KapStone Reports 2007 Full Year Results

NORTHBROOK, Ill., March 14 /PRNewswire-FirstCall/ -- KapStone Paper and Packaging Corporation NASDAQ: KPPC today reported results for the fourth quarter and year ended December 31, 2007.

                                    Predecessor                    Predecessor
                                        KPB                            KPB
                         Three Months Ended Dec. 31,    Year Ended Dec. 31,
    $000's                  2007        2006           2007            2006
    GAAP Net Income        $8,634      $5,919  (1)   $26,963         $19,967
    Adjusted Net Income    $8,634      $5,919  (1)   $27,940  (2)    $19,967

    GAAP Basic Earnings
     per Share              $0.34          NA          $1.08            NA
    Adjusted Basic
     Earnings per Share     $0.34          NA          $1.12  (2)       NA

    GAAP Diluted Earnings
     per Share              $0.23          NA          $0.75            NA
    Adjusted Diluted
     Earnings per Share     $0.23          NA          $0.78  (2)       NA

    EBITDA                $16,515     $14,608        $55,627         $52,161
    Adjusted EBITDA       $16,515     $14,608  (1)   $57,153  (2)    $52,161

    (1) Fourth quarter 2006 results were revised to reflect retrospective
        application of a change in accounting for planned major maintenance
        activities.
    (2) Year ended December 31, 2007 results were adjusted to eliminate a
        $1.5 million pre-tax non-cash charge made in connection with the KPB
        acquisition to adjust inventory to fair value.

Full Year Operating Highlights

Full year 2007 net sales of $256.8 million were up $10.6 million, or 4.3%, and operating income of $44.3 million was up 30.5% over last year.

Unbleached kraft paper net sales for the year ended December 31, 2007, rose to $227.9 million, up $13.7 million, or 6.4%, over the prior year. Net sales benefited from higher average revenue per ton, up $18 per ton or 3.4%, propelled by higher prices net of mix changes and increased volume, up 11,358 tons or 2.8%. Operating income for the unbleached kraft paper segment for the year ended December 31, 2007, was $51.9 million for the year, up $17.6 million, or 51.4% over the prior year. The significant improvement in operating income during the year reflects higher selling prices and volume, cost reduction initiatives, and lower depreciation charges of $6.9 million on the reduced fixed asset depreciable asset base that resulted from the revaluation of plant and equipment to fair value, partially offset by $2.9 million of unplanned outages and a non-cash charge to adjust inventory to fair value of $1.2 million as part of the KPB acquisition.

Dunnage bag net sales were down by $3.0 million, or 8.3%, to $32.8 million for the year ended December 31, 2007, mainly due to a 7.5% reduction in volume. Dunnage bag operating income was down $1.2 million, or 15.5%, to $6.4 million due to lower sales volume, a non-cash charge of $0.3 million to adjust inventory to fair value as part of the KPB acquisition and higher amortization expenses of $0.2 million.

Corporate expenses of $14.0 million for the year ended December 31, 2007, were $6.2 million higher than the prior year and reflect expenses for the Company's headquarters while the amount in 2006 reflects an allocation of corporate expenses when KPB was owned by International Paper Company (IP). Included in the 2007 corporate expenses are charges of approximately $2.4 million for the cost of transitional services provided by IP that will be terminated upon start-up of the Company's own ERP system. It is currently projected that the Company's new ERP system will be fully implemented in the second quarter of 2008.

Fourth Quarter Operating Highlights

Fourth quarter 2007 net sales of $64.9 million were up $7.9 million, or 13.9%, and operating income of $13.5 million was up 34.6% over the same quarter last year.

Unbleached kraft paper net sales rose to $58.0 million, up $8.2 million, or 16.5%, over the prior year. Increased volume, up 7,780 tons, and higher average revenue per ton, up $40 per ton, drove the increase while a less favorable mix partially offset the volume and pricing gains. Operating income for the unbleached kraft paper segment was $15.2 million in the fourth quarter, up $5.2 million, or 52.2% over the prior year. The significant improvement in operating income during the quarter reflects higher selling prices and volume, and lower depreciation charges of $1.6 million on the reduced depreciable asset base that resulted from the revaluation of plant and equipment to fair value, partially offset by $1.9 million of unplanned outages.

