KapStone Reports Third Quarter 2009 Results

NORTHBROOK, Ill., Nov. 4 /PRNewswire-FirstCall/ -- KapStone Paper and
Packaging Corporation (Nasdaq: KPPC) today reported results for the third
quarter ended September 30, 2009.

-- Net income of $25.7 million, up $23.4 million versus prior year
-- EBITDA of $60.3 million, up $33.8 million versus prior year
-- $53.5 million of alternative fuel mixture tax credits earned in the
quarter
-- Diluted EPS of $0.69, up $0.63 per share versus prior year
-- $158.4 million of debt pre-payments made in the quarter

-- An additional $25.0 million debt pre-payment was made after September
30, 2009

Roger W. Stone, Chairman and Chief Executive Officer, stated, "In the third
quarter, we made substantial progress toward many important goals. Our
operating rate was in the high 90 percent range compared to 85 percent in the
second quarter and 72 percent in the first quarter. Our backlog is getting
stronger and we are starting to see some modest price improvement. Our
balance sheet strengthened due to the debt reduction of over $158 million in
the third quarter resulting from good operating cash flow and the proceeds
received from the exercise of 17 million warrants."

Third Quarter Operating Highlights
While unit sales volume during the third quarter of 2009 increased by over 3
percent, consolidated net sales decreased $37.4 million to $170.3 million
compared to $207.7 million from the same quarter a year ago. Lower selling
prices and less favorable product mix on a higher percentage of linerboard
sales reduced revenues by $39.8 million. Net sales for third quarter of 2009
also compare unfavorably to the same period of 2008 due the inclusion in
2008's net sales of $8.9 million from the dunnage bag business which was sold
on March 31, 2009. However, when comparing net sales in the third quarter of
2009 to the second quarter of 2009, sales improved by $13.8 million on a 17
percent volume increase as demand has continued increasing from the first
quarter of the year.

Operating income of $46.5 million for the 2009 third quarter increased by
$32.4 million, or 229 percent compared to the 2008 quarter primarily due to
$53.5 million of alternative fuel mixture tax credits, $7.1 million from lower
costs on materials, energy and transportation, and $6.0 million due to a
change in the timing of the annual cold mill outage in North Carolina. These
gains were partially offset by lower average selling prices, a less favorable
product mix, and the sale of the dunnage bag business. Selling prices of most
of our products continued to decline throughout the first half of the year and
stabilized during the third quarter. As a result, average revenue per ton for
the third quarter of 2009 was $495 versus $605 in the same quarter a year ago,
or down 18 percent per ton. Operations in the third quarter of 2009 as
compared to the same quarter a year ago were negatively impacted by an
unplanned outage in the third quarter of 2009 due to the failure of a major
water pipe which shut the mill down for approximately two days, reducing
production by 6,000 tons and reducing operating income by approximately $2.5
million, including the impact of $1.1 million less received from the
alternative fuel mixture tax credit.

Operating income for the third quarter of 2009 improved $13.1 million over the
second quarter of 2009 primarily on increased volumes and higher operating
rates despite a decline in average revenue per ton, down $34, or 6 percent,
from the second quarter of 2009.

Included in the 2009 and 2008 third quarters' 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 the CKD acquisition. The coal contract and related amortization
terminate on December 31, 2009.

Interest expense of $2.8 million for the third quarter of 2009 decreased by
$5.2 million over the comparable quarter in 2008 and reflected the impact of
over $250 million of debt repayments and lower interest rates since a year
ago. Effective August 1, 2009, the Company's average interest rate on its term
loans was reduced to 2.9 percent down from an average of 3.5 percent for the
quarter ended June 30, 2009. Interest rates on the term loans are expected to
be further reduced to approximately 1.75 percent in November 2009. In the 2009
third quarter, the Company incurred higher non-cash amortization charges
related to debt issuance costs of approximately $2.5 million which included a
one-time charge of approximately $1.9 million for the acceleration of the
amortization associated with the debt repayments.

