10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number: 001-33494

KapStone Paper and Packaging Corporation

(Exact Name of Registrant as Specified in Its Charter)

Delaware	20-2699372
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

KapStone Paper and Packaging Corporation

1101 Skokie Blvd., Suite 300

Northbrook, IL 60062

(Address of Principal Executive Offices, including zip code)

Registrant’s Telephone Number, including area code (847) 239-8800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer x
Non-accelerated filero	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

There were 46,714,963 shares of the Registrant’s Common Stock, $0.0001 par value, outstanding at July 24, 2012, excluding 40,000 shares held as treasury shares.

KAPSTONE PAPER AND PACKAGING CORPORATION

Index to Form 10-Q

TABLE OF CONTENTS

PART I. — FINANCIAL INFORMATION
	Item 1. — Consolidated Financial Statements (Unaudited) and Notes to Consolidated Financial Statements	1
	Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
	Item 3. — Quantitative and Qualitative Disclosures about Market Risk	16
	Item 4. — Controls and Procedures	16
PART II. — OTHER INFORMATION
	Item 1. — Legal Proceedings	17
	Item 1A. — Risk Factors	17
	Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds	17
	Item 3. — Defaults Upon Senior Securities	17
	Item 4. — Mine Safety Disclosures	17
	Item 5. — Other Information	17
	Item 6. — Exhibits	18
SIGNATURE		19

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PART 1. FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

KapStone Paper and Packaging Corporation

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	June 30,			December 31,
	2012			2011
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	9,683		$	8,062
Trade accounts receivable, less allowances of $307 in 2012 and $571 in 2011	114,723			108,320
Other receivables	6,721			11,247
Inventories	109,947			110,054
Prepaid expenses and other current assets	6,979			4,207
Deferred income taxes	11,770			10,048
Total current assets	259,823			251,938
Plant, property and equipment, net	566,151			567,195
Other assets	4,209			4,313
Intangible assets, net	59,282			63,715
Goodwill	235,334			237,193
Total assets	$	1,124,799		$	1,124,354
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	—		$	6,094
Other current borrowings	1,552			—
Accounts payable	84,263			81,051
Accrued expenses	22,579			21,217
Accrued compensation costs	20,136			27,445
Total current liabilities	128,530			135,807
Other liabilities:
Long-term debt, net of current portion	293,355			335,635
Pension and post-retirement benefits	10,230			10,676
Deferred income taxes	96,687			84,316
Other liabilities	11,157			11,642
Total other liabilities	411,429			442,269
Commitments and contingencies
Stockholders’ equity:
Preferred stock $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding	—			—
Common stock $0.0001 par value, 175,000,000 shares authorized; 46,703,892 shares issued and outstanding (40,000 treasury shares outstanding) at June 30, 2012 and 46,449,695 issued and outstanding (40,000 treasury shares outstanding) at December 31, 2011	5			5
Additional paid-in capital	235,123			230,665
Retained earnings	352,035			318,068
Accumulated other comprehensive loss	(2,323		)	(2,460		)
Total stockholders’ equity	584,840			546,278
Total liabilities and stockholders’ equity	$	1,124,799		$	1,124,354

See notes to consolidated financial statements.

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KAPSTONE PAPER AND PACKAGING CORPORATION

Consolidated Statements of Income and Comprehensive Income

(In thousands, except share and per share amounts)

(unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Net sales	$	306,259		$	214,786	$	606,102		$	421,524
Cost of sales, excluding depreciation and amortization	213,335			143,143		427,409			285,794
Depreciation and amortization	15,327			12,778		30,503			24,569
Freight and distribution expenses	27,936			19,681		53,679			37,510
Selling, general and administrative expenses	17,436			8,866		35,008			18,172
Other operating income	230			290		428			578
Operating income	32,455			30,608		59,931			56,057
Foreign exchange (loss)/gain	(508		)	45		(388		)	335
Interest expense, net	3,193			1,077		6,472			2,174
Income before provision for income taxes	28,754			29,576		53,071			54,218
Provision for income taxes	10,350			11,417		19,104			20,928
Net income	$	18,404		$	18,159	$	33,967		$	33,290
Other comprehensive income — pension and postretirement plan liability adjustments, net of tax	70			100		137			203
Total comprehensive income	$	18,474		$	18,259	$	34,104		$	33,493
Weighted-average number of shares outstanding:
Basic	46,620,354			46,250,362		46,555,990			46,172,108
Diluted	47,744,589			47,416,400		47,792,980			47,435,487
Net income per share:
Basic	$	0.39		$	0.39	$	0.73		$	0.72
Diluted	$	0.39		$	0.38	$	0.71		$	0.70

See notes to consolidated financial statements.

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KAPSTONE PAPER AND PACKAGING CORPORATION

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

	Six Months Ended June 30,
	2012			2011
Operating activities
Net income	$	33,967		$	33,290
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	30,503			24,569
Stock-based compensation expense	3,577			2,521
Excess tax benefits from stock-based compensation	(1,496		)	(758		)
Amortization of debt issuance costs	1,803			848
Loss on disposal of fixed assets	591			182
Deferred income taxes	14,728			14,291
Changes in operating assets and liabilities:
Trade accounts receivable, net	(6,027		)	(14,762		)
Other receivables	4,526			(247		)
Inventories	(237		)	(2,160		)
Prepaid expenses and other current assets	(2,772		)	(675		)
Other assets	41			(253		)
Accounts payable	3,622			(3,091		)
Accrued expenses and other	1,218			(1,505		)
Accrued compensation costs	(7,044		)	(2,288		)
Accrued income taxes	—			3,130
Net cash provided by operating activities	77,000			53,092
Investing activities
USC acquisition	(314		)	—
KPB acquisition earn-out payment	—			(49,700		)
Capital expenditures	(27,454		)	(12,914		)
Net cash used in investing activities	(27,768		)	(62,614		)
Financing activities
Proceeds from revolving credit facility	39,400			7,600
Repayments on revolving credit facility	(39,400		)	(7,600		)
Repayments of long-term debt	(50,000		)	(9,418		)
Proceeds from other current borrowings	3,398			2,273
Repayments on other current borrowings	(1,846		)	(1,235		)
Payment of withholding taxes on vested restricted stock awards	(1,179		)	(866		)
Proceeds from the exercises of stock options	475			621
Proceeds from issuance of shares to ESPP	90			97
Loan amendment costs	(45		)	(244		)
Excess tax benefits from stock-based compensation	1,496			758
Net cash used in financing activities	(47,611		)	(8,014		)
Net increase (decrease) in cash and cash equivalents	1,621			(17,536		)
Cash and cash equivalents-beginning of period	8,062			67,358
Cash and cash equivalents-end of period	$	9,683		$	49,822

 See notes to consolidated financial statements.

3

KAPSTONE PAPER AND PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

1.Financial Statements

The accompanying unaudited consolidated financial statements of KapStone Paper and Packaging Corporation (the “Company,” “we,” “us,” “our” or “KapStone”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

2.Recent Accounting Pronouncements

Intangibles — Goodwill and Other

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-08, “Intangibles — Goodwill and Other.” This guidance provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20-35-4. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will adopt the provisions of this guidance in conjunction with its annual impairment testing in the fourth quarter of 2012.

Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which revises the manner in which entities should present comprehensive income in their financial statements. The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted the provisions of this guidance in using the continuous statement approach in 2012 on a retrospective basis for all periods presented.

Fair Value Measurements

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop converged guidance on how to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP; however, it expands existing disclosure requirements for fair value measurements and makes other amendments, many of which eliminate unnecessary wording differences between U.S. GAAP and IFRS. This ASU is effective for interim and annual periods beginning after December 15, 2011. The application of the requirements of this guidance did not have a material effect on the consolidated financial statements.

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3.USC Acquisition

On October 31, 2011, the Company consummated the acquisition of U.S. Corrugated Inc. (“USC”) from its stockholders by merger for $330.0 million in cash plus $1.6 million of working capital adjustments. On March 9, 2012, KapStone reached an agreement with USC on the final calculation of Merger Consideration and paid an additional $0.3 million which was allocated to acquisition consideration.

The following table summarizes the acquisition consideration:

Purchase price, net of cash acquired	$	330,000
Working capital adjustments	1,946
Total acquisition consideration	$	331,946

The USC acquisition was accounted for in accordance with the provisions of ASC 805, “Business Combinations,” and the accompanying consolidated financial statements include the results of USC since October 31, 2011. The Company estimated the fair value of the assets and liabilities of USC at the time of acquisition and used third-party appraisals to determine the fair market value for tangible and intangible assets. The excess of the purchase price over the aggregate estimated fair value of net assets acquired was allocated to goodwill. The allocation is not final as the review of the fair value of deferred income tax assets and liabilities and certain other acquired assets and liabilities is in process.

The following table summarizes the preliminary allocation of acquisition consideration to the fair value of the assets acquired and the liabilities assumed at the date of acquisition:

Trade accounts receivable	$	38,377
Other receivables	5,745
Inventories	32,859
Prepaid expenses and other current assets	754
Plant, property and equipment	106,082
Other assets	634
Intangible assets	45,000
Goodwill	180,823
Deferred income tax asset	5,126
Accounts payable	(34,116		)
Accrued expenses	(3,660		)
Accrued compensation costs	(5,526		)
Deferred income taxes	(36,045		)
Other liabilities	(4,107		)
Total acquisition consideration	$	331,946

4.Annual Planned Maintenance Outage

Annual planned maintenance outage costs for the three months ended June 30, 2012 and 2011 totaled $3.8 million and $3.0 million, respectively. In addition, planned maintenance outage costs for the six months ended June 30, 2012 and 2011 totaled $4.6 million and $3.4 million, respectively.

5.Inventories

Inventories consist of the following at June 30, 2012 and December 31, 2011, respectively:

	(Unaudited)
	June 30,		December 31,
	2012		2011
Raw materials	$	43,504	$	46,926
Work in process	2,042		1,780
Finished goods	38,730		36,747
Replacement parts and supplies	25,671		24,601
Inventories	$	109,947	$	110,054

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6.Debt

Amendment to Credit Agreement

On May 10, 2012, the Company entered into a First Amendment to Credit Agreement (the “First Amendment”), by and among Kapstone Kraft Paper Corporation, as Borrower (the “Borrower”), the Company and certain subsidiaries of the Company as Guarantors, the lenders party thereto, and Bank of America N.A., as Administrative Agent, which amends the Credit Agreement, dated as of October 31, 2011 (collectively, the “Credit Agreement”). The First Amendment, among other things, expands the “accordion” feature under the Credit Agreement, removes certain mandatory prepayment events, and modifies the calculation methodology of the financial covenants. The “accordion” feature in the Credit Agreement now permits KapStone, subject to certain terms and conditions, to request an increase in the revolving commitments and/or additional term loans in an aggregate principal amount of up to $450.0 million.

Voluntary Prepayment

On June 29, 2012, the Company made a $50.0 million voluntary prepayment on its term loan under the Credit Agreement using cash generated from operations.

Debt Covenants

The Company’s Credit Agreement contains, among other provisions, covenants with which we must comply while the agreement is in force. The covenants limit our ability to, among other things, incur indebtedness, create additional liens on our assets, make investments, engage in mergers and acquisitions, pay dividends and sell any assets outside the normal course of business. As of June 30, 2012, the Company was in compliance with all applicable covenants in the Credit Agreement.

Other Current Borrowings

In 2012 and 2011, the Company entered into financing agreements of $3.4 million and $2.3 million, respectively, at an annual interest rate of 2.00 and 1.75 percent, respectively, for its annual property insurance premiums. The agreements required the Company to pay consecutive monthly payments through the term of each financing agreement ending on December 1st. As of June 30, 2012, there was $1.6 million outstanding under the current agreement which is included in “Other current borrowings” on the Consolidated Balance Sheets.

Interest Paid

Interest paid was $2.4 million and $0.6 million for the three months ended June 30, 2012 and 2011, respectively. In addition, interest paid was $4.7 million and $1.3 million for the six months ended June 30, 2012 and 2011, respectively. The increase in interest paid reflects a higher term loan balance resulting from the USC acquisition.

Fair Value of Debt

At June 30, 2012 the fair value of the Company’s debt approximates the carrying value of $293.4 million as the variable interest rates re-price frequently at current market rates. The debt was valued using Level 2 inputs in the fair value hierarchy which are significant observable inputs including quoted prices for debt of similar terms and maturities.

7.Income Taxes

The Company’s effective tax rate for the six months ended June 30, 2012 and 2011 was 36.0 percent and 38.6 percent, respectively. The effective tax rate decreased in 2012 due to a higher expected benefit from the domestic manufacturing deduction. The differences between the effective tax rate and the federal statutory tax rate for the periods ended June 30, 2012 and 2011 are due to the impact of state tax, net of the federal benefit and the domestic manufacturing deduction.

The gross unrecognized tax benefits, including interest, as of June 30, 2012 is $5.0 million and is unchanged from December 31, 2011. Unrecognized tax benefits of $5.0 million are included in “Other liabilities” on the Consolidated Balance Sheets.

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In the normal course of business, the Company is subject to examination by taxing authorities. The Company’s open tax year is 2010.

Income taxes paid net of refunds were $4.0 million and $0.1 million for the three months ended June 30, 2012 and 2011, respectively. In addition, income taxes paid net of refunds were $4.3 million and $0.3 million for the six months ended June 30, 2012 and 2011, respectively.

8.Net Income Per Share

Basic and diluted net income per share is calculated as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Net income as reported	$	18,404	$	18,159	$	33,967	$	33,290
Weighted-average number of common shares for basic net income per share	46,620,354		46,250,362		46,555,990		46,172,108
Incremental effect of dilutive common stock equivalents:
Unexercised stock options	899,480		889,370		923,301		908,410
Unvested restricted stock awards	224,755		276,668		313,689		354,969
Weighted-average number of shares for diluted net income per share	47,744,589		47,416,400		47,792,980		47,435,487
Net income per share — basic	$	0.39	$	0.39	$	0.73	$	0.72
Net income per share — diluted	$	0.39	$	0.38	$	0.71	$	0.70

Unexercised stock options to purchase a total of 0.3 million shares were outstanding during both the three months ended June 30, 2012 and 2011, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.

