Northbrook, Ill. - KapStone Paper and Packaging Corporation today reported preliminary results for the fourth quarter and year ended December 31, 2010.

For the fourth quarter ended December 31, 2010:

- Record net sales of $200 million, up 21% versus 2009
- Diluted EPS of $0.28, down $0.27 per share versus prior year
- Record adjusted diluted EPS of $0.28, up $0.45 per share versus prior year

For the year ended December 31, 2010:

- Record net sales of $783 million, up 24% versus 2009
- Diluted EPS of $1.38, down $0.91 per share versus prior year
- Record adjusted diluted EPS of $0.67, up $1.48 versus prior year
- Net debt (total debt less cash) reduced by $102 million in the year to $48 million

Roger W. Stone, Chairman and Chief Executive Officer, stated, "This past year was an excellent period for our company. Strong price recovery during the year pushed our average revenue per ton up from $503 per ton in the fourth quarter of 2009 to $611 per ton in the fourth quarter of 2010.  Higher selling prices helped to generate record sales of $783 million. Our full year operating rate of 98.5 percent resulted in record production of 1.27 million tons of paper. Continued strong cash flows from operations of $136 million enabled us to slash our net debt from over $470 million just 30 months ago to $48 million at year end."

"Early in the fourth quarter of 2010 our Roanoke Rapids mill completed its annual planned maintenance outage at a cost of $6.6 million. In January 2011, we successfully negotiated a lower earn-out payment of $49.7 million with International Paper Company relating to our 2007 kraft paper business acquisition and saved over $5 million."

Fourth Quarter Operating Highlights

Net sales for the quarter ended December 31, 2010, were $199.6 million, an increase of 20.9 percent, compared to fourth quarter of 2009 sales of $165.1 million. The increase in net sales was attributable primarily to $32.5 million from higher unit selling prices. Average revenue per ton increased to $611 versus $503 during the fourth quarter of 2009. Volume and mix gains accounted for $4.4 million of the sales increase. Sales in the fourth quarter of 2010 were negatively impacted by $2.4 million due to exchange rates reflecting a stronger US dollar.

Operating income of $17.6 million for the fourth quarter exceeded the prior year's results by $28.9 million after excluding the 2009 benefit from alternative fuel mixture tax credits of $56.5 million. The improvement resulted from higher selling prices, as well as $2.7 million from mix improvement and higher volume. Fourth quarter operating income was negatively impacted by $2.0 million in inflationary cost increases and $1.5 million for higher compensation and benefits costs that were curtailed in 2009, but reinstated for 2010. Additionally, foreign exchange rates reduced operating income by $2.4 million.  

Interest expense was $0.7 million for the fourth quarter of 2010, down $0.6 million from a year ago as a result of year over year net debt reduction. At December 31, 2010, the interest rate on the majority of the Company's debt was 1.76 percent. Amortization of debt issuance costs of $0.4 million for the fourth quarter of 2010 was reduced by $1.4 million from a year ago due to a significantly lower amount of debt repayments in 2010.  

The effective tax rate for the 2010 fourth quarter was 19.4 percent compared to 40.1 percent for the 2009 fourth quarter. The 2010 effective tax rate is lower due to a discrete adjustment relating to state income taxes, a higher than expected benefit related to the domestic manufacturing deduction and the recently announced extension of the federal research and development tax credit.

For income tax purposes, the Company has taken the position that the alternative fuel mixture tax credit is not taxable as it is similar to an excise tax refund. Since the IRS has issued no specific guidance in this area, the Company has recorded a $68 million liability for an unrecognized tax benefit.

Full Year Operating Highlights

Net sales for the year ended December 31, 2010, were $782.7 million, an increase of 23.7 percent, compared to 2009 sales of $632.5 million. The increase in net sales was attributable primarily to $60.8 million from higher unit selling prices. Average revenue per ton increased to $586 versus $524 in 2009. Volume and mix gains accounted for $101.2 million of the sales increase driven by an 11.8 percent increase in unit sales. Sales in 2010 were negatively impacted by $4.9 million due to exchange rates reflecting a stronger US dollar.

Operating income of $68.7 million for the year ended December 31, 2010 exceeded the prior year's results by $75.5 million after excluding the net benefit from alternative fuel mixture tax credits of $141.8 million and $16.4 million for the gain on sale of the dunnage bag business. The improvement resulted from $60.8 million of higher selling prices, $33.6 million from mix improvement and higher volume, $9.7 million of lower amortization expenses and $5.1 million from lower transitional services. 2010 operating income was negatively impacted by $11.2 million for higher compensation and benefits costs that were curtailed in 2009, but reinstated for 2010, $9.8 million of inflationary increases on input and freight costs and $6.8 million for the Charleston mill's tri-annual planned maintenance outage. Additionally, foreign exchange rates reduced operating income by $4.9 million.

Interest expense was $3.2 million for the year ended December 31, 2010, down $10.0 million from a year ago as a result of year over year net debt reduction. Amortization of debt issuance costs of $2.2 million for 2010 was reduced by $3.7 million from a year ago due to a significantly lower amount of debt repayments in 2010.  

The effective tax rate for the year ended December 31, 2010 was (3.8) percent compared to 39.4 percent for 2009. The 2010 effective tax rate is lower due to the cellulosic biofuel producer's tax credit, a higher expected benefit related to the domestic manufacturing deduction and lower state income taxes.

Cash Flow and Working Capital

Cash and cash equivalents increased by $25.7 million in the quarter ended December 31, 2010, reflecting $44.9 million provided by operating activities offset by $14.5 million used in investing activities and $4.7 million used in financing activities.  

Cash and cash equivalents increased by $64.9 million in the year ended December 31, 2010, reflecting $136.1 million provided by operating activities offset by $35.2 million used in investing activities and $36.0 million used in financing activities.

Total net debt outstanding as of December 31, 2010, was $47.5 million and was reduced by $31.1 million during the fourth quarter of 2010. For the year, net debt was reduced by $102.3 million.      

At December 31, 2010, the Company had approximately $67.4 million of cash, $106.7 million of working capital and $88.2 million of revolver borrowing capacity.

Capital expenditures for the quarter and year ended December 31, 2010 were $14.5 million and $38.3 million, respectively, of which about $25.0 million was spent on maintenance and upgrade projects at the mills. The Company expects capital expenditures to increase to approximately $41.0 million in 2011.  

The Company was in compliance with all debt covenants at December 31, 2010. Due to the significant debt reduction and the high EBITDA generated over the past two years, the Company's debt to EBITDA ratio was 1.08 to 1 at December 31, 2010.  

Conclusion

In summary, Stone commented, "2010 was a record year for KapStone and provides a strong foundation. Looking forward, we should benefit from a full year of the 2010 price increases for our products and improved product mix. With our very low net debt and strong cash flows, we are very well positioned to take advantage of growth opportunities."