KapStone Reports Second Quarter 2009 Results

NORTHBROOK, Ill., July 30 /PRNewswire-FirstCall/ -- KapStone Paper and
Packaging Corporation (Nasdaq: KPPC) today reported results for the second
quarter ended June 30, 2009.

-- Net sales of $156.5 million, up 130 percent, versus prior year
-- Net income of $18.1 million, up 120 percent, versus prior year
-- EBITDA of $47.0 million, up 193 percent versus prior year
-- Diluted EPS of $0.63, up 186 percent versus prior year

-- $40 million of voluntary debt pre-payments to be made by July 31, 2009

Roger W. Stone, Chairman and Chief Executive Officer, stated, "Having endured
the lowest sustained operating rates that I can recall, I am relieved to
report that we have seen continued volume improvement in our markets since the
first quarter of this year. In June, we shipped the highest volume of product
since last September, and by mid-June, we were able to bring all our paper
machines back on-line while substantially reducing our inventory levels from
year-end. We optimized machine down-time by transferring some production from
Charleston to Roanoke Rapids, and our operations ran well during the quarter.
We benefited from lower operating costs as a result of lower raw materials
costs and the curtailment savings we previously announced. However, pricing
deterioration, lower operating rates, and a less favorable product mix
negatively impacted our earnings in the second quarter. Generating strong
cash flows and reducing our debt are key objectives, and by July 31st we will
make $40 million of voluntary debt pre-payments. Further, we intend to
continue to make voluntary debt pre-payments during the third quarter."

Second 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 June 30, 2009, resulting in
significant changes in results over the prior year period.

Consolidated net sales of $156.5 million in the second quarter of 2009
increased from $68.2 million for the 2008 second quarter, or a 130 percent
increase. The Charleston acquisition accounted for $102.4 million of the net
sales increase. Operating income of $33.4 million for the 2009 quarter
increased by $20.2 million, or 152 percent compared to the 2008 quarter
primarily due to $48.6 million of alternative fuel mixture tax credits
partially offset by lower selling prices, unfavorable product mix and higher
corporate expenses primarily due to the Charleston acquisition.

Segment Results

Unbleached kraft segment net sales increased to $150.4 million, an increase of
$89.9 million, or 148 percent over 2008. The Charleston acquisition accounted
for $96.3 million of the net sales increase. Net sales in the 2009 second
quarter improved by $20.9 million compared to the first quarter of 2009 due to
an increase in incoming orders. To balance production with demand, the Company
ran four of its five paper machines alternating downtime among the three
machines at the Charleston mill. By mid-June 2009, both paper mills were
running at normal capacity. Average selling prices declined by 11 percent from
the first quarter of 2009 to the 2009 second quarter.

Operating income for the unbleached kraft segment increased to $40.9 million
in the second quarter of 2009, a $25.0 million, or a 157 percent increase,
over the prior year. The $48.6 million of alternative fuel mixture tax credits
boosted operating income in addition to savings from lower operating costs
partially offset by lower operating rates and lower average selling prices.
Included in the second quarter of 2009 operating results is a $2.4 million
charge for the amortization of an intangible asset relating to an acquired
coal contract with favorable prices valued at $14.1 million at the date of
acquisition. The coal contract terminates on December 31, 2009.

Net sales in the second quarter of 2009 for the all other segment, consisting
of the dunnage bag business and the Summerville lumber mill (Summerville),
totaled $6.1 million compared to $8.9 million for the 2008 second quarter.
There were no sales for the dunnage bag business in the second quarter of 2009
due to its sale on March 31, 2009. Summerville was acquired as part of the
Charleston acquisition from MWV. Operating loss in the segment was $1.5
million for the second quarter of 2009 reflecting the first quarter sale of
the dunnage bag business 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.

Corporate expenses of $5.3 million for the second quarter of 2009 were $1.3
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. Corporate expenses
in the second quarter of 2009 were $0.5 million less than the first quarter of
2009 as the Company was able to reduce the amount of support services provided
by MWV. The Company expects to completely transition from MWV's support
services before the end of the year eliminating approximately an additional
$0.5 million of expense per quarter.

Interest expense of $4.2 million for the second quarter of 2009 increased by
$3.7 million over the comparable quarter in 2008 and reflected the cost of the
Company's new senior secured credit facility. Effective August 1, 2009, the
Company's average interest rate on its term loans will be reduced to 2.9
percent down from an average of 3.5 percent for the quarter ended June 30,
2009. The reduction in the interest rates and the lower debt is projected to
save the Company $1.3 million of interest charges in the third quarter of 2009
compared to the 2009 second quarter although there will be a non-cash charge
of approximately $0.6 million in the third quarter for the acceleration of the
amortization of the deferred financing fees associated with the senior secured
notes that will be paid in full. Amortization of debt issuance costs amounted
to $0.9 million for the second quarter of 2009 compared to less than $0.1
million for the 2008 quarter and increased due to the higher financing costs
for the new senior secured credit facility established as part of the
Charleston acquisition.

