10-K 1 a08-2448_110k.htm 10-K

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-K

 

x

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

For the fiscal year ended December 31, 2007

 

 

 

or

 

 

 

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 0-23876

 

Smurfit-Stone Container Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

 

43-1531401

(State of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

150 North Michigan Avenue
 
 

Chicago, Illinois

 

60601

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s Telephone Number: (312) 346-6600

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.01 Par Value

 

NASDAQ Global Select Market

7% Series A Cumulative Exchangeable Redeemable Convertible Preferred Stock, $0.01 Par Value

 

NASDAQ Global Select Market

 
Securities registered pursuant to Section 12(g) of the Act:      None
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  x Noo

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o Nox

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

 

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.

 

Large accelerated filer  x             Accelerated filer  o                 Non-accelerated filer  o           Smaller reporting company o

 

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

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $3.4 billion, based on the closing sales price of $13.31 per share of such stock on The NASDAQ Global Select Market on June 29, 2007.

 

The number of shares outstanding of the registrant’s common stock as of February 25, 2008: 255,506,075

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Document

 

Part of Form 10-K Into Which Document Is Incorporated

Sections of the Registrant’s Proxy Statement to be filed on or before March 28, 2008 for the Annual Meeting of Stockholders to be held on May 7, 2008.

 

Part III

 

 



 

SMURFIT-STONE CONTAINER CORPORATION

ANNUAL REPORT ON FORM 10-K

December 31, 2007

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

PART I
 
 

Item 1.

Business

 

Item 1A.

Risk Factors

 

Item 1B.

Unresolved Staff Comments

 

Item 2.

Properties

 

Item 3.

Legal Proceedings

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Item 6.

Selected Financial Data

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

Item 8.

Financial Statements and Supplementary Data

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

Item 9A.

Controls and Procedures

 

Item 9B.

Other Information

 

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

Item 11.

Executive Compensation

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

Item 14.

Principal Accountant Fees and Services

 

 

 

 

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

 

 

FORWARD-LOOKING STATEMENTS
 

Except for the historical information contained in this Annual Report on Form 10-K, certain matters discussed herein contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.  Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those contained in such forward-looking statements.  When used in this document, the words “anticipates,” “believes,” “expects,” “intends” and similar expressions as they relate to Smurfit-Stone Container Corporation, its operations or its management are intended to identify such forward-looking statements.  These forward-looking statements are subject to numerous risks and uncertainties.  There are important factors that could cause actual results to differ materially from those in forward-looking statements, certain of which are beyond our control.  These factors, risks and uncertainties are discussed in Part I, Item 1A, “Risk Factors.”

 

Our actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements.  Accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will transpire or occur or, if any of them do so, what impact they will have on our results of operations or financial condition.  We expressly decline any obligation to publicly revise any forward-looking statements that have been made to reflect the occurrence of events after the date hereof.

 

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PART I

 

ITEM 1.      BUSINESS

 

Unless the context otherwise requires, “we,” “us,” “our,” “Company” and “Smurfit-Stone” refer to the business of Smurfit-Stone Container Corporation and its subsidiaries.

 

GENERAL

 

Smurfit-Stone Container Corporation, incorporated in Delaware in 1989, is the industry’s leading integrated manufacturer of paperboard and paper-based packaging in North America, including containerboard and corrugated containers, and is one of the world’s largest paper recyclers.  We have a complete line of graphics capabilities for packaging. For the year ended December 31, 2007, our net sales were $7,420 million and our net loss available to common stockholders was $115 million.

 

Smurfit-Stone is a holding company with no business operations of its own.  Smurfit-Stone conducts its business operations through its wholly-owned subsidiary Smurfit-Stone Container Enterprises, Inc. (SSCE), a Delaware corporation.

 

DISCONTINUED OPERATIONS

 

On June 30, 2006, we completed the sale of substantially all of the assets of our Consumer Packaging division for $1.04 billion.  Reflecting final working capital adjustments and sales transaction costs, net cash proceeds were $897 million, which excluded $130 million of accounts receivable previously sold to Stone Receivables Corporation (SRC) under our accounts receivable securitization program.  We recorded a pretax gain of $171 million, offset by a $174 million income tax provision, resulting in a net loss on sale of discontinued operations of $3 million.  The after-tax loss was the result of a provision for income taxes that was higher than the statutory income tax rate due to non-deductible goodwill of $273 million.

 

The Consumer Packaging division was a reportable segment comprised of four coated recycled boxboard mills and 39 consumer packaging operations in the United States, including folding carton, multiwall and specialty bag, flexible packaging, label, contract packaging and lamination businesses and one consumer packaging plant in Brampton, Ontario.   Net sales for these operations were $787 million for the six months ended June 30, 2006, and $1,584 million for the year ended December 31, 2005.  These facilities employed approximately 6,600 hourly and salaried employees.  The results of operations of the Consumer Packaging segment have been reclassified as discontinued operations for all periods presented.

 

FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS

 

In 2007, we combined our Reclamation operations into the Containerboard and Corrugated Containers segment and now operate as one segment.  The change to one segment was driven by changes to our management structure and further integration resulting from our strategic initiative plan, including the sale of the Consumer Packaging division.  The Reclamation segment was previously a non-reportable segment.  The 2006 and 2005 financial information has been restated to conform to the current year presentation.  For financial information relating to our segment for the last three fiscal years, including our net sales to external customers by country of origin and total long-lived assets by country, see the information set forth in Note 26 of the Notes to Consolidated Financial Statements.

 

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PRODUCTS
 
CONTAINERBOARD, CORRUGATED CONTAINERS and RECLAMATION SEGMENT
 

The Containerboard, Corrugated Containers and Reclamation segment includes 16 paper mills (13 located in the United States and three in Canada), 124 container plants (102 located in the United States, 16 in Canada, three in Mexico, two in China and one in Puerto Rico), 24 reclamation plants, one paper tube and core plant and one wood products plant located in the United States and one lamination plant located in Canada.  In addition, we have equity ownership in two corrugated container plants in Asia (one in China and one in Thailand), as well as one sheet plant and a lithographic printing plant in China.  Also, we own approximately one million acres of timberland in Canada and operate wood harvesting facilities in Canada and the United States.  The primary products of our Containerboard, Corrugated Containers and Reclamation segment include:

 

·                  containerboard;

·                  corrugated containers;

·                  kraft paper;

·                  market pulp; and

·                  reclaimed and brokered fiber.

