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KapStone Misses Overall in 2Q

Zacks Equity Research

KapStone Paper and Packaging Corporation (KS) reported second-quarter 2012 adjusted earnings per share (EPS) of 42 cents, up 8% from the year-ago quarter EPS of 39 cents but short of the Zacks Consensus Estimate of 45 cents. Including special items, EPS in the quarter stood at 39 cents, up 3% year over year from 38 cents.

Revenues increased 43% to $306 million from $214.8 million in the year-ago quarter but missed the Zacks Consensus Estimate of $308 million. The year-over-year climb can be attributed to $92.7 million of incremental sales from the USC acquisition.

KapStone’s paper production was a record 390,000 tons in the quarter. Average selling price decreased $10 from the prior-year quarter, mainly due to lower export containerboard prices, which have been recovering after declining significantly in March. However, average selling prices increased $15 per ton sequentially to $623 per ton, based on product mix improvements and a recovery of export containerboard prices.

Cost of sales increased 49% to $213.3 million in the quarter. Selling, general and administrative expenses surged 97% to $17.4 million. The company’s operating profit increased 6% to $32 million, driven by benefits from acquisition partially offset by lower selling prices, lower sales volume, unfavorable foreign exchange rates, increase in input costs and acquisition start up expenses. Operating margin contracted 370 basis points to 10.6% from 14.3% in the prior-year quarter.


Cash and cash equivalents decreased to $9.7 million as of June 30, 2012 from $20.1 million as of March 31, 2012. During the quarter, cash flow from operations increased to $57.2 million from $40.6 million in the prior year quarter.

Long-term debt decreased to $293.3 million as of June 30, 2012, from $329.4 million as of March 31, 2012. Consequently, the debt-to-capitalization ratio improved to 33.5% as of June 30, 2012 from 37.9% as of March 31, 2012. KapStone repaid $50 million of loan in the quarter.

Our Take

KapStone’s backlog remains strong, which bodes well for the company in 2012. Furthermore, its strong cash flow and balance sheet provides it with flexibility to invest in growth opportunities. The company's loan repayment in the quarter helped reduce the interest burden to a certain extent, which in turn will boost margins going forward. The company has also announced a price hike in July, with shipments beginning in mid-August that will benefit third quarter results.

Northbrook, Illinois-based KapStone Paper is a leading producer of unbleached kraft paper and corrugated products. The company is the parent company of KapStone Kraft Paper Corporation and KapStone Container Corporation which includes three paper mills and 14 converting plants across the eastern and midwestern U.S. It competes with Rock-Tenn Co. (RKT). KapStone currently maintains a Zacks #3 Rank (Hold) on its stock for the short term.


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