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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 September 30, 2009

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)

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 Exchange Act 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 o Noo

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):

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 45,413,624 shares of the Registrant’s Common Stock, $0.0001 par value, outstanding as of October 30, 2009, excluding 40,000 shares held as treasury shares.

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KapStone Paper and Packaging Corporation Index to Form 10-Q

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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)

See notes to consolidated financial statements

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KapStone Paper and Packaging Corporation

Consolidated Statements of Income

(In thousands, except share and per share amounts)

(Unaudited)

See notes to consolidated financial statements

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KapStone Paper and Packaging Corporation

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See notes to consolidated financial statements

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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 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 generally accepted accounting principles 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 nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. For further information, refer to the consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2008.

2.                                      Reclassification

Receivables from sales of shaft horsepower of $2.9 million as of December 31, 2008 have been reclassified from prepaid and other current assets to trade account receivables to conform to the current period presentation.

3.                                      Accounting Pronouncements

The Accounting Standards Codification (“ASC”) has become the source of authoritative U.S. generally accepted accounting principles (U.S. GAAP). The ASC only changes the referencing of financial accounting standards and does not change or alter existing U.S. GAAP.

The Company adopted a new accounting standard included in ASC 855, “Subsequent Events” which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. This statement became effective for interim and annual periods ending after June 15, 2009.

The Company has evaluated subsequent events after the balance sheet date of September 30, 2009 through November 4, 2009, which is the date of the accompanying financial statements were issued. Refer to Note 16 for the required disclosure.

The Company adopted a new accounting standard included in ASC 820, “Fair Value Measurements and Disclosures” which provide additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This standard also includes guidance on identifying circumstances that indicate a transaction is not orderly. This standard emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This standard became effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively. The adoption of this standard did not have an effect on the consolidated financial statements.

The Company adopted a new accounting standard included in ASC 825, “Financial Instruments” requiring  disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This standard became effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have an effect on the consolidated financial statements.

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4.             Sale of Dunnage Bag Business

On March 31, 2009 the Company consummated the sale of its dunnage bag business to Illinois Tool Works Inc. for $36.0 million less working capital adjustments. The Company considered the sale an opportunity to lower its debt and focus on its core business. As a condition of sale, $2.5 million of the sale proceeds are being held in escrow until September 30, 2010 to be available to satisfy any losses or indemnity claims that may arise against the Company in connection with the sale.  The Company realized a gain on the sale of the dunnage bag business as follows (in thousands):

The following table shows the major categories of net assets of the dunnage bag business as of March 31, 2009 and December 31, 2008, respectively (in thousands):

As a result of the sale, the Company incurred an earn-out liability of $4.0 million in accordance with the Kraft Paper Business (“KPB”) asset purchase agreement dated June 23, 2006 with International Paper Company (“IP”). The terms of the KPB asset purchase agreement include a contingent earn-out payment due in 2012 (the fifth anniversary of the acquisition); however, in the event of a sale of the dunnage bag business prior to that date, a percentage of the earn-out becomes due and payable within 30 days following the sale provided certain criteria are met. The earn-out was paid on April 30, 2009.

The terms of the dunnage bag sale agreement include a contingency for certain slow-moving inventory items, which were excluded from the working capital adjustment calculated at closing. In the quarter ended September 30, 2009, the Company incurred approximately $0.3 million for working capital adjustments related to this contingency.

For segment reporting purposes, the dunnage bag business is included in all other.

5.                                      Alternative Fuel Mixture Tax Credit

The federal government has implemented an incentive program through the U.S. Internal Revenue Code that provides payments under certain circumstances for the use of alternative fuels and alternative fuel mixtures in lieu of fossil-based fuels.  The credit is based on the amount of alternative fuel contained in the mixture. KapStone qualifies for the alternative fuel mixture tax credit because it uses a bio-fuel known as black liquor, which is a byproduct of its wood pulping process, to power its mills.

In March 2009, the Internal Revenue Service approved the Company’s registration as an alternative fuel mixer. The Company generated refund claims totaling $121.9 million for the first nine months of 2009 covering fuel used at its Charleston mill from January 29th through September 30th and at its Roanoke Rapids mill from February 14th  through September 30th.  At September 30, 2009, $14.4 million of the credit was included as a reduction to finished goods inventory. For the three and nine month periods ended September 30, 2009, $53.5 million and $107.5 million, respectively, of the alternate fuel mixture tax credits were recorded as a reduction to cost of sales.