The effective tax rate for the 2009 quarter was 37.9 percent compared to 52.2
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 2009 third quarter reflects $61.0 million provided by
operating activities, $6.9 million used in investing activities and $73.1
million used in financing activities. During the 2009 quarter, the Company
received $85.2 million from exercises of 17 million common stock warrants. The
Company used the proceeds from the warrant exercises and cash proceeds from
operations to paydown $158.4 million of debt. Since September 30, 2009, the
Company has prepaid an additional $25.0 million of debt, bringing the total
debt outstanding as of today to $194.9 million.

The Company was in compliance with all debt covenants at September 30, 2009.
Due to the significant debt reduction and the high EBITDA generated over the
past year, the Company's debt to EBITDA ratio is 1.42 to 1 at September 30,
2009.

For 2010, the Company is evaluating whether it may qualify for a $1.01 per
gallon tax credit for cellulosic biofuel producers under Section 40(b)(6). We
are also researching how we can indirectly benefit from the Biomass Crop
Assistance Program (BCAP) a subsidy for suppliers of biomass who sell to
approved biomass conversion facilities, which will, in turn, convert biomass
to energy. Both of KapStone's mills are approved biomass conversion
facilities.

At September 30, 2009, the Company had working capital of $66.1 million.

On March 31, 2009, KapStone received approval from the Internal Revenue
Service for its registration as an alternative fuel mixer, which provides a
refund of $0.50 per gallon of alternative fuel used in KapStone's pulp making
process. KapStone has submitted refund claims totaling $121.9 million based
on fuel usage from mid-January 2009 through September 30, 2009. The Company
has received refunds from the Internal Revenue Service totaling $109.7 million
through the end of the third quarter. The pre-tax impact of the alternative
fuel mixture tax credit is included in cost of sales in the consolidated
financial statements in the amounts of $53.5 million and $107.5 million for
the three and nine months ended September 30, 2009, respectively, and $14.4
million of the credit is included in the consolidated balance sheet as a
reduction to finished goods inventory. The cash receipts and pre-tax earnings
generated from the alternative fuel mixture tax credit are currently expected
to exceed $50 million for the fourth quarter of 2009. The alternative fuel
mixture tax credit is currently scheduled to expire on December 31, 2009.

Conclusion
In summary, Stone commented, "Since the first quarter of 2009, our operations
have experienced a steady recovery with higher production and sales in each
quarter. We are sharply focused on improving product mix and pricing and are
planning on a strong finish for 2009. Recent announcements confirm that the
industry is committed to balancing supply with demand and that speaks well for
its future. With a stronger and improving balance sheet, we are
well-positioned for future growth."

Conference Call
KapStone will host a conference call at 11 a.m. ET, Thursday, November 5,
2009, to discuss the Company's financial results for the 2009 third 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: 800.299.8538
International: 617.786.2902
Participant Pass code: 62214320

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 and
Adjusted EBITDA provide useful information to investors because they improve
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. Reconciliations of Net Income to EBITDA, EBITDA
to Adjusted EBITDA, Net Income to Adjusted Net Income, Basic EPS to Adjusted
Basic EPS, and Diluted EPS to Adjusted Diluted EPS are 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 September 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)

Quarter Ended Fav / (Unfav)
September 30, Variance
--------------
2009 2008 %
---- ---- ----

Net sales $170,335 $207,671 -18.0%

Cost and expenses:
Cost of sales, excluding
depreciation and amortization
86,812 151,064 42.5%
Freight and distribution 16,262 19,969 18.6%
Selling, general and
administrative expenses 7,105 9,757 27.2%
Depreciation and amortization 13,664 12,953 -5.5%
(Loss) / gain on sale of
business (278) - n/a
Other operating income 285 218 30.7%
--- --- ----
Operating income 46,499 14,146 228.7%

