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Caraustar Industries Posts 2nd Quarter Loss

July 28, 2006 - Caraustar Industries, Inc. today announced that sales from continuing operations for the second quarter ended June 30, 2006 were $233.8 million, an increase of 7.6 percent over sales of $217.2 million for the same quarter in 2005. Loss from continuing operations for the second quarter of 2006 was $8.1 million, or $0.28 per share, compared to 2005 second quarter income from continuing operations of $1.1 million, or $0.04 per share.

The second quarter 2006 and 2005 results included restructuring and impairment costs of approximately $3.6 million and $0.3 million pre-tax, or $0.08 and $0.01 per share, respectively. The second quarter 2006 results also included $0.7 million ($0.02 per share) in accelerated depreciation related to four closed facilities, severance cost of $0.5 million ($0.01 per share), an inventory write-down of $0.5 million ($0.01 per share) and a cost of $12.4 million ($0.27 per share) associated with the redeemed senior subordinated notes ($10.3 million loss on redemption and $2.1 million interest expense). The company accrued $1.5 million ($0.03 per share) related to a vendor claim in the second quarter of 2006. The vendor claims that it under billed the company and the company expects that the amounts it has accrued regarding this matter will be sufficient.

Paperboard volume, excluding discontinued operations, for the quarter ended June 30, 2006 increased approximately 6.3 thousand tons, or 2.4 percent, compared to the same period last year, led by gypsum facing paper grades. This increase paralleled an industry aggregate increase of 2.4 percent. Gypsum facing paper volume was up 10.8 percent over second quarter 2005 (when the Sweetwater Paperboard mill incurred downtime and inefficiencies associated with an equipment upgrade). Compared to the second quarter of 2005, recycled folding paperboard was up 3.5 percent; tube, can and composite container volume was flat; and other specialty paperboard was down 3.8 percent. Margins expanded by $9 per ton in the mill group and $39 per ton in the tube and core group compared to the same period a year ago. The margin expansion in the mill group was offset by the $1.5 million accrued for the aforementioned vendor claim. The margin increase in the company's tube and core business was partially offset by certain expenses included in operating income and referred to above (inventory write-down of $0.5 million, accelerated depreciation of $0.3 million and severance of $0.5 million). Freight costs related to tubes and cores also increased $0.5 million over the same period a year ago.

Caraustar's 50-percent interest in the Premier Boxboard Limited (PBL) mill contributed $2.0 million in equity in income of unconsolidated affiliates for the second quarter 2006 compared to $2.2 million last year. For the six months ended June 30, 2006, Caraustar's share of PBL's income was $3.6 million compared to $4.0 million for the same period last year, down primarily due to a 5 day power utility outage in the first quarter 2006. Year to date, Caraustar received $5.0 million in cash distributions from PBL in both 2006 and 2005. In 2006, the full amount was received in the second quarter, whereas in 2005, $1.0 million was received in the first quarter and $4.0 million was received in the second quarter.

Six-month period ended June 30, 2006

Sales from continuing operations for the six-month period ended June 30, 2006 were $468.1 million, an increase of 7.0 percent compared to sales of $437.4 million for the same period in 2005. Income from continuing operations for the six-month period in 2006 was $77.1 million, or $2.69 per share, compared to income from continuing operations for the six-month period in 2005 of $3.1 million, or $0.11 per share. Income from continuing operations for the first half of 2006 included restructuring charges of $3.6 million, a gain of $135.2 million on the sale of the company's 50-percent interest in its Standard Gypsum joint venture, and a cost of $18.8 million associated with the redeemed senior subordinated notes ($10.3 million loss on redemption and $8.5 million interest expense). Income from operations decreased from $10.2 million for the six-month period ended June 30, 2005 to $4.5 million for the same period in 2006. The primary factors for this decrease in income from operations were higher fuel and energy costs in the paperboard mills of approximately $3.7 million, higher restructuring and impairment costs of $2.8 million, expense of $1.5 million related to a vendor claim and increased selling, general and administrative costs of $2.1 million. These factors were partially offset by higher selling prices and lower recovered fiber costs. Selling, general and administrative costs were higher due primarily to a $1.2 million settlement of a patent infringement claim recorded in the first quarter of 2006 and $0.5 million related to severance. The sale of Caraustar's 50-percent interest in Standard Gypsum on January 17, 2006 resulted in the reduction in equity in income of unconsolidated affiliates from $17.9 million in 2005 to $3.7 million in 2006.

Michael J. Keough, president and chief executive officer of Caraustar, commented, "On a look-through basis, after adjustments for restructuring and other costs, we view our performance as slightly ahead of expectations. Volume improved for uncoated recycled grades as Caraustar was up about 6 thousand tons. Our paperboard mills operated at 95.7 percent in the second quarter of 2006, up from 93.0 percent a year ago, but down when compared to 96.9 percent for the first quarter 2006. Pricing is improving but still lags input cost increases. Recently announced price increases should positively impact the third quarter.

"In the second quarter 2006, we consolidated our tube and core and custom packaging businesses into the Converted Products Group and have redirected our focus to make this business more efficient and effective in serving customers. There were write-offs this quarter of non-strategic assets with this change in operating philosophy, and we continue to evaluate the impact of consolidating these businesses.

"Subsequent to quarter end, we completed the sale of our Sprague Paperboard mill to Cascades, Inc. for $14.5 million and applied the proceeds to our revolving line of credit. This transaction and the continuing negotiations for the sale of Caraustar's other two coated recycled boxboard mills and the contract packaging business are part of the company's previously announced decision to exit non-core businesses."

Liquidity

The company ended the second quarter with a cash balance of $7.4 million compared to $86.7 million at the end of second quarter of 2005 and $300.4 million at March 31, 2006. For the six months ended June 30, 2006, the company used $3.6 million of cash in operating activities versus providing $7.4 million for the same period last year. The decrease is primarily the result of lower income from continuing operations and an $11.5 million decrease in distributions from unconsolidated affiliates, due to the sale of Standard Gypsum. Capital expenditures were $15.8 million for the six months ended June 30, 2006 versus $11.6 million for the same period a year ago. The increase was due to $2.7 million in higher ERP investment and $1.7 million associated with the sale of the partition business in the first quarter 2006.

The company had $49.0 million in drawn borrowings outstanding under its $145 million senior secured credit facility and had $12.6 million in letters of credit outstanding. Subsequent to June 30, 2006, the company repaid $15.0 million of the $49.0 million outstanding under its senior secured credit facility.

SOURCE: Caraustar Industries, Inc.




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