NORTHBROOK, Ill. -- KapStone Paper and Packaging Corporation today reported results for the third quarter ended 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."