The effective tax rate for the 2009 quarter was 36.5 percent compared to 36.8
percent for the 2008 quarter. The anticipated effective tax rate for the full
year of 2009 is approximately 38 percent.

Cash Flow and Working Capital

Cash flow for the first six months of 2009 reflects $62.8 million generated
from operating activities and $62.1 million of cash used to paydown debt,
mainly due to cash proceeds generated from the sale of the dunnage bag
business and cash from operations. Total debt outstanding as of June 30, 2009
was $378.3 million. By July 31, 2009 the Company will make $40 million of
voluntary debt prepayments. The Company reached agreement with the lender of
the 8.3 percent notes to pre-pay the senior secured notes in their entirety.
The Company anticipates making further voluntary debt prepayments by September
30, 2009. The cash receipts and pre-tax earnings generated from the
alternative fuel mixture tax credit are currently expected to exceed $50
million for the third quarter of 2009.

The Company was in compliance with all debt covenants at June 30, 2009.

At June 30, 2009, the Company had working capital of $67 million.

Conclusion

In summary, Stone commented, "We see demand for our products increasing.
Pricing seems to have stabilized, and in fact, with improved market demand and
low industry inventory levels, on July 15th we announced a $50/ton price
increase for our kraft paper. With higher operating rates, increased
shipments, potential benefits from kraft paper price increases, a lower cost
profile, and a much stronger balance sheet, we are optimistic about the
balance of 2009 and the opportunities that await us."

Conference Call

KapStone will host a conference call at 2 p.m. ET, Thursday, July 30, 2009, to
discuss the Company's financial results for the 2009 second 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: 866.383.8008
International: 617.597.5341
Participant Passcode: 71627996

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://www.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 June 30, 2009, 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)

Six
Quarter Fav / Months Fav /
Ended (Unfav) Ended (Unfav)
June 30, Variance June 30, Variance
------- -------- ------- --------
2009 2008 % 2009 2008 %
---- ---- ----- ---- ---- -----

Net sales 156,493 $68,162 129.6% $297,077 $135,291 119.6%

Cost and
expenses:
Cost of sales,
excluding
depreciation
and
amortization 88,354 40,800 -116.6% 184,838 82,358 -124.4%
Freight and
distribution 13,165 6,924 -90.1% 26,493 13,511 -96.1%
Selling,
general and
administrative
expenses 7,630 4,564 -67.2% 16,187 9,494 -70.5%
Depreciation and
amortization 13,488 2,835 -375.8% 27,097 5,428 -399.2%
(Loss) / gain
on sale of
business (704) - n/a 16,695 - n/a
Other
operating
income 216 187 15.5% 448 371 20.8%
--- --- ---- --- --- ----
Operating
income 33,368 13,226 152.3% 59,605 24,871 139.7%

Foreign
exchange
gain /
(loss) 171 - n/a (127) - n/a
Interest
income - 293 n/a 1 840 -99.9%
Interest
expense 4,156 419 -891.9% 9,066 1,113 -714.6%
Amortization
of debt
issuance costs 855 41 -1985.4% 1,678 100 -1578.0%
--- -- ------- ----- --- -------
Income before
provision for
income taxes 28,528 13,059 118.5% 48,735 24,498 98.9%
Provision for
income taxes 10,416 4,808 -116.6% 19,511 9,017 -116.4%
------ ----- ------ ------ ----- ------

Net income $18,112 $8,251 119.5% $29,224 $15,481 88.8%
======= ====== ===== ======= ======= ====

Earnings
per share:
Basic $0.64 $0.32 $1.03 $0.61
===== ===== ===== =====
Diluted $0.63 $0.22 $1.02 $0.43
===== ===== ===== =====

Weighted-average
number of shares
outstanding:
Basic 28,370,298 25,391,330 28,370,273 25,336,688
========== ========== ========== ==========
Diluted 28,646,527 36,719,720 28,563,291 35,638,521
========== ========== ========== ==========

Effective
tax rate 36.5% 36.8% 40.0% 36.8%
==== ==== ==== ====

OPERATING
SEGMENT DATA
($ In thousands)
Six
Quarter Fav / Months Fav /
Ended (Unfav) Ended (Unfav)
June 30, Variance June 30, Variance
------- -------- ------- --------
2009 2008 % 2009 2008 %
---- ---- ----- ---- ---- -----

Net sales
Unbleached
kraft $150,398 $60,545 148.4% $279,858 $120,905 131.5%
Other 6,095 8,905 -31.6% 18,118 16,797 7.9%
Intersegment
sales
elimination - (1,288) n/a (899) (2,411) 62.7%
--- ------ --- ---- ------ ----
Total net
sales $156,493 $68,162 129.6% $297,077 $135,291 119.6%
======== ======= ===== ======== ======== =====