9.Pension Plan and Post Retirement Benefits

Defined Benefit Pension Plan

The KapStone Paper and Packaging Corporation Defined Benefit Pension Plan (the “Pension Plan”) provides benefits for approximately 1,000 union employees.

Net pension cost recognized for the three and six months ended June 30, 2012 and 2011 for the Pension Plan is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Service cost for benefits earned during the period	$	1,023		$	844		$	2,047		$	1,688
Interest cost on projected benefit obligation	251			203			503			406
Expected return on plan assets	(233		)	(185		)	(467		)	(370		)
Amortization of net loss	54			—			108			—
Amortization of prior service cost	92			141			184			282
Net pension cost — other multi-employer plan	17			—			34			—
Total net pension cost	$	1,204		$	1,003		$	2,409		$	2,006

KapStone funds the Pension Plan according to IRS funding requirements. Based on those requirements, KapStone funded $2.6 million for the six months ended June 30, 2012 and expects to fund an additional $3.0 million to the Pension Plan in 2012.

Defined Contribution Plan

The KapStone Defined Contribution Plan (the “Contribution Plan”) covers all eligible employees. The Company’s monthly contributions to the Contribution Plan are based on the matching of employee contributions. For the three months ended June 30, 2012 and 2011, the Company recognized expense of $2.6 million and $1.6 million, respectively. In addition, for the six months ended June 30, 2012 and 2011, the

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Company recognized expense of $5.4 million and $3.6 million, respectively. Effective October 31, 2011, employees who joined the Company as part of the USC acquisition are included in the Contribution Plan.

10.Stock-Based Compensation

On March 7, 2012, the Compensation Committee of the board of directors approved stock awards to executive officers, certain employees and directors. The 2012 awards included 310,847 stock option grants and 124,341 restricted stock units.

The Company accounts for stock awards in accordance with ASC 718, “Compensation — Stock Compensation,” which requires that the cost resulting from all share-based payment transactions be recognized as compensation cost over the vesting period based on the fair value of the instrument on the date of grant.

Total stock-based compensation expense related to the stock option and restricted stock unit grants for the three and six months ended June 30, 2012 and 2011 is as follows:

	Three Months EndedJune 30,				Six Months EndedJune 30,
	2012		2011		2012		2011
Stock option compensation expense	$	717	$	448	$	2,025	$	1,399
Restricted stock unit compensation expense	547		315		1,552		1,122
Total stock-based compensation expense	$	1,264	$	763	$	3,577	$	2,521

Total unrecognized stock-based compensation cost related to the stock option grants and restricted stock units as of June 30, 2012 and December 31, 2011 is as follows:

	June 30, 2012		December 31, 2011
Unrecognized stock option compensation cost	$	2,790	$	1,648
Unrecognized restricted stock compensation cost	2,539		1,687
Total stock-based compensation cost	$	5,329	$	3,335

As of June 30, 2012, total unrecognized compensation cost related to non-vested stock options and restricted stock units is expected to be recognized over a weighted average period of 1.9 years and 2.1 years, respectively.

Stock Options

Stock option awards vest as follows: 50% after two years and the remaining 50% after three years or upon the retirement of a grantee of such stock options who has reached the age 65. The stock options awarded in 2012 have a contractual term of ten years and are subject to forfeiture should the recipient terminate his or her employment with the Company for certain reasons prior to vesting in his or her awards, or the occurrence of certain other events such as termination with cause. The exercise price of these stock options is based on the closing market price of our common stock on the date of grant ($19.75 for the 2012 awards described above) and compensation expense is recorded on an accelerated basis over the awards’ vesting periods.

The weighted average fair value of the KapStone stock options granted in March 2012 was $10.38. The fair value was calculated using the Black-Scholes option-pricing model based on the market price at the grant date and the weighted average assumptions specific to the underlying options. The Company uses the “simplified method”, defined in SEC Staff Accounting Bulletin (“SAB”) No. 107, to determine the expected life assumption for all of its options. The Company uses the “simplified method”, as permitted by SAB No. 110, as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected life due to the limited time its equity shares have been publicly traded. The expected volatility assumption is based on the volatility of KapStone stock from the same time period as the expected term of the stock options. The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term similar to the expected life of the stock options.

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The assumptions utilized for calculating the fair value of stock options during the periods are as follows:

	Six Months Ended June 30,
	2012		2011
KapStone Stock Options Black-Scholes assumptions (weighted average):
Expected volatility	56.52	%	45.24	%
Expected life (years)	5.98		5.94
Risk-free interest rate	1.10	%	2.47	%
Expected dividend yield	—	%	—	%

The following table summarizes stock options amounts and activity:

			Weighted Average		Weighted Average
			Exercise		Remaining	Intrinsic
	Options		Price		Life (Years)	Value
Outstanding at January 1, 2012	2,473,874		$	7.86	6.7	$	19,742
Granted	310,847		19.75		9.9
Exercised	(100,378	)	4.73			1,451
Forfeited	—		—
Outstanding at June 30, 2012	2,684,343		$	9.35	6.6	$	18,867
Exercisable at June 30, 2012	1,867,486		$	6.28	5.6	$	17,876

For the three and six months ended June 30, 2012, exercises of employee stock options totaled 9,274 shares and 100,378 shares, respectively, with cash proceeds to the Company of $0.1 million and $0.5 million, respectively.

Restricted Stock

Restricted stock units are restricted as to transferability until they vest three years from the grant date or upon the retirement of the grantee who has reached the age 65. These restricted stock units are subject to forfeiture should the employee terminate employment with the Company for certain reasons prior to vesting in their award, or upon the occurrence of certain other events. The value of these restricted stock units is based on the closing market price of our common stock on the date of grant and compensation expense is recorded on a straight-line basis over the awards’ vesting periods.

The following table summarizes restricted stock units amounts and activity:

			Weighted Average Grant
	Units		Price
Outstanding at January 1, 2012	496,395		$	9.22
Granted	124,341		19.75
Vested	(216,784	)	3.70
Forfeited	—		—
Outstanding at June 30, 2012	403,952		$	15.43

11.Contingencies

We are subject to various legal proceedings arising from our operations. We are party to a legal proceeding arising from an accident which occurred during our 2009 annual planned maintenance outage at our mill in Roanoke Rapids, NC. We establish reserves for claims and proceedings when it is probable that liabilities exist and where reasonable estimates can be made. While it is not possible to predict the outcome of this matter, based on our assessment of the facts and circumstances now known, we do not believe there is a reasonable possibility that this matter will have a material adverse effect on our financial position. However, actual outcomes may be different from those expected and could have a material effect on our results of operations or cash flows in a particular period.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in Part I Item 1A of our Form 10-K for the fiscal year ended December 31, 2011 and in our other Securities and Exchange Commission filings. The information contained in this Form 10-Q represents our best judgment at the date of this report based on information currently available. In providing forward-looking statements, KapStone does not intend, and does not undertake any duty or obligations, to update its statements as a result of new information, future events or otherwise.

The Company has one reportable segment as of June 30, 2012. The Company manufactures and sells unbleached kraft paper and corrugated products.

The following discussion should be read in conjunction with our Consolidated Financial Statements and related Notes thereto included elsewhere in this report.

Comparison of Results of Operations for the Three Months Ended June 30, 2012 and 2011

	Three Months Ended June 30,					Increase/
(in thousands):	2012			2011		(Decrease)
Net sales	$	306,259		$	214,786	$	91,473
Cost of sales, excluding depreciation and amortization	213,335			143,143		70,192
Depreciation and amortization	15,327			12,778		2,549
Freight and distribution expenses	27,936			19,681		8,255
Selling, general and administrative expenses	17,436			8,866		8,570
Other operating income	230			290		(60		)
Operating income	32,455			30,608		1,847
Foreign exchange (loss)/gain	(508		)	45		(553		)
Interest expense, net	3,193			1,077		2,116
Income before provision for income taxes	28,754			29,576		(822		)
Provision for income taxes	10,350			11,417		(1,067		)
Net income	$	18,404		$	18,159	$	245

Net sales for the quarter ended June 30, 2012 were $306.3 million compared to $214.8 million for the second quarter of 2011, an increase of $91.5 million or 42.6 percent. The increase in net sales was driven by the U.S. Corrugated Inc. (“USC”) acquisition which accounted for $97.2 million. Excluding the acquisition, net sales decreased by $5.7 million due to $2.7 million of lower average selling prices, $1.6 million of unfavorable exchange rate effects due to a stronger US dollar, as certain sales to European customers are invoiced in euros, and 5,575 fewer tons of paper sold, partially offset by $2.9 million of higher lumber sales. Average selling prices decreased primarily due to lower export containerboard prices partially offset by the partial realization of kraft paper price increases announced in 2011. Average selling price per ton for the quarter ended June 30, 2012 was $623 compared to $633 for the prior year’s quarter.

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The following represents the Company’s tons of paper sold by product line:

	Three Months Ended June 30,		Increase/
Product Line (in tons):	2012	2011	(Decrease)		%
Domestic containerboard	117,481	106,376	11,105		10.4
Export containerboard	44,688	57,388	(12,700	)	(22.1	)
Kraft paper	65,748	70,414	(4,666	)	(6.6	)
DuraSorb®	71,565	68,680	2,885		4.2
Kraftpak ®	24,024	26,223	(2,199	)	(8.4	)
Tons of paper sold	323,506	329,081	(5,575	)	(1.7	)

Tons of paper sold for the quarter ended June 30, 2012 was 323,506 tons compared to 329,081 tons for the quarter ended June 30, 2011, a decrease of 5,575 tons or 1.7 percent. Domestic containerboard sales increased 10.4 percent reflecting the impact of the acquisition and higher sales of lightweight containerboard. Export containerboard sales decreased 22.1 percent due to a shift in product mix. Kraft paper sales decreased 6.6 percent reflecting an overall decrease in demand in the industry and a transfer of volumes to lightweight containerboard grades. Durasorb® sales increased 4.2 percent due to increased demand.

Corrugated product sales for the quarter ended June 30, 2012 totaled 1.6 billion square feet compared to none for the quarter ended June 30, 2011. The Company’s corrugated product sales began with the USC acquisition which closed in the fourth quarter of 2011.

The following represents a summary of tons of paper sold and produced by the Company:

	Three Months Ended June 30,				Increase/
	2012		2011		(Decrease)		%
Tons of paper sold to third parties	323,506		329,081		(5,575	)	(1.7	)
Tons transferred to converting plants	66,481		—		66,481		100.0
Inventory change	(440	)	(1,300	)	860		66.2
Tons of paper produced	389,547		327,781		61,766		18.8

The 61,766 increase in tons of production in the second quarter of 2012 includes 60,452 tons from the acquisition and 1,314 tons from higher production rates.

Cost of sales, excluding depreciation and amortization expense, for the quarter ended June 30, 2012 was $213.3 million compared to $143.1 million for the second quarter of 2011, an increase of $70.2 million, or 49.0 percent. The increase in cost of sales was mainly due to the $72.6 million impact of the acquisition. Excluding the acquisition, cost of sales decreased by $2.4 million due to lower sales volumes and $1.8 million of productivity gains partially offset by $2.3 million of inflation on labor, benefits and input costs. Annual planned maintenance outages in the quarters ended June 30, 2012 and 2011 totaled $3.8 million and $3.0 million, respectively.

Depreciation and amortization expense for the quarter ended June 30, 2012 totaled $15.3 million compared to $12.8 million for the quarter ended June 30, 2011. The increase of $2.5 million was primarily due to $3.1 million from the acquisition, $0.6 million of which is amortization of identified intangible assets. Excluding the acquisition, depreciation and amortization expense decreased $0.6 million in the quarter ended June 30, 2012.

Freight and distribution expenses for the quarter ended June 30, 2012 totaled $27.9 million compared to $19.7 million for the quarter ended June 30, 2011. The increase of $8.2 million was primarily due to $7.7 million from the acquisition. Excluding the acquisition, freight and distribution expenses increased $0.5 million due to inflation on fuel costs and product mix.

Selling, general and administrative expenses for the quarter ended June 30, 2012 totaled $17.4 million compared to $8.9 million for the quarter ended June 30, 2011. The increase of $8.5 million was primarily due to $8.0 million from the acquisition. Excluding the acquisition, selling, general and administrative expenses increased $0.5 million due to higher stock compensation expenses and acquisition related expenses. For the

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quarter ended June 30, 2012, selling, general and administrative expenses as a percentage of net sales increased to 5.7 percent from 4.1 percent in the quarter ended June 30, 2011.

Foreign exchange loss for the quarter ended June 30, 2012 of $0.5 million was higher than the negligible gain for the quarter ended June 30, 2011. The change reflects the strengthening of the U.S. dollar compared to the Euro in the quarter ended June 30, 2012.

Net interest expense for the quarters ended June 30, 2012 and 2011 was $3.2 million and $1.1 million, respectively. Interest expense reflects interest on the Company’s Credit Agreement and amortization of debt issuance costs. Interest expense was $2.1 million higher in the quarter ended June 30, 2012 primarily due to a higher term loan balance to fund the USC acquisition.

Provision for income taxes for the quarters ended June 30, 2012 and 2011 was $10.4 million and $11.4 million, respectively, reflecting an effective tax rate of 36.0 percent for the quarter ended June 30, 2012 compared to 38.6 percent for the similar period in 2011. The lower provision for income taxes in 2012 primarily reflects a lower effective tax rate due to a higher expected benefit from the domestic manufacturing deduction.