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The alternate fuel mixture tax credit is scheduled to expire on December 31, 2009.

6.             Inventories

Inventories consist of the following at September 30, 2009, and December 31, 2008, respectively (in thousands):

7.             Accrued Expenses

Accrued expenses consist of the following at September 30, 2009, and December 31, 2008, respectively (in thousands):

8.             Long-Term Debt

Long-term debt and notes at September 30, 2009 and December 31, 2008, are summarized as follows (in thousands):

In accordance with the Company’s Senior Credit Agreement, $85.2 million of mandatory prepayments were made as a result of exercises of common stock warrants in the quarter ended September 30, 2009. In addition, the Company made voluntary prepayments of $30.2 million. In connection with the mandatory and voluntary prepayments, the Company amortized an additional $1.2 million of debt issuance costs in the quarter ended September 30, 2009.

In the quarter ended September 30, 2009, the Company extinguished the remaining $33.6 million of its senior notes in addition to a scheduled principal payment of $3.0 million. In connection with the extinguishment the Company amortized an additional $0.6 million of debt issuance costs.

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At September 30, 2009, $13.0 million of letters of credit were outstanding under the Senior Credit Agreement.

9.                                      Income Taxes

The Company’s U.S. federal statutory income tax rate is 35.0% for 2009 and 2008. The Company’s effective tax rate for the nine months ended September 30, 2009 and 2008 was 39.0% and 39.3%, respectively.

During the three months ended September 30, 2009, the Company established a $41.3 million liability for unrecognized tax benefits related to the tax position taken regarding the alternative fuel mixture tax credits all of which would impact the effective tax rate if recognized. It is reasonably possible that the total amount of unrecognized tax benefit relating to the tax position taken regarding the alternative fuel mixture tax credits will increase by approximately $27.7 million within the next twelve months.

In the normal course of business, we are subject to examination by taxing authorities. The Company’s open tax years are 2006 through 2008. The Company’s 2007 and 2008 federal income tax returns are currently under examination by the Internal Revenue Service (IRS).

10.          Net Income Per Share

Basic and diluted net income per share is calculated as follows (in thousands except for share and per share data):

Common stock warrants were not included in the calculation of diluted earnings per share for the three and nine months ended September 30, 2009 since the weighted average share price per share of common stock was $4.96 and $3.42, respectively, compared to the warrant’s conversion price of $5.00 and the effect would be anti-dilutive.

Stock option grants totaling 2.1 million and 2.2 million were outstanding during the three and nine months ended September 30, 2009, respectively, but were not included in the computation of diluted earnings per share because the effect of including the stock option grants would be anti-dilutive. Stock option grants totaling 1.3 million were outstanding during the three and nine months ended September 30, 2008, but were not included in the computation of diluted earnings per share because the effect of including the stock option grants would be anti-dilutive.

Underwriter’s purchase option with respect to 1,000,000 Units was outstanding during the three and nine months ended September 30, 2009, but such Units were not included in the computation of diluted earnings per share because the effect of including the underwriter’s option would be anti-dilutive.

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11.                               Pension plan and post retirement benefits

Defined Benefit Plan

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

As part of the July 1, 2008 Charleston Kraft Division acquisition, approximately 615 union employees were added to the Company’s Plan. As a consequence of the sale of the dunnage bag business approximately 124 union employees ceased earning benefits under the Plan as of March 31, 2009.

Net pension cost recognized for the three and nine months ended September 30, 2009 and 2008 for the Company’s pension plan, is as follows (in thousands):

KapStone funds its Plan according to IRS funding requirements. Based on those requirements, the Company funded $3.8 million to the Plan for the nine months ended September 30, 2009. An additional $1.7 million is planned to be funded prior to December 31, 2009.

Other Post-Retirement Benefits

Net post-retirement cost recognized for the three and nine months ended September 30, 2009 and 2008 for the Company’s retiree medical and life insurance plan was less than $0.1 million.