Operating
income
Unbleached
kraft $40,934 $15,930 157.0% $56,416 $30,480 85.1%
Other (1,538) 1,269 -221.2% (2,375) 2,600 -191.3%
(Loss) /
gain on
sale of
business (704) - n/a 16,695 - n/a
Corporate (5,324) (3,973) -34.0% (11,131) (8,209) -35.6%
------ ------ ----- ------- ------ -----
Total
operating
income $33,368 $13,226 152.3% $59,605 $24,871 139.7%
======= ======= ===== ======= ======= =====

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

June 30, December 31,
2009 2008
---- ----
(unaudited)
Assets
Current assets:
Cash and cash equivalents $22,147 $4,165
Trade accounts receivable, net 59,069 71,489
Other receivables 13,958 6,207
Inventories 66,048 89,692
Refundable and prepaid income taxes - 14,145
Prepaid expenses and other current
assets 2,929 1,748
Deferred income taxes 5,469 3,363
----- -----
Total current assets 169,620 190,809
------- -------

Plant, property and equipment, net 475,758 483,780
Restricted cash 2,500 -
Other assets 685 882
Intangible assets, net 32,836 45,195
Goodwill 5,449 6,524
----- -----
Total assets $686,848 $727,190
======== ========

Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt and
notes $39,913 $40,556
Accounts payable 35,654 42,214
Accrued expenses 16,086 30,462
Accrued compensation costs 9,184 13,646
Accrued income taxes 2,130 ---
----- -
Total current liabilities 102,967 126,878
------- -------

Long-term debt and notes, less
current portion 329,078 389,374
Pension and post retirement benefits 9,678 8,355
Deferred income taxes 28,280 15,951
Other liabilities 5,841 5,865
----- -----
Total other liabilities 372,877 419,545
------- -------

Stockholders' equity:
Common stock $.0001 par value 3 3
Additional paid-in capital 133,241 132,206
Retained earnings 77,990 48,766
Accumulated other comprehensive loss (230) (208)
---- ----
Total stockholders' equity 211,004 180,767
------- -------
Total liabilities and stockholders'
equity $686,848 $727,190
======== ========

KapStone Paper and Packaging Corporation
Consolidated Statement of Cash Flows and Supplemental Information
($ In thousands)
(unaudited)

Quarter Ended Six Months Ended
June 30, June 30,
------------- ----------------
2009 2008 2009 2008
---- ---- ---- ----
Operating activities:
Net income $18,112 $8,251 $29,224 $15,481
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation and
amortization 13,488 2,835 27,097 5,428
Stock based compensation
expense 528 455 1,034 691
Amortization of debt issuance
costs 855 41 1,678 100
Loss on disposal of assets (87) - 288 11
Deferred income taxes 4,180 275 11,345 1,686
Gain / (loss) on sale of
business 704 - (16,695) -
Changes in operating assets
and liabilities 28,601 (840) 8,816 (2,464)
------ ---- ----- ------
Total cash provided by
operating activities $66,381 $11,017 $62,787 $20,933
------- ------- ------- -------

Investing activities:
CKD acquisition $1,000 $(1,924) $1,000 $(2,393)
KPB acquisition-earn-out for
sale of dunnage bag business (3,977) - (3,977) -
Proceeds from sale of
business - - 36,083 -
Restricted cash - - (2,500) -
Capital expenditures (6,587) (2,319) (12,910) (4,620)
------ ------ ------- ------
Total cash (used in) /
provided by investing
activities $(9,564) $(4,243) $17,696 $(7,013)
------- ------- ------- -------

Financing activities:
Proceeds from revolving
credit facility $23,400 $- $61,300 $-
Repayments on revolving
credit facility (52,700) - (73,700) -
Repayments of long-term
debt and notes (6,925) (11,600) (49,731) (15,139)
Proceeds from exercises of
warrants into common stock - 1,074 - 1,092
Debt issuance costs paid 35 - (370) -
-- --- ---- ---
Total cash (used in) /
provided by financing
activities $(36,190) $(10,526) $(62,501) $(14,047)
-------- -------- -------- --------

Net increase / (decrease) in
cash and cash
equivalents 20,627 (3,752) 17,982 (127)
Cash and cash equivalents-
beginning of period 1,520 60,260 4,165 56,635
----- ------ ----- ------
Cash and cash equivalents-end
of period $22,147 $56,508 $22,147 $56,508
======= ======= ======= =======

Supplemental information
------------------------

Net Income (GAAP) to EBITDA
(Non-GAAP):
Net income (GAAP) $18,112 $8,251 $29,224 $15,481
Interest income - (293) (1) (840)
Interest expense 4,156 419 9,066 1,113
Amortization of debt issuance
costs 855 41 1,678 100
Provision for income taxes 10,416 4,808 19,511 9,017
Depreciation and
amortization 13,488 2,835 27,097 5,428
------ ----- ------ -----
EBITDA (Non-GAAP) $47,027 $16,061 $86,575 $30,299
======= ======= ======= =======

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