Kapstone reports good first operating quarter on pricing

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On January 2, 2007, KapStone Paper and Packaging Corporation (the Company) completed the acquisition of substantially all of the assets and assumed certain liabilities, of the Kraft Papers Business, or KPB, a division of International Paper Company. The assets include an unbleached kraft paper manufacturing facility in Roanoke Rapids, North Carolina and Ride Rite® Converting, and an inflatable dunnage bag manufacturer located in Fordyce, Arkansas.

Prior to the acquisition of KPB, the Company, a special purpose acquisition corporation or "blank check company," had no operations. For periods prior to the acquisition, KPB is deemed to be the predecessor to the Company. Therefore, in this release, the KapStone results for the first quarter of 2007 are compared to KPB's first quarter 2006 results.

Total net sales for the 2007 first quarter were $65.4 million, an increase of 2.2% over the same quarter last year. First quarter 2007 net income increased 52.6% to $7.1 million compared to the same period a year ago. Adjusted EBITDA for the 2007 first quarter was $15.6 million, an increase of $3.0 million, or 23.8%, over the same quarter last year. Adjusted basic and diluted EPS were $0.32 and $0.24, respectively, for the 2007 first quarter. Adjusted EBITDA and adjusted basic and diluted EPS exclude a $1.5 million non-cash purchase accounting adjustment made in connection with the KPB acquisition to reflect the sale of inventory acquired at fair value. -- See "Non-GAAP Financial Measures" below for a further discussion of adjusted EBITDA and adjusted EPS.

Operating Highlights

Operating income for the unbleached kraft paper segment approximated $13.0 million in the first quarter, a 57.2% increase over the prior year. The significant improvement reflected higher revenues from favorable pricing and improved product mix and productivity gains. The 2007 results also reflect the effects of purchase accounting, including lower depreciation charges on the reduced depreciable asset base and a $1.2 million non-cash adjustment to reflect the sale of inventory acquired at fair value. Prior period information has been revised to reflect the retrospective application of a change in accounting for planned major maintenance activities. The manufacturing facility typically shuts down for annual maintenance activities in the second quarter. Current accounting guidance requires these costs to be recorded in the period incurred. The previous period was revised to reflect this change.

Operating income for the dunnage bags segment approximated $1.5 million, in the first quarter, a decrease of $0.3 million from the prior year, reflecting primarily a non-cash purchase accounting adjustment for the sale of inventory acquired at fair value.

Roger Stone, KapStone's chairman and chief executive officer, said, "The operations performed remarkably well as we transitioned into KapStone. Favorable pricing, improving linerboard mix, and productivity gains coupled with great enthusiasm from our workforce contributed momentum for the operations to provide us with an outstanding inaugural quarter."

Cash Flow and Working Capital

Net cash from operating activities for the 2007 first quarter totaled $14.8 million, compared to $7.5 million a year ago. Capital expenditures of $2.1 million in the quarter were primarily spent on equipment upgrades for the unbleached kraft facility. Working capital at March 31, 2007 was $59.9 million including cash and cash equivalents of $35.2 million.

About the Company

Headquartered in Northfield, IL, KapStone Paper and Packaging Corporation is a leading North American producer of kraft paper and converter of inflatable dunnage bags. The Company is the parent company of KapStone Kraft Paper Corporation which includes a paper mill in Roanoke Rapids, NC, and Ride Rite®, an inflatable dunnage bag manufacturer in Fordyce, AR. The business employs approximately 700 people.

SOURCE: KapStone Paper and Packaging Corp.