Comparison of Results of Operations for the Six Months Ended June 30, 2012 and 2011

	Six Months Ended June 30,				Increase/
(in thousands):	2012		2011		(Decrease)
Net sales	$	606,102	$	421,524	$	184,578
Cost of sales, excluding depreciation and amortization	427,409		285,794		141,615
Depreciation and amortization	30,503		24,569		5,934
Freight and distribution expenses	53,679		37,510		16,169
Selling, general and administrative expenses	35,008		18,172		16,836
Other operating income	428		578		(150		)
Operating income	59,931		56,057		3,874
Foreign exchange gain/(loss)	(388)		335		(723		)
Interest expense, net	6,472		2,174		4,298
Income before provision for income taxes	53,071		54,218		(1,147		)
Provision for income taxes	19,104		20,928		(1,824		)
Net income	$	33,967	$	33,290	$	677

Net sales for the six months ended June 30, 2012 were $606.1 million compared to $421.5 million for the first six months of 2011, an increase of $184.6 million or 43.8 percent. The increase in net sales was driven by the USC acquisition which accounted for $191.8 million. Excluding the acquisition, net sales decreased by $7.2 million due to $4.2 million in lower average selling prices, $2.0 million due to the unfavorable exchange rate effect of a stronger US dollar and a less favorable product mix, partially offset by an increase of 662 tons of paper sold and $4.1 million of higher lumber sales. Average selling prices decreased primarily due to lower export containerboard prices. Average selling price per ton for the six months ended June 30, 2012 was $615 compared to $626 for the prior year period.

The following represents the Company’s tons of paper sold by product line:

	Six Months Ended June 30,		Increase/
Product Line (in tons):	2012	2011	(Decrease)		%
Domestic containerboard	224,057	200,896	23,161		11.5
Export containerboard	124,452	130,977	(6,525	)	(5.0	)
Kraft paper	127,734	141,378	(13,644	)	(9.7	)
DuraSorb®	129,181	128,446	735		0.6
Kraftpak ®	47,692	50,757	(3,065	)	(6.0	)
Tons of paper sold	653,116	652,454	662		0.1

Tons of paper sold for the first six months of 2012 was 653,116 tons compared to 652,454 tons for the first six months of 2011, an increase of 662 tons or 0.1 percent. Domestic containerboard sales increased 11.5 percent reflecting the impact of the acquisition and higher sales of lightweight containerboard. Export containerboard sales decreased by 5.0 percent due to a shift in product mix. Kraft paper sales decreased 9.7 percent reflecting an overall decrease in demand in the industry and a transfer of volumes to lightweight containerboard grades. Kraftpak® sales declined 6.0 percent due to lower demand.

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Corrugated product sales for the first six months of 2012 totaled 3.1 billion square feet compared to none for the first six months of 2011. The Company’s corrugated product sales began with the acquisition which closed in the fourth quarter of 2011.

The following represents a summary of tons of paper sold and produced by the Company:

	Six Months Ended June 30			Increase/
	2012		2011	(Decrease)		%
Tons of paper sold to third parties	653,116		652,454	662		0.1
Tons transferred to converting plants	132,415		—	132,415		100.0
Inventory change	(382	)	712	(1,094	)	(214.7	)
Tons of paper produced	785,149		653,166	131,983		20.2

The 131,983 increase in tons of production in the first six months of 2012 includes 121,292 tons from the USC acquisition and 10,691 tons from higher production rates and one extra day of production.

Cost of sales, excluding depreciation and amortization expense, for the six months ended June 30, 2012 was $427.4 million compared to $285.8 million for the first six months of 2011, an increase of $141.6 million, or 49.5 percent. The increase in cost of sales was mainly due to the $144.2 million impact of the acquisition. Excluding the acquisition, cost of sales decreased by $2.6 million due to product mix and $6.5 million of productivity gains, partially offset by $6.6 million of inflation on labor, benefits and input costs. Annual planned maintenance outages during the six months ended June 30, 2012 and 2011 totaled $4.6 million and $3.4 million, respectively.

Depreciation and amortization expense for the six months ended June 30, 2012 totaled $30.5 million compared to $24.6 million for the six months ended June 30, 2011. The increase of $5.9 million was primarily due to $6.3 million from the acquisition, $1.3 million of which is amortization of identified intangible assets. Excluding the acquisition, depreciation and amortization expense decreased $0.4 million in the first six months of 2012.

Freight and distribution expenses for the six months ended June 30, 2012 totaled $53.7 million compared to $37.5 million for the six months ended June 30, 2011. The increase of $16.2 million was primarily due to $15.0 million from the acquisition. Excluding the acquisition, freight and distribution expenses increased $1.2 million primarily due to inflation on fuel costs and product mix.

Selling, general and administrative expenses for the six months ended June 30, 2012 totaled $35.0 million compared to $18.2 million for the six months ended June 30, 2011. The increase of $16.8 million was primarily due to $14.9 million from the acquisition. Excluding the acquisition, selling, general and administrative expenses increased $1.9 million due to the higher compensation related expenses and acquisition related expenses. For the six months ended June 30, 2012, selling, general and administrative expenses as a percentage of net sales increased to 5.8 percent from 4.3 percent in the first six months of 2011.

Foreign exchange loss for the six months ended June 30, 2012 was $0.4 million compared to a foreign exchange gain of $0.3 million for the six months ended June 30, 2011. The change reflects the strengthening of the U.S. dollar compared to the Euro in the first six months of 2012.

Net interest expense for the six months ended June 30, 2012 and 2011 was $6.5 million and $2.2 million, respectively. Interest expense reflects interest on the Company’s Credit Agreement and amortization of debt issuance costs. Interest expense was $4.3 million higher in the first six months of 2012 due to a higher term loan balance to fund the USC acquisition.

Provision for income taxes for the six months ended June 30, 2012 and 2011 was $19.1 million and $20.9 million, respectively, reflecting an effective tax rate of 36.0 percent for the first six months of 2012 compared to 38.6 percent for the similar period in 2011. The lower provision for income taxes in 2012 primarily reflects a lower effective tax rate due to a higher expected benefit from the domestic manufacturing deduction.

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Liquidity and Capital Resources

Amendment to Credit Agreement

On May 10, 2012, the Company entered into a First Amendment to Credit Agreement (the “First Amendment”), by and among Kapstone Kraft Paper Corporation, as Borrower (the “Borrower”), the Company and certain subsidiaries of the Company as Guarantors, the lenders party thereto, and Bank of America N.A., as Administrative Agent, which amends the Credit Agreement, dated as of October 31, 2011 (collectively, the “Credit Agreement”). The First Amendment, among other things, expands the “accordion” feature under the Credit Agreement, removes certain mandatory prepayment events, and modifies the calculation methodology of the financial covenants. The “accordion” feature in the Credit Agreement now permits KapStone, subject to certain terms and conditions, to request an increase in the revolving commitments and/or additional term loans in an aggregate principal amount of up to $450.0 million.

Voluntary Prepayment

For the first six months of 2012, the Company made a $50.0 million voluntary prepayment on its term loan under the Credit Agreement using cash flow from operations.

Debt Covenants

Under the financial covenants of the Credit Agreement, KapStone must comply on a quarterly basis with a maximum permitted leverage ratio. The leverage ratio is calculated by dividing KapStone’s debt by its rolling twelve month total earnings before interest expense, taxes, depreciation and amortization and allowable adjustments. The maximum permitted leverage ratio declines over the life of the Credit Agreement. On June 30, 2012, the maximum permitted leverage ratio was 3.50 to 1.00. On June 30, 2012, KapStone was in compliance with the Credit Agreement with a leverage ratio of 1.65 to 1.00.

The Credit Agreement also includes a financial covenant requiring a minimum fixed charge coverage ratio. This ratio is calculated by dividing KapStone’s twelve month total earnings before interest expense, taxes, depreciation and amortization and allowable adjustments less cash payments for income taxes and capital expenditures by the sum of our cash interest and required principal payments during the twelve month period. From the closing date of the Credit Agreement through the quarter ending June 30, 2012, the fixed charge coverage ratio was required to be at least 1.25 to 1.00. On June 30, 2012, KapStone was in compliance with the Credit Agreement with a fixed charge coverage ratio of 7.69 to 1.00.

As of June 30, 2012, KapStone was in compliance with all applicable covenants in the Credit Agreement.

Other Current Borrowings

In 2012, the Company entered into a financing agreement of $3.4 million at an annual interest rate of 2.00 percent, for the annual property insurance premium. The agreement required the Company to make consecutive monthly repayments through the term of the financing agreement ending on December 1. As of June 30, 2012, there was $1.6 million outstanding under the current agreement.

Income taxes

The Company’s effective tax rate for 2012 is projected at 36.0 percent. The cash tax rate for 2012 is projected at 10.0 percent reflecting utilization of federal net operating losses and the cellulosic biofuel producer’s credit.

Income taxes paid, net of refunds, were $4.3 million and $0.4 million for the six months ended June 30, 2012 and 2011, respectively.

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Sources and Uses of Cash

Six months ended June 30 (in thousands)	2012			2011
Operating activities	$	77,000		$	53,092
Investing activities	(27,768		)	(62,614		)
Financing activities	(47,611		)	(8,014		)

Cash and cash equivalents increased by $1.6 million from December 31, 2011, reflecting $77.0 million of net cash provided by operating activities, $27.8 million of net cash used in investing activities and $47.6 million of net cash used in financing activities.

Net cash provided by operating activities was $77.0 million primarily due to net income of $34.0 million for the first six months of 2012 and $49.7 million of non-cash charges. Changes in operating assets and liabilities used $6.7 million of cash. Net cash provided by operating activities increased by $23.9 million in the first six months of 2012 compared to the same period in 2011 mainly due to changes in operating assets and liabilities using $15.2 million of less cash, $8.0 million of higher non-cash charges and $0.7 million of higher net income in the first six months of 2012 than the first six months of 2011.

Net cash used in investing activities was $27.8 million reflecting $27.5 million of capital expenditures. For the six months ended June 30, 2012, capital expenditures for legacy operations were $20.4 million related to spending on equipment upgrades and replacements at the paper mills. In addition, there were $7.1 million of capital expenditures related to the acquisition, primarily related to investments in information technology. Net cash used in investing activities decreased by $34.8 million in the first six months of 2012 compared to the same period in 2011 mainly due to the $49.7 million contingent earn-out payment in 2011, partially offset by higher capital expenditures in the first six months of 2012.

Net cash used in financing activities was $47.6 million reflecting the $50.0 million voluntary prepayment of the term loan under the Credit Agreement, partially offset by $1.6 million of net proceeds from other current borrowings and $0.8 million of proceeds from share transactions. Net cash used in financing activities increased by $39.6 million for the first six months of 2012 compared to the same period in 2011 primarily due to a higher amount of debt repayments in 2012.

Future Cash Needs

We expect that cash generated from operating activities, and if needed, the ability to draw from our revolving credit facility under our Credit Agreement, which has a current availability of $142.4 million, will be sufficient to meet anticipated 2012 operating cash needs. The Company expects to spend approximately $36.7 million on capital expenditures for the balance of 2012. In addition, the Company expects to fund an additional $3.0 million to its pension plan.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet financing arrangements and have not established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the sensitivity of income to changes in interest rates, commodity prices, equity prices, and other market-driven rates or prices.

Under KapStone’s Credit Agreement, at June 30, 2012, we have an outstanding credit facility consisting of a term loan and revolving credit facility totaling $455.3 million. The initial term loan and the revolving credit facility have a maturity date of October 31, 2016. Depending on the type of borrowing, the applicable interest rate under the revolving credit facility is calculated at a per annum rate equal to (a) LIBOR plus an applicable margin, which is currently 2.00% for Eurodollar loans, or (b) (i) the greatest of (x) the prime rate, (y) the federal funds effective rate plus 0.5% or (z) one-month LIBOR plus 1.00% plus (ii) an applicable margin, which is currently 1.00% for base rate loans. The unused portion of the revolving credit facility will also be subject to an unused fee that will be calculated at a per annum rate (the “Unused Fee Rate”), which is currently 0.40%. Commencing with the delivery of the financial statements for the fiscal quarter ending June 30, 2012, the applicable margin for borrowings under the revolving credit facility and the Unused Fee Rate will be determined by reference to a pricing grid based on the Company’s total leverage ratio. Under such pricing grid, the applicable margins for the revolving credit facility will range from 1.50% to 2.50% for Eurodollar loans and from 0.50% to 1.50% for base rate loans and the Unused Fee Rate will range from 0.30% to 0.50%.

Changes in market rates may impact the base rate in our Credit Agreement. For instance, if the bank’s LIBOR rate was to increase or decrease by one percentage point (1.0%), our annual interest expense would change by approximately $3.1 million based upon our expected future monthly loan balances per our existing repayment schedule.

We are exposed to price fluctuations of certain commodities used in production. Key raw materials and energy used in the production process include roundwood and woodchips, OCC, fuel oil, electricity and caustic soda. We purchase these raw materials and energy at market prices, and do not use forward contracts or other financial instruments to hedge our exposure to price risk related to these commodities. We have three contracts to purchase coal at fixed prices with all expiring on December 31, 2012.

We are exposed to price fluctuations in the price of our finished goods. The prices we charge for our products are primarily based on market conditions.

We are exposed to currency fluctuations as we invoice certain European customers in Euros. The Company did not use forward contracts to reduce the impact of currency fluctuations during the quarter ended June 30, 2012. No such contracts were outstanding at June 30, 2012.

ITEM 4.

CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2012.

There were no changes in our internal control over financial reporting during the three months ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are subject to various legal proceedings arising from our operations. We are party to a legal proceeding arising from an accident which occurred during our 2009 annual planned maintenance outage at our mill in Roanoke Rapids, NC. We establish reserves for claims and proceedings when it is probable that liabilities exist and where reasonable estimates can be made. While it is not possible to predict the outcome of this matter, based on our assessment of the facts and circumstances now known, we do not believe there is a reasonable possibility that this matter will have a material adverse effect on our financial position. However, actual outcomes may be different from those expected and could have a material effect on our results of operations or cash flows in a particular period.

ITEM 1A.

RISK FACTORS

There have been no material changes from the Risk Factors described in our Form 10-K for the fiscal year ended December 31, 2011.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

None.

ITEM 5.

OTHER INFORMATION

None.

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ITEM 6.

EXHIBITS

The following Exhibits are filed as part of this report.

Exhibit No.	Description
4.1	Amended and Restated 2006 Incentive Plan.
10.1	First Amendment to Credit Agreement, dated as of May 10, 2012, by and among Kapstone Kraft Paper Corporation, as Borrower, KapStone Paper and Packaging Corporation and the other Guarantors party thereto, the Lenders party thereto and Bank of America N.A., as Administrative Agent. Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 15, 2012.
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase.
101.DEF	XBRL Taxonomy Extension Definition Linkbase.
101.LAB	XBRL Taxonomy Extension Label Linkbase.
101.PRE	XBRL Extension Presentation Linkbase.