Dunnage bag net sales were down from the prior year by $0.1 million, or 1.5%, to $8.1 million mainly due to a slight decrease in volume. Dunnage bag operating income was down $0.1 million, or 6.1%, to $1.6 million due to lower sales volume.

Corporate expenses of $3.4 million for the fourth quarter were $1.7 million higher than the comparable quarter in the prior year and reflect expenses for the Company's headquarters while the amount in 2006 reflects an allocation of corporate expenses when KPB was owned by IP. Included in the 2007 corporate expenses are charges of approximately $0.6 million for the cost of transitional services provided by IP that will be terminated upon start-up of the Company's own ERP system. It is currently projected that the Company's new ERP system will be fully implemented in the second quarter of 2008.

Cash Flow and Working Capital

Net cash from operating activities for the year ended December 31, 2007 totaled $52.2 million, an improvement of $16.0 million, or 44.3%, over the comparable prior year. Capital expenditures of $11.9 million for the 2007 period were primarily spent on equipment upgrades and replacements for the unbleached kraft facility and the new ERP system. Working capital at December 31, 2007 was $65.1 million including cash and cash equivalents of $56.6 million. With a cash and cash equivalents balance of $56.6 million and combined current and long-term debt balances of $52.5 million at December 31, 2007, the Company is now $4.1 million net cash positive.

Roger Stone, KapStone's chairman and chief executive officer, said, "We are particularly pleased with the operating results achieved in our inaugural year including an adjusted EBITDA margin of 22% and net income margin of 11%. With our operations performing well and a strong demand for our products, we delivered significant cash to the balance sheet resulting in our cash balances now exceeding our debt obligations. We are entering 2008 in an even stronger position with an opportunity for continuing performance improvements, a first quarter price increase of $40 per ton on our kraft paper products, and a results-driven management team."

Conference Call

KapStone has scheduled a conference call at 2 p.m. ET, March 17, 2008, to discuss the Company's financial results for 2007. The conference call will be available via the Internet by accessing the Company's web site at http://kapstonepaper.com. A replay of the webcast will be available for 7 days following the call.

About the Company

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(R) Converting, 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 2007 are compared to KPB's 2006 results.

Headquartered in Northbrook, 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(R), an inflatable dunnage bag manufacturer in Fordyce, AR. The business employs approximately 700 people.

Non-GAAP Financial Measures

Investors are cautioned that adjusted net income, adjusted EBITDA and adjusted EPS information contained in this press release are not financial measures under U.S. generally accepted accounting principles (GAAP). In addition, they should not be construed as alternatives to any other measures of performance determined in accordance with GAAP. These non-GAAP financial measures are provided to enhance the user's overall understanding of the Company's current financial performance and the Company's prospects for the future. The Company believes that these non-GAAP measures provide useful information to investors because they improve the comparability of the financial results between periods and provide for greater transparency to key measures used to evaluate the performance and liquidity of the Company. Management uses Adjusted EBITDA for evaluating the Company's performance against competitors and as a primary measure for employees' incentive programs and potential future contingent earn-out payments to IP.

Adjusted net income represents net income excluding a one-time non-cash purchase accounting adjustment made in connection with the KPB acquisition to adjust finished goods inventory to fair value. EBITDA represents earnings before interest, income taxes, depreciation and amortization. Adjusted EBITDA is computed by eliminating from EBITDA a one-time non-cash purchase accounting adjustment made in connection with the KPB acquisition to adjust inventory to fair value. Adjusted EBITDA is not a measure of financial performance under GAAP and should not be considered as an alternative to earnings before income taxes (or any other performance measure under GAAP) as a measure of performance or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. Adjusted 2007 EPS is based on net income excluding the non-cash purchase accounting adjustment made in connection with the KPB acquisition to adjust inventory to fair value.

