2012 and 2011, respectively. In addition, income taxes paid net of refunds were $4.3 million and $0.3 million for the six months ended June 30, 2012 and 2011, respectively.

 

8.                                      Net Income Per Share

 

Basic and diluted net income per share is calculated as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income as reported

 

$

18,404

 

$

18,159

 

$

33,967

 

$

33,290

 

Weighted-average number of common shares for basic net income per share

 

46,620,354

 

46,250,362

 

46,555,990

 

46,172,108

 

Incremental effect of dilutive common stock equivalents:

 

 

 

 

 

 

 

 

 

Unexercised stock options

 

899,480

 

889,370

 

923,301

 

908,410

 

Unvested restricted stock awards

 

224,755

 

276,668

 

313,689

 

354,969

 

Weighted-average number of shares for diluted net income per share

 

47,744,589

 

47,416,400

 

47,792,980

 

47,435,487

 

 

 

 

 

 

 

 

 

 

 

Net income per share — basic

 

$

0.39

 

$

0.39

 

$

0.73

 

$

0.72

 

Net income per share — diluted

 

$

0.39

 

$

0.38

 

$

0.71

 

$

0.70

 

 

Unexercised stock options to purchase a total of 0.3 million shares were outstanding during both the three months ended June 30, 2012 and 2011, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.

 

9.                                      Pension Plan and Post Retirement Benefits

 

Defined Benefit Pension Plan

 

The KapStone Paper and Packaging Corporation Defined Benefit Pension Plan (the “Pension Plan”) provides benefits for approximately 1,000 union employees.

 

Net pension cost recognized for the three and six months ended June 30, 2012 and 2011 for the Pension Plan is as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Service cost for benefits earned during the period

 

$

1,023

 

$

844

 

$

2,047

 

$

1,688

 

Interest cost on projected benefit obligation

 

251

 

203

 

503

 

406

 

Expected return on plan assets

 

(233

)

(185

)

(467

)

(370

)

Amortization of net loss

 

54

 

 

108

 

 

Amortization of prior service cost

 

92

 

141

 

184

 

282

 

Net pension cost — other multi-employer plan

 

17

 

 

34

 

 

Total net pension cost

 

$

1,204

 

$

1,003

 

$

2,409

 

$

2,006

 

 

KapStone funds the Pension Plan according to IRS funding requirements. Based on those requirements, KapStone funded $2.6 million for the six months ended June 30, 2012 and expects to fund an additional $3.0 million to the Pension Plan in 2012.

 

Defined Contribution Plan

 

The KapStone Defined Contribution Plan (the “Contribution Plan”) covers all eligible employees. The Company’s monthly contributions to the Contribution Plan are based on the matching of employee contributions. For the three months ended June 30, 2012 and 2011, the Company recognized expense of $2.6 million and $1.6 million, respectively. In addition, for the six months ended June 30, 2012 and 2011, the

 

7



Table of Contents

 

Company recognized expense of $5.4 million and $3.6 million, respectively. Effective October 31, 2011, employees who joined the Company as part of the USC acquisition are included in the Contribution Plan.

 

10.                               Stock-Based Compensation

 

On March 7, 2012, the Compensation Committee of the board of directors approved stock awards to executive officers, certain employees and directors. The 2012 awards included 310,847 stock option grants and 124,341 restricted stock units.

 

The Company accounts for stock awards in accordance with ASC 718, “Compensation — Stock Compensation,” which requires that the cost resulting from all share-based payment transactions be recognized as compensation cost over the vesting period based on the fair value of the instrument on the date of grant.

 

Total stock-based compensation expense related to the stock option and restricted stock unit grants for the three and six months ended June 30, 2012 and 2011 is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Stock option compensation expense

 

$

717

 

$

448

 

$

2,025

 

$

1,399

 

Restricted stock unit compensation expense

 

547

 

315

 

1,552

 

1,122

 

Total stock-based compensation expense

 

$

1,264

 

$

763

 

$

3,577

 

$

2,521

 

 

Total unrecognized stock-based compensation cost related to the stock option grants and restricted stock units as of June 30, 2012 and December 31, 2011 is as follows:

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

 

 

 

 

Unrecognized stock option compensation cost

 

$

2,790

 

$

1,648

 

Unrecognized restricted stock compensation cost

 

2,539

 

1,687

 

Total stock-based compensation cost

 

$

5,329

 

$

3,335

 

 

As of June 30, 2012, 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 1.9 years and 2.1 years, respectively.