 

We produce a full range of high quality corrugated containers designed to protect, ship, store and display products made to our customers’ merchandising and distribution specifications.  Corrugated containers are sold to a broad range of manufacturers of consumer goods.  Corrugated containers are used to transport such diverse products as home appliances, electric motors, small machinery, grocery products, produce, books and furniture.  We provide customers with innovative packaging solutions to advertise and sell their products.  In addition, we manufacture and sell a variety of retail ready, point of purchase displays and a full line of specialty products, including pizza boxes, corrugated clamshells for the food industry, Cordeck® recyclable pallets and custom die-cut boxes to display packaged merchandise on the sales floor.  We also provide custom, proprietary and standard automated packaging machines, offering customers turn-key installation, automation, line integration and packaging solutions.  Our container plants serve local customers and large national accounts.  Net sales of corrugated containers for 2007, 2006 and 2005 represented 60%, 64% and 65%, respectively, of the Company’s total net sales.

 

Our containerboard mills produce a full line of containerboard, which is used primarily in the production of corrugated packaging.  We produced 3,736,000 tons of unbleached kraft linerboard, 959,000 tons of white top linerboard and 2,641,000 tons of medium in 2007.  Our containerboard mills and corrugated container operations are highly integrated, with the majority of our containerboard used internally by our corrugated container operations.  In 2007, our corrugated container plants consumed 4,913,000 tons of containerboard.  Net sales of containerboard to third parties for 2007, 2006 and 2005 represented 21%, 19% and 19%, respectively, of the Company’s total net sales.

 

Our paper mills also produce market pulp, kraft paper, solid bleached liner (SBL) and other specialty products.  We produce bleached northern and southern hardwood pulp, bleached southern softwood pulp and fluff pulp, which are sold to manufacturers of paper products, including photographic and other specialty papers, as well as the printing and writing sectors.  Kraft paper is used in numerous products, including consumer and industrial bags, grocery and shopping bags, counter rolls, handle stock and refuse bags.

 

Our reclamation operations procure fiber resources for our paper mills as well as other producers.  We operate 24 reclamation facilities in the United States that collect, sort, grade and bale recovered paper.  We also collect aluminum and plastics for resale to manufacturers of these products.  In addition, we operate a nationwide brokerage system whereby we purchase and resell recovered paper to our recycled paper mills and other producers on a regional and national contract basis.  Our waste reduction services extract additional recyclables from the waste stream by partnering with customers to reduce their waste expenses and increase efficiencies.  Brokerage contracts provide bulk purchasing, often resulting in lower prices and cleaner recovered paper.  Many of our reclamation facilities are located close to our recycled paper mills, ensuring availability of supply with minimal shipping costs.  In 2007, our paper mills

 

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consumed 2,780,000 tons of the fiber reclaimed and brokered by our reclamation operations, representing an integration level of approximately 41%.

 

Production for our paper mills, sales volume for our corrugated container facilities and fiber reclaimed and brokered for the last three years were:

 

(In thousands of tons, except as noted)

 

 

 

 

 

 

 

 

 

2007

 

2006

 

2005

 

Mill Production

 

 

 

 

 

 

 

Containerboard

 

7,336

 

7,402

 

7,215

 

Solid bleached sulfate (SBS)/SBL(Note 1)

 

269

 

313

 

283

 

Kraft paper

 

177

 

199

 

204

 

Market pulp

 

574

 

564

 

563

 

Corrugated containers sold (in billion square feet)

 

74.8

 

80.0

 

81.3

 

Fiber reclaimed and brokered

 

6,842

 

6,614

 

6,501

 

 

                                                Note 1: Production for the years ended 2007, 2006 and 2005 include 143,000, 189,000 and 177,000 tons, respectively, of SBS which was produced by the Brewton, Alabama mill.  The Brewton, Alabama mill was sold in September 2007.  See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Sale of Assets.”

 

RAW MATERIALS

 

Wood fiber and reclaimed fiber are the principal raw materials used in the manufacture of our paper products.  We satisfy the majority of our need for wood fiber through purchases on the open market or under supply agreements.  We satisfy essentially all of our need for reclaimed fiber through our reclamation facilities and nationwide brokerage system.

 

MARKETING AND DISTRIBUTION

 

Our marketing strategy is to sell a broad range of paper-based packaging products to manufacturers of industrial and consumer products.  We seek to meet the quality and service needs of the customers of our converting plants at the most efficient cost, while balancing those needs against the demands of our open market paperboard customers.  Our converting plants focus on supplying both specialized packaging with high value graphics that enhance a product’s market appeal and high-volume commodity products.

 

We serve a broad customer base.  We serve thousands of accounts from our plants and sell packaging and other products directly to end users and converters, as well as through resellers.  Our corrugated container sales organization is centralized with sales responsibilities for all converting plants.  This allows us to better focus on revenue growth and assign the appropriate resources to the best opportunities.  Marketing of containerboard and pulp to third parties is centralized in our board sales group.  Total tons of containerboard and market pulp sold in 2007, 2006 and 2005 were 3,381,000, 3,093,000 and 2,651,000, respectively.

 

Our business is not dependent upon a single customer or upon a small number of major customers.  We do not believe the loss of any one customer would have a material adverse effect on our business.

 

COMPETITION

 

The markets in which we sell our principal products are highly competitive and comprised of many participants.  Although no single company is dominant, we do face significant competitors, including large vertically integrated companies as well as numerous smaller companies.  The markets in which we compete have historically been sensitive to price fluctuations brought about by shifts in industry capacity and other cyclical industry conditions.  While we compete primarily on the basis of price in many of our product lines, other competitive factors include design, quality and service, with varying emphasis depending on product line.

 

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BACKLOG

 

Demand for our major product lines is relatively constant throughout the year, and seasonal fluctuations in marketing, production, shipments and inventories are not significant.  Backlog orders are not a significant factor in the industry.  We do not have a significant backlog of orders as most orders are placed for delivery within 30 days.

 

RESEARCH AND NEW PRODUCT DEVELOPMENT

 

The majority of our research and development activities are performed at our facility located in Carol Stream, Illinois.  We use advanced technology to assist all levels of the manufacturing and sales processes, from raw material supply through finished packaging performance.  Research programs have provided improvements in coatings and barriers, stiffeners, inks and printing.  Our technical staff conducts basic, applied and diagnostic research, develops processes and products and provides a wide range of other technical services.  In 2007, 2006 and 2005, we spent approximately $3 million, $4 million and $9 million, respectively, on research and new product development activities.

 

INTELLECTUAL PROPERTY

 

We actively pursue applications for patents on new technologies and designs and attempt to protect our patents against infringement.  Nevertheless, we believe our success and growth are more dependent on the quality of our products and our relationships with customers than on the extent of our patent protection.  We hold or are licensed to use certain patents, licenses, trademarks and trade names on our products, but do not consider the successful continuation of any material aspect of our business to be dependent upon such intellectual property.