Foreign exchange gain /(loss) 175 (607) n/a
Interest income - 51 n/a
Interest expense 2,821 8,011 64.8%
Amortization of debt issuance
costs 2,532 761 -232.7%
----- --- ------
Income before provision for
income taxes 41,321 4,818 757.6%
Provision for income taxes 15,649 2,513 -522.7%
------ ----- ------

Net income $25,672 $2,305 1013.8%
======= ====== ======

Earnings per share:
Basic $0.70 $0.09
===== =====
Diluted $0.69 $0.06
===== =====

Weighted-average number
of shares outstanding:
Basic 36,548,515 26,904,070
========== ==========
Diluted 36,940,773 38,012,635
========== ==========

Effective tax rate 37.9% 52.2%
==== ====

Nine Months Ended Fav / (Unfav)
September 30, Variance
-----------------
2009 2008 %
---- ---- ----

Net sales $467,412 $342,962 36.3%

Cost and expenses:
Cost of sales, excluding
depreciation and amortization
271,650 233,422 -16.4%
Freight and distribution 42,755 33,480 -27.7%
Selling, general and
administrative expenses 23,292 19,251 -21.0%
Depreciation and amortization 40,761 18,381 -121.8%
(Loss) / gain on sale of
business 16,417 - n/a
Other operating income 733 589 24.4%
--- --- ----
Operating income 106,104 39,017 171.9%

Foreign exchange gain /(loss) 48 (607) n/a
Interest income 1 891 -99.9%
Interest expense 11,887 8,815 -34.8%
Amortization of debt issuance
costs 4,210 1,170 -259.8%
----- ----- ------
Income before provision for
income taxes 90,056 29,316 207.2%
Provision for income taxes 35,160 11,530 -204.9%
------ ------ ------

Net income $54,896 $17,786 208.6%
======= ======= =====

Earnings per share:
Basic $1.77 $0.69
===== =====
Diluted $1.75 $0.49
===== =====

Weighted-average number
of shares outstanding:
Basic 31,096,354 25,859,149
========== ==========
Diluted 31,355,785 36,429,893
========== ==========

Effective tax rate 39.0% 39.3%
==== ====

OPERATING SEGMENT DATA
($ In thousands)

Quarter Ended Fav / (Unfav)
September 30, Variance
--------------
2009 2008 %
---- ---- ----
Net sales
Unbleached kraft $170,335 $199,601 -14.7%
Other - 8,906 -100.0%
Intersegment sales
elimination - (836) n/a
- ---- ---
Total net sales $170,335 $207,671 -18.0%
======== ======== =====

Operating income
Unbleached kraft $51,952 $19,608 165.0%
Other - 1,608 -100.0%
(Loss) / gain on sale of
business (278) - n/a
Corporate (5,175) (7,070) 26.8%
------ ------ ----
Total operating income $46,499 $14,146 228.7%
======= ======= =====

Nine Months Ended Fav / (Unfav)
September 30, Variance
-----------------
2009 2008 %
---- ---- ----
Net sales
Unbleached kraft $461,384 $320,506 44.0%
Other 6,927 25,703 -73.0%
Intersegment sales
elimination (899) (3,247) 72.3%
---- ------ ----
Total net sales $467,412 $342,962 36.3%
======== ======== ====

Operating income
Unbleached kraft $105,245 $50,087 110.1%
Other 748 4,209 -82.2%
(Loss) / gain on sale of
business 16,417 - n/a
Corporate (16,306) (15,279) -6.7%
------- ------- ----
Total operating income $106,104 $39,017 171.9%
======== ======= =====

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

September 30, December 31,
2009 2008
---- ----
(unaudited)
Assets
Current assets:
Cash and cash equivalents $3,074 $4,165
Trade accounts receivable, net of
allowances of $2,884 in 2009 and
$2,421 in 2008 59,615 71,489
Other receivables 15,189 6,207
Inventories 61,600 89,692
Refundable and prepaid
income taxes 2,947 14,145
Prepaid expenses and other
current assets 3,193 1,748
Restricted cash 2,500 -
Deferred income taxes 5,620 3,363
----- -----
Total current assets 153,738 190,809
------- -------