 

Stock Options

 

Stock option awards vest as follows: 50% after two years and the remaining 50% after three years or upon the retirement of a grantee of such stock options who has reached the age 65. The stock options awarded in 2012 have a contractual term of ten years and are subject to forfeiture should the recipient terminate his or her employment with the Company for certain reasons prior to vesting in his or her awards, or the occurrence of certain other events such as termination with cause. The exercise price of these stock options is based on the closing market price of our common stock on the date of grant ($19.75 for the 2012 awards described above) and compensation expense is recorded on an accelerated basis over the awards’ vesting periods.

 

The weighted average fair value of the KapStone stock options granted in March 2012 was $10.38. The fair value was calculated using the Black-Scholes option-pricing model based on the market price at the grant date and the weighted average assumptions specific to the underlying options. The Company uses the “simplified method”, defined in SEC Staff Accounting Bulletin (“SAB”) No. 107, to determine the expected life assumption for all of its options. The Company uses the “simplified method”, as permitted by SAB No. 110, as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected life due to the limited time its equity shares have been publicly traded. The expected volatility assumption is based on the volatility of KapStone stock from the same time period as the expected term of the stock options. The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term similar to the expected life of the stock options.

 

8



Table of Contents

 

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

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

KapStone Stock Options Black-Scholes assumptions (weighted average):

 

 

 

 

 

Expected volatility

 

56.52

%

45.24

%

Expected life (years)

 

5.98

 

5.94

 

Risk-free interest rate

 

1.10

%

2.47

%

Expected dividend yield

 

%

%

 

The following table summarizes stock options amounts and activity:

 

 

 

 

 

Weighted
Average

 

Weighted
Average

 

 

 

 

 

 

 

Exercise

 

Remaining

 

Intrinsic

 

 

 

Options

 

Price

 

Life (Years)

 

Value

 

Outstanding at January 1, 2012

 

2,473,874

 

$

7.86

 

6.7

 

$

19,742

 

Granted

 

310,847

 

19.75

 

9.9

 

 

 

Exercised

 

(100,378

)

4.73

 

 

 

1,451

 

Forfeited

 

 

 

 

 

 

 

Outstanding at June 30, 2012

 

2,684,343

 

$

9.35

 

6.6

 

$

18,867

 

Exercisable at June 30, 2012

 

1,867,486

 

$

6.28

 

5.6

 

$

17,876

 

 

For the three and six months ended June 30, 2012, exercises of employee stock options totaled 9,274 shares and 100,378 shares, respectively, with cash proceeds to the Company of $0.1 million and $0.5 million, respectively.

 

Restricted Stock

 

Restricted stock units are restricted as to transferability until they vest three years from the grant date or upon the retirement of the grantee who has reached the age 65. These restricted stock units are subject to forfeiture should the employee terminate employment with the Company for certain reasons prior to vesting in their award, or upon the occurrence of certain other events. The value of these restricted stock units is based on the closing market price of our common stock on the date of grant and compensation expense is recorded on a straight-line basis over the awards’ vesting periods.

 

The following table summarizes restricted stock units amounts and activity:

 

 

 

 

 

Weighted
Average
Grant

 

 

 

Units

 

Price

 

Outstanding at January 1, 2012

 

496,395

 

$

9.22

 

Granted

 

124,341

 

19.75

 

Vested

 

(216,784

)

3.70

 

Forfeited

 

 

 

Outstanding at June 30, 2012

 

403,952

 

$

15.43

 

 

11.                               Contingencies

 

We are subject to various legal proceedings arising from our operations. We are party to a legal proceeding arising from an accident which occurred during our 2009 annual planned maintenance outage at our mill in Roanoke Rapids, NC. We establish reserves for claims and proceedings when it is probable that liabilities exist and where reasonable estimates can be made. While it is not possible to predict the outcome of this matter, based on our assessment of the facts and circumstances now known, we do not believe there is a reasonable possibility that this matter will have a material adverse effect on our financial position. However, actual outcomes may be different from those expected and could have a material effect on our results of operations or cash flows in a particular period.