 

EMPLOYEES

 

We had approximately 22,700 employees at December 31, 2007, of which approximately 18,600 were employees of U.S. operations.  Approximately 11,100 (60%) of our U.S. employees are represented by collective bargaining units.  The expiration dates of union contracts for our major paper mill facilities are as follows:

 

·                  Panama City, Florida - March 2008

·                  Fernandina Beach, Florida - June 2008

·                  West Point, Virginia - September 2008

·                  Pontiac, Quebec, Canada - April 2009

·                  Florence, South Carolina - August 2009

·                  La Tuque, Quebec, Canada - August 2009

·                  Hodge, Louisiana - June 2010

·                  Jacksonville, Florida -  June 2010

·                  Missoula, Montana -  May 2011

·                  Hopewell, Virginia - July 2011

 

We believe our employee relations are generally good.  While the terms of our collective bargaining agreements may vary, we believe the material terms of the agreements are customary for the industry, the type of facility, the classification of the employees and the geographic location covered thereby.

 

ENVIRONMENTAL COMPLIANCE

 

Our operations are subject to extensive environmental regulation by federal, state, local and foreign authorities.  In the past, we have made significant capital expenditures to comply with water, air, solid and hazardous waste and other environmental laws and regulations.  We expect to make significant expenditures in the future for environmental compliance.  Because various environmental standards are subject to change, it is difficult to predict with certainty the amount of capital expenditures that will ultimately be required to comply with future standards.

 

 

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The United States Environmental Protection Agency (EPA) issued its comprehensive rule governing air emissions (Maximum Achievable Control Technology (MACT)) and water discharges for the pulp, paper and paperboard industry known as the “Cluster Rule.”  Phase II of MACT I of the Cluster Rule required us to implement systems to collect and control high volume, low concentration gases (or implement an approved compliance alternative) at various mills.  All projects required for compliance were completed and operating prior to the required compliance dates.  To comply with Phase II of MACT I, we spent approximately $65 million through 2006 and $9 million in 2007.

 

In  2004, the EPA promulgated a MACT regulation to limit hazardous air pollutant emissions from certain industrial boilers (Boiler MACT).  Several of our mills were required to install new pollution control equipment in order to meet the compliance deadline of September 13, 2007.  The Boiler MACT rule was challenged by third parties in litigation, and the United States District Court of Appeals for the D.C. Circuit issued a decision vacating Boiler MACT and remanding the rule to the EPA.  Except for one mill which obtained a compliance extension until March 2008, all projects required to bring us into compliance with the now vacated Boiler MACT requirements were completed by September 13, 2007.  We spent approximately $50 million on Boiler MACT projects through 2006 and $28 million in 2007.  We anticipate spending approximately $3 million on these projects during the first quarter of 2008.  It is presently unclear whether future rulemaking will require us to install additional pollution control equipment on industrial boilers at our facilities.

 

In addition to Cluster Rule and Boiler MACT compliance, we anticipate additional capital expenditures related to environmental compliance.  Excluding the spending on Cluster Rule and Boiler MACT projects described above, for the past three years we have spent an average of approximately $9 million annually on capital expenditures for environmental purposes.  Since our principal competitors are subject to comparable environmental standards, including the Cluster Rule and Boiler MACT, it is our opinion, based on current information, that compliance with environmental standards should not adversely affect our competitive position or operating results.  However, we could incur significant expenditures due to changes in law or the discovery of new information, which could have a material adverse effect on our operating results.  See Part I, Item 3, “Legal Proceedings, Environmental Matters.”

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

Mathew Blanchard, born September 9, 1959, was appointed Vice President and General Manager - Board Sales Division in July 2000.

 

Ronald D. Hackney, born November 9, 1946, was appointed Senior Vice President — Human Resources on February 23, 2005, and prior to that had been Vice President - Human Resources since July 2003.  He was Division Human Resource Manager for the Containerboard Mill and Forest Resources Division from April 1995 to July 2003.

 

Charles A. Hinrichs, born December 3, 1953, was appointed Senior Vice President and Chief Financial Officer on February 23, 2005, and prior to that had been Vice President and Chief Financial Officer since January 2002.  He was Vice President and Treasurer from November 1998 to January 2002.

 

Craig A. Hunt, born May 31, 1961, was appointed Senior Vice President, Secretary and General Counsel on February 23, 2005, and prior to that had been Vice President, Secretary and General Counsel since November 1998.

 

Mack C. Jackson, born May 18, 1955, was appointed Senior Vice President and General Manager — Containerboard Mill and Forest Resources Division on February 23, 2005, and prior to that had been Vice President and General Manager — Containerboard Mill and Forest Resources Division since January 2005.  He was Vice President of Mill Operations from August 2002 to January 2005.  Prior to that, he was General Manager of two of our containerboard mills since 1994.

 

Paul K. Kaufmann, born May 11, 1954, was appointed Senior Vice President and Corporate Controller on February 23, 2005, and prior to that had been Vice President and Corporate Controller since November 1998.

 

 

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Steven J. Klinger, born March 5, 1959, was appointed President and Chief Operating Officer on May 11, 2006.  Prior to joining Smurfit-Stone, Mr. Klinger was employed by Georgia Pacific Corporation for 23 years, most recently as Executive Vice President, Packaging from February 2003 to May 2006 and President, Packaging and Containerboard Sales / Logistics from August 2001 to January 2003.

 

John L. Knudsen, born August 29, 1957, was appointed Senior Vice President of Manufacturing for the Container Division in October 2005.  He was Vice President of Strategic Planning for the Container Division from April 2005 to October 2005.  Prior to that, he was Vice President and Regional Manager for the Container Division from August 2000 to April 2005.

 

Patrick J. Moore, born September 7, 1954, has served as Chairman and Chief Executive Officer since May 2006.  He had been Chairman, President and Chief Executive Officer since May 2003, and prior to that he was President and Chief Executive Officer since January 2002, when he was also elected as a Director.  He was Vice President and Chief Financial Officer from November 1998 until January 2002.  Mr. Moore is a director of Archer Daniels Midland Company.

 

Susan M. Neumann, born February 5, 1954, was appointed Senior Vice President, Corporate Communications on November 15, 2006.  Prior to joining Smurfit-Stone, Ms. Neumann was employed by Albertsons, Inc. most recently as Senior Vice President, Education, Communications and Public Affairs from November 2003 to November 2006, Group Vice President, Communications and Education from January 2002 to November 2003 and Vice President, Communications from January 1996 to January 2002.