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SIGNATURE

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	KAPSTONE PAPER AND PACKAGING CORPORATION
August 1, 2012	By:	/s/ Andrea K. Tarbox
		Andrea K. Tarbox
		Vice President and Chief Financial Officer
		(duly authorized officer and principal financial officer)

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EX-4.1

Exhibit 4.1

KAPSTONE PAPER AND PACKAGING
2006 INCENTIVE PLAN

(amended and restated as of May 18, 2012)

1.       Purpose.  KapStone Paper and Packaging Corporation, a Delaware corporation (“KapStone”), desires to attract and retain the best available talent and to encourage the highest level of performance. The KapStone Paper and Packaging 2006 Incentive Plan (the “Plan”) is intended to contribute significantly to the attainment of these objectives by affording eligible employees and independent contractors of KapStone and its Affiliates (as defined in Section 20) (collectively, with KapStone, the “Company”) the opportunity to acquire a proprietary interest in KapStone through the grant of (i) stock options (“Options”) to purchase shares of common stock, $.001 par value per share, of KapStone (the “Common Stock”), (ii) restricted shares or the right to receive shares of Common Stock (“Restricted Stock”) and (iii) stock appreciation rights to receive a payment in Common Stock or cash equal to the amount of the excess of the Fair Market Value of the Common Stock on the date of exercise over the Fair Market Value of the Common Stock on the date of grant (“Stock Appreciation Rights”; and collectively with Options and Restricted Stock, “Awards”, and each individually an “Award”).

2.       Administration.

(a)  The Plan shall be administered by a committee (the “Committee”) of not fewer than two members of the board of directors of KapStone (the “Board”) who shall be appointed by and serve at the pleasure of the Board. To the extent necessary to comply with Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and, to the extent necessary to exclude Options and Stock Appreciation Rights granted under the Plan from the calculation of the income tax deduction limit under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), each member of the Committee shall be an “outside director” within the meaning of Section 162(m) of the Code and Treasury Regulations promulgated thereunder. A majority of the Committee shall constitute a quorum.

(b) The Committee shall have and may exercise all of the powers of the Board under the Plan, other than the power to appoint a director to Committee membership. The Committee shall have plenary authority in its discretion, subject to and consistent with the express provisions of the Plan, to direct the grants of Awards; to determine the numbers of shares of Common Stock covered by each Award, the purchase price, if any, of the Common Stock covered by each Award, the individuals to whom an Award is given (each a “Grantee”), the time or times at which the Award shall be granted or may vest; to prescribe, amend and rescind rules and regulations relating to the Plan, including, without limitation, such rules and regulations as it shall deem advisable so that transactions involving Awards may qualify for exemption under such rules and regulations as the Securities and Exchange Commission may promulgate from time to time exempting transactions from Section 16(b) of the Exchange Act; to determine the terms and provisions of, and to cause the Company to enter into, agreements with Grantees in connection with Awards under the Plan (“Award Agreements”), which Award Agreements may vary from one another, as the Committee shall deem appropriate; to amend any Award Agreement from time to time with the consent of the Grantee; and to make all other determinations the Committee may deem necessary or advisable for the administration of the Plan.  The Committee shall have discretion to include such provisions in the Award Agreements as it shall deem appropriate, including those related to non-competition, non-solicitation of employees or customers, the forfeiture of Awards or profits relating thereto upon a finding of fraud or other material misconduct on the part of a Grantee, or such other provisions, not inconsistent with law or the requirements of the Plan as it may from time to time determine appropriate.  Every action, decision, interpretation or determination made by the Committee or the Board with respect to the application or administration of the Plan shall be conclusive and binding upon the Company and any person having or claiming any interest pursuant to any Award granted under the Plan.

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(c) Except as otherwise required by law, no member of the Board or the Committee shall be liable for anything whatsoever in connection with the administration of the Plan other than such member’s own willful misconduct. Under no circumstances shall any member of the Board or the Committee be liable for any act or omission of any other member of the Board or the Committee. The Board and the Committee shall be entitled to rely, in the performance of its functions with respect to the Plan, upon information and advice furnished by KapStone’s officers, KapStone’s accountants, KapStone’s legal counsel and any other party the Board and Committee deems necessary. No member of the Board or Committee shall be liable for any action taken or not taken in reliance upon any such advice.

(d) Each Award under the Plan shall be deemed to have been granted when the determination of the Committee with respect to such Award is made. Once an Award has been granted, all conditions and requirements of the Plan with respect to such Award shall be deemed conditions on exercise, not grant.

(e) Notwithstanding the foregoing or any other provision of the Plan, the Committee shall have no authority to issue Awards under the Plan under terms and conditions which would cause such Awards to be considered nonqualified “deferred compensation” subject to the provisions of Section 409A of the Code, including by way of example but not limitation, no Options or Stock Appreciation Rights shall be issued with an exercise price below Fair Market Value and all Restricted Stock shall be issued and reported as income to the Grantee no later than the fifteenth (15th) day of the third calendar month after the end of the calendar year in which the right to the shares covered by such Award becomes vested.

3.       Eligible Persons.  Subject in the case of ISOs to Section 7(g)(i), Awards may be granted to employees, officers and directors of, and consultants and advisors to, the Company. In determining the persons to whom Awards shall be made and the number of shares to be covered by each Award, the Committee shall take into account the duties of the respective persons, their present and potential contributions to the success of the Company and other factors deemed relevant by the Committee in connection with accomplishing the purposes of the Plan.

4.       Share Limitations under the Plan.

(a) Subject to adjustment as provided in Section 14 and the provisions of this Section 4, a maximum of five million seven hundred thousand (5,700,000) shares of Common Stock shall be reserved for issuance pursuant to Awards granted under the Plan. If an Award is forfeited or expires without being exercised, or if Restricted Stock is repurchased by the Company as provided in Section 8(e), the shares of Common Stock subject to the Award shall be available for additional grants under the Plan. If an Option is exercised in whole or in part by a Grantee tendering previously owned shares of Common Stock, or if any shares are withheld in connection with the exercise of an Option to pay the exercise price or to satisfy the Grantee’s tax liability, the full number of shares in respect of which the Option has been exercised shall be applied against the limit set forth in this Section 4(a).

(b) KapStone may grant Options under the Plan in substitution for options held by employees of another corporation who become employees of KapStone or an Affiliate as the result of a merger or consolidation of the employing corporation with KapStone or an Affiliate, or as a result of the acquisition by KapStone or an Affiliate of property or stock of the employing corporation. Substitute Options shall be granted on such terms as the Committee considers appropriate in the circumstances and in compliance with Section 409A of the Code.  Substitute Options shall be in addition to the limit set forth in Section 4(a).

(c) The maximum aggregate number of shares of Common Stock issuable pursuant to Awards that a Grantee may be granted within one fiscal year of KapStone shall be five hundred thousand (500,000).

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(d) The aggregate numbers set forth in this Section 4 shall be subject to adjustment as provided in Section 14.

5.       Term of Award.  The term of each Award shall be fixed by the Committee and specified in the applicable Award Agreement, but in no event shall it be more than ten years from the date of grant. Subject in the case of ISOs to Section 7(g), the term of an Award may be extended from time to time by the Committee, provided that no extension shall extend the term beyond ten years from the date of grant.

6.       Vesting.  The Committee shall determine the vesting schedule applicable to a particular Award and specify the vesting schedule in the applicable Award Agreement. Notwithstanding the foregoing the Committee may accelerate the vesting of an Award at any time.

7.       Options.

(a) Type of Options.  Options granted under the Plan may be either incentive stock options (“ISOs”) intended to meet the requirements of Section 422 of the Code or nonqualified stock options (“NSOs”) which are not intended to meet such Code requirements.

(b) Rights to Purchase.  The Committee may grant Options to employees, officers and directors of, and consultants and advisors to, the Company, in such amounts, and subject to such terms and conditions as the Committee may determine in its sole discretion, including such restrictions on transferability and other restrictions as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise, as the Committee shall determine.

(c) Option Agreement.  The terms and conditions of each Option shall be set forth in an Option Agreement in the form approved by the Committee. Each Option Agreement shall, at a minimum, specify (i) the number of shares of Common Stock subject to the Option, (ii) whether the Option is intended to be an ISO or NSO, (iii) the provisions related to vesting and exercisability of the Option, including the Option exercise price, and (iv) that the Option is subject to the terms and provisions of the Plan. Option Agreements may differ from one another.

(d)  Termination of Relationship to the Company.

i. With respect to an Option granted to an individual who is an employee of the Company at the time of Option grant, unless the Option Agreement expressly provides to the contrary, (i) the Option shall terminate immediately upon the Grantee’s termination of employment for Cause (as defined in Section 20); (ii) subject in the case of ISOs to Section 7(g), the Option shall terminate two years following the Grantee’s termination of employment by reason of death or Disability (as defined in Section 20); (iii) subject in the case of ISOs to Section 7(g), the Option shall terminate two years after Retirement (as defined in Section 20); (iv) the Option shall terminate three months after the Grantee’s termination of employment for any other reason; and (v) vesting of an Option will terminate in all cases immediately upon termination of employment. In no event shall an Option remain exercisable beyond the expiration date specified in the applicable Option Agreement. An Option Agreement may contain such provisions as the Board shall approve with reference to the determination of the date employment terminates for purposes of the Plan and the effect of leaves of absence, which provisions may vary from one another.

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ii. With respect to an Option granted to an individual who is not an employee of the Company at the time of Option grant, the Board shall determine and specify in the applicable Option Agreement the consequences, if any, of the termination of the Grantee’s relationship with the Company.

(e)  Option Price. Subject in the case of ISOs to Section 7(g), the exercise price per share of Common Stock covered by an Option shall be established by the Committee; provided, however, that (a) the exercise price per share for any Option shall not be less than one hundred percent (100%) of the Fair Market Value of a share of Common Stock on the date the Option is granted and (b) no ISO granted to a 10% Shareholder (as defined in Section 7(g)) shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Common Stock on the date the Option is granted. Notwithstanding the foregoing, an Option (whether an ISO or NSO) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provision of Sections 409A and 424(a) of the Code.

(f)  No Stockholder Rights. No Grantee shall have the rights of a stockholder with respect to shares covered by an Option until such person becomes the holder of record of such shares.

(g)  ISO Provisions.

i. Employment Requirement; Termination of Employment, Death or Disability. ISOs may only be awarded to employees of KapStone or a corporation which, with respect to KapStone, is a “parent corporation” or “subsidiary corporation” within the meaning of Sections 424(e) and (f) of the Code. No ISO may be exercised unless, at the time of such exercise, the Grantee is, and has been continuously since the date of grant of his or her option, employed by the Company, except that:

(1)an ISO may be exercised within the period of three months after the date the Grantee ceases to be an employee of the Company (or within such lesser period as may be specified in the applicable Option Agreement), provided, that the Option Agreement may designate a longer exercise period and that the exercise after such three-month period shall be treated as the exercise of a NSO under the Plan;

(2)if the Grantee dies while in the employ of the Company, or within three months after the Grantee ceases to be such an employee, the ISO may be exercised by the person to whom it is transferred by will or the laws of descent and distribution within the period of one year after the date of death (or within such lesser period as may be specified in the applicable Option Agreement); provided, that the Option Agreement may designate a longer exercise period and that the exercise after such one-year period shall be treated as the exercise of a NSO under the Plan; and

(3)if while in the employ of the Company the Grantee becomes disabled within the meaning of Section 22(e)(3) of the Code or any successor provisions thereto, the ISO may be exercised within the period of one year after the date the Grantee ceases to be such an employee because of such disability (or within such lesser period as may be specified in the applicable Option Agreement) provided, that the Option Agreement may designate a longer exercise period and that the exercise after such one-year period shall be treated as the exercise of a NSO under the Plan.

For all purposes of the Plan and any Option granted hereunder, “employment” shall be defined in accordance with the provisions of Section 1.421-7(h) of the Income Tax Regulations (or any successor regulations). Notwithstanding the foregoing provisions, no ISO may be exercised after its expiration date.

ii. 10% Shareholders.  In the case of an individual who at the time the Option is granted owns stock possessing more than 10% of the total combined voting power of all classes of the stock of KapStone or of a parent or subsidiary corporation of KapStone (a “10% Shareholder”), (i) the Option exercise price of any ISO granted to such person shall in no event be less than 110% of the Fair Market Value of the Common

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Stock on the date the ISO is granted and (ii) the term of an ISO granted to such person may not exceed five years from the date of grant.

iii. $100,000 Limit.  The aggregate Fair Market Value (determined at the time an ISO is granted) of the Common Stock covered by ISOs exercisable for the first time by an employee during any calendar year (under all plans of the Company) may not exceed $100,000.

iv. Options Which Do Not Satisfy ISO Requirements.  To the extent that any Option which is issued under the Plan exceeds the limit set forth in paragraph (c) or otherwise does not comply with the requirements of Code Section 422, it shall be treated as a NSO.

(h) Cancellation and New Grant of Options, Etc.  The Committee shall have the authority to effect, at any time and from time to time, with the consent of the affected Grantees, (i) the cancellation of any or all outstanding Options under the Plan and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of Common Stock and having an Option exercise price per share which may be lower or higher than the exercise price per share of the cancelled Options or (ii) the amendment of the terms of any and all outstanding Options under the Plan to provide an Option exercise price per share which is higher or lower than the then-current exercise price per share of such outstanding options; provided, however, that the Committee shall not take any of the actions described in (i) or (ii) hereof without receiving the approval of KapStone ‘s stockholders. The provisions of this Section 7(h) may not be altered or amended without stockholder approval.

(i)  Buyout Provisions.  The Committee may at any time offer to buy out for a payment in cash or shares, an Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the Grantee at the time that such offer is made; provided, however, that the Committee shall not be permitted to take such action with regard to any Option the exercise price of which, on the date in question, is in excess of the Fair Market Value of a share of Common Stock without receiving the approval of KapStone’s stockholders. The provisions of this Section 7(i) may not be altered or amended without stockholder approval.

(j)  No Deferral Feature.  The Option Agreement shall not provide for any deferral feature with respect to an Option constituting a deferral of compensation under Section 409A of the Code.