Defined Contribution Plans

The KapStone Defined Contribution Plan (“Contribution Plan”) covers all eligible employees. Company contributions to the Contribution Plan are based on matching of employee contributions, vest immediately for salaried and non-bargained hourly employees and vest after three years for union employees. For the three months ended September 30, 2009 and 2008, the Company recognized expense of $0.4 million and $0.8 million, respectively, for matching contributions. For the nine months ended September 30, 2009 and 2008, the Company recognized expense of $1.6 million and $1.5 million, respectively, for matching contributions.

The Company’s Retirement Savings Plan, which covers all eligible salaried and non-bargained hourly employees, provides for an annual contribution based on an employee’s salary and age.  The Company contributions vest 100% after three years. For the three months ended September 30, 2009 and 2008, the Company recognized expense of $0 and $0.5 million, respectively. For the nine months ended September 30, 2009 and 2008, the Company recognized expense of $0 and $0.8 million, respectively.

The Company temporarily suspended these benefits for salaried and non-bargained hourly employees in the first quarter of 2009 due to economic conditions.

12.          Stock-Based Compensation

On December 29, 2006, stockholders approved the 2006 Incentive Plan (“2006 Plan”).  A maximum of 3.0 million shares of our common stock, available for issuance pursuant to stock options, restricted stock awards or stock appreciation rights (collectively called “Awards”), may be granted under the 2006 Plan. If any Award is forfeited or expires without being exercised, or if restricted stock is repurchased by the Company, the shares of stock subject to the Award shall be available for additional grants under the 2006 Plan. Awards may be granted to employees, officers and directors of, and consultants or advisors to, the Company and any subsidiary corporations. Options intended to qualify, under the standards set forth in certain federal tax rules, as incentive stock options (“ISOs”) may be granted only to employees.

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The Company accounts for stock awards under 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. The Company recognized $0.6 million and $1.7 million of compensation cost for the three and nine months ended September 30, 2009, respectively, and $0.5 million and $1.2 million for the three and nine months ended September 30, 2008, respectively.

Stock Options

In May 2009, the Company’s Compensation Committee granted 829,702 stock options to directors, executive officers and employees of the Company.  The stock options vest as follows: 50% after two years and the remaining 50% after three years.  The stock options awarded in 2009 have a contractual term of ten years. The stock options are subject to forfeiture should the recipient terminate his or her employment with the Company for certain reasons prior to vesting in their 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 (May 13, 2009 for the 2009 awards) and compensation expense is recorded on an accelerated basis over the awards’ vesting periods.

The fair value of the KapStone stock options granted in May 2009 was $1.79. The fair value was calculated using the Black-Scholes-Merton option-pricing model based on the market price at the grant date and the weighted average assumptions specific to the underlying options. The expected volatility assumption is based on volatility of related industry stocks. The Company uses the “simplified method”, defined in SEC Staff Accounting Bulletin (“SAB”) No. 110, 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 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 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 stock options during the period are as follows:

A summary of information related to stock options is as follows:

Total stock-based compensation related to the stock option grants was $0.4 million and $1.0 million for the three and nine months ended September 30, 2009, respectively, and $0.3 million and $0.7 million for the three and nine months ended September 30, 2008, respectively.

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As of September 30, 2009 and 2008, there was $1.9 million and $1.8 million, respectively, of total unrecognized compensation cost related to non-vested stock options. The cost is expected to be recognized over a weighted average period of two years.

Restricted Stock

In May 2009, the Company’s Compensation Committee granted 219,864 restricted stock units to executive officers and employees as compensation for service. These restricted stock units are restricted as to transferability until they vest three years from the grant date. These restricted stock units are subject to forfeiture should these employees terminate their employment with the Company for certain reasons prior to vesting in their awards, or 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 our restricted stock amounts and activity:

Total stock-based compensation related to the restricted stock awards was $0.3 million and $0.7 million for the three and nine months ended September 30, 2009, respectively, and $0.2 million and $0.5 million for the three and nine months ended September 30, 2008, respectively.

As of September 30, 2009 and 2008, there was $1.5 million and $1.6 million, respectively, of total unrecognized compensation cost related to the restricted stock which will be recognized over the remaining vesting period of approximately two years. No restricted stock awards were vested as of September 30, 2009.