 

9



ITEM 2.

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-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in Part I Item 1A of our Form 10-K for the fiscal year ended December 31, 2011 and in our other Securities and Exchange Commission filings. The information contained in this Form 10-Q represents our best judgment at the date of this report based on information currently available. In providing forward-looking statements, KapStone does not intend, and does not undertake any duty or obligations, to update its statements as a result of new information, future events or otherwise.

 

The Company has one reportable segment as of June 30, 2012. The Company manufactures and sells unbleached kraft paper and corrugated products.

 

The following discussion should be read in conjunction with our Consolidated Financial Statements and related Notes thereto included elsewhere in this report.

 

Comparison of Results of Operations for the Three Months Ended June 30, 2012 and 2011

 

 

 

Three Months Ended June 30,

 

Increase/

 

(in thousands):

 

2012

 

2011

 

(Decrease)

 

Net sales

 

$

306,259

 

$

214,786

 

$

91,473

 

Cost of sales, excluding depreciation and amortization

 

213,335

 

143,143

 

70,192

 

Depreciation and amortization

 

15,327

 

12,778

 

2,549

 

Freight and distribution expenses

 

27,936

 

19,681

 

8,255

 

Selling, general and administrative expenses

 

17,436

 

8,866

 

8,570

 

Other operating income

 

230

 

290

 

(60

)

Operating income

 

32,455

 

30,608

 

1,847

 

Foreign exchange (loss)/gain

 

(508

)

45

 

(553

)

Interest expense, net

 

3,193

 

1,077

 

2,116

 

Income before provision for income taxes

 

28,754

 

29,576

 

(822

)

Provision for income taxes

 

10,350

 

11,417

 

(1,067

)

Net income

 

$

18,404

 

$

18,159

 

$

245

 

 

Net sales for the quarter ended June 30, 2012 were $306.3 million compared to $214.8 million for the second quarter of 2011, an increase of $91.5 million or 42.6 percent. The increase in net sales was driven by the U.S. Corrugated Inc. (“USC”) acquisition which accounted for $97.2 million. Excluding the acquisition, net sales decreased by $5.7 million due to $2.7 million of lower average selling prices, $1.6 million of unfavorable exchange rate effects due to a stronger US dollar, as certain sales to European customers are invoiced in euros, and 5,575 fewer tons of paper sold, partially offset by $2.9 million of higher lumber sales. Average selling prices decreased primarily due to lower export containerboard prices partially offset by the partial realization of kraft paper price increases announced in 2011. Average selling price per ton for the quarter ended June 30, 2012 was $623 compared to $633 for the prior year’s quarter.

 

10



The following represents the Company’s tons of paper sold by product line:

 

 

 

Three Months Ended June 30,

 

Increase/

 

 

 

Product Line (in tons):

 

2012

 

2011

 

(Decrease)

 

%

 

Domestic containerboard

 

117,481

 

106,376

 

11,105

 

10.4

 

Export containerboard

 

44,688

 

57,388

 

(12,700

)

(22.1

)

Kraft paper

 

65,748

 

70,414

 

(4,666

)

(6.6

)

DuraSorb®

 

71,565

 

68,680

 

2,885

 

4.2

 

Kraftpak ®

 

24,024

 

26,223

 

(2,199

)

(8.4

)

Tons of paper sold

 

323,506

 

329,081

 

(5,575

)

(1.7

)

 

Tons of paper sold for the quarter ended June 30, 2012 was 323,506 tons compared to 329,081 tons for the quarter ended June 30, 2011, a decrease of 5,575 tons or 1.7 percent. Domestic containerboard sales increased 10.4 percent reflecting the impact of the acquisition and higher sales of lightweight containerboard. Export containerboard sales decreased 22.1 percent due to a shift in product mix. Kraft paper sales decreased 6.6 percent reflecting an overall decrease in demand in the industry and a transfer of volumes to lightweight containerboard grades. Durasorb® sales increased 4.2 percent due to increased demand.