8.       Restricted Stock.

(a) Type of Restricted Stock.  Restricted Stock granted under the Plan may be either restricted stock shares (“RS Shares”) or restricted stock units (“RS Units”).  “RS Shares” means Shares which are issued and awarded to Grantees subject to a substantial risk of forfeiture and restrictions on transfer of such Shares during a specified period as provided in subsection (b).  “RS Units” means bookkeeping units that represent the right of a Grantee to receive the specified number of Shares upon lapse of the substantial risk of forfeiture and other restrictions on such Shares during the specified period as provided in subsection (b).

(b) Rights to Purchase.  The Committee may grant Restricted Stock to employees, officers and directors of, and consultants and advisors to, the Company, in such amounts, and subject to such terms and conditions as the Committee may determine in its sole discretion, including such restrictions on transferability and other restrictions as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise, as the Committee shall determine. Grantees shall not be required to pay cash or other consideration for Restricted Stock granted hereunder, other than in the form of services performed under such terms and conditions as the Committee may determine.

(c) Restricted Stock Grant Agreement.  Restricted Stock shall be granted under a Restricted Stock Grant Agreement that shall specify whether the Restricted Stock is an Award of RS Shares or RS Units, the number of RS Shares or RS Units granted, and the terms of the restrictions referred to in subsection (b).  If the Award is made in the form of RS Shares, then (i) the Award shall be further evidenced by certificates or other indicia of ownership for the Shares registered in the name of the Grantee and referring to the terms, conditions, and restrictions applicable to such RS Shares; (ii) the Award of RS Shares shall be entered upon the records of the duly authorized transfer agent of the

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Company as soon as practicable after the Award; but (iii) the Company may retain physical possession of any such certificates, and the Company may require a Grantee awarded RS Shares to deliver a stock power to the Company, endorsed in blank, relating to the RS Shares for so long as the Restricted Stock is subject to risk of forfeiture.

(d) Termination of Employment Prior to Vesting of Restricted Stock.  Unless the Restricted Stock Grant Agreement expressly provides to the contrary, immediately upon the termination of the Grantee’s status as an employee, officer or director of, or consultant or advisor to, the Company for any reason other than the death or Disability of the Grantee, Restricted Stock granted to such Grantee that has not vested prior to such time may no longer vest, and Grantee shall forfeit all rights (and the Company shall have no further obligations) with respect to such Restricted Stock. In the event of the death or Disability of the Grantee, the Award shall immediately vest in full.

(e) Repurchase Right.  The Committee may in its sole discretion provide that a Restricted Stock Grant Agreement shall grant the Company the right to repurchase RS Shares upon the termination for specified reasons or any reason of the purchaser’s status as an employee, officer, director of, or consultant or advisor to, the Company.  The purchase price for the RS Shares repurchased by the Company pursuant to such repurchase right and the rate at which such repurchase right shall lapse (if any) shall be determined by the Committee in its sole discretion and shall be set forth in the Restricted Stock Grant Agreement.

(f) Other Provisions.  The Restricted Stock Grant Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee in its sole discretion.

(g) Rights as a Shareholder.  Unless otherwise provided in the Restricted Stock Grant Agreement:

i.              A Grantee awarded RS Shares that have not been forfeited shall have the rights of a stockholder with respect to such RS Shares from and after the date that the Award of RS Shares is entered upon the records of the duly authorized transfer agent of the Company, including without limitation the right to vote such RS Shares and the right to receive dividends declared on the RS Shares; provided, however, that any dividend in Shares on RS Shares shall be held subject to the same restrictions and for the same period as the RS Shares to which they relate.

ii.             A Grantee awarded RS Units that have not been forfeited shall have no rights as a stockholder (unless and until Shares are issued in respect of such RS Unites upon lapse of the substantial risk of forfeiture), including without limitation no right to vote Shares represented by such RS Units; provided, however, that if dividends (other than dividends in Shares) are paid on Shares represented by RS Units, then the Company will cumulate amounts equivalent to the amount of dividends and pay to the Grantee such amount when the restrictions lapse; and if dividends in Shares are paid on Shares, the Company will credit the Grantee with additional RS Units equal to the per-share dividend on RS Units that have not yet either vested or been forfeited, with such additional RS Units being subject to the same restrictions and for the same period as the RS Units to which they relate.

(h) No Deferral Provisions.  A Restricted Stock Award shall not provide for any deferral of compensation recognition after vesting with respect to Restricted Stock which would cause the Award to constitute a deferral of compensation which is not in compliance with Section 409A of the Code.

9.       Stock Appreciation Rights.

(a) Rights to Purchase.  The Committee may grant Stock Appreciation Rights to employees, officers and directors of, and consultants and advisors to, the Company, in such amounts, and subject to such terms and conditions as the Committee may determine in its sole discretion, including such restrictions on transferability and other restrictions as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise, as the Committee shall determine. No Stock Appreciation Rights shall be granted under the terms and conditions which would cause such rights to be treated as deferred compensation subject to Section 409A of the Code. Grantees shall not be required to pay cash or other consideration for Stock Appreciation Rights granted hereunder, other than in the form of services performed under such terms and conditions as the Committee may determine.

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(b) Stock Appreciation Rights Agreement.  Stock Appreciation Rights shall be granted under a Stock Appreciation Rights Agreement. Each Stock Appreciation Rights Agreement shall, at a minimum, specify (i) the number of shares of Common Stock subject to the Stock Appreciation Right, (ii)  the provisions related to vesting and exercisability of the Stock Appreciation Right, including the base price, and (iii) that the Stock Appreciation Right is subject to the terms and provisions of the Plan.  Stock Appreciation Rights Agreements may differ from one another.

(c) Termination of Employment Prior to Vesting of Stock Appreciation Rights.

i.              With respect to a Stock Appreciation Right granted to an individual who is an employee of the Company at the time of Stock Appreciation Right grant, unless the Stock Appreciation Rights Agreement expressly provides to the contrary, (i) the Stock Appreciation Right shall terminate immediately upon the Grantee’s termination of employment for Cause (as defined in Section 20); (ii) the Stock Appreciation Right shall terminate two years following the Grantee’s termination of employment by reason of death or Disability (as defined in Section 20); (iii) the Stock Appreciation Right shall terminate two years after Retirement (as defined in Section 20); (iv) the Stock Appreciation Right shall terminate three months after the Grantee’s termination of employment for any other reason; and (v) vesting of a Stock Appreciation Right will terminate in all cases immediately upon termination of employment. In no event shall a Stock Appreciation Right remain exercisable beyond the expiration date specified in the applicable Stock Appreciation Rights Agreement. A Stock Appreciation Rights Agreement may contain such provisions as the Board shall approve with reference to the determination of the date employment terminates for purposes of the Plan and the effect of leaves of absence, which provisions may vary from one another.

ii.             With respect to a Stock Appreciation Right granted to an individual who is not an employee of the Company at the time of Stock Appreciation Right grant, the Board shall determine and specify in the applicable Stock Appreciation Rights Agreement the consequences, if any, of the termination of the Grantee’s relationship with the Company.

(d)  Base Price. The base price per share of Common Stock covered by a Stock Appreciation Right shall be established by the Committee; provided, however, that the base price per share for any Stock Appreciation Right shall not be less than one hundred percent (100%) of the Fair Market Value of a share of Common Stock on the date the Stock Appreciation Right is granted.  Notwithstanding the foregoing, a Stock Appreciation Right may be granted with a base price lower than the minimum base price set forth above if such Stock Appreciation Right is granted pursuant to an assumption or substitution for another Stock Appreciation Right in a manner qualifying under the provision of Sections 409A and 424(a) of the Code.

(e)  Other Provisions.  The Stock Appreciation Rights Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee in its sole discretion.

(f)  Rights as a Shareholder.  No Grantee shall have the rights of a stockholder with respect to shares covered by a Stock Appreciation Right until such person becomes the holder of record of such shares.

(g) Cancellation and New Grant of Stock Appreciation Rights, Etc.  The Committee shall have the authority to effect, at any time and from time to time, with the consent of the affected Grantees, (i) the cancellation of any or all outstanding Stock Appreciation Rights under the Plan and the grant in substitution therefor of new Stock Appreciation Rights under the Plan covering the same or different numbers of shares of Common Stock and having a base price per share which may be lower or higher than the base price per share of the cancelled Stock Appreciation Rights or (ii) the amendment of the terms of any and all outstanding Stock Appreciation Rights under the Plan to provide a base price per share which is higher or lower than the then-current base price per share of such outstanding Stock Appreciation Rights; provided, however, that the Committee shall not take any of the actions described in (i) or (ii) hereof without receiving the approval of KapStone ‘s stockholders. The provisions of this Section 9(g) may not be altered or amended without stockholder approval.

(h) Buyout Provisions.  The Committee may at any time offer to buy out for a payment in cash or shares, a Stock Appreciation Right previously granted, based on such terms and conditions as the Committee shall establish and communicate to the Grantee at the time that such offer is made; provided, however, that the Committee shall not be

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permitted to take such action with regard to any Stock Appreciation Right the base price of which, on the date in question, is in excess of the Fair Market Value of a share of Common Stock without receiving the approval of KapStone’s stockholders. The provisions of this Section 9(h) may not be altered or amended without stockholder approval.

(i)  No Deferral Feature.  The Stock Appreciation Rights Agreement shall not provide for any deferral feature with respect to a Stock Appreciation Right constituting a deferral of compensation under Section 409A of the Code.

10.     Exercise of Awards.

(a) An Award other than a Restricted Stock Award may be exercised at any time and from time to time, in whole or in part, as to any or all full shares as to which such Award is then exercisable. An Award may not be exercised with respect to a fractional share. A Grantee (or other person who, pursuant to Section 11, may exercise the Award) shall exercise the Award by delivering to KapStone in the manner provided in the Award Agreement a written notice of exercise, stating the number of shares of Common Stock with respect to which the exercise is being made.  Upon receipt by KapStone of any notice of exercise, the exercise of the Award as set forth in that notice shall be irrevocable.

(b) Upon exercise of an Option, the Grantee shall pay to KapStone the Option exercise price per share of Common Stock multiplied by the number of full shares as to which the Option is then exercised. A Grantee may pay the Option exercise price by (i) tendering or causing to be tendered to KapStone cash, (ii) delivery or deemed delivery of shares of Common Stock owned by the Grantee having a Fair Market Value equal to the exercise price, (iii) authorizing KapStone to withhold whole shares of Common Stock which would otherwise be delivered to the Grantee having an aggregate Fair Market Value, determined as of the date of exercise, equal to the exercise price, (iv) delivery of other property permitted by law and acceptable to the Board or Committee, or (v) any other means which the Board or Committee determines are consistent with the purpose of the Plan and with applicable laws and regulations (including, without limitation, the provisions of Rule 16b-3 and Regulation T promulgated by the Federal Reserve Board).

(c) The Company shall, in its sole discretion, take any action reasonably believed by it to be necessary to comply with local, state or federal tax laws relating to the reporting and withholding of taxes. In the event a Grantee has exercised an Award, a Grantee shall, upon notification of the amount due, promptly pay or cause to be paid the amount determined by the Company as necessary to satisfy all applicable tax withholding requirements. A Grantee may satisfy his or her tax withholding requirement in any manner satisfactory to the Company.

(d) Any certificates or other indicia of ownership representing the shares as to which an Award has been exercised shall refer to the restrictions applicable to such shares.

11.     Nontransferability.

(a) Except as provided in Section 11 (b), Awards granted under the Plan shall not be assignable or transferable other than by will or the laws of descent and distribution and Options and Stock Appreciation Rights may be exercised during the lifetime of the Grantee only by the Grantee or by the Grantee’s guardian or legal representative.  In the event of any attempt by a Grantee to transfer, assign, pledge, hypothecate or otherwise dispose of an Award or any right thereunder, except as provided for herein, or in the event of the levy of any attachment, execution or similar process upon the rights or interest hereby conferred, KapStone may terminate the Award (making such Award null and void) or repurchase the RS Shares as provided in Section 8(e) by notice to the Grantee.

(b) Notwithstanding paragraph (a), if (and on the terms) so provided in the applicable Option Agreement, a Grantee may transfer a NSO, by gift or a domestic relations order, to a Family Member (as defined in Section 20) of the Grantee. If a NSO is transferred in accordance with this subparagraph, the Option shall be exercisable solely by the transferee, but the determination of the exercisability of the Option shall be based solely on the activities and state of affairs of the Grantee. Thus, for example, if, after a transfer with respect to an Option, the Grantee ceases to be an employee of the Company, such termination shall trigger the provisions of Section 7(d) hereof. Conversely, if after a

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transfer the transferee ceases to be an employee of the Company, such termination shall not trigger the provisions of Section 7(d) hereof.

12.     Compliance with Law; Registration of Shares.

(a) The Plan and any grant hereunder shall be subject to all applicable laws, rules, and regulations of any applicable jurisdiction or authority or agency thereof and to such approvals by any regulatory or governmental agency which, in the opinion of Company’s counsel, may be required or appropriate.

(b) Notwithstanding any other provision of the Plan or Award Agreements made pursuant hereto, the Company shall not be required to issue or deliver any certificate or certificates for shares of Common Stock under the Plan prior to fulfillment of all of the following conditions:

i. Effectiveness of any registration or other qualification of such shares of the Company under any law or regulation of any applicable jurisdiction or authority or agency thereof which the Board shall, in its absolute discretion or upon the advice of counsel, deem necessary or advisable; and

ii. Grant of any other consent, approval or permit from any applicable jurisdiction or authority or agency thereof or securities exchange or quotation system which the Board shall, in its absolute discretion or upon the advice of counsel, deem necessary or advisable.

The Company shall use all reasonable efforts to obtain any consent, approval or permit described above; provided, however, that except to the extent as may be specified in an Award Agreement with respect to any particular grant, the Company shall be under no obligation to register or qualify any shares of Common Stock subject to an Award under any federal or state securities law or on any exchange.