13.             Stockholder’s Equity

In connection with the Company’s initial public offering, on August 19, 2005, the Company sold 20,000,000 units (“Units”) for a gross price of $6.00 per Unit. Each Unit consists of one share of the Company’s common stock, $0.0001 par value, and two warrants. Each warrant entitled the holder to purchase from the Company one share of common stock at an exercise price of $5.00 with an expiration date of August 17, 2009. For the three and nine months ended September 30, 2009, 17,043,376 common stock warrants were exercised with proceeds totaling $85.2 million. On August 17, 2009, the 19,371,454 remaining warrants expired.

For the three and nine months ended September 30, 2008, 2,810,615 and 3,029,180, respectively, common stock warrants were exercised with proceeds totaling $14.1 million and $15.1 million, respectively.

14.          Annual Planned Maintenance Outage

Cost of sales for the three and nine month periods ended September 30, 2008 included approximately $6.0 million for the annual planned maintenance outage for the Company’s North Carolina unbleached kraft paper facility. The annual planned maintenance outage in 2009 occurred in October 2009.

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15.          Segment Information

The Company has two reportable segments, unbleached kraft and all other.  The unbleached kraft segment consists of the Company’s paper mills in Roanoke Rapids, North Carolina and North Charleston, South Carolina, which produce unbleached kraft paper, linerboard, unbleached kraft board and saturating kraft. These products are sold to customers who convert our products into end-market finished products. The unbleached kraft segment also includes a lumber mill, based in Summerville, South Carolina, which produces dimensional softwood board lumber that is sold primarily to regional and local retailers, wood treating operations and industrial customers. The all other segment consisted of the Company’s former dunnage bag business, based in Fordyce, Arkansas, which converted unbleached kraft paper and film into inflatable dunnage bags.

The Company’s reportable and operating segments are based on financial information regularly evaluated by the chief operating decision maker in determining resource allocation and assessing performance, in accordance with ASC 280, Segment Reporting. In the third quarter 2009 the Company revised its reporting structure and as a result the lumber mill operation is now included in the unbleached kraft segment.

Segment disclosures have been revised to conform to the current presentation for all reporting periods.

On March 31, 2009 the Company consummated the sale of its dunnage bag business to Illinois Tool Works Inc.

Corporate expenses that benefit the entire organization are not charged to the operating segments.

16.          Subsequent Event

Subsequent to the balance sheet date of September 30, 2009, the Company made a $25.0 million voluntary prepayment on its long-term debt.

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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 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 II Item 1A in this Form 10-Q, in Part I Item 1A of our Form 10-K for the fiscal year ended December 31, 2008 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 following discussion should be read in conjunction with our Consolidated Financial Statements and related Notes thereto included elsewhere in this report.

Overview

We were formed on April 15, 2005 to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in the paper, packaging, forest products and related industries.

On January 2, 2007, the Company purchased substantially all of the assets and  assumed certain liabilities of the Kraft Papers Business (“ KPB”), a division of International Paper Company, consisting of an unbleached kraft paper manufacturing facility in Roanoke Rapids, North Carolina and Ride Rite® Converting, an inflatable dunnage bag manufacturer located in Fordyce, Arkansas, for a purchase price of $155 million in cash, less certain post-closing adjustments of $7.8 million, plus two contingent earn-out payments of up to $55 million (in aggregate and adjusted for the 2009 sale of Ride Rite® Converting), based on KPB’s annual earnings before interest, income taxes, depreciation and amortization, or EBITDA, during the five years immediately following the acquisition.

On July 1, 2008, the Company  purchased substantially all of the assets and assumed certain liabilities of the Charleston Kraft Division (“CKD”), a division of MeadWestvaco Corporation (“MWV”), consisting of an unbleached kraft paper manufacturing facility in North Charleston, South Carolina, including a cogeneration facility, chip mills located in Elgin, Hampton, Andrews and Kinards, South Carolina and a lumber mill located in Summerville, South Carolina, for a purchase price of $485 million less certain adjustments of $14.0 million.

The results reported below do not reflect any actual or pro forma adjustments related to the acquisition prior to the consummation of the acquisition on July 1, 2008. The results reported below include the results of CKD since the date of acquisition, July 1, 2008.

On March 31, 2009, the Company consummated the sale of its dunnage bag business for $36.0 million less certain working capital adjustments to Illinois Tool Works Inc. (“ITW”).  The results of operations for the dunnage bag business are included in the all other segment until the date of the sale. In conjunction with the sale, the Company signed a long-term supply agreement with ITW pursuant to which the Company sells kraft paper to ITW.