 

Corrugated product sales for the quarter ended June 30, 2012 totaled 1.6 billion square feet compared to none for the quarter ended June 30, 2011. The Company’s corrugated product sales began with the USC acquisition which closed in the fourth quarter of 2011.

 

The following represents a summary of tons of paper sold and produced by the Company:

 

 

 

Three Months Ended June 30,

 

Increase/

 

 

 

 

 

2012

 

2011

 

(Decrease)

 

%

 

Tons of paper sold to third parties

 

323,506

 

329,081

 

(5,575

)

(1.7

)

Tons transferred to converting plants

 

66,481

 

 

66,481

 

100.0

 

Inventory change

 

(440

)

(1,300

)

860

 

66.2

 

Tons of paper produced

 

389,547

 

327,781

 

61,766

 

18.8

 

 

The 61,766 increase in tons of production in the second quarter of 2012 includes 60,452 tons from the acquisition and 1,314 tons from higher production rates.

 

Cost of sales, excluding depreciation and amortization expense, for the quarter ended June 30, 2012 was $213.3 million compared to $143.1 million for the second quarter of 2011, an increase of $70.2 million, or 49.0 percent. The increase in cost of sales was mainly due to the $72.6 million impact of the acquisition. Excluding the acquisition, cost of sales decreased by $2.4 million due to lower sales volumes and $1.8 million of productivity gains partially offset by $2.3 million of inflation on labor, benefits and input costs. Annual planned maintenance outages in the quarters ended June 30, 2012 and 2011 totaled $3.8 million and $3.0 million, respectively.

 

Depreciation and amortization expense for the quarter ended June 30, 2012 totaled $15.3 million compared to $12.8 million for the quarter ended June 30, 2011. The increase of $2.5 million was primarily due to $3.1 million from the acquisition, $0.6 million of which is amortization of identified intangible assets. Excluding the acquisition, depreciation and amortization expense decreased $0.6 million in the quarter ended June 30, 2012.

 

Freight and distribution expenses for the quarter ended June 30, 2012 totaled $27.9 million compared to $19.7 million for the quarter ended June 30, 2011. The increase of $8.2 million was primarily due to $7.7 million from the acquisition. Excluding the acquisition, freight and distribution expenses increased $0.5 million due to inflation on fuel costs and product mix.

 

Selling, general and administrative expenses for the quarter ended June 30, 2012 totaled $17.4 million compared to $8.9 million for the quarter ended June 30, 2011. The increase of $8.5 million was primarily due to $8.0 million from the acquisition. Excluding the acquisition, selling, general and administrative expenses increased $0.5 million due to higher stock compensation expenses and acquisition related expenses. For the

 

11



Table of Contents

 

quarter ended June 30, 2012, selling, general and administrative expenses as a percentage of net sales increased to 5.7 percent from 4.1 percent in the quarter ended June 30, 2011.

 

Foreign exchange loss for the quarter ended June 30, 2012 of $0.5 million was higher than the negligible gain for the quarter ended June 30, 2011. The change reflects the strengthening of the U.S. dollar compared to the Euro in the quarter ended June 30, 2012.

 

Net interest expense for the quarters ended June 30, 2012 and 2011 was $3.2 million and $1.1 million, respectively. Interest expense reflects interest on the Company’s Credit Agreement and amortization of debt issuance costs. Interest expense was $2.1 million higher in the quarter ended June 30, 2012 primarily due to a higher term loan balance to fund the USC acquisition.

 

Provision for income taxes for the quarters ended June 30, 2012 and 2011 was $10.4 million and $11.4 million, respectively, reflecting an effective tax rate of 36.0 percent for the quarter ended June 30, 2012 compared to 38.6 percent for the similar period in 2011. The lower provision for income taxes in 2012 primarily reflects a lower effective tax rate due to a higher expected benefit from the domestic manufacturing deduction.