13.     Change in Control.

(a) In the event that a Change in Control occurs, the Board may determine that (i) any Option shall be assumed, or a substantially equivalent Award shall be substituted, by an acquiring or succeeding entity (or an affiliate thereof) on such terms as the Board determines to be appropriate; (ii) upon written notice to the Grantee, provide that the Award shall terminate immediately prior to the consummation of the transaction unless exercised by the Grantee within a specified period following the date of the notice; (iii) in the event that the Change in Control is a sale or similar transaction under the terms of which holders of Common Stock receive a payment for each share of Common Stock surrendered in the transaction (the “Sales Price”), make or provide for a payment to each Grantee equal to the amount by which (A) the Sales Price times the number of shares of Common Stock subject to the Award (to the extent such Award is then exercisable) exceeds (B) the aggregate exercise or base price, if any, for all such shares of Common Stock; or (iv) may make such other equitable adjustments as the Board deems appropriate.

(b)  “Change in Control” means the occurrence of any of the following:  (i) any “person” (as that term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly, of securities representing 35% or more of the combined voting power for election of directors of the then outstanding securities of the Company or any successor of the Company; (ii) during any period of two consecutive years or less, individuals who at the beginning of such period constituted the Board cease, for any reason, to constitute at least a majority of the Board, unless the election or nomination for election of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; (iii)  the consummation of the liquidation of the Company or the sale or other disposition of 50% or more of the assets of the Company; or (iv) the consummation of any merger or consolidation to which the Company is a party as a result of which the persons who were share owners of the Company immediately prior to the effective date of the merger or consolidation will have beneficial ownership of less than 50% of the combined voting power for election of directors of the surviving corporation following the effective date of such merger or consolidation.

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14.     Adjustments upon Changes in Capitalization.

(a) In the event of any stock dividend or split, recapitalization, combination, exchange or similar change affecting the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company, the Committee shall make any or all of the following adjustments as it deems appropriate to equitably reflect such event: (i) adjust the aggregate number of shares (or such other security as is designated by the Board) which may be acquired pursuant to the Plan, (ii) adjust the purchase price to be paid for any or all such shares subject to the then outstanding Awards, (iii) adjust the number of shares of Common Stock (or such other security as is designated by the Board) subject to any or all of the then outstanding Awards and (iv) make any other equitable adjustments or take such other equitable action as the Board, in its discretion, shall deem appropriate. For purposes hereof, the conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.”

(b) Any and all adjustments or actions taken by the Board pursuant to this Section 14 shall be conclusive and binding for all purposes.

15.     No Right to Continued Employment.  Neither the Plan nor any action taken hereunder shall be construed as giving any employee or any independent contractor any right to continue in the employ of or to be engaged as an independent contractor by the Company or affect the right of the Company to terminate such person’s employment or other relationship with the Company at any time.

16.     Amendment; Early Termination.  Subject to Sections 7(h) and 9(g), the Board may at any time and from time to time alter, amend, suspend or terminate the Plan in whole or in part; provided, however, that no amendment requiring stockholder approval by law or by the rules of any stock exchange, inter-dealer quotation system, or other market in which shares of Common Stock are traded, shall be effective unless and until such stockholder approval has been obtained in compliance with such rule or law; and provided, further, that no such amendment shall materially adversely affect the rights of a Grantee in any Award previously granted under the Plan without the Grantee’s written consent.

17.     Effective Date.  The Plan shall be effective as of the date of its adoption by the Board (the “Effective Date”), subject to the approval thereof by the stockholders of KapStone entitled to vote thereon within 12 months of such date. In the event that such stockholder approval is not obtained within such time period, the Plan and any Awards granted under the Plan on or prior to the expiration of such 12 month period shall be void and of no further force and effect.

18.     Termination of Plan.  Unless terminated earlier by the Board in accordance with Section 16 above, the Plan shall terminate on, and no further Awards may be granted after, the tenth anniversary of the Effective Date.

19.     Severability.  In the event that any one or more provisions of the Plan or an Award Agreement, or any action taken pursuant to the Plan or an Award Agreement, should, for any reason, be unenforceable or invalid in any respect under the laws of the United States, any state of the United States or any other jurisdiction, such unenforceability or invalidity shall not affect any other provision of the Plan or Award Agreement, but in such particular jurisdiction and instance the Plan and/or Award Agreement, as applicable, shall be construed as if such unenforceable or invalid provision had not been contained therein or if the action in question had not been taken thereunder.

20.     Definitions.

(a)  Affiliate.  The term “Affiliate” means any entity, whether or not incorporated, that directly or through one or more intermediaries is controlled by KapStone.

(b) Cause.  The term “Cause” when used herein in conjunction with termination of employment (or other service relationship) means (i) if the Grantee is a party to an employment or similar agreement with the Company which defines “cause” (or a similar term), the meaning set forth in such agreement (other than death or disability), or (ii) otherwise, termination by the Company of the employment (or other service relationship) of the Grantee by

10

reason of the Grantee’s (1) intentional failure to perform reasonably assigned duties, (2) dishonesty or willful misconduct in the performance of his duties, (3) involvement in a transaction which is materially adverse to the Company, (4) breach of fiduciary duty involving personal profit, (5) willful violation of any law, rule, regulation or court order (other than misdemeanor traffic violations and misdemeanors not involving misuse or misappropriation of money or property), (6) commission of an act of fraud or intentional misappropriation or conversion of any asset or opportunity of the Company, or (7) material breach of any provision of the Plan, the Grantee’s Award Agreement or any other written agreement between the Grantee and the Company, in each case as determined in good faith by the Board, whose determination shall be final, conclusive and binding on all parties.

(c)  Disability.  Except as otherwise specified in the applicable Award Agreement or in the Grantee’s Employment Agreement with the Company, the Grantee shall be deemed to have a “Disability” if the Grantee is unable to engage in any substantial gainful activity by reason of any medically determined physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months, as reasonably determined by the Board in good faith and in its discretion.

(d)  Fair Market Value.  As used herein, the term “Fair Market Value” of a share of Common Stock as of a specified date for the purposes of the Plan shall mean the value of a share of Common Stock determined consistent with the requirements of Sections 422 and 409A of the Code as follows: the arithmetic mean of the high and low sales prices of a share of Common Stock on the date of grant on the principal securities exchange (including the Nasdaq National Market) on which such shares are traded on the relevant date for which Fair Market Value is being determined, or if the shares are not traded on a securities exchange, Fair Market Value shall be deemed to be the average of the high bid and low asked prices of the Common Stock on the date of grant in the over-the-counter market on which such shares are traded on the relevant date for which Fair Market Value is being determined. If the shares are not publicly traded, Fair Market Value of a share of Common Stock (including, in the case of any repurchase of shares, any distributions with respect thereto which would be repurchased with the shares) shall be determined in good faith by the Board or the Committee. In no case shall Fair Market Value be determined with regard to restrictions other than restrictions which, by their terms, will never lapse.

(e) Family Member of the Grantee.  As used herein, “Family Member of the Grantee” means the Grantee’s child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Grantee’s household (other than a tenant or employee), a trust in which these persons have more than 50% of the beneficial interest, a foundation in which these persons (or the Grantee) control the management of assets, and any other entity in which these persons (or the Grantee) own more than 50% of the voting interests.

(f) Retirement.  As used herein, “Retirement” means the termination of employment of a Grantee over the age of 64.

11

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Roger W. Stone, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of KapStone Paper and Packaging Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 1, 2012

	/s/ Roger W. Stone
Name:	Roger W. Stone
Title:	Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Andrea K. Tarbox, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of KapStone Paper and Packaging Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 1, 2012

	/s/ Andrea K. Tarbox
Name:	Andrea K. Tarbox
Title:	Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of CEO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of KapStone Paper and Packaging Corporation for the quarter ended June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Roger W. Stone, Chairman and Chief Executive Officer of KapStone Paper and Packaging Corporation, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of KapStone Paper and Packaging Corporation.

Dated: August 1, 2012

By:	/s/ Roger W. Stone
	Roger W. Stone
	Chairman and Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification of CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of KapStone Paper and Packaging Corporation for the quarter ended June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrea K. Tarbox, Vice President and Chief Financial Officer of KapStone Paper and Packaging Corporation, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of KapStone Paper and Packaging Corporation.

Dated: August 1, 2012

By:	/s/ Andrea K. Tarbox
	Andrea K. Tarbox
	Vice President and Chief Financial Officer

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Inventories (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Inventories
Raw materials	$ 43,504	$ 46,926
Work in process	2,042	1,780
Finished goods	38,730	36,747
Replacement parts and supplies	25,671	24,601
Inventories	$ 109,947	$ 110,054

XML

Annual Planned Maintenance Outage

6 Months Ended

Jun. 30, 2012

Annual Planned Maintenance Outage

Annual Planned Maintenance Outage

4.Annual Planned Maintenance Outage

Annual planned maintenance outage costs for the three months ended June 30, 2012 and 2011 totaled $3.8 million and $3.0 million, respectively. In addition, planned maintenance outage costs for the six months ended June 30, 2012 and 2011 totaled $4.6 million and $3.4 million, respectively.

XML

Pension Plan and Post Retirement Benefits (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012 employee	Jun. 30, 2011
Pension Plan and Post Retirement Benefits
Number of union employees			1,000
Defined Benefit Pension Plan
Service cost for benefits earned during the period	$ 1,023,000	$ 844,000	$ 2,047,000	$ 1,688,000
Interest cost on projected benefit obligation	251,000	203,000	503,000	406,000
Expected return on plan assets	(233,000)	(185,000)	(467,000)	(370,000)
Amortization of net loss	54,000		108,000
Amortization of prior service cost	92,000	141,000	184,000	282,000
Net pension cost - other multi-employer plan	17,000		34,000
Total net pension cost	1,204,000	1,003,000	2,409,000	2,006,000
Amount funded			2,600,000
Additional amount expected to be funded in 2012	3,000,000		3,000,000
Expense recognized	$ 2,600,000	$ 1,600,000	$ 5,400,000	$ 3,600,000

XML

Net Income Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Net Income Per Share
Net income as reported	$ 18,404	$ 18,159	$ 33,967	$ 33,290
Weighted-average number of common shares for basic net income per share	46,620,354	46,250,362	46,555,990	46,172,108
Incremental effect of dilutive common stock equivalents:
Unexercised stock options (in shares)	899,480	889,370	923,301	908,410
Unvested restricted stock awards (in shares)	224,755	276,668	313,689	354,969
Weighted-average number of shares for diluted net income per share	47,744,589	47,416,400	47,792,980	47,435,487
Net income per share - basic (in dollars per share)	$ 0.39	$ 0.39	$ 0.73	$ 0.72
Net income per share - diluted (in dollars per share)	$ 0.39	$ 0.38	$ 0.71	$ 0.70
Anti-dilutive unexercised stock options excluded from computation of diluted earnings per share	300,000	300,000

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Stock-Based Compensation (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended			6 Months Ended
	Jun. 30, 2012	Mar. 31, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Stock-based compensation
Stock-based compensation expense	$ 1,264		$ 763	$ 3,577	$ 2,521
Unrecognized stock-based compensation cost
Total stock-based compensation cost	5,329			5,329		3,335
Stock Options
Stock-based compensation
Option grants (in shares)				310,847
Stock-based compensation expense	717		448	2,025	1,399
Unrecognized stock-based compensation cost
Unrecognized stock option compensation cost	2,790			2,790		1,648
Weighted average period of recognition				1 year 10 months 24 days
Stock Options
Percentage of granted award which will vest after two years	50.00%			50.00%
Vesting period for 50% of awards				2 years
Percentage of granted award which will vest after three years	50.00%			50.00%
Vesting period for remaining 50% of awards				3 years
Minimum age requirement of grantee as a condition for vesting				65 years
Contractual term				10 years
Granted (in dollars per share)				$ 19.75
Weighted average fair value (in dollars per share)		$ 10.38
Stock Units
Minimum age requirement of grantee as a condition for vesting				65 years
KapStone Stock Options Black-Scholes assumptions (weighted average):
Expected volatility (as a percent)				56.52%	45.24%
Expected life				5 years 11 months 23 days	5 years 11 months 8 days
Risk-free interest rate (as a percent)				1.10%	2.47%
Restricted Stock Units
Stock-based compensation
Units granted (in shares)				124,341
Stock-based compensation expense	547		315	1,552	1,122
Unrecognized stock-based compensation cost
Unrecognized restricted stock compensation cost	$ 2,539			$ 2,539		$ 1,687
Weighted average period of recognition				2 years 1 month 6 days
Stock Options
Minimum age requirement of grantee as a condition for vesting				65 years
Stock Units
Minimum age requirement of grantee as a condition for vesting				65 years
Vesting period				3 years

XML

Stock-Based Compensation (Details 2) (USD $)	3 Months Ended	6 Months Ended	12 Months Ended
	Jun. 30, 2012	Jun. 30, 2012	Dec. 31, 2011
Stock Options
Options
Outstanding at the beginning of the period (in shares)		2,473,874
Granted (in shares)		310,847
Exercised (in shares)		(100,378)
Outstanding at the end of the period (in shares)	2,684,343	2,684,343	2,473,874
Exercisable at the end of the period (in shares)	1,867,486	1,867,486
Exercises of employee stock options	9,274	100,378
Weighted Average Exercise Price
Outstanding at the beginning of the period (in dollars per share)		$ 7.86
Granted (in dollars per share)		$ 19.75
Exercised (in dollars per share)		$ 4.73
Outstanding at the end of the period (in dollars per share)	$ 9.35	$ 9.35	$ 7.86
Exercisable at the end of the period (in dollars per share)	$ 6.28	$ 6.28
Weighted Average Remaining Life (Years)
Outstanding at the beginning of the period		6 years 7 months 6 days	6 years 8 months 12 days
Granted		9 years 10 months 24 days
Outstanding at the end of the period		6 years 7 months 6 days	6 years 8 months 12 days
Exercisable at the end of the period		5 years 7 months 6 days
Intrinsic Value
Outstanding at beginning of the period		$ 19,742,000
Exercised		1,451,000
Outstanding at the end of the period	18,867,000	18,867,000	19,742,000
Exercisable at the end of the period	17,876,000	17,876,000
Cash proceeds from exercises of options	$ 100,000	$ 500,000
Contractual term		10 years
Minimum age requirement of grantee as a condition for vesting		65 years
Restricted Stock Units
Intrinsic Value
Vesting period		3 years
Minimum age requirement of grantee as a condition for vesting		65 years
Units
Outstanding at the beginning of the period (in shares)		496,395
Granted (in shares)		124,341
Vested (in shares)		(216,784)
Outstanding at the end of the period (in shares)	403,952	403,952
Weighted Average Grant Price
Outstanding at the beginning of the period (in dollars per share)		$ 9.22
Granted (in dollars per share)		$ 19.75
Vested (in dollars per share)		$ 3.70
Outstanding at the end of the period (in dollars per share)	$ 15.43	$ 15.43

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USC Acquisition

6 Months Ended

Jun. 30, 2012

USC Acquisition

USC Acquisition

3.USC Acquisition

On October 31, 2011, the Company consummated the acquisition of U.S. Corrugated Inc. (“USC”) from its stockholders by merger for $330.0 million in cash plus $1.6 million of working capital adjustments. On March 9, 2012, KapStone reached an agreement with USC on the final calculation of Merger Consideration and paid an additional $0.3 million which was allocated to acquisition consideration.

