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KapStone Paper and Packaging Corporation (KS - Snapshot Report) reported third-quarter 2012 adjusted earnings per share (EPS) of 41 cents, up 14% from 36 cents a year ago but short of the Zacks Consensus Estimate of 48 cents. Including special items, EPS in the quarter stood at 38 cents, up 9% year over year from 35 cents.
 
Revenues increased 43% to $309 million from $216 million in the year-ago quarter but missed the Zacks Consensus Estimate of $312 million. The year-over-year climb can be attributed to incremental sales of $99 million from the USC acquisition.
 
KapStone’s paper production was 389,000 tons in the quarter. Production at KapStone’s Roanoke Rapids mill was hit by a flood in late August and its Charleston mill also encountered some productivity problems, which temporarily impacted operations. Average selling price increased $2 per ton sequentially but decreased $14 per ton on a year-over-year basis due to lower export containerboard prices and product mix.
 
Cost of sales increased 50% to $219 million in the quarter. Selling, general and administrative expenses surged 84% to $16 million. The company’s operating profit increased 3% to $31 million, driven by benefits from acquisition and timing of annual planned maintenance outages partially offset by lower selling prices, and unplanned downtime at the Roanoke Rapids mill and unfavorable foreign exchange rates. Operating margin contracted 390 basis points year over year to 10%.
 
Financials
 
Cash and cash equivalents increased to $36 million as of September 30, 2012 from $9.7 million as of June 30, 2012. During the quarter, cash flow from operations decreased to $40 million from $51 million in the prior-year quarter.
 
Long-term debt increased to $294.3 million as of September 30, 2012, from $293.3 million as of June 30, 2012. The debt-to-capitalization ratio improved to 32.8% as of September 30, 2012 from 33.5% as of June 30, 2012. 
 
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 announced $50 per ton containerboard price increase for mid-August shipments was implemented late in the third quarter and is expected to benefit fourth 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 - Analyst Report). KapStone currently maintains a Zacks #1 Rank (Strong Buy) on its stock for the short term.

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