Forward-Looking Statements

Statements in this news release that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can often be identified by words such as "may," "will," "should," "would,' "expect," "project," "anticipate," "intend," "plan," "believe," "estimate," "potential," "outlook," or "continue," the negative of these terms or other similar expressions and include, among others, statements under the caption "Operating Highlights". These statements reflect management's current views and are subject to risks, uncertainties and assumptions, many of which are beyond the Company's control that could cause actual results to differ materially from those expressed or implied in these statements. Factors that could cause actual results to differ materially include, but are not limited to: (i) industry conditions, including changes in cost, competition, changes in the Company's product mix and demand and pricing for the Company's products; (ii) market and economic factors, including changes in pension and healthcare costs and natural disasters, such as hurricanes; (iii) results of legal proceedings and compliance costs, including unanticipated expenditures related to the cost of compliance with environmental and other governmental regulations; and (iv) the ability to achieve and effectively manage growth; (v) ability to pay the Company's debt obligations; and (vi) ability to carry out the Company's strategic initiatives and manage associated costs. Further information on these and other risks and uncertainties is provided under Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, which is incorporated herein by reference, and elsewhere in reports that the Company files or furnishes with the SEC. These filings can be found on KapStone's Web site at http://www.kapstonepaper.com and the SEC's Web site at http://www.sec.gov. Forward-looking statements included herein speak only as of the date hereof and the Company disclaims any obligation to revise or update such statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events or circumstances.

                      KapStone Paper and Packaging Corp
                 Condensed Consolidated Statements of Income
                   (In thousands, except per share amounts)

                                Predecessor              Predecessor
                                    KPB   Fav/(Unfav)        KPB   Fav/(Unfav)
                           3 Months Ended              Year Ended
                              Dec. 31,     Variance      Dec. 31,     Variance
                           2007    2006 (1)    %     2007    2006 (1)     %

    Net sales            $64,938  $56,997    13.9%  $256,795 $246,161     4.3%

    Cost and expenses:
      Cost of sales       38,818   34,683   -11.9%   162,429  160,444    -1.2%
      Freight and
       distribution        6,105    5,347   -14.2%    23,581   22,274    -5.9%
      Selling and
       administrative
       expenses            3,837    2,358   -62.7%    16,482   11,282   -46.1%
      Depreciation and
       amortization        3,055    4,610    33.7%    11,327   18,210    37.8%
    Other operating
     income                  337        -      NA      1,324        -      NA
    Operating income      13,460    9,999    34.6%    44,300   33,951    30.5%
    Interest income          629        -      NA      2,096        -      NA
    Interest expense        (978)    (352) -177.8%    (4,295)  (1,411) -204.4%
    Income before
     provision for income
     taxes:               13,111    9,647    35.9%    42,101   32,540    29.4%
    Total provision for
     income taxes          4,477    3,728   -20.1%    15,138   12,573   -20.4%
    Net income            $8,634   $5,919    45.9%   $26,963  $19,967    35.0%
    Earnings per share:
      Basic                $0.34        -              $1.08        -
      Diluted              $0.23        -              $0.75        -

    Weighted-average
     number of shares
     outstanding:
      Basic           25,138,797                  25,010,057
      Diluted         37,098,615                  36,134,488

    (1) Prior period information has been revised in accordance to reflect the
        retrospective application of a change in accounting
        for planned major maintenance activities.



    OPERATING SEGMENT DATA
    (In thousands)
                                Predecessor   Fav/          Predecessor  Fav/
                                    KPB     (Unfav)             KPB    (Unfav)
                           3 Months Ended              Year Ended
                              Dec. 31,     Variance      Dec. 31,     Variance
                           2007    2006 (1)    %     2007    2006 (1)     %
    Net sales
      Unbleached kraft   $57,953  $49,762    16.5% $227,921  $214,175     6.4%
      Dunnage bags         8,095    8,216    -1.5%   32,801    35,753    -8.3%
      Intersegment elim.
       from unbleached
       kraft              (1,110)    (981)  -13.1%   (3,927)   (3,767)   -4.2%
    Total net sales      $64,938  $56,997    13.9% $256,795  $246,161     4.3%

    Operating income by
     industry segment
      Unbleached kraft   $15,198   $9,983    52.2%  $51,901   $34,280    51.4%
      Dunnage bags         1,618    1,724    -6.1%    6,350     7,514   -15.5%
      Corporate expenses  (3,356)  (1,708)  -96.5%  (13,951)   (7,843)  -77.9%
    Total operating
     income              $13,460   $9,999    34.6%  $44,300   $33,951    30.5%



