Northbrook, Ill. - KapStone Paper and Packaging Corporation today reported results for the third quarter ended September 30, 2010.

Roger W. Stone, Chairman and Chief Executive Officer, stated, "KapStone's record production in the third quarter of 2010 coupled with favorable industry dynamics enabled us to also achieve record sales of $207 million. Our mills produced 329,000 tons of paper, ran at 100 percent of capacity, and significantly improved operating margins. Wood costs continued to decline from earlier in 2010 when unusually wet weather in the Southeast created supply shortages and higher costs. Although the August domestic linerboard price increase was unsuccessful, a $40 per ton price increase for kraft paper announced in August 2010 should be fully realized in this year's fourth quarter along with improved export pricing. KapStone's order backlog remains strong."

Third Quarter Operating Highlights

Net sales for the quarter ended September 30, 2010 were $207.5 million, an increase of 21.8 percent, when compared to third quarter of 2009 sales of $170.3 million. The increase in net sales was attributable primarily to higher unit selling prices and mix improvement. Average revenue per ton increased to $614 versus $495 during the third quarter of 2009 and accounted for $28.4 million of the improvement in sales. Mix enhancement accounted for $12.2 million of the sales increase. Sales revenues in the third quarter of 2010 were negatively impacted by exchange rates and lower sales volumes by $2.1 million and $1.3 million, respectively.

Operating income of $26.6 million for the 2010 third quarter exceeded prior year's results by $33.6 million after excluding the 2009 benefit from the alternative fuel mixture tax credits of $53.5 million. The primary reasons for the improved results were higher unit pricing and mix improvement which contributed $28.4 million and $9.4 million, respectively. Third quarter operating income was negatively impacted by a $3.9 million increase in freight and distribution costs and the $3.8 million reinstatement of certain salaried benefits which had been suspended in the prior year. Additionally, foreign exchange rates reduced operating income by $2.1 million.  

Interest expense was $0.8 million for the third quarter of 2010, which decreased by $2.0 million versus the comparable quarter in 2009 as a result of year over year net debt reduction of $138 million. At September 30, 2010, the interest rate on the majority of the Company's debt was 1.76 percent.  

The effective tax rate for the 2010 third quarter was (49.9) percent compared to 37.9 percent for the 2009 third quarter. The 2010 effective tax rate is lower due to the benefit related to the cellulosic biofuel producer's credit.

In August 2010, the U.S. Internal Revenue Service ("IRS") approved the Company's registration as a producer of cellulosic biofuel for the tax year 2009. With this registration, the Company applied for a nonrefundable income tax credit of $1.01 per gallon of qualified cellulosic biofuel for black liquor burned by the Company in early 2009 for which the Company did not claim the alternative fuel mixture tax credit. A $20.7 million benefit (net of U.S. federal and state taxes) related to the cellulosic biofuel tax credit was reflected in the Company's income tax provision as a discrete item for the quarter ended September 30, 2010. The Company reported $33.9 million (the gross tax credit amount) as a deferred tax asset as of September 30, 2010 which is available to offset taxable income in future years.

Cash Flow and Working Capital

Cash and cash equivalents increased by $19.7 million in the quarter ended September 30, 2010, reflecting $33.1 million provided by operating activities offset by $5.8 million used in investing activities and $7.6 million used in financing activities.  

Total net debt outstanding as of September 30, 2010, was $78.6 million and was reduced by $27.7 million during the third quarter of 2010. The Company was in compliance with all debt covenants at September 30, 2010.    

At September 30, 2010, the Company had approximately $41.6 million of cash, $91.1 million of working capital and $87.7 million of revolver borrowing capacity.

Conclusion

Stone concluded, "Industry fundamentals remain solid characterized by relatively strong demand, high operating rates, low inventories and stable to improving prices."