Plant, property and equipment, net 470,304 483,780
Other assets 1,553 882
Intangible assets, net 29,517 45,195
Goodwill 5,449 6,524
----- -----
Total assets $660,561 $727,190
======== ========

Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt
and notes $25,960 $40,556
Accounts payable 36,404 42,214
Accrued expenses 16,607 30,462
Accrued compensation costs 8,689 13,646
----- ------
Total current liabilities 87,660 126,878
------ -------

Long-term debt and notes, less
current portion 187,059 389,374
Pension and post retirement benefits 6,994 8,355
Deferred income taxes 32,757 15,951
Other liabilities 23,556 5,865
------ -----
Total other liabilities 250,366 419,545
------- -------

Stockholders' equity:
Common stock $.0001 par value 5 3
Additional paid-in capital 219,107 132,206
Retained earnings 103,662 48,766
Accumulated other comprehensive loss (239) (208)
---- ----
Total stockholders' equity 322,535 180,767
------- -------
Total liabilities and
stockholders' equity $660,561 $727,190
======== ========

KapStone Paper and Packaging Corporation
Consolidated Statement of Cash Flows
($ in thousands)
(unaudited)

Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -----------------
2009 2008 2009 2008
---- ---- ---- ----

Operating activities:
Net income $25,672 $2,305 $54,896 $17,786
Adjustments to
reconcile net income
to cash provided by
operating activities:
Depreciation
and
amortization 13,664 12,953 40,761 18,381
Stock based
compensation
expense 652 498 1,686 1,189
Amortization of
debt issuance
costs 2,532 1,070 4,210 1,170
Loss on
disposal of
assets 468 - 756 -
Deferred
income
taxes 2,405 11,313 13,750 12,999
Gain / (loss) on
sale of business (278) - (16,417) -
Changes in operating
assets and liabilities 15,888 (21,068) 24,148 (23,521)
------ ------- ------ -------
Total cash provided by
operating activities $61,003 $7,071 $123,790 $28,004
------- ------ -------- -------

Investing activities:
CKD acquisition $- $(468,058) $1,000 $(470,451)
KPB acquisition-earn-
out due to sale of
dunnage bag business - - (3,977) -
Proceeds from
sale of
business (1,185) - 34,898 -
Restricted cash - - (2,500) -
Capital expenditures (5,746) (8,094) (18,656) (12,714)
------ ------ ------- -------
Total cash (used
in) / provided
by investing
activities $(6,931) $(476,152) $10,765 $(483,165)
------- --------- ------- ---------

Financing activities:
Proceeds from
revolving credit
facility $3,000 $71,800 $64,300 $71,800
Repayments on
revolving credit
facility (3,000) (17,000) (76,700) (17,000)
Proceeds from long-
term debt and notes - 455,000 - 455,000
Repayments of long-
term debt and notes (158,362) (56,814) (208,093) (71,953)
Proceeds from
exercises of
warrants
into common
stock 85,217 14,054 85,217 15,146
Debt
issuance
costs paid - (12,593) (370) (12,593)
--- ------- ---- -------
Total cash (used
in) / provided
by financing
activities $(73,145) $454,447 $(135,646) $440,400
-------- -------- --------- --------

Net increase /
(decrease) in
cash and cash
equivalents (19,073) (14,634) (1,091) (14,761)
Cash and cash
equivalents-beginning
of period 22,147 56,508 4,165 56,635
------ ------ ----- ------
Cash and cash
equivalents-end of
period $3,074 $41,874 $3,074 $41,874
====== ======= ====== =======

KapStone Paper and Packaging Corporation
Supplemental Information
GAAP to Non-GAAP Reconciliations
($ in thousands, except share and per share amounts)
(unaudited)