                      KapStone Paper and Packaging Corp
                    Condensed Consolidated Balance Sheets
                                (In thousands)
                                                                 Predecessor
                                                                     KPB
                                                     Dec. 31,    December 31,
                                                       2007          2006
    Assets
    Current assets:
      Cash and cash equivalents                      $56,635             $1
      Trade accounts receivable, net                  30,208         25,824
      Inventories, net                                19,846         24,087
      Deferred income taxes                            1,263              -
      Prepaid expenses and other current assets          735          1,425
    Total current assets                             108,687         51,337

    Plant, property and equipment, net               104,858        201,593
    Deferred acquisition costs                         1,664              -
    Other assets                                       2,071          4,452
    Intangible assets, net                             5,875              -
    Goodwill                                           2,295              -
    Total assets                                    $225,450       $257,382

    Liabilities and Stockholders' Equity
    Current liabilities:
      Accounts payable                               $11,050         $7,931
      Accrued expenses                                12,969          7,144
      Current portion long-term debt                  19,578              -
    Total current liabilities                         43,597         15,075

    Long-term debt                                    32,922         22,357
    Asset retirement obligations                         279            265
    Deferred income taxes                              1,047              -
    Pension and post retirement benefits               3,420              -
    Total liabilities                                 81,265         37,697

    Stockholders' equity:
    Common stock $.0001 par value                          3              -
    Invested capital                                 115,002              -
    Divisional control                                     -        219,685
    Accumulated other comprehensive income                79              -
    Retained earnings                                 29,101              -
    Total stockholders' equity                       144,185        219,685
    Total liabilities and stockholders' equity      $225,450       $257,382



    SUPPLEMENTAL INFORMATION
    GAAP to Non-GAAP Reconciliations
             Unaudited                           Predecessor       Predecessor
    (In thousands, except per share data)            KPB               KPB
                                           3 Months Ended       Year Ended
                                              Dec. 31,           Dec. 31,
                                            2007   2006 (1)    2007   2006 (1)
    Net Income (GAAP) to  Adjusted
     Net Income (Non-GAAP):
    Net income (GAAP)                      $8,634   $5,919   $26,963   $19,967
      One-time non-cash charge made in
       connection with the KPB acquisition
       to adjust inventory to fair value.       -        -       977         -

    Adjusted Net Income (Non-GAAP)         $8,634   $5,919   $27,940   $19,967

    Net Income (GAAP) to Adjusted EBITDA
     (Non-GAAP):
    Net income (GAAP)                      $8,634   $5,919   $26,963   $19,967
      Interest income                        (629)       -    (2,096)        -
      Interest expense                        978      352     4,295     1,411
      Tax provision                         4,477    3,727    15,138    12,573
      Depreciation and amortization         3,055    4,610    11,327    18,210
    EBITDA                                 16,515   14,608    55,627    52,161
      One-time non-cash charge made in
       connection with the KPB
       acquisition to adjust inventory
       to fair value.                                          1,526
    Adjusted EBITDA (Non-GAAP)            $16,515  $14,608   $57,153   $52,161

    Basic EPS (GAAP) to Adjusted Basic EPS
     (Non-GAAP):
    Basic EPS (GAAP)                        $0.34       NA     $1.08        NA
    Adjustment:
      One-time non-cash charge made in
       connection with the KPB acquisition
       to adjust inventory to fair value.      NA       NA      0.04        NA
    Adjusted Basic EPS (Non-GAAP)           $0.34       NA     $1.12        NA

    Diluted EPS (GAAP) to Adjusted Diluted
     EPS (Non-GAAP):
    Diluted earnings per share (GAAP)       $0.23       NA     $0.75        NA
    Adjustment:
      One-time non-cash charge made in
       connection with the KPB acquisition
       to adjust inventory to fair value.      NA       NA      0.03        NA
    Adjusted Diluted EPS (Non-GAAP)         $0.23       NA     $0.78        NA

    (1) Prior period information has been revised in accordance to reflect
        retrospective application of a change in accounting