KapStone planning to use cash from any warrant exercises to cut debt

By Jennifer Lanning Drey

Portland, Ore., July 30 - KapStone Paper and Packaging Corp. plans to use any potential cash infusion from the exercise of common stock warrants in the third quarter to continue reducing debt, Andrea Tarbox, chief financial officer of KapStone, said Thursday during the company's second-quarter earnings conference call.

KapStone has 36.6 million warrants that will expire if not exercised by Aug. 17. If all of the warrants are exercised the company will receive more than $180 million, she said.

"Given the economic climate, we will continue to focus on debt reduction," Tarbox said.

By July 31, KapStone will have made $40 million of voluntary debt prepayments this year and intends to continue making prepayments in the third quarter, she said.

Since KapStone's acquisition of the Charleston Kraft Division from MeadWestvaco Corp. on July 1, 2008, the company will have reduced debt by $135 million through July 31.

KapStone had $378 million of total debt at the June 30 end of the second quarter.

The company's cash balance was $22 million at the end of the second quarter, up $18 million from Dec. 31.

Net cash provided by operating activities was $66 million in the second quarter, compared to $11 million in the prior year.

"As our operations continue to generate cash, we intend to keep making voluntary prepayments," Tarbox said.

KapStone's voluntary prepayments made through July 31 include the repayment of the $33.6 million balance of its senior secured notes, Tarbox said.

Positive demand trends

Although still being affected by the economic downturn, in June KapStone shipped its highest volume of product since September 2008, Roger Stone, chief executive officer of KapStone, said during the call.

Additionally, KapStone's operating rates showed a month-over-month improvement in each of the months in the second quarter, Tarbox said.

The company posted second-quarter net sales of $156.5 million, which were up from $68.2 million in the comparable period of 2008 due to the Charleston acquisition.

Second-quarter operating income was $33.4 million, up $20.2 million from the same quarter in 2008, primarily due to $48.6 million of alternative fuel mixture tax credits, partially offset by lower selling prices, unfavorable product mix and higher corporate expenses due to the acquisition.

KapStone is a Northfield, Ill.-based producer and seller of unbleached kraft paper and lightweight linerboard, and dunnage bags.

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