Quarter Ended Nine Months
Sept 30, Ended Sept 30,
------------- ---------------
2009 2008 2009 2008
---- ---- ---- ----
Net Income (GAAP) to EBITDA (Non-
GAAP) to Adjusted EBITDA:
Net income (GAAP) $25,672 $2,305 $54,896 $17,786
Interest income - (51) (1) (891)
Interest expense 2,821 8,011 11,887 8,815
Amortization of debt issuance
costs 2,532 761 4,210 1,170
Provision for income taxes 15,649 2,513 35,160 11,530
Depreciation and amortization 13,664 12,953 40,761 18,381
------ ------ ------ ------
EBITDA (Non-GAAP) $60,338 $26,492 $146,913 $56,791
======= ======= ======== =======

Alternative fuel mixture tax credits (53,458) - (107,464) -
Charleston outage costs 1,805 - 1,805 -
Dunnage bag business 278 (1,706) (17,266) (4,492)
Stock based compensation expense 652 498 1,686 1,189
KPB annual maintenance outage - 5,966 - 5,966
CKD acquisition start up expenses - 2,205 - 2,361
--- ----- --- -----
Adjusted EBITDA (Non-GAAP) $9,615 $33,455 $25,674 $61,815
====== ======= ======= =======

Net Income (GAAP) to Adjusted Net
Income (Non-GAAP):
Net income (GAAP) $25,672 $2,305 $54,896 $17,786
Alternative fuel mixture tax credits (33,213) - (65,508) -
Amortization of acquired coal
contract with favorable prices 1,513 1,092 4,458 1,386
Accelerated amortization of debt
issuance costs 1,170 - 1,148 -
Charleston outage costs 1,121 - 1,100 -
Dunnage bag business 173 (815) (10,525) (2,725)
Stock based compensation expense 405 238 1,028 721
KPB annual maintenance outage - 2,852 - 3,620
CKD acquisition start up expenses - 1,054 - 1,432
--- ----- --- -----
Adjusted Net Income (Non-GAAP) $(3,157) $6,726 $(13,402) $22,220
======= ====== ======== =======

Basic EPS (GAAP) to Adjusted
Basic EPS (Non-GAAP):
Basic EPS (GAAP) $0.70 $0.09 $1.77 $0.69
Alternative fuel mixture tax credits (0.91) - (2.11) -
Amortization of acquired coal
contract with favorable prices 0.04 0.04 0.14 0.05
Accelerated amortization of debt
issuance costs 0.03 - 0.04 -
Charleston outage costs 0.03 - 0.04 -
Dunnage bag business - (0.03) (0.34) (0.11)
Stock based compensation expense 0.01 0.01 0.03 0.03
KPB annual maintenance outage - 0.11 - 0.14
CKD acquisition start up expenses - 0.04 - 0.06
--- ---- --- ----
Adjusted Basic EPS (Non-GAAP) $(0.10) $0.26 $(0.43) $0.86
====== ===== ====== =====

Diluted EPS (GAAP) to Adjusted
Diluted EPS (Non-GAAP):
Diluted earnings per share (GAAP) $0.69 $0.06 $1.75 $0.49
Alternative fuel mixture tax credits (0.90) - (2.09) -
Amortization of acquired coal
contract with favorable prices 0.04 0.03 0.14 0.04
Accelerated amortization of debt
issuance costs 0.03 - 0.04 -
Charleston outage costs 0.03 - 0.04 -
Dunnage bag business - (0.02) (0.34) (0.07)
Stock based compensation expense 0.01 0.01 0.03 0.02
KPB annual maintenance outage - 0.08 - 0.10
CKD acquisition start up expenses - 0.03 - 0.04
--- ---- --- ----
Adjusted Diluted EPS (Non-GAAP) $(0.10) $0.19 $(0.43) $0.62
====== ===== ====== =====

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