 

Mark R. O’Bryan, born January 15, 1963, was appointed Senior Vice President — Strategic Initiatives and Chief Information Officer in April 2007.  He had been Senior Vice President — Strategic Initiatives since July 2005 and prior to that had been Vice President - Operational Improvement for the Consumer Packaging Division from April 2004 to July 2005.  He was Vice President — Procurement from October 1999 to April 2004.

 

Michael R. Oswald, born October 29, 1956, was appointed Senior Vice President and General Manager of the Reclamation Division in August 2005.  Prior to that, he was Vice President of Operations for the Reclamation Division from January 1997 to August 2005.

 

Steven C. Strickland, born July 12, 1952, was appointed Senior Vice President of Sales for the Container Division on October 27, 2006.  Prior to joining Smurfit-Stone, Mr. Strickland was employed by Unisource most recently as Senior Vice President of Packaging and Supply from September 2006 to October 2006, Senior Vice President of Packaging from March 2004 to August 2006, Senior Vice President of Operations — East from March 2003 to March 2004 and Vice President of National Sales from September 1999 to March 2003.

 

AVAILABLE INFORMATION

 

We make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished as required by Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), through our Internet Website (www.smurfit-stone.com) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC).  You may access these SEC filings via the hyperlink that we provide on our Website to a third-party SEC filings Website.

 

ITEM 1A.   RISK FACTORS

 

We are subject to certain risks and events that, if one or more of them occur, could adversely affect our business, our financial condition and results of operations and the trading price of our common stock.  You should consider the following risk factors, in addition to the other information presented in this report, as well as the other reports and registration statements we file from time to time with the SEC, in evaluating us, our business and an investment in our securities.  The risks below are not the only ones

 

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we face.  Additional risks not currently known to us or that we currently deem immaterial also may adversely impact our business.

 

We have a highly leveraged capital structure.

 

Our high leverage could have significant consequences for us, including the following:

 

·                  we may be required to seek additional sources of capital, including additional borrowings under our existing credit facilities, other private or public debt or equity financings to service or refinance our indebtedness, which borrowings may not be available on favorable terms, particularly in the event that our credit ratings are downgraded by rating agencies;

·                  a substantial portion of our cash flow from operations will be needed to meet the payment of principal and interest on our indebtedness and other obligations and will not be available for our working capital, capital expenditures and other general corporate purposes; and

·                  our level of debt makes us more vulnerable to economic downturns and reduces our operational and business flexibility in responding to changing business and economic conditions and opportunities.

 

In addition, we are more highly leveraged than some of our competitors, which may place us at a competitive disadvantage.

 

The terms of our debt may severely limit our ability to plan for or respond to changes in our business.

 

Our ability to incur additional debt, and in certain cases refinance outstanding debt, is significantly limited or restricted under the agreements relating to our and our subsidiaries’ existing debt.  Our senior secured credit facilities and the indentures governing our outstanding senior notes restrict our ability to take specific actions, even if such actions may be in our best interest.  These restrictions limit our ability to:

 

·                  incur liens or make negative pledges on our assets;

·                  merge, consolidate or sell our assets;

·                  issue additional debt;

·                  pay dividends or repurchase or redeem capital stock;

·                  make investments and acquisitions;

·                  enter into certain transactions with stockholders and affiliates;

·                  make capital expenditures;

·                  materially change our business;

·                  amend our debt and other material agreements;

·                  issue and sell capital stock;

·                  make investments in unrestricted subsidiaries; or

·                  prepay specified indebtedness or other debt.

 

Our senior secured credit facility requires us to maintain specified financial ratios.  Our failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in our being required to repay these borrowings before their due date.  If we were unable to make this repayment or otherwise refinance these borrowings, our lenders could foreclose on our assets.  If we were unable to refinance these borrowings on favorable terms, our costs of borrowing could increase significantly.

 

Our senior debt bears interest at fixed and floating rates.  Currently, only a portion of our floating interest rate debt is capped. If interest rates rise, our senior debt interest payments also will increase.  Although we may enter into agreements to hedge our interest rate risk, these agreements may be inadequate to protect us fully against our interest rate risk.

 

Our industry is cyclical and highly competitive.

 

Our operating results reflect the industry’s general cyclical pattern.  The majority of our products can be subject to extreme price competition.  Some segments of our industry have production overcapacity, which may require us to take downtime periodically to reduce inventory levels during periods of weak demand.  In addition, the industry is capital intensive, which leads to high fixed costs and has historically resulted in continued production as long as prices are sufficient to cover marginal costs.  These conditions have contributed to substantial price competition and volatility in the industry.  Decreases in

 

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prices for our products, coupled with our highly leveraged financial position, may adversely impact our ability to respond to competition and to other market conditions or to otherwise take advantage of business opportunities.

 

The paperboard and packaging products industries are highly competitive and are particularly sensitive to price fluctuations as well as other factors including innovation, design, quality and service, with varying emphasis on these factors depending on the product line.  To the extent that one or more of our competitors become more successful with respect to any key competitive factor, our ability to attract and retain customers could be materially adversely affected.  Many of our competitors are less leveraged, have financial and other resources greater than ours and are more capable to withstand the adverse nature of the business cycle.  If our facilities are not as cost efficient as those of our competitors, we may need to temporarily or permanently close such facilities and suffer a consequent reduction in our revenues.

 

Our pension plans are underfunded and will require additional cash contributions.

 

We have made substantial contributions to our pension plans in the past five years and expect to continue to make substantial contributions in the coming years in order to ensure that our funding levels remain adequate in light of projected liabilities and to meet the requirements of the Pension Protection Act of 2006.  These contributions reduce the amount of cash available for us to repay indebtedness or make capital investments.

 

Price fluctuations in energy costs and raw materials could adversely affect our manufacturing costs.

 

The cost of producing and transporting our products is highly sensitive to the price of energy.  Energy prices, in particular oil and natural gas, have experienced significant volatility in recent years, with a corresponding effect on our production costs.  Energy prices may continue to fluctuate and may rise to higher levels in future years.  This could adversely affect our production costs and results of operations. Although we may enter into agreements to hedge our energy costs, these agreements may be inadequate to protect us fully against the volatility of energy costs.  To the extent we have  positions that are not hedged or our hedging procedures do not perform as planned, fluctuating energy costs could reduce our operating profit.

 

Wood fiber and reclaimed fiber, the principal raw materials used in the manufacture of our paper products, are purchased in highly competitive, price-sensitive markets, which have historically exhibited price and demand cyclicality.  Adverse weather, conservation regulations and the shutdown of a number of sawmills have caused, and will likely continue to cause, a decrease in the supply of wood fiber and higher wood fiber costs in some of the regions in which we procure wood fiber.  Fluctuations in supply and demand for reclaimed fiber, particularly export demand from Asian producers, have occasionally caused tight supplies of reclaimed fiber.  At such times, we may experience an increase in the cost of fiber or may temporarily have difficulty obtaining adequate supplies of fiber.

 

Factors beyond our control could hinder our ability to service our debt and meet our operating requirements.

 

Our ability to meet our obligations and to comply with the financial covenants contained in our debt instruments will largely depend on our future performance.  Our performance will be subject to financial, business and other factors affecting us.  Many of these factors are beyond our control, such as:

 

·                  the state of the economy;

·                  the financial markets;

·                  demand for, and selling prices of, our products;

·                  performance of our major customers;

·                  costs of raw materials and energy;

·                  hurricanes and other major weather-related disruptions; and

·                  legislation and other factors relating to the paperboard and packaging products industries generally or to specific competitors.

 

9



 

If operating cash flows, net proceeds from borrowings, divestitures or other financing sources do not provide us with sufficient liquidity to meet our operating and debt service requirements, we will be required to pursue other alternatives to repay debt and improve liquidity.  Such alternatives may include:

 

·                  sales of assets;

·                  cost reductions;

·                  deferral of certain discretionary capital expenditures and benefit payments; and

·                  amendments or waivers to our debt instruments.

 

We might not successfully complete any of these measures or they may not generate the liquidity we require to operate our business and service our obligations.  If we are not able to generate sufficient cash flow or otherwise obtain funds necessary to make required debt payments or we fail to comply with our debt covenants, we would be in default under the terms of our various debt instruments.  This would permit our debt holders to accelerate the maturity of such debt and would cause defaults under our other debt.

 

We are subject to environmental regulations and liabilities that could weaken our operating results and financial condition.

 

Federal, state, provincial, foreign and local environmental requirements, particularly those relating to air and water quality, are a significant factor in our business.  Maintaining compliance with existing environmental laws, as well as complying with requirements imposed by new or changed environmental laws, may require capital expenditures for compliance.  In addition, ongoing remediation costs and future remediation liability at sites where we may be a potentially responsible party (PRP) for cleanup activity under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and analogous state and other laws may materially adversely affect our results of operations and financial condition.

 

Foreign currency risks and exchange rate fluctuations could hinder the results of our Canadian operations.

 

Our assets and liabilities outside the United States are primarily located in Canada.  Our principal foreign exchange exposure is the Canadian dollar.  The functional currency for our Canadian operations is the U.S. dollar.  Our net income could be reduced to the extent we have un-hedged positions, our hedging procedures do not perform as planned or the Canadian dollar continues to strengthen.  Our financial performance is directly affected by exchange rates because:

 

·                  certain of our products are manufactured in Canada, but sold in U.S. dollars; and

·                  the monetary assets and liabilities of our Canadian operations are translated into U.S. dollars for financial reporting purposes.

 

ITEM 1B.   UNRESOLVED STAFF COMMENTS

 

None

 

 

10



ITEM 2.      PROPERTIES

 

The manufacturing facilities of our consolidated subsidiaries are located primarily in North America.  We believe that our facilities are adequately insured, properly maintained and equipped with machinery suitable for our use. During the last two years, we have invested significant capital in our operations to upgrade or replace corrugators and converting machines, while closing higher cost facilities.  See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Strategic Initiatives.”  Our manufacturing facilities as of December 31, 2007 are summarized below:

 

 

 

Number of Facilities

 

State

 

 

 

Total

 

Owned

 

Leased

 

Locations(a)

 

United States

 

 

 

 

 

 

 

 

 

Paper mills

 

13

 

13

 

 

 

10

 

Corrugated container plants

 

102

 

72

 

30

 

30

 

Wood products plant

 

1

 

1

 

 

 

1

 

Paper tube and core plant

 

1

 

1

 

 

 

1

 

Reclamation plants

 

24

 

16

 

8

 

14

 

Subtotal

 

141

 

103

 

38

 

36

 

 

 

 

 

 

 

 

 

 

 

Canada and Other North America

 

 

 

 

 

 

 

 

 

Paper mills

 

3

 

3

 

 

 

N/A

 

Corrugated container plants

 

20

 

16

 

4

 

N/A

 

Laminating plant

 

1

 

1

 

 

 

N/A

 

Subtotal

 

24

 

20

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

China

 

 

 

 

 

 

 

 

 

Corrugated container plants

 

2

 

1

 

1

 

N/A

 

 

 

 

 

 

 

 

 

 

 

Total

 

167

 

124

 

43

 

N/A

 

 

 

 

 

 

 

 

 

 

 


(a) Reflects the number of states in which we have at least one manufacturing facility.

 

Our paper mills represent approximately 74% of our investment in property, plant and equipment.  In addition to manufacturing facilities, we own approximately one million acres of timberland in Canada and operate wood harvesting facilities in Canada and the United States.  The approximate annual tons of productive capacity of our paper mills at December 31, 2007 were:

 

 

 

Annual Capacity (in thousands)

 

 

 

United States

 

Canada

 

Total

 

Containerboard

 

6,631

 

507

 

7,138

 

SBL

 

 

 

127

 

127

 

Kraft paper

 

185

 

 

 

185

 

Market pulp

 

286

 

254

 

540

 

Total

 

7,102

 

888

 

7,990

 

 
Substantially all of our North American operating facilities have been pledged as collateral under our various credit agreements. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources - Net Cash Provided By (Used For) Financing Activities."
 

 

11



 
ITEM 3.      LEGAL PROCEEDINGS

 

LITIGATION

 

In 2003, we settled all of the antitrust class action cases pending against Smurfit-Stone, which were based on allegations of a conspiracy among linerboard manufacturers from 1993 to 1995, and made aggregate settlement payments of $92.5 million, one-half of which was paid in December 2003 and the remainder of which was paid in January 2005.  We subsequently settled all of the lawsuits brought on behalf of numerous companies that opted out of these class actions to seek their own recovery (Direct Action Cases), and made aggregate payments of $60 million, including $14 million in 2005 and $46 million in 2006.  We recorded additional charges of $36 million in 2005 in connection with these settlements.

 

We are a defendant in a number of lawsuits and claims arising out of the conduct of our business.  While the ultimate results of such suits or other proceedings against us cannot be predicted with certainty, we believe the resolution of these matters will not have a material adverse effect on our consolidated financial condition or results of operations.

 

ENVIRONMENTAL MATTERS

 

Federal, state, local and foreign environmental requirements are a significant factor in our business.  We employ processes in the manufacture of pulp, paperboard and other products which result in various discharges, emissions and wastes.  These processes are subject to numerous federal, state, local and foreign environmental laws and regulations, including reporting and disclosure obligations.  We operate and expect to continue to operate under permits and similar authorizations from various governmental authorities that regulate such discharges, emissions and wastes.

 

We also face potential liability as a result of releases, or threatened releases, of hazardous substances into the environment from various sites owned and operated by third parties at which Company-generated wastes have allegedly been deposited.  Generators of hazardous substances sent to off-site disposal locations at which environmental problems exist, as well as the owners of those sites and certain other classes of persons, all of whom are referred to as PRPs, are, in most instances, subject to joint and several liability for response costs for the investigation and remediation of such sites under CERCLA and analogous state laws, regardless of fault or the lawfulness of the original disposal.  We have received notice that we are or may be a PRP at a number of federal and/or state sites where response action may be required and as a result may have joint and several liability for cleanup costs at such sites.  However, liability for CERCLA sites is typically shared with other PRPs and costs are commonly allocated according to relative amounts of waste deposited.  In estimating our reserves for environmental remediation and future costs, our estimated liability of $5 million reflects our expected share of costs after consideration for the relative percentage of waste deposited at each site, the number of other PRPs, the identity and financial condition of such parties and experience regarding similar matters.  In addition to participating in the remediation of sites owned by third parties, we have entered into consent orders for the investigation and/or remediation of certain of our owned properties.

 

Based on current information, we believe the costs of the potential environmental enforcement matters discussed above, response costs under CERCLA and similar state laws, and the remediation of owned property will not have a material adverse effect on our financial condition or results of operations.  As of December 31, 2007, we had approximately $18 million reserved for environmental liabilities.  We believe our liability for these matters was adequately reserved at December 31, 2007, and that the possibility is remote that we would incur any material liabilities for which we have not recorded adequate reserves.

 

ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter ended December 31, 2007.

 

12



PART II

 

ITEM 5.                 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

MARKET INFORMATION

 

At December 31, 2007, approximately 45,000 stockholders, including stockholders of record, beneficial owners and employee participants in our voluntary savings plans, held our common stock.  Our common stock trades on The NASDAQ Global Select Market under the symbol "SSCC."  The high and low sales prices of our common stock in 2007 and 2006 were:

 

 

2007

 

2006

 

 

 

High

 

Low

 

High

 

Low

 

First Quarter

 

$

14.08

 

$

9.85

 

$

14.40

 

$

12.13

 

Second Quarter

 

$

13.54

 

$

11.25

 

$

15.15

 

$

10.21

 

Third Quarter

 

$

14.08

 

$

8.85

 

$

11.80

 

$

9.77

 

Fourth Quarter

 

$

13.56

 

$

9.45

 

$

11.62

 

$

9.88

 

 

DIVIDENDS ON COMMON STOCK

 

We have not paid cash dividends on our common stock and do not intend to pay dividends in the foreseeable future.  Our ability to pay dividends in the future is restricted by certain provisions contained in various agreements and indentures relating to SSCE’s outstanding indebtedness.  See Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources - Net Cash Provided By (Used For) Financing Activities.”

 

STOCK PERFORMANCE GRAPH

 

The information set forth under this caption shall not be deemed to be “filed” or incorporated by reference into any of our other filings with the SEC.

The graph below compares the cumulative total stockholder return on an investment in the Common Stock, the S&P 500 Index, and an index of a peer group of paper companies (the Peer Group) for the five-year period ended December 31, 2007.  The Peer Group is comprised of the following four medium- to large-sized companies whose primary business is the manufacture and sale of paper products and packaging: International Paper Company, Weyerhaeuser Company, Packaging Corporation of America and Temple-Inland Inc.  The 2006 Peer Group also included Greif Inc., but that company was removed from the Peer Group for 2007 because its business is no longer an appropriate comparison.  The graph assumes the value of an investment in the Common Stock and each index was $100.00 at December 31, 2002 and that all dividends were reinvested.

GRAPHIC

 

 

 

INDEXED RETURNS

 

 

 

Years Ending

 

 

 

Base

 

 

 

 

 

Period

 

 

 

 

 

 

 

 

 

 

 

Company Name / Index

 

12/31/02

 

12/31/03

 

12/31/04

 

12/31/05

 

12/31/06

 

12/31/07

 

Smurfit-Stone Container Corporation

 

100

 

120.65

 

121.37

 

92.07

 

68.61

 

68.61

 

S&P 500 Index

 

100

 

128.68

 

142.69

 

149.70

 

173.34

 

182.86

 

New Peer Group

 

100

 

130.07

 

135.69

 

129.48

 

138.06

 

145.19

 

Old Peer Group

 

100

 

130.46

 

137.50

 

132.17

 

144.47

 

152.57

 

 

13



 

ITEM 6.   SELECTED FINANCIAL DATA

 

(In millions, except per share and statistical data)

 

 

 

 

 

 

 

Restated(a)

 

 

 

2007

 

2006

 

2005

 

2004

 

2003(b)(c)

 

Summary of Operations

 

 

 

 

 

 

 

 

 

 

 

Net sales (d)

 

$

7,420

 

$

7,157

 

$

6,812

 

$

6,716

 

$

6,146

 

Operating income (loss) (e)(f)(g)

 

305

 

276

 

(253

)

172

 

(42

)

Income (loss) from continuing operations before cumulative effect of accounting change (g)

 

(103

)

(70

)

(381

)

(109

)

(270

)

Discontinued operations, net of income tax provision

 

 

 

11

 

51

 

54

 

59

 

Net income (loss) available to common stockholders

 

(115

)

(71

)

(342

)

(66

)

(227

)

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share of common stock

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before cumulative effect of accounting change

 

(.45

)

(.32

)

(1.54

)

(.47

)

(1.14

)

Discontinued operations

 

 

 

.04

 

.20

 

.21

 

.24

 

Net income (loss) available to common stockholders

 

(.45

)

(.28

)

(1.34

)

(.26

)

(.92

)

Weighted average basic and diluted shares outstanding

 

256

 

255

 

255

 

253

 

246

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Financial Data

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

243

 

$

265

 

$

221

 

$

273

 

$

162

 

Net cash provided by (used for) investing activities

 

68

 

706

 

(277

)

(200

)

15

 

Net cash provided by (used for) financing activities

 

(313

)

(967

)

55

 

(79

)

(171

)

Depreciation, depletion and amortization

 

360

 

377

 

408

 

416

 

415

 

Capital investments and acquisitions

 

384

 

274

 

285

 

232

 

238

 

Working capital, net

 

13

 

(141

)

(4

)

148

 

136

 

Net property, plant, equipment and timberland

 

3,486

 

3,774

 

4,289

 

4,682

 

4,974

 

Total assets

 

7,387

 

7,777

 