The following table summarizes the acquisition consideration:

Purchase price, net of cash acquired	$	330,000
Working capital adjustments	1,946
Total acquisition consideration	$	331,946

The USC acquisition was accounted for in accordance with the provisions of ASC 805, “Business Combinations,” and the accompanying consolidated financial statements include the results of USC since October 31, 2011. The Company estimated the fair value of the assets and liabilities of USC at the time of acquisition and used third-party appraisals to determine the fair market value for tangible and intangible assets. The excess of the purchase price over the aggregate estimated fair value of net assets acquired was allocated to goodwill. The allocation is not final as the review of the fair value of deferred income tax assets and liabilities and certain other acquired assets and liabilities is in process.

The following table summarizes the preliminary allocation of acquisition consideration to the fair value of the assets acquired and the liabilities assumed at the date of acquisition:

Trade accounts receivable	$	38,377
Other receivables	5,745
Inventories	32,859
Prepaid expenses and other current assets	754
Plant, property and equipment	106,082
Other assets	634
Intangible assets	45,000
Goodwill	180,823
Deferred income tax asset	5,126
Accounts payable	(34,116		)
Accrued expenses	(3,660		)
Accrued compensation costs	(5,526		)
Deferred income taxes	(36,045		)
Other liabilities	(4,107		)
Total acquisition consideration	$	331,946

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 9,683	$ 8,062
Trade accounts receivable, less allowances of $307 in 2012 and $571 in 2011	114,723	108,320
Other receivables	6,721	11,247
Inventories	109,947	110,054
Prepaid expenses and other current assets	6,979	4,207
Deferred income taxes	11,770	10,048
Total current assets	259,823	251,938
Plant, property and equipment, net	566,151	567,195
Other assets	4,209	4,313
Intangible assets, net	59,282	63,715
Goodwill	235,334	237,193
Total assets	1,124,799	1,124,354
Current liabilities:
Current portion of long-term debt		6,094
Other current borrowings	1,552
Accounts payable	84,263	81,051
Accrued expenses	22,579	21,217
Accrued compensation costs	20,136	27,445
Total current liabilities	128,530	135,807
Other liabilities:
Long-term debt, net of current portion	293,355	335,635
Pension and post-retirement benefits	10,230	10,676
Deferred income taxes	96,687	84,316
Other liabilities	11,157	11,642
Total other liabilities	411,429	442,269
Commitments and contingencies
Stockholders' equity:
Preferred stock $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding
Common stock $0.0001 par value, 175,000,000 shares authorized; 46,703,892 shares issued and outstanding (40,000 treasury shares outstanding) at June 30, 2012 and 46,449,695 issued and outstanding (40,000 treasury shares outstanding) at December 31, 2011	5	5
Additional paid-in capital	235,123	230,665
Retained earnings	352,035	318,068
Accumulated other comprehensive loss	(2,323)	(2,460)
Total stockholders' equity	584,840	546,278
Total liabilities and stockholders' equity	$ 1,124,799	$ 1,124,354

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Financial Statements

6 Months Ended

Jun. 30, 2012

Financial Statements

Financial Statements

1.Financial Statements

The accompanying unaudited consolidated financial statements of KapStone Paper and Packaging Corporation (the “Company,” “we,” “us,” “our” or “KapStone”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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Stock-Based Compensation (Tables)

6 Months Ended

Jun. 30, 2012

Stock-Based Compensation

Schedule of total stock-based compensation expense related to the stock option and restricted stock unit grants

	Three Months EndedJune 30,				Six Months EndedJune 30,
	2012		2011		2012		2011
Stock option compensation expense	$	717	$	448	$	2,025	$	1,399
Restricted stock unit compensation expense	547		315		1,552		1,122
Total stock-based compensation expense	$	1,264	$	763	$	3,577	$	2,521

Schedule of total unrecognized stock-based compensation cost related to the stock option grants and restricted stock units

	June 30, 2012		December 31, 2011
Unrecognized stock option compensation cost	$	2,790	$	1,648
Unrecognized restricted stock compensation cost	2,539		1,687
Total stock-based compensation cost	$	5,329	$	3,335

Schedule of the assumptions utilized for calculating the fair value of stock options

	Six Months Ended June 30,
	2012		2011
KapStone Stock Options Black-Scholes assumptions (weighted average):
Expected volatility	56.52	%	45.24	%
Expected life (years)	5.98		5.94
Risk-free interest rate	1.10	%	2.47	%
Expected dividend yield	—	%	—	%

Summary of stock options amounts and activity

			Weighted Average		Weighted Average
			Exercise		Remaining	Intrinsic
	Options		Price		Life (Years)	Value
Outstanding at January 1, 2012	2,473,874		$	7.86	6.7	$	19,742
Granted	310,847		19.75		9.9
Exercised	(100,378	)	4.73			1,451
Forfeited	—		—
Outstanding at June 30, 2012	2,684,343		$	9.35	6.6	$	18,867
Exercisable at June 30, 2012	1,867,486		$	6.28	5.6	$	17,876

Summary of restricted stock units amounts and activity

			Weighted Average Grant
	Units		Price
Outstanding at January 1, 2012	496,395		$	9.22
Granted	124,341		19.75
Vested	(216,784	)	3.70
Forfeited	—		—
Outstanding at June 30, 2012	403,952		$	15.43

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Annual Planned Maintenance Outage (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Annual Planned Maintenance Outage
Annual planned maintenance outage costs	$ 3.8	$ 3.0	$ 4.6	$ 3.4

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Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2012

Recent Accounting Pronouncements

Recent Accounting Pronouncements

2.Recent Accounting Pronouncements

Intangibles — Goodwill and Other

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-08, “Intangibles — Goodwill and Other.” This guidance provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20-35-4. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will adopt the provisions of this guidance in conjunction with its annual impairment testing in the fourth quarter of 2012.

Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which revises the manner in which entities should present comprehensive income in their financial statements. The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted the provisions of this guidance in using the continuous statement approach in 2012 on a retrospective basis for all periods presented.

Fair Value Measurements

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop converged guidance on how to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP; however, it expands existing disclosure requirements for fair value measurements and makes other amendments, many of which eliminate unnecessary wording differences between U.S. GAAP and IFRS. This ASU is effective for interim and annual periods beginning after December 15, 2011. The application of the requirements of this guidance did not have a material effect on the consolidated financial statements.

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Consolidated Balance Sheets
Trade accounts receivable, allowances (in dollars)	$ 307	$ 571
Preferred stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Common stock, shares authorized	175,000,000	175,000,000
Common stock, shares issued	46,703,892	46,449,695
Common stock, shares outstanding	46,703,892	46,449,695
Treasury shares, shares outstanding	40,000	40,000

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Recent Accounting Pronouncements (Policies)

6 Months Ended

Jun. 30, 2012

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-08, “Intangibles — Goodwill and Other.” This guidance provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20-35-4. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will adopt the provisions of this guidance in conjunction with its annual impairment testing in the fourth quarter of 2012.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which revises the manner in which entities should present comprehensive income in their financial statements. The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted the provisions of this guidance in using the continuous statement approach in 2012 on a retrospective basis for all periods presented.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop converged guidance on how to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP; however, it expands existing disclosure requirements for fair value measurements and makes other amendments, many of which eliminate unnecessary wording differences between U.S. GAAP and IFRS. This ASU is effective for interim and annual periods beginning after December 15, 2011. The application of the requirements of this guidance did not have a material effect on the consolidated financial statements.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2012	Jul. 24, 2012
Document and Entity Information
Entity Registrant Name	KAPSTONE PAPER & PACKAGING CORP
Entity Central Index Key	0001325281
Document Type	10-Q
Document Period End Date	Jun. 30, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		46,714,963
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2

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USC Acquisition (Tables)

6 Months Ended

Jun. 30, 2012

USC Acquisition

Summary of acquisition consideration

Purchase price, net of cash acquired	$	330,000
Working capital adjustments	1,946
Total acquisition consideration	$	331,946

Summary of the preliminary allocation of acquisition consideration to the fair value of the assets acquired and the liabilities assumed at the date of acquisition

Trade accounts receivable	$	38,377
Other receivables	5,745
Inventories	32,859
Prepaid expenses and other current assets	754
Plant, property and equipment	106,082
Other assets	634
Intangible assets	45,000
Goodwill	180,823
Deferred income tax asset	5,126
Accounts payable	(34,116		)
Accrued expenses	(3,660		)
Accrued compensation costs	(5,526		)
Deferred income taxes	(36,045		)
Other liabilities	(4,107		)
Total acquisition consideration	$	331,946

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Consolidated Statements of Income and Comprehensive Income (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Net sales	$ 306,259	$ 214,786	$ 606,102	$ 421,524
Cost of sales, excluding depreciation and amortization	213,335	143,143	427,409	285,794
Depreciation and amortization	15,327	12,778	30,503	24,569
Freight and distribution expenses	27,936	19,681	53,679	37,510
Selling, general and administrative expenses	17,436	8,866	35,008	18,172
Other operating income	230	290	428	578
Operating income	32,455	30,608	59,931	56,057
Foreign exchange (loss)/gain	(508)	45	(388)	335
Interest expense, net	3,193	1,077	6,472	2,174
Income before provision for income taxes	28,754	29,576	53,071	54,218
Provision for income taxes	10,350	11,417	19,104	20,928
Net income	18,404	18,159	33,967	33,290
Other comprehensive income - pension and postretirement plan liability adjustments, net of tax	70	100	137	203
Total comprehensive income	$ 18,474	$ 18,259	$ 34,104	$ 33,493
Weighted-average number of shares outstanding:
Basic (in shares)	46,620,354	46,250,362	46,555,990	46,172,108
Diluted (in shares)	47,744,589	47,416,400	47,792,980	47,435,487
Net income per share:
Basic (in dollars per share)	$ 0.39	$ 0.39	$ 0.73	$ 0.72
Diluted (in dollars per share)	$ 0.39	$ 0.38	$ 0.71	$ 0.70

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Income Taxes

6 Months Ended

Jun. 30, 2012

Income Taxes

Income Taxes

7.Income Taxes

The Company’s effective tax rate for the six months ended June 30, 2012 and 2011 was 36.0 percent and 38.6 percent, respectively. The effective tax rate decreased in 2012 due to a higher expected benefit from the domestic manufacturing deduction. The differences between the effective tax rate and the federal statutory tax rate for the periods ended June 30, 2012 and 2011 are due to the impact of state tax, net of the federal benefit and the domestic manufacturing deduction.

The gross unrecognized tax benefits, including interest, as of June 30, 2012 is $5.0 million and is unchanged from December 31, 2011. Unrecognized tax benefits of $5.0 million are included in “Other liabilities” on the Consolidated Balance Sheets.

In the normal course of business, the Company is subject to examination by taxing authorities. The Company’s open tax year is 2010.

Income taxes paid net of refunds were $4.0 million and $0.1 million for the three months ended June 30, 2012 and 2011, respectively. In addition, income taxes paid net of refunds were $4.3 million and $0.3 million for the six months ended June 30, 2012 and 2011, respectively.

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Debt

6 Months Ended

Jun. 30, 2012

Debt

Debt

6.Debt

Amendment to Credit Agreement

On May 10, 2012, the Company entered into a First Amendment to Credit Agreement (the “First Amendment”), by and among Kapstone Kraft Paper Corporation, as Borrower (the “Borrower”), the Company and certain subsidiaries of the Company as Guarantors, the lenders party thereto, and Bank of America N.A., as Administrative Agent, which amends the Credit Agreement, dated as of October 31, 2011 (collectively, the “Credit Agreement”). The First Amendment, among other things, expands the “accordion” feature under the Credit Agreement, removes certain mandatory prepayment events, and modifies the calculation methodology of the financial covenants. The “accordion” feature in the Credit Agreement now permits KapStone, subject to certain terms and conditions, to request an increase in the revolving commitments and/or additional term loans in an aggregate principal amount of up to $450.0 million.

Voluntary Prepayment

On June 29, 2012, the Company made a $50.0 million voluntary prepayment on its term loan under the Credit Agreement using cash generated from operations.

Debt Covenants

The Company’s Credit Agreement contains, among other provisions, covenants with which we must comply while the agreement is in force. The covenants limit our ability to, among other things, incur indebtedness, create additional liens on our assets, make investments, engage in mergers and acquisitions, pay dividends and sell any assets outside the normal course of business. As of June 30, 2012, the Company was in compliance with all applicable covenants in the Credit Agreement.

Other Current Borrowings

In 2012 and 2011, the Company entered into financing agreements of $3.4 million and $2.3 million, respectively, at an annual interest rate of 2.00 and 1.75 percent, respectively, for its annual property insurance premiums. The agreements required the Company to pay consecutive monthly payments through the term of each financing agreement ending on December 1st. As of June 30, 2012, there was $1.6 million outstanding under the current agreement which is included in “Other current borrowings” on the Consolidated Balance Sheets.

Interest Paid

Interest paid was $2.4 million and $0.6 million for the three months ended June 30, 2012 and 2011, respectively. In addition, interest paid was $4.7 million and $1.3 million for the six months ended June 30, 2012 and 2011, respectively. The increase in interest paid reflects a higher term loan balance resulting from the USC acquisition.