 

Comparison of Results of Operations for the Six Months Ended June 30, 2012 and 2011

 

 

 

Six Months Ended June 30,

 

Increase/

 

(in thousands):

 

2012

 

2011

 

(Decrease)

 

Net sales

 

$

606,102

 

$

421,524

 

$

184,578

 

Cost of sales, excluding depreciation and amortization

 

427,409

 

285,794

 

141,615

 

Depreciation and amortization

 

30,503

 

24,569

 

5,934

 

Freight and distribution expenses

 

53,679

 

37,510

 

16,169

 

Selling, general and administrative expenses

 

35,008

 

18,172

 

16,836

 

Other operating income

 

428

 

578

 

(150

)

Operating income

 

59,931

 

56,057

 

3,874

 

Foreign exchange gain/(loss)

 

(388)

 

335

 

(723

)

Interest expense, net

 

6,472

 

2,174

 

4,298

 

Income before provision for income taxes

 

53,071

 

54,218

 

(1,147

)

Provision for income taxes

 

19,104

 

20,928

 

(1,824

)

Net income

 

$

33,967

 

$

33,290

 

$

677

 

 

Net sales for the six months ended June 30, 2012 were $606.1 million compared to $421.5 million for the first six months of 2011, an increase of $184.6 million or 43.8 percent. The increase in net sales was driven by the USC acquisition which accounted for $191.8 million. Excluding the acquisition, net sales decreased by $7.2 million due to $4.2 million in lower average selling prices, $2.0 million due to the unfavorable exchange rate effect of a stronger US dollar and a less favorable product mix, partially offset by an increase of 662 tons of paper sold and $4.1 million of higher lumber sales. Average selling prices decreased primarily due to lower export containerboard prices. Average selling price per ton for the six months ended June 30, 2012 was $615 compared to $626 for the prior year period.

 

The following represents the Company’s tons of paper sold by product line:

 

 

 

Six Months Ended June 30,

 

Increase/

 

 

 

Product Line (in tons):

 

2012

 

2011

 

(Decrease)

 

%

 

Domestic containerboard

 

224,057

 

200,896

 

23,161

 

11.5

 

Export containerboard

 

124,452

 

130,977

 

(6,525

)

(5.0

)

Kraft paper

 

127,734

 

141,378

 

(13,644

)

(9.7

)

DuraSorb®

 

129,181

 

128,446

 

735

 

0.6

 

Kraftpak ®

 

47,692

 

50,757

 

(3,065

)

(6.0

)

Tons of paper sold

 

653,116

 

652,454

 

662

 

0.1

 

 

Tons of paper sold for the first six months of 2012 was 653,116 tons compared to 652,454 tons for the first six months of 2011, an increase of 662 tons or 0.1 percent. Domestic containerboard sales increased 11.5 percent reflecting the impact of the acquisition and higher sales of lightweight containerboard. Export containerboard sales decreased by 5.0 percent due to a shift in product mix. Kraft paper sales decreased 9.7 percent reflecting an overall decrease in demand in the industry and a transfer of volumes to lightweight containerboard grades. Kraftpak® sales declined 6.0 percent due to lower demand.

 

12



Corrugated product sales for the first six months of 2012 totaled 3.1 billion square feet compared to none for the first six months of 2011. The Company’s corrugated product sales began with the acquisition which closed in the fourth quarter of 2011.

 

The following represents a summary of tons of paper sold and produced by the Company:

 

 

 

Six Months Ended June 30

 

Increase/

 

 

 

 

 

2012

 

2011

 

(Decrease)

 

%

 

Tons of paper sold to third parties

 

653,116

 

652,454

 

662

 

0.1

 

Tons transferred to converting plants

 

132,415

 

 

132,415

 

100.0

 

Inventory change

 

(382

)

712

 

(1,094

)

(214.7

)

Tons of paper produced

 

785,149

 

653,166

 

131,983

 

20.2

 

 

The 131,983 increase in tons of production in the first six months of 2012 includes 121,292 tons from the USC acquisition and 10,691 tons from higher production rates and one extra day of production.

 

Cost of sales, excluding depreciation and amortization expense, for the six months ended June 30, 2012 was $427.4 million compared to $285.8 million for the first six months of 2011, an increase of $141.6 million, or 49.5 percent. The increase in cost of sales was mainly due to the $144.2 million impact of the acquisition. Excluding the acquisition, cost of sales decreased by $2.6 million due to product mix and $6.5 million of productivity gains, partially offset by $6.6 million of inflation on labor, benefits and input costs. Annual planned maintenance outages during the six months ended June 30, 2012 and 2011 totaled $4.6 million and $3.4 million, respectively.

 

Depreciation and amortization expense for the six months ended June 30, 2012 totaled $30.5 million compared to $24.6 million for the six months ended June 30, 2011. The increase of $5.9 million was primarily due to $6.3 million from the acquisition, $1.3 million of which is amortization of identified intangible assets. Excluding the acquisition, depreciation and amortization expense decreased $0.4 million in the first six months of 2012.

 

Freight and distribution expenses for the six months ended June 30, 2012 totaled $53.7 million compared to $37.5 million for the six months ended June 30, 2011. The increase of $16.2 million was primarily due to $15.0 million from the acquisition. Excluding the acquisition, freight and distribution expenses increased $1.2 million primarily due to inflation on fuel costs and product mix.

 

Selling, general and administrative expenses for the six months ended June 30, 2012 totaled $35.0 million compared to $18.2 million for the six months ended June 30, 2011. The increase of $16.8 million was primarily due to $14.9 million from the acquisition. Excluding the acquisition, selling, general and administrative expenses increased $1.9 million due to the higher compensation related expenses and acquisition related expenses. For the six months ended June 30, 2012, selling, general and administrative expenses as a percentage of net sales increased to 5.8 percent from 4.3 percent in the first six months of 2011.

 

Foreign exchange loss for the six months ended June 30, 2012 was $0.4 million compared to a foreign exchange gain of $0.3 million for the six months ended June 30, 2011. The change reflects the strengthening of the U.S. dollar compared to the Euro in the first six months of 2012.

 

Net interest expense for the six months ended June 30, 2012 and 2011 was $6.5 million and $2.2 million, respectively. Interest expense reflects interest on the Company’s Credit Agreement and amortization of debt issuance costs. Interest expense was $4.3 million higher in the first six months of 2012 due to a higher term loan balance to fund the USC acquisition.

 

Provision for income taxes for the six months ended June 30, 2012 and 2011 was $19.1 million and $20.9 million, respectively, reflecting an effective tax rate of 36.0 percent for the first six months of 2012 compared to 38.6 percent for the similar period in 2011. The lower provision for income taxes in 2012 primarily reflects a lower effective tax rate due to a higher expected benefit from the domestic manufacturing deduction.

 

13



Liquidity and Capital Resources

 

Amendment to Credit Agreement

 

On May 10, 2012, the Company entered into a First Amendment to Credit Agreement (the “First Amendment”), by and among Kapstone Kraft Paper Corporation, as Borrower (the “Borrower”), the Company and certain subsidiaries of the Company as Guarantors, the lenders party thereto, and Bank of America N.A., as Administrative Agent, which amends the Credit Agreement, dated as of October 31, 2011 (collectively, the “Credit Agreement”). The First Amendment, among other things, expands the “accordion” feature under the Credit Agreement, removes certain mandatory prepayment events, and modifies the calculation methodology of the financial covenants. The “accordion” feature in the Credit Agreement now permits KapStone, subject to certain terms and conditions, to request an increase in the revolving commitments and/or additional term loans in an aggregate principal amount of up to $450.0 million.

 

Voluntary Prepayment

 

For the first six months of 2012, the Company made a $50.0 million voluntary prepayment on its term loan under the Credit Agreement using cash flow from operations.

 

Debt Covenants

 

Under the financial covenants of the Credit Agreement, KapStone must comply on a quarterly basis with a maximum permitted leverage ratio. The leverage ratio is calculated by dividing KapStone’s debt by its rolling twelve month total earnings before interest expense, taxes, depreciation and amortization and allowable adjustments. The maximum permitted leverage ratio declines over the life of the Credit Agreement. On June 30, 2012, the maximum permitted leverage ratio was 3.50 to 1.00. On June 30, 2012, KapStone was in compliance with the Credit Agreement with a leverage ratio of 1.65 to 1.00.

 

The Credit Agreement also includes a financial covenant requiring a minimum fixed charge coverage ratio. This ratio is calculated by dividing KapStone’s twelve month total earnings before interest expense, taxes, depreciation and amortization and allowable adjustments less cash payments for income taxes and capital expenditures by the sum of our cash interest and required principal payments during the twelve month period. From the closing date of the Credit Agreement through the quarter ending June 30, 2012, the fixed charge coverage ratio was required to be at least 1.25 to 1.00. On June 30, 2012, KapStone was in compliance with the Credit Agreement with a fixed charge coverage ratio of 7.69 to 1.00.

 

As of June 30, 2012, KapStone was in compliance with all applicable covenants in the Credit Agreement.

 

Other Current Borrowings

 

In 2012, the Company entered into a financing agreement of $3.4 million at an annual interest rate of 2.00 percent, for the annual property insurance premium. The agreement required the Company to make consecutive monthly repayments through the term of the financing agreement ending on December 1. As of June 30, 2012, there was $1.6 million outstanding under the current agreement.

 

Income taxes

 

The Company’s effective tax rate for 2012 is projected at 36.0 percent. The cash tax rate for 2012 is projected at 10.0 percent reflecting utilization of federal net operating losses and the cellulosic biofuel producer’s credit.

 

Income taxes paid, net of refunds, were $4.3 million and $0.4 million for the six months ended June 30, 2012 and 2011, respectively.

 

14



Sources and Uses of Cash

 

Six months ended June 30 (in thousands)

 

2012

 

2011

 

Operating activities

 

$

77,000

 

$

53,092

 

Investing activities

 

(27,768

)

(62,614

)

Financing activities

 

(47,611

)

(8,014

)

 

Cash and cash equivalents increased by $1.6 million from December 31, 2011, reflecting $77.0 million of net cash provided by operating activities, $27.8 million of net cash used in investing activities and $47.6 million of net cash used in financing activities.

 

Net cash provided by operating activities was $77.0 million primarily due to net income of $34.0 million for the first six months of 2012 and $49.7 million of non-cash charges. Changes in operating assets and liabilities used $6.7 million of cash. Net cash provided by operating activities increased by $23.9 million in the first six months of 2012 compared to the same period in 2011 mainly due to changes in operating assets and liabilities using $15.2 million of less cash, $8.0 million of higher non-cash charges and $0.7 million of higher net income in the first six months of 2012 than the first six months of 2011.

 

Net cash used in investing activities was $27.8 million reflecting $27.5 million of capital expenditures. For the six months ended June 30, 2012, capital expenditures for legacy operations were $20.4 million related to spending on equipment upgrades and replacements at the paper mills. In addition, there were $7.1 million of capital expenditures related to the acquisition, primarily related to investments in information technology. Net cash used in investing activities decreased by $34.8 million in the first six months of 2012 compared to the same period in 2011 mainly due to the $49.7 million contingent earn-out payment in 2011, partially offset by higher capital expenditures in the first six months of 2012.

 

Net cash used in financing activities was $47.6 million reflecting the $50.0 million voluntary prepayment of the term loan under the Credit Agreement, partially offset by $1.6 million of net proceeds from other current borrowings and $0.8 million of proceeds from share transactions. Net cash used in financing activities increased by $39.6 million for the first six months of 2012 compared to the same period in 2011 primarily due to a higher amount of debt repayments in 2012.

 

Future Cash Needs

 

We expect that cash generated from operating activities, and if needed, the ability to draw from our revolving credit facility under our Credit Agreement, which has a current availability of $142.4 million, will be sufficient to meet anticipated 2012 operating cash needs. The Company expects to spend approximately $36.7 million on capital expenditures for the balance of 2012. In addition, the Company expects to fund an additional $3.0 million to its pension plan.