9,114

 

9,583

 

9,956

 

Long-term debt (h)

 

3,359

 

3,634

 

4,571

 

4,498

 

4,807

 

Redeemable preferred stock

 

97

 

93

 

89

 

85

 

82

 

Stockholders’ equity(a)

 

1,855

 

1,779

 

1,854

 

2,234

 

2,254

 

 

 

 

 

 

 

 

 

 

 

 

 

Statistical Data (tons in thousands)

 

 

 

 

 

 

 

 

 

 

 

Containerboard production (tons)

 

7,336

 

7,402

 

7,215

 

7,438

 

7,185

 

Kraft paper production (tons)

 

177

 

199

 

204

 

259

 

293

 

Market pulp production (tons)

 

574

 

564

 

563

 

549

 

497

 

SBS/SBL production (tons)

 

269

 

313

 

283

 

276

 

290

 

Corrugated containers sold (billion square feet)

 

74.8

 

80.0

 

81.3

 

81.8

 

79.7

 

Fiber reclaimed and brokered (tons)

 

6,842

 

6,614

 

6,501

 

6,542

 

6,549

 

Number of employees (i)

 

22,700

 

25,200

 

33,500

 

35,300

 

36,700

 

 

14



 

Notes to Selected Financial Data

 

(a)          In 2007, we determined that $28 million of net benefits from income taxes previously recognized on non-cash foreign currency exchange losses from 2000 to 2006 should not have been recognized under Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.”  The effect of the restatement on the 2005, 2004 and 2003 consolidated statements of operations was a loss of $3 million, $9 million and $19 million, respectively.  In addition, the 2003 consolidated balance sheet adjustment includes the cumulative effect of income (loss) adjustments for the fiscal years ended December 31, 2002, 2001 and 2000 of $(1) million, $3 million and $1 million respectively.

(b)         Results for 2003 include the acquisition of Smurfit-MBI after March 31, 2003, the date of the acquisition.

(c)          We recorded a $5 million charge, net of income tax, or $.02 per diluted share, in 2003 for the cumulative effect of an accounting change in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations.”

(d)         Effective April 1, 2006, we adopted Emerging Issues Task Force Issue No. 04-13, “Accounting for Purchases and Sales of Inventory With the Same Counterparty”, which required us to prospectively report certain inventory buy/sell transactions of similar containerboard types in our Containerboard and Corrugated Containers segment on a net basis in our consolidated statements of operations, thereby reducing net sales and cost of goods sold by $194 million in 2006.

(e)          In 2004, operating income (loss) included an asset impairment charge of $73 million attributable to the write-down of non-core pulp mill fixed assets.

(f)            In 2007, 2006, 2005, 2004 and 2003, we recorded restructuring charges of $16 million, $43 million, $321 million, $16 million and $115 million, respectively.

(g)         In 2007, we recorded a loss of $65 million (after-tax loss of approximately $97 million) related to the sale of our Brewton, Alabama mill.

(h)         In 2007, 2006, 2005, 2004 and 2003, long-term debt includes obligations under capital leases of $7 million, $7 million, $12 million, $13 million and $12 million, respectively.

(i)             Number of employees for 2006 excludes approximately 6,600 employees of our former Consumer Packaging division, which was sold on June 30, 2006.

 

ITEM 7.                 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

Smurfit-Stone Container Corporation is an integrated manufacturer of paperboard and paper-based packaging.  Our major products are containerboard, corrugated containers, market pulp, recycled fiber and kraft paper. We operate in one reportable industry segment.  Our mill operations supply paper to our corrugated container converting operations.  The products of our converting operations, as well as the mill and reclamation tonnage in excess of what is consumed internally, are the main products sold to third parties.  Our operating facilities and customers are located primarily in the United States and Canada.

 

Market conditions and demand for our products are subject to cyclical changes in the economy and changes in industry capacity, both of which can significantly impact selling prices and our profitability.  In recent years, the continued loss of domestic manufacturing to offshore competition and the changing retail environment in the U.S. have also played a key role in reducing growth in domestic packaging demand.  The influence of superstores and discount retailing giants, as well as the impacts from online shopping, has resulted in a shifting of demand to packaging which is more condensed, lighter weight and less expensive.  These factors have greatly influenced the corrugated industry.

 

In 2007, we implemented price increases for our products, made substantial progress executing our strategic initiative plan and strengthened our management team.  The higher average prices and incremental strategic initiative savings more than offset significant cost inflation.  In 2007, U.S. industry per day shipments of corrugated containers decreased 2.1%. Our North American per day shipments of corrugated containers decreased 7.2% compared to 2006 due primarily to the closures of converting facilities and continued efforts to improve margins by exiting unprofitable business. Increased

 

15



 

containerboard sales to third parties substantially offset the reduction in corrugated containers sold.  During 2007, our containerboard inventories decreased and ended the year at record low levels.  In September 2007, we sold our Brewton, Alabama mill and used the proceeds to repay debt.

 

For 2007, we recorded a net loss available to common stockholders of $115 million, compared to a net loss of $71 million in 2006.  The higher loss was due principally to the 2007 loss on sale of the Brewton, Alabama mill ($97 million after-tax loss) and higher non-cash foreign currency exchange losses ($53 million after-tax).  The 2007 results benefited from higher sales prices, savings from our strategic initiatives, lower interest expense and lower restructuring charges in 2007 compared to 2006.  These benefits were partially offset by significant cost inflation on key input costs including fiber and freight.

 

In 2008, we anticipate continued improvement in our financial performance driven by higher average prices and incremental initiative benefits.  While we expect continued inflation, cost pressures should moderate compared to levels seen in recent years. There is uncertainty about the direction of the overall economy, but we are projecting improved operating performance for our business in 2008.

 

RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS

 

In 2007, we determined that $28 million of net benefits from income taxes previously recognized on non-cash foreign currency exchange losses from 2000 to 2006 should not have been recognized under SFAS No. 109, “Accounting for Income Taxes.”  Because we are indefinitely reinvested in the foreign operations, the losses should have been treated as permanent differences when determining taxable income for financial accounting purposes.

 

We performed an evaluation to determine if the errors resulting from recognizing the deferred tax impact of the non-cash foreign currency exchange losses were material to any individual prior period, taking into account the requirements of SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB No.108), which was adopted in 2006.  Based on this analysis, we concluded the errors were not material to any individual period from 2000 to 2006 and, therefore as provided by SAB No. 108, the correction of the error does not require previously filed reports to be amended.  We have restated the 2006 consolidated balance sheet and 2005 financial statements included in this filing.  In Note 2 of the Notes to Consolidated Financial Statements, we have provided tables that show the impact of the financial statement adjustments related to the restatement of the Company’s previously reported financial statements for the fiscal years ended December 31, 2006 and 2005.  In addition, 2004 and 2003 financial information included in Part I, Item 6, “Selected Financial Data” has been restated.