Fair Value of Debt

At June 30, 2012 the fair value of the Company’s debt approximates the carrying value of $293.4 million as the variable interest rates re-price frequently at current market rates. The debt was valued using Level 2 inputs in the fair value hierarchy which are significant observable inputs including quoted prices for debt of similar terms and maturities.

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USC Acquisition (Details) (USC, USD $)	Mar. 09, 2012	Oct. 31, 2011
USC
USC Acquisition Earn-out Payment
Purchase price, net of cash acquired		$ 330,000,000
Working capital adjustments on acquisition	1,946,000	1,600,000
Additional amount paid on acquisition	300,000
Total acquisition consideration	331,946,000
Summary of the preliminary allocation of acquisition consideration to the fair value of the assets acquired and the liabilities assumed at the date of acquisition:
Trade accounts receivable	38,377,000
Other receivables	5,745,000
Inventories	32,859,000
Prepaid expenses and other current assets	754,000
Plant, property and equipment	106,082,000
Other assets	634,000
Intangible assets	45,000,000
Goodwill	180,823,000
Deferred income tax asset	5,126,000
Accounts payable	(34,116,000)
Accrued expenses	(3,660,000)
Accrued compensation costs	(5,526,000)
Deferred income taxes	(36,045,000)
Other liabilities	(4,107,000)
Total acquisition consideration	$ 331,946,000

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Inventories (Tables)

6 Months Ended

Jun. 30, 2012

Inventories

Schedule of Inventories

	(Unaudited)
	June 30,		December 31,
	2012		2011
Raw materials	$	43,504	$	46,926
Work in process	2,042		1,780
Finished goods	38,730		36,747
Replacement parts and supplies	25,671		24,601
Inventories	$	109,947	$	110,054

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Stock-Based Compensation

6 Months Ended

Jun. 30, 2012

Stock-Based Compensation

Stock-Based Compensation

10.Stock-Based Compensation

On March 7, 2012, the Compensation Committee of the board of directors approved stock awards to executive officers, certain employees and directors. The 2012 awards included 310,847 stock option grants and 124,341 restricted stock units.

The Company accounts for stock awards in accordance with ASC 718, “Compensation — Stock Compensation,” which requires that the cost resulting from all share-based payment transactions be recognized as compensation cost over the vesting period based on the fair value of the instrument on the date of grant.

Total stock-based compensation expense related to the stock option and restricted stock unit grants for the three and six months ended June 30, 2012 and 2011 is as follows:

	Three Months EndedJune 30,				Six Months EndedJune 30,
	2012		2011		2012		2011
Stock option compensation expense	$	717	$	448	$	2,025	$	1,399
Restricted stock unit compensation expense	547		315		1,552		1,122
Total stock-based compensation expense	$	1,264	$	763	$	3,577	$	2,521

Total unrecognized stock-based compensation cost related to the stock option grants and restricted stock units as of June 30, 2012 and December 31, 2011 is as follows:

	June 30, 2012		December 31, 2011
Unrecognized stock option compensation cost	$	2,790	$	1,648
Unrecognized restricted stock compensation cost	2,539		1,687
Total stock-based compensation cost	$	5,329	$	3,335

As of June 30, 2012, total unrecognized compensation cost related to non-vested stock options and restricted stock units is expected to be recognized over a weighted average period of 1.9 years and 2.1 years, respectively.

Stock Options

Stock option awards vest as follows: 50% after two years and the remaining 50% after three years or upon the retirement of a grantee of such stock options who has reached the age 65. The stock options awarded in 2012 have a contractual term of ten years and are subject to forfeiture should the recipient terminate his or her employment with the Company for certain reasons prior to vesting in his or her awards, or the occurrence of certain other events such as termination with cause. The exercise price of these stock options is based on the closing market price of our common stock on the date of grant ($19.75 for the 2012 awards described above) and compensation expense is recorded on an accelerated basis over the awards’ vesting periods.

The weighted average fair value of the KapStone stock options granted in March 2012 was $10.38. The fair value was calculated using the Black-Scholes option-pricing model based on the market price at the grant date and the weighted average assumptions specific to the underlying options. The Company uses the “simplified method”, defined in SEC Staff Accounting Bulletin (“SAB”) No. 107, to determine the expected life assumption for all of its options. The Company uses the “simplified method”, as permitted by SAB No. 110, as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected life due to the limited time its equity shares have been publicly traded. The expected volatility assumption is based on the volatility of KapStone stock from the same time period as the expected term of the stock options. The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term similar to the expected life of the stock options.

The assumptions utilized for calculating the fair value of stock options during the periods are as follows:

	Six Months Ended June 30,
	2012		2011
KapStone Stock Options Black-Scholes assumptions (weighted average):
Expected volatility	56.52	%	45.24	%
Expected life (years)	5.98		5.94
Risk-free interest rate	1.10	%	2.47	%
Expected dividend yield	—	%	—	%

The following table summarizes stock options amounts and activity:

			Weighted Average		Weighted Average
			Exercise		Remaining	Intrinsic
	Options		Price		Life (Years)	Value
Outstanding at January 1, 2012	2,473,874		$	7.86	6.7	$	19,742
Granted	310,847		19.75		9.9
Exercised	(100,378	)	4.73			1,451
Forfeited	—		—
Outstanding at June 30, 2012	2,684,343		$	9.35	6.6	$	18,867
Exercisable at June 30, 2012	1,867,486		$	6.28	5.6	$	17,876

For the three and six months ended June 30, 2012, exercises of employee stock options totaled 9,274 shares and 100,378 shares, respectively, with cash proceeds to the Company of $0.1 million and $0.5 million, respectively.

Restricted Stock

Restricted stock units are restricted as to transferability until they vest three years from the grant date or upon the retirement of the grantee who has reached the age 65. These restricted stock units are subject to forfeiture should the employee terminate employment with the Company for certain reasons prior to vesting in their award, or upon the occurrence of certain other events. The value of these restricted stock units is based on the closing market price of our common stock on the date of grant and compensation expense is recorded on a straight-line basis over the awards’ vesting periods.

The following table summarizes restricted stock units amounts and activity:

			Weighted Average Grant
	Units		Price
Outstanding at January 1, 2012	496,395		$	9.22
Granted	124,341		19.75
Vested	(216,784	)	3.70
Forfeited	—		—
Outstanding at June 30, 2012	403,952		$	15.43

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Net Income Per Share

6 Months Ended

Jun. 30, 2012

Net Income Per Share

Net Income Per Share

8.Net Income Per Share

Basic and diluted net income per share is calculated as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Net income as reported	$	18,404	$	18,159	$	33,967	$	33,290
Weighted-average number of common shares for basic net income per share	46,620,354		46,250,362		46,555,990		46,172,108
Incremental effect of dilutive common stock equivalents:
Unexercised stock options	899,480		889,370		923,301		908,410
Unvested restricted stock awards	224,755		276,668		313,689		354,969
Weighted-average number of shares for diluted net income per share	47,744,589		47,416,400		47,792,980		47,435,487
Net income per share — basic	$	0.39	$	0.39	$	0.73	$	0.72
Net income per share — diluted	$	0.39	$	0.38	$	0.71	$	0.70

Unexercised stock options to purchase a total of 0.3 million shares were outstanding during both the three months ended June 30, 2012 and 2011, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.

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Pension Plan and Post Retirement Benefits

6 Months Ended

Jun. 30, 2012

Pension Plan and Post Retirement Benefits

Pension Plan and Post Retirement Benefits

9.Pension Plan and Post Retirement Benefits

Defined Benefit Pension Plan

The KapStone Paper and Packaging Corporation Defined Benefit Pension Plan (the “Pension Plan”) provides benefits for approximately 1,000 union employees.

Net pension cost recognized for the three and six months ended June 30, 2012 and 2011 for the Pension Plan is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Service cost for benefits earned during the period	$	1,023		$	844		$	2,047		$	1,688
Interest cost on projected benefit obligation	251			203			503			406
Expected return on plan assets	(233		)	(185		)	(467		)	(370		)
Amortization of net loss	54			—			108			—
Amortization of prior service cost	92			141			184			282
Net pension cost — other multi-employer plan	17			—			34			—
Total net pension cost	$	1,204		$	1,003		$	2,409		$	2,006

KapStone funds the Pension Plan according to IRS funding requirements. Based on those requirements, KapStone funded $2.6 million for the six months ended June 30, 2012 and expects to fund an additional $3.0 million to the Pension Plan in 2012.

Defined Contribution Plan

The KapStone Defined Contribution Plan (the “Contribution Plan”) covers all eligible employees. The Company’s monthly contributions to the Contribution Plan are based on the matching of employee contributions. For the three months ended June 30, 2012 and 2011, the Company recognized expense of $2.6 million and $1.6 million, respectively. In addition, for the six months ended June 30, 2012 and 2011, the Company recognized expense of $5.4 million and $3.6 million, respectively. Effective October 31, 2011, employees who joined the Company as part of the USC acquisition are included in the Contribution Plan.

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Contingencies

6 Months Ended

Jun. 30, 2012

Contingencies

Contingencies

11.Contingencies

We are subject to various legal proceedings arising from our operations. We are party to a legal proceeding arising from an accident which occurred during our 2009 annual planned maintenance outage at our mill in Roanoke Rapids, NC. We establish reserves for claims and proceedings when it is probable that liabilities exist and where reasonable estimates can be made. While it is not possible to predict the outcome of this matter, based on our assessment of the facts and circumstances now known, we do not believe there is a reasonable possibility that this matter will have a material adverse effect on our financial position. However, actual outcomes may be different from those expected and could have a material effect on our results of operations or cash flows in a particular period.

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Pension Plan and Post Retirement Benefits (Tables)

6 Months Ended

Jun. 30, 2012

Pension Plan and Post Retirement Benefits

Schedule of net pension cost recognized for the Pension plan

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Service cost for benefits earned during the period	$	1,023		$	844		$	2,047		$	1,688
Interest cost on projected benefit obligation	251			203			503			406
Expected return on plan assets	(233		)	(185		)	(467		)	(370		)
Amortization of net loss	54			—			108			—
Amortization of prior service cost	92			141			184			282
Net pension cost — other multi-employer plan	17			—			34			—
Total net pension cost	$	1,204		$	1,003		$	2,409		$	2,006

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Debt (Details) (USD $)	3 Months Ended		6 Months Ended				1 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012 Level 2	Jun. 30, 2012 Credit facility	Jun. 30, 2012 Term Loan	Dec. 31, 2012 Other Borrowing	Jun. 30, 2012 Other Borrowing	Dec. 31, 2011 Other Borrowing
Debt
Additional borrowing capacity allowed by exercising an accordion feature						$ 450,000,000
Voluntary prepayment of term loan							50,000,000
Interest Rate (as a percent)								2.00%		1.75%
Other current borrowings	1,552,000		1,552,000					3,400,000	1,600,000	2,300,000
Interest	2,400,000	600,000	4,700,000	1,300,000
Fair value of debt					$ 293,400,000

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Operating activities
Net income	$ 33,967	$ 33,290
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	30,503	24,569
Stock-based compensation expense	3,577	2,521
Excess tax benefits from stock-based compensation	(1,496)	(758)
Amortization of debt issuance costs	1,803	848
Loss on disposal of fixed assets	591	182
Deferred income taxes	14,728	14,291
Changes in operating assets and liabilities:
Trade accounts receivable, net	(6,027)	(14,762)
Other receivables	4,526	(247)
Inventories	(237)	(2,160)
Prepaid expenses and other current assets	(2,772)	(675)
Other assets	41	(253)
Accounts payable	3,622	(3,091)
Accrued expenses and other	1,218	(1,505)
Accrued compensation costs	(7,044)	(2,288)
Accrued income taxes		3,130
Net cash provided by operating activities	77,000	53,092
Investing activities
USC acquisition	(314)
KPB acquisition earn-out payment		(49,700)
Capital expenditures	(27,454)	(12,914)
Net cash used in investing activities	(27,768)	(62,614)
Financing activities
Proceeds from revolving credit facility	39,400	7,600
Repayments on revolving credit facility	(39,400)	(7,600)
Repayments of long-term debt	(50,000)	(9,418)
Proceeds from other current borrowings	3,398	2,273
Repayments on other current borrowings	(1,846)	(1,235)
Payment of withholding taxes on vested restricted stock awards	(1,179)	(866)
Proceeds from the exercises of stock options	475	621
Proceeds from issuance of shares to ESPP	90	97
Loan amendment costs	(45)	(244)
Excess tax benefits from stock-based compensation	1,496	758
Net cash used in financing activities	(47,611)	(8,014)
Net increase (decrease) in cash and cash equivalents	1,621	(17,536)
Cash and cash equivalents-beginning of period	8,062	67,358
Cash and cash equivalents-end of period	$ 9,683	$ 49,822

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Inventories

6 Months Ended

Jun. 30, 2012

Inventories

Inventories

5.Inventories

Inventories consist of the following at June 30, 2012 and December 31, 2011, respectively:

	(Unaudited)
	June 30,		December 31,
	2012		2011
Raw materials	$	43,504	$	46,926
Work in process	2,042		1,780
Finished goods	38,730		36,747
Replacement parts and supplies	25,671		24,601
Inventories	$	109,947	$	110,054

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Income Taxes (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Income Taxes
Effective tax rate (as a percent)			36.00%	38.60%
Gross unrecognized tax benefits, including interest	$ 5.0		$ 5.0
Income taxes paid, net of refunds	$ 4.0	$ 0.1	$ 4.3	$ 0.3

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Net Income Per Share (Tables)

6 Months Ended

Jun. 30, 2012

Net Income Per Share

Schedule of basic and diluted net income per share

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Net income as reported	$	18,404	$	18,159	$	33,967	$	33,290
Weighted-average number of common shares for basic net income per share	46,620,354		46,250,362		46,555,990		46,172,108
Incremental effect of dilutive common stock equivalents:
Unexercised stock options	899,480		889,370		923,301		908,410
Unvested restricted stock awards	224,755		276,668		313,689		354,969
Weighted-average number of shares for diluted net income per share	47,744,589		47,416,400		47,792,980		47,435,487
Net income per share — basic	$	0.39	$	0.39	$	0.73	$	0.72
Net income per share — diluted	$	0.39	$	0.38	$	0.71	$	0.70