STRONG CASH FLOWS PROVIDE FOR $100 MILLION DEBT REDUCTION
KapStone Paper and Packaging Corporation (NYSE:KS) today reported record results for the third quarter ended September 30, 2018. As compared to 2017's third quarter, results for 2018's third quarter are below:
Net sales of $894 million up $25 million, or 3 percent
Net income of $73 million up $42 million, or 142 percent
Diluted EPS of $0.72 up $0.42 per share, or 140 percent
Non U.S. GAAP financial measures for the 2018 third quarter compared to 2017 are as follows:
Adjusted EBITDA of $163 million up $42 million, or 35 percent
Adjusted net income of $78 million up $40 million, or 104 percent
Adjusted diluted EPS of $0.78 up $0.39 per share, or 100 percent
Matt Kaplan, President and Chief Executive Officer, stated, "I'm extremely proud of our record third quarter results which reflect continued higher prices, good demand and excellent operating performance despite Hurricane Florence's $6 million EBITDA impact. In addition, we successfully completed our once every five years cold mill maintenance outage at Longview.
"Our balance sheet has strengthened substantially in the past year. Record operating cash flows enabled us to reduce our debt by over $100 million from June 30, 2018, and our bank debt to EBITDA leverage ratio is now 2.33, a significant improvement from a year ago.
"Victory Packaging, our distribution business, had a seasonally strong third quarter and is expecting a strong finish for 2018."
Third Quarter Operating Highlights
Consolidated net sales of $894 million in the third quarter of 2018 increased by $25 million, or 3 percent, compared to $868 million for the 2017 third quarter. The increase in net sales is primarily due to higher prices, partially offset by lower sales volume. The Company sold 702,000 tons of paper during the third quarter of 2018 compared to 735,000 tons a year earlier. The Company's average mill selling price of $756 per ton in the third quarter of 2018 increased by $58 per ton, or about 8 percent, compared to the third quarter of 2017 due to higher prices for most products and a favorable product mix. Mill selling prices increased by $20 per ton, or nearly 3 percent, compared to the second quarter of 2018.
Net income of $73 million for the 2018 third quarter increased by $42 million, or 142 percent, compared to the 2017 third quarter. The higher earnings primarily reflects:
Higher selling prices and a better product mix of $41 million;
Improved productivity and lower spending generated $9 million of benefits;
Planned maintenance costs were $4 million lower than the prior year;
Lower recycled fiber costs of $14 million; and
A lower effective income tax rate resulting from the passage of the Tax Cuts and Jobs Act passed in December 2017.
The above items were partially offset by:
WestRock merger related expenses of $5 million;
Inflation of $12 million driven by higher virgin fiber, freight and compensation costs;
Hurricane Florence idled our Charleston mill for five days with a negative impact of $6 million; and
$7 million of higher management incentives due to higher earnings.
Cash Flow and Working Capital
Cash and cash equivalents of $22 million as of September 30, 2018, increased by $13 million from June 30, 2018. Operating activities provided $156 million during the third quarter. Investing activities used $32 million and financing activities used $110 million of cash in the current quarter, reflecting a $75 million debt prepayment, $25 million of other debt reductions and a $10 million quarterly dividend payment.
On August 30, 2018, our Board of Directors approved a regular $0.10 per share cash dividend which was paid on October 11th.
At September 30, 2018, the Company had approximately $501 million of working capital and $484 million of revolver borrowing capacity. The Company's net debt to EBITDA ratio as defined by our credit agreement decreased to 2.33 times at September 30, 2018, down from 3.87 times a year ago.
KapStone and WestRock are targeting completing the proposed merger by the end of the calendar year 2018, subject to satisfaction or waiver of the closing conditions in the merger agreement.