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KapStone Paper and Packaging Posts 1Q Loss

May 5, 2010 KapStone Paper and Packaging Corp. reported results for the first quarter ended March 31, 2010.

  • Net sales of $176.5 million, up 26 percent, versus prior year
  • Cash flows from operations of $23.0 million, up $26.6 million versus prior year, include $13.1 million of alternative fuel mixture tax credit receipts
  • Alternative fuel mixture tax credit of $22.2 million earned in the quarter
  • Net income of $6.4 million, down 43 percent, versus prior year
  • Diluted EPS of $0.14, down 64 percent, versus prior year
  • Successful completion of Charleston tri-annual planned maintenance outage
  • Net debt (total debt less cash) reduced by $16.7 million in the quarter

Roger W. Stone, Chairman and Chief Executive Officer, stated, "I am very encouraged by the favorable industry dynamics that have driven higher operating rates and pricing. In 2010, we have implemented several price increases that will benefit our operations beginning in the second quarter and throughout the remainder of the year. Due to our very strong order backlog, we experienced a lag for improving our product mix while we worked to honor our commitments from previous orders taken in leaner times. Our operations are now starting to benefit from mix improvements. The unusually wet weather in the Southeast in late 2009 and early 2010, which put upward pressure on our wood costs, seems to be improving, and the higher costs experienced in the first quarter are decreasing. Our operations performed well this quarter as we produced about 299,000 tons of paper yielding an operating rate of 96%, despite the Charleston mill being down for its tri-annual maintenance outage."

FIRST QUARTER OPERATING HIGHLIGHTS

Consolidated net sales of $176.5 million in the first quarter of 2010 increased by $35.9 million compared to $140.6 million for the 2009 first quarter, up 26 percent, mainly due to $57.8 million of higher sales volume, partially offset by $11.5 million of lower selling prices, $4.4 million due to a less favorable product mix from a higher percentage of linerboard sales and $6.0 million due to the sale of the dunnage bag business.

Operating income of $12.0 million for the 2010 quarter, decreased by $14.3 million, or 54 percent compared to the 2009 quarter primarily due to approximately $17.4 million for the 2009 gain on sale of the dunnage bag business, $11.5 million of lower selling prices, $6.5 million due to the Charleston mill's tri-annual planned maintenance outage, $4.4 million due to a less favorable product mix, $4.2 million due to inflation on input costs and $2.4 million as certain compensation benefits were reinstated effective November 2009 and January 2010. These declines were partially offset by approximately $16.7 million of higher alternative fuel mixture tax credits (the tax credit expired on December 31, 2009 and earnings in 2010 reflect $14.3 million for the amount of the credit deferred in inventory at year end and an adjustment of $7.9 million for the amount of inorganic material included with our black liquor that was burned in 2009, but excluded from refunds). Operating income in the 2010 quarter also increased by $14.4 million due to higher sales volume, $2.3 million of lower depreciation and amortization expenses mainly due to the expiration of a coal contract acquired as part of the 2008 Charleston Kraft Division acquisition and $1.5 million of lower selling and administrative expenses due to the termination of the MeadWestvaco transitional support agreement in the fourth quarter of 2009.

Interest expense of $0.9 million for the first quarter of 2010 decreased by $4.0 million over the comparable quarter in 2009 and reflected significantly lower debt levels as the Company made approximately $278 million of repayments since March 31, 2009. At March 31, 2010, the interest rate on the majority of the Company's debt is 1.7 percent. Amortization of debt issuance costs for the 2010 quarter includes approximately $0.3 million of accelerated amortization due to the $10.0 million voluntary debt repayment.

The effective tax rate for the 2010 first quarter was 35.9 percent compared to 45.0 percent for the 2009 first quarter. The 2009 effective tax rate was higher due to a discrete adjustment relating to the sale of the dunnage bag business and a lower expected benefit from the domestic manufacturing deduction.

CASH FLOW AND WORKING CAPITAL

Cash and cash equivalents increased by $1.4 million in the quarter ended March 31, 2010, reflecting $23.0 million of net cash provided by operating activities, $6.6 million of cash used by investing activities and $15.0 million of cash used for financing activities.

On March 31, 2010, the Company made a $10.0 million voluntary debt repayment. Total debt outstanding as of March 31, 2010, was $137.0 million and net debt was reduced by $16.7 million from year end. The Company was in compliance with all debt covenants at March 31, 2010.

At March 31, 2010, the Company had approximately $63.0 million of working capital and $82.5 million of revolver borrowing capacity. The Company expects to receive in cash approximately $13.2 million in federal income tax refunds and $7.9 million from alternative fuel mixture tax credits. The majority of this cash is expected to be used to make additional repayments.

In December 2009, the Company filed its registration as a cellulosic biofuel producer for the year 2009. The cellulosic biofuel tax credit, under Section 40(b)(6) of the Internal Revenue ("IRS") Code, is a $0.51 per gallon credit for cellulosic biofuel producers. The Company will not recognize any benefit associated with this tax credit until it is approved by the IRS. If approved, the Company can apply for the tax credit related to cellulosic biofuel produced during 2009 and it would be realized by reducing future income tax payable.

CONCLUSION

In summary, Stone commented, "We continue to work hard to obtain much needed price recovery and improve our product mix. We believe that KapStone's second quarter of 2010 and the remainder of the year will benefit on an increasing basis from the realization of the announced price increases and better mix management. We are focused on maintaining strong cash flows and reducing our debt to ensure a healthy and profitable future."

ABOUT THE COMPANY

Headquartered in Northbrook, IL, KapStone Paper and Packaging 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 1,600 people.

SOURCE: KapStone Paper and Packaging Corp.




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