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Comparison of Results of Operations for the Three Months Ended September 30, 2009 and the Three Months Ended September 30, 2008

Net sales for the quarter ended September 30, 2009, were $170.3 million compared to $207.7 million for the third quarter of 2008, a decrease of $37.4 million or 18.0%. The decrease in net sales was primarily due to $28.0 million of lower average revenue per ton and $11.8 million of a less favorable product mix due to a higher percentage of linerboard sales, which has a lower average selling price than other products, offset by $11.3 million of higher sales volume. In addition, the sale of the dunnage bag business in the first quarter of 2009 contributed $8.9 million of the decrease.

Cost of sales for the quarter ended September 30, 2009, was $86.8 million compared to $151.1 million for the third quarter of 2008, a decrease of $64.3 million, or 42.5%. The decrease in cost of sales was mainly due to $53.5 million of alternative fuel mixture tax credits, $6.0 million as a result of a change in the timing of the annual planned maintenance outage from the third quarter in 2008 to the fourth quarter in 2009, $6.3 million due to the sale of the dunnage bag business, $4.7 million of deflation on energy and raw materials and $2.1 million of temporary salary and benefit curtailments, partially offset by $9.2 million of higher volume and product mix.

Freight and distribution expenses for the quarter ended September 30, 2009, totaled $16.3 million compared to $20.0 million for the third quarter of 2008. The decrease of $3.7 million was mainly due to $2.6 million reflecting a higher percentage of 2009 shipments being comprised of exports where the customer pays for the freight and $2.4 million of lower fuel oil surcharges and lower costs due to favorable freight contract negotiations, offset by higher volume.

Selling, general and administrative expenses for the quarter ended September 30, 2009, totaled $7.1 million compared to $9.8 million for the third quarter of 2008. The decrease of $2.7 million reflects $0.8 million of lower compensation and benefit expenses as the Company temporarily suspended certain benefits as a result of economic conditions, $0.5 million of lower transitional services provided by MWV and $1.5 million of lower CKD acquisition start-up expenses. As a percent of net sales, selling, general and administrative expenses dropped from 4.7% in 2008 to 4.2% in 2009.

Depreciation and amortization for the quarter ended September 30, 2009, totaled $13.7 million compared to $13.0 million for the third quarter of 2008. The increase of $0.7 million is primarily due to higher capital expenditures.

The loss on sale of business of $0.3 million is the result of working capital adjustments in connection with the sale of the dunnage bag business. The dunnage bag business was sold in March 2009.

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Foreign exchange gains for the quarter ended September 30, 2009 increased by $0.8 million compared to the same period in 2008. The increase reflects the weakening of the U.S. dollar in the third quarter of 2009 of approximately 4%, compared to the strengthening of the U.S. dollar in the third quarter of 2008 of approximately 8%.

Interest income for the quarter ended September 30, 2009 decreased by $0.1 million compared with the same period in 2008. Due to lower interest rates in 2009, the Company used its excess cash to pay down principal balances on its long-term debt rather than investing.

Interest expense for the quarters ended September 30, 2009 and 2008 was $5.4 million and $8.8 million, respectively. Interest expense reflects interest on the Company’s long-term debt and amortization of debt issuance costs. Interest expense was $3.4 million lower in the quarter ended September 30, 2009 primarily due to lower debt levels and lower interest rates. Amortization of debt issuance costs for the quarters ended September 30, 2009 and 2008 was $2.5 million and $0.8 million, respectively. The increase of $1.7 million is primarily due to $1.9 million of accelerated amortization expense in connection with mandatory and voluntary debt prepayments during the three months ended September 30, 2009.

Provision for income taxes for the quarters ended September 30, 2009 and 2008 was $15.6 million and $2.5 million, respectively. The increase of $13.1 million is a result of $36.5 million of higher pre-tax income. The effective tax rate for the quarter ended September 30, 2009 was 37.9% compared to 52.2% for the similar period in 2008. The effective tax rate for the quarter ended September 30, 2009 decreased from the same period in 2008 due to a higher expected benefit from the federal domestic manufacturing deduction.

Segment Results

The following table presents a reconciliation of consolidated net sales and operating income to amounts reported by operating segment: