KapStone Reports First Quarter 2009 Results

NORTHBROOK, Ill., May 11 /PRNewswire-FirstCall/ -- KapStone Paper and
Packaging Corporation (Nasdaq: KPPC) today reported results for the first
quarter ended March 31, 2009.

-- Net sales of $140.6 million, up 109 percent, versus prior year
-- Net income of $11.1 million, up 54 percent, versus prior year
-- EBITDA of $39.5 million, up 178 percent versus prior year
-- Diluted EPS of $0.39, up 86 percent versus prior year
-- Sale of dunnage bag business for $36.1 million and $17.4 million
pre-tax
gain

-- Alternative fuel mixture tax incentive of $23.9 million generated for
the quarter of which $5.4 million was recognized in earnings and $18.5
million deferred in inventory

Roger W. Stone, Chairman and Chief Executive Officer, stated, "Our financial
results for the quarter were strong benefiting from the sale of the dunnage
bag business and our credits earned for the alternative fuel mixture tax
incentive. The extremely difficult global economic conditions challenged us
with the lowest continuing industry operating rates that I have ever
experienced. While the industry has done a remarkable job of balancing supply
with demand, lower demand is now negatively impacting our prices. We reduced
the costs we could control and took advantage of an opportunity to lower our
debt and focus on our core business by selling our dunnage bag business at an
attractive price."

First Quarter Operating Highlights
Due to the acquisition of the Charleston Kraft Division (Charleston) from
MeadWestvaco Corporation (MWV) on July 1, 2008, a full quarter of Charleston's
operations are included for the three months ended March 31, 2009, resulting
in significant changes in results over the prior year period. On March 31,
2009, the Company sold its dunnage bag business to Illinois Tool Works Inc.
(ITW) for $36.1 million resulting in a pre-tax gain of $17.4 million.

Consolidated net sales of $140.6 million in the first quarter of 2009
increased from $67.1 million for the 2008 first quarter, up 109 percent, due
to $85.8 million of sales from the Charleston acquisition. Operating income
of $26.2 million for the 2009 quarter increased by $14.6 million, or 125
percent compared to the 2008 quarter primarily due to a $17.4 million pre-tax
gain on the sale of the dunnage bag business and a $5.4 million benefit from
the alternative fuel mixture tax incentive. Although the alternative fuel tax
credit generated in the quarter was $23.9 million, $18.5 million was deferred
and included in our first-in first-out based finished goods inventory and will
be recognized in earnings upon the sale of that inventory. Operating income
also benefited from the Company's mid-quarter implementation of cost
curtailments and totaled approximately $3 million. However, offsetting these
gains were the impacts from the significant volume declines, inflation on raw
materials and energy costs which, despite the recent declines, are still
higher than the prior year period, increased bad debt expense, and higher
corporate expenses primarily due to the Charleston acquisition.

Segment Results
Unbleached kraft segment sales increased to $129.5 million, an increase of
$69.1 million, or 115 percent over 2008. The Charleston acquisition accounted
for $80.7 million of the sales increase. Due to a lack of orders in the first
quarter of 2009, the Company decided to run four of its five machines
alternating downtime among the machines at the Charleston mill. Therefore,
the Company's production was down from fourth quarter 2008 levels by 22
percent. Our operating rate for the first quarter of 2009 was approximately
72%. Excluding the effect from the Charleston acquisition, sales were down on
a volume decline of 20 percent, or $11.6 million, due to the very difficult
economic environment. Average selling prices remained higher than the 2008
first quarter, but were down from the fourth quarter of 2008.

Operating income for the unbleached kraft segment was $15.5 million in the
first quarter of 2009, a $0.9 million, or 6 percent increase, over the prior
year. The $5.4 million alternative fuel mixture tax credit boosted operating
income, but significant volume declines and a $2.4 million quarterly charge
for the amortization of an intangible asset negatively impacted the results.
The amortization is recorded for an acquired coal contract with favorable
prices valued at $14.1 million at the date of acquisition. The contract and
its related amortization expense will terminate December 31, 2009.

Excluding the Charleston acquisition, unbleached kraft segment operating
income was down $1.7 million primarily due to lower volume, higher costs for
raw materials and energy, and increased bad debt expense. Partially
offsetting these negative impacts were benefits from the alternative fuel tax
credit.

Net sales for the all other segment, consisting of the dunnage bag business
and the Summerville lumber mill (Summerville), totaled $12.0 million.
Summerville was acquired as part of the Charleston acquisition from MWV.
Operating loss in the segment was $0.8 million for the first quarter of 2009
reflecting lower dunnage bag volume and low sales volumes and selling prices
for Summerville mainly due to a continued slowdown in the number of new
housing starts and lower consumer spending. As part of the dunnage bag
business sale, the Company signed a long-term paper supply agreement with ITW.

Corporate expenses of $5.8 million for the first quarter of 2009 were $1.6
million higher than the comparable quarter in the prior year and reflected
higher costs to support the Charleston acquisition, partially offset by lower
compensation costs due to salary and benefit curtailments.

Interest expense of $4.9 million for the first quarter of 2009 increased by
$4.2 million over the comparable quarter in 2008 and reflected the cost of the
Company's new senior secured credit facility. Beginning in January 2009 the
Company has been locking into interest rates on a monthly basis. In January,
the Company reset the interest rate on the majority of its debt, or
approximately $388 million of term loans, to 3.5 percent. Amortization of
debt issuance costs amounted to $0.8 million for the first quarter of 2009
compared to $0.1 million for the 2008 quarter and increased due to the higher
financing costs for the senior secured credit facility established as part of
the CKD acquisition.

The effective tax rate for the 2009 quarter was 45.0 percent compared to 36.8
percent for the 2008 quarter and reflects higher taxes for the gain on sale of
the dunnage bag business and a lower expected benefit from the domestic
manufacturing tax deduction. The anticipated effective tax rate for the full
year of 2009 is approximately 39 percent.

Cash Flow and Working Capital
Cash flow for the first quarter of 2009 reflects a $2.6 million outflow
comprised of $3.6 million of cash used for operations, $27.3 million of cash
provided by investing activities and $26.3 million of cash used for financing
activities. Total debt outstanding as of March 31, 2009 was $414.5 million,
down $25.9 million from year end mainly due to cash proceeds generated from
the sale of the dunnage bag business. The Company was in compliance with all
debt covenants at March 31, 2009.

In January 2009 the Company received a $9.3 million federal tax refund. An
additional tax refund of approximately $4.3 million is expected later in 2009.

At March 31, 2009, the Company had working capital of $70 million.

Alternative Fuel Tax Credit
The federal government has implemented an incentive program through the U.S.
Internal Revenue Code that provides payments under certain circumstances for
the use of alternative fuels and alternative fuel mixtures in lieu of
fossil-based fuels. The credit is based on the amount of alternative fuel
contained in the mixture. KapStone qualifies for the alternative fuel mixtures
tax credit because it uses a bio-fuel known as black liquor, which is a
byproduct of its wood pulping process, to power its mills.

In March, the Company was notified that its registration as an alternative
fuel mixer was approved by the Internal Revenue Service. The Company
submitted refund claims totaling $23.9 million for the first quarter covering
fuel used at its Charleston mill from January 29 through March 31 and for its
Roanoke Rapids mill from February 14 through March 31. On April 20, 2009, the
Company received the $23.9 million refund. The Company now files for refunds
on a weekly basis which approximate $3.2 million to $3.6 million at current
operating rates. The credit is currently scheduled to expire on December 31,
2009. There can be no assurance that the federal incentive program for
alternative fuel mixtures will continue in effect, and that its provisions
will not be changed in a manner that would have a material adverse effect on
KapStone's future cash flows and results of operations.

Conclusion

In summary, Stone commented, "We are hopeful that the demand for our products
bottomed out in the first quarter, and we are cautiously optimistic that there
is some meaningful strengthening in demand. However, demand will have to
increase significantly before we are in a position to resume normal operations
for all five of our machines. We expect cash flow from operations to be
sufficient to meet our obligations, particularly with the continued benefit
from the alternative fuel mixture tax incentive. We are focused on maintaining
strong cash flows and reducing our debt to ensure a healthy and profitable
future."

Conference Call
KapStone will host a conference call at 2 p.m. ET, Monday, May 11, 2009, to
discuss the Company's financial results for the 2009 first quarter. All
interested parties are invited to listen and may do so by either accessing a
simultaneous broadcast webcast on KapStone's website,
http://www.kapstonepaper.com, or for those unable to access the webcast, the
following dial-in numbers are available:

Domestic: 888.396.2369
International: 617.847.8710
Participant Passcode: 33888993

The webcast is also being distributed through the Thomson StreetEvents
Network. Individual investors can listen to the call at http://earnings.com,
Thomson's individual investor portal, powered by StreetEvents. Institutional
investors can access the call via Thomson StreetEvents
(http://streetevents.com) a password-protected event management site.

A replay of the webcast will be available for 30 days on the Company's web
site following the call.

About the Company
Headquartered in Northbrook, IL, KapStone Paper and Packaging Corporation is a
leading North American producer of unbleached kraft paper products, and
linerboard. The Company is the parent company of KapStone Kraft Paper
Corporation which includes paper mills in Roanoke Rapids, NC and North
Charleston, SC, a lumber mill in Summerville, SC, and five chip mills in South
Carolina. The business employs approximately 1,550 people.

Non-GAAP Financial Measures
This press release includes certain non-GAAP financial measures. Management
uses these measures to focus on the on-going operations, and believes it is
useful to investors because they enable them to perform meaningful comparisons
of past and present operating results. The Company believes that EBITDA
provides useful information to investors because it improves the comparability
of the financial results between periods and provide for greater transparency
to key measures used to evaluate the performance and liquidity of the Company.
Management uses EBITDA for evaluating the Company's performance against
competitors and as a primary measure for employees' incentive programs and
potential future contingent earn-out payments to International Paper Company.
A reconciliation of net income to EBITDA is included in the financial
schedules contained in this press release. However, these measures should not
be construed as an alternative to any other measure of performance determined
in accordance with GAAP.

Forward-Looking Statements
Statements in this news release that are not historical are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements can often be identified by words such as
"may," "will," "should," "would,' "expect," "project," "anticipate," "intend,"
"plan," "believe," "estimate," "potential," "outlook," or "continue," the
negative of these terms or other similar expressions. These statements
reflect management's current views and are subject to risks, uncertainties and
assumptions, many of which are beyond the Company's control that could cause
actual results to differ materially from those expressed or implied in these
statements. Factors that could cause actual results to differ materially
include, but are not limited to: (1) the ability of KapStone to successfully
integrate Charleston's operations and employees and KapStone's ability to
realize anticipated synergies and cost savings; (2) industry conditions,
including changes in cost, competition, changes in the Company's product mix
and demand and pricing for the Company's products; (3) market and economic
factors, including changes in raw material and healthcare costs, exchange
rates and interest rates; (4) results of legal proceedings and compliance
costs, including unanticipated expenditures related to the cost of compliance
with environmental and other governmental regulations; (5) the ability to
achieve and effectively manage growth; (6) the ability to pay the Company's
debt obligations; (7) the ability to carry out the Company's strategic
initiatives and manage associated costs; and (8) the potential impact of
changes to or a discontinuation before December 31, 2009 of the federal
incentive program for alternative fuel mixtures. Further information on these
and other risks and uncertainties is provided under Item 1A "Risk Factors" in
the Company's Annual Report on Form 10-K for the year ended December 31, 2008
and Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, which
is incorporated herein by reference, and elsewhere in reports that the Company
files or furnishes with the SEC. These filings can be found on KapStone's Web
site at www.kapstonepaper.com and the SEC's Web site at www.sec.gov.
Forward-looking statements included herein speak only as of the date hereof
and the Company disclaims any obligation to revise or update such statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events or circumstances.

KapStone Paper and Packaging Corporation
Consolidated Statements of Income
(In thousands, except share and per share amounts)
(unaudited)

Fav /(Unfav)
Quarter Ended March 31, Variance
2009 2008 %

Net sales $140,584 $67,129 109.4%

Cost and expenses:
Cost of sales, excluding
depreciation and amortization 96,484 41,558 -132.2%
Freight and distribution 13,328 6,587 -102.3%
Selling, general and
administrative expenses 8,557 4,930 -73.6%
Depreciation and amortization 13,609 2,593 -424.8%
Other operating income 232 184 26.1%
Gain on sale of business 17,399 - -
Operating income 26,237 11,645 125.3%

Foreign exchange losses 298 - -
Interest income 1 547 -99.8%
Interest expense 4,910 694 -607.5%
Amortization of debt issuance costs 823 59 -1294.9%
Income before provision for income
taxes 20,207 11,439 76.7%
Provision for income taxes 9,095 4,209 -116.1%
Net income $11,112 $7,230 53.7%

Net income per share:
Basic $0.39 $0.29
Diluted $0.39 $0.21

Weighted-average number of
shares outstanding:
Basic 28,370,248 25,282,047
Diluted 28,480,055 34,557,324

Effective tax rate 45.0% 36.8%

OPERATING SEGMENT DATA
(In thousands)
Fav /(Unfav)
Quarter Ended March 31, Variance
2009 2008 %
Net sales
Unbleached kraft $129,460 $60,360 114.5%
All other 12,023 $7,892 52.3%
Elimination of intersegment
sales (899) (1,123) -19.9%
Total net sales $140,584 $67,129 109.4%

Operating income
Unbleached kraft $15,482 $14,550 6.4%
All other (837) 1,331 -162.9%
Gain on sale of business 17,399 - -
Corporate (5,807) (4,236) -37.1%
Total operating income $26,237 $11,645 125.3%

KapStone Paper and Packaging Corporation
Consolidated Balance Sheets
(In thousands)

March 31, December 31,
2009 2008
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $1,520 $4,165
Trade accounts receivable, net 56,704 71,489
Other receivables 27,714 6,207
Inventories 79,256 89,692
Refundable and prepaid income taxes 2,921 14,145
Prepaid expenses and other current assets 4,255 1,748
Deferred income taxes 1,234 3,363
Total current assets 173,604 190,809

Plant, property and equipment, net 478,754 483,780
Restricted cash 2,500 -
Other assets 1,157 882
Intangible assets, net 36,202 45,195
Goodwill 5,461 6,524
Total assets $697,678 $727,190

Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt and notes $37,605 $40,556
Accounts payable 38,135 42,214
Accrued expenses 19,043 30,462
Accrued compensation costs 8,405 13,646
Total current liabilities 103,188 126,878

Long-term debt and notes, net 367,184 389,374
Pension and post retirement benefits 9,227 8,355
Deferred income taxes 19,874 15,951
Other liabilities 5,829 5,865
Total other liabilities 402,114 419,545

Stockholders' equity:
Common stock $.0001 par value 3 3
Additional paid-in capital 132,712 132,206
Retained earnings 59,878 48,766
Accumulated other comprehensive loss (217) (208)
Total stockholders' equity 192,376 180,767
Total liabilities and stockholders' equity $697,678 $727,190

KapStone Paper and Packaging Corporation
Consolidated Statement of Cash Flows and GAAP to Non-GAAP Reconciliation
(In thousands)
(unaudited)

Quarter Ended March 31,
2009 2008
Operating activities:
Net income $11,112 $7,230
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 13,609 2,593
Stock based compensation expense 506 236
Amortization of debt issuance costs 823 59
Gain on sale of dunnage bag business (17,399) -
Loss on disposal of equipment 375 -
Deferred income taxes 7,165 1,411
Alternate fuel mixture tax credit receivable (23,909) -
Changes in operating assets and liabilities 4,124 (1,613)
Total cash (used for) / provided by operating
activities $(3,594) $9,916

Investing activities:
CKD acquisition $- $(469)
Proceeds from sale of dunnage bag business 36,083 -
Capital expenditures (6,323) (2,301)
Restricted cash held in escrow (2,500) -
Total cash provided by / (used for) investing
activities $27,260 $(2,770)

Financing activities:
Proceeds from revolving credit facility $37,900 $-
Repayments on revolving credit facility (21,000) -
Debt issuance costs (405) -
Repayments of long-term debt and notes (42,806) (3,539)
Proceeds from exercises of common stock warrants - 18
Total cash (used for) / provided by financing
activities $(26,311) $(3,521)

Net increase / (decrease) in cash and cash
equivalents (2,645) 3,625
Cash and cash equivalents-beginning of period 4,165 56,635
Cash and cash equivalents-end of period $1,520 $60,260

GAAP to Non-GAAP Reconciliation
Net Income (GAAP) to EBITDA (Non-GAAP):
Net income (GAAP) $11,112 $7,230
Interest income (1) (547)
Interest expense 4,910 694
Amortization of debt issuance costs 823 59
Provision for income taxes 9,095 4,209
Depreciation and amortization 13,609 2,593
EBITDA (Non-GAAP) $39,548 $14,238

SOURCE KapStone Paper and Packaging Corporation

Andrea K. Tarbox, Vice President and Chief Financial Officer of KapStone Paper
and Packaging Corporation, +1-847-239-8812