 

Off-Balance Sheet Arrangements

 

We have not entered into any off-balance sheet financing arrangements and have not established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

 

15



Table of Contents

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the sensitivity of income to changes in interest rates, commodity prices, equity prices, and other market-driven rates or prices.

 

Under KapStone’s Credit Agreement, at June 30, 2012, we have an outstanding credit facility consisting of a term loan and revolving credit facility totaling $455.3 million. The initial term loan and the revolving credit facility have a maturity date of October 31, 2016. Depending on the type of borrowing, the applicable interest rate under the revolving credit facility is calculated at a per annum rate equal to (a) LIBOR plus an applicable margin, which is currently 2.00% for Eurodollar loans, or (b) (i) the greatest of (x) the prime rate, (y) the federal funds effective rate plus 0.5% or (z) one-month LIBOR plus 1.00% plus (ii) an applicable margin, which is currently 1.00% for base rate loans. The unused portion of the revolving credit facility will also be subject to an unused fee that will be calculated at a per annum rate (the “Unused Fee Rate”), which is currently 0.40%. Commencing with the delivery of the financial statements for the fiscal quarter ending June 30, 2012, the applicable margin for borrowings under the revolving credit facility and the Unused Fee Rate will be determined by reference to a pricing grid based on the Company’s total leverage ratio. Under such pricing grid, the applicable margins for the revolving credit facility will range from 1.50% to 2.50% for Eurodollar loans and from 0.50% to 1.50% for base rate loans and the Unused Fee Rate will range from 0.30% to 0.50%.

 

Changes in market rates may impact the base rate in our Credit Agreement. For instance, if the bank’s LIBOR rate was to increase or decrease by one percentage point (1.0%), our annual interest expense would change by approximately $3.1 million based upon our expected future monthly loan balances per our existing repayment schedule.

 

We are exposed to price fluctuations of certain commodities used in production. Key raw materials and energy used in the production process include roundwood and woodchips, OCC, fuel oil, electricity and caustic soda. We purchase these raw materials and energy at market prices, and do not use forward contracts or other financial instruments to hedge our exposure to price risk related to these commodities. We have three contracts to purchase coal at fixed prices with all expiring on December 31, 2012.

 

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. The Company did not use forward contracts to reduce the impact of currency fluctuations during the quarter ended June 30, 2012. No such contracts were outstanding at June 30, 2012.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2012.

 

There were no changes in our internal control over financial reporting during the three months ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

16



PART II. — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

 

We are subject to various legal proceedings arising from our operations. We are party to a legal proceeding arising from an accident which occurred during our 2009 annual planned maintenance outage at our mill in Roanoke Rapids, NC. We establish reserves for claims and proceedings when it is probable that liabilities exist and where reasonable estimates can be made. While it is not possible to predict the outcome of this matter, based on our assessment of the facts and circumstances now known, we do not believe there is a reasonable possibility that this matter will have a material adverse effect on our financial position. However, actual outcomes may be different from those expected and could have a material effect on our results of operations or cash flows in a particular period.

 

ITEM 1A.

RISK FACTORS

 

There have been no material changes from the Risk Factors described in our Form 10-K for the fiscal year ended December 31, 2011.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5.

OTHER INFORMATION

 

None.

 

17



ITEM 6.

 

EXHIBITS

 

The following Exhibits are filed as part of this report.

 

Exhibit
No.

 

Description

4.1

 

Amended and Restated 2006 Incentive Plan.

 

 

 

10.1

 

First Amendment to Credit Agreement, dated as of May 10, 2012, by and among Kapstone Kraft Paper Corporation, as Borrower, KapStone Paper and Packaging Corporation and the other Guarantors party thereto, the Lenders party thereto and Bank of America N.A., as Administrative Agent. Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 15, 2012.

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

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.

 

18



SIGNATURE

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

KAPSTONE PAPER AND PACKAGING CORPORATION

 

 

 

 

August 1, 2012

By:

/s/ Andrea K. Tarbox

 

 

Andrea K. Tarbox

 

 

Vice President and Chief Financial Officer

 

 

(duly authorized officer and principal financial officer)

 

19


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