 

STRATEGIC INITIATIVES

 

During 2005, we announced a strategic initiative plan to improve performance and better position us for long-term growth.  Our plan focused on cost reduction and productivity initiatives with a target to achieve $525 million in annual savings in 2008 compared to levels prior to the start of our plan.  In order to reduce our costs in our converting operations, we planned to close up to 30 converting facilities by the end of 2008 (inclusive of 28 facilities closed through December 31, 2007), transfer the majority of their production to other facilities and invest in new corrugators and finishing equipment in certain locations to improve our productivity.  We expected to achieve additional cost reductions through i) mill consolidation, ii) productivity improvements at the mills and the remaining container plants, iii) standardization of containerboard trim sizes and grades produced, iv) transportation and procurement savings and v) reductions in selling and administrative expenses.

 

In 2005, as the first step in this cost reduction process and in order to better align production capacity with market conditions and demand, we permanently closed the New Richmond, Quebec linerboard mill, the Bathurst, New Brunswick medium mill and the previously idled No. 2 paper machine at the Fernandina Beach, Florida linerboard mill. Our containerboard manufacturing capacity was reduced by 700,000 tons,

 

16



 

or 8.5%, as a result of these closures.  In addition, we also closed two converting facilities, exited our investment in the Las Vegas, Nevada converting facility, and agreed to the closure of the Groveton, New Hampshire medium mill, in which we own a minority interest.  As a result of these closures, we recorded restructuring charges of $321 million, including non-cash charges of $267 million related to the write-down of assets, primarily property, plant and equipment, to estimated net realizable values.  The remaining charges were primarily for severance, benefits, lease commitments and post-closure environmental costs.  These shutdowns resulted in approximately 780 employees being terminated. In addition, another 720 employees were terminated as part of the strategic initiative plan.

 

In 2006, in conjunction with the strategic initiative plan, we closed 14 converting facilities and permanently shut down four corrugators, resulting in the termination of approximately 1,400 employees.  In addition, another 700 employees were terminated as part of the strategic initiative plan.  We recorded restructuring charges of $43 million, net of gains of $18 million from the sale of three closed facilities and the No. 2 paper machine at the Fernandina Beach, Florida linerboard mill.  Restructuring charges include non-cash charges of $23 million related to the write-down of assets, primarily property, plant and equipment, to estimated net realizable values and the acceleration of depreciation for equipment expected to be abandoned or taken out of service.   The remaining charges of $38 million were primarily for severance and benefits, including pension settlement costs of $6 million.

 

In 2007, we closed 12 converting facilities and the Carthage, Indiana and Los Angeles, California medium mills and reduced our headcount by approximately 1,750 employees.  The restructuring charges were $16 million, net of gains of $69 million on the sale of properties related to previously closed facilities.  Restructuring charges include non-cash charges of $48 million related to the write-down of assets, primarily property, plant and equipment, to estimated net realizable values and the acceleration of depreciation for equipment expected to be abandoned or taken out of service. The remaining charges of $37 million were primarily for severance and benefits.  The production of the two medium mills, which had combined annual capacity of 200,000 tons, was partially offset by restarting the previously idled machine at the Jacksonville, Florida mill with annual capacity to produce 170,000 tons of medium.

 

For 2007, we targeted $420 million in savings and productivity improvements, net of transition costs, from our strategic initiatives, compared to levels prior to the start of our plan as adjusted for the impact of inflation.  During 2007, we realized savings of $438 million from these initiatives, including incremental savings of $195 million compared to 2006.  The benefits were driven by headcount reductions, productivity improvements, including benefits from our operational excellence program, and the closure of four containerboard mills and 28 converting facilities through December 31, 2007.  As a result of these actions, we have reduced our headcount by approximately 5,350 since June 30, 2005.

 

For 2008, we are targeting $525 million in cumulative savings and productivity improvements from our strategic initiatives.  Incremental savings compared to 2007 will be driven by improved box plant productivity from our capital investments and our operational excellence program.  We expect to incur capital expenditures of approximately $400 million in 2008.  We expect to fund the capital expenditures through anticipated improvements in our operating cash flows and with proceeds from the sale of closed facilities.

 

During 2008, to continue implementation of the strategic initiative plan, we expect to record additional restructuring charges of approximately $20 million, including accelerated depreciation of approximately $8 million related to equipment expected to be abandoned or taken out of service in conjunction with the future closure of certain facilities.

 

SALE OF ASSETS

 

In September 2007, we completed the sale of the Brewton, Alabama, mill assets for $355 million.  We received cash proceeds of $338 million, which excluded $16 million of accounts receivable previously sold to Stone Receivables Corporation under the accounts receivable securitization program and was net of $1 million of other closing adjustments.  The Brewton mill had annual production capacity of approximately 300,000 tons of white top linerboard and 190,000 tons of solid bleached sulfate (SBS).  We continue to produce white top linerboard at two of our mills.  Substantially all of the proceeds were applied directly to debt reduction.   We recorded a pretax loss of $65 million, and a $32 million income tax

 

17



 

provision, resulting in a net loss of $97 million.  The after-tax loss was the result of a provision for income taxes that was higher than the statutory income tax rate due to non-deductible goodwill of $146 million.

 

RESULTS OF OPERATIONS

 

Discontinued Operations

 

Our Consumer Packaging segment, which was sold on June 30, 2006, has been classified as discontinued operations and is excluded from the segment results for all periods presented.  See Part I, Item 1, “Business, Discontinued Operations.”

 

Recently Adopted Accounting Standards

 

Effective January 1, 2007, we adopted the Financial Accounting Standards Board (FASB) Staff Position (FSP) No. AUG AIR-1 “Accounting for Planned Major Maintenance Activities.” This FSP prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods.  The FSP requires retrospective application to all financial statements presented.  The new standard does not impact our annual 2006 and 2005 financial statements.

 

Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN No. 48), an interpretation of SFAS No. 109, “Accounting for Income Taxes.”  FIN No. 48 creates a single model to address accounting for uncertainty in tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  Upon adoption, we reduced our existing reserves for uncertain tax positions by $2 million.  This reduction was recorded as a cumulative effect adjustment to the retained deficit.  As of January 1, 2007, we had $120 million of net unrecognized tax benefits, of which $38 million was classified as a reduction to the amount of our net operating loss carryforwards and $82 million was classified as a liability for unrecognized tax benefits and included in other long-term liabilities.

 

Upon adoption of FIN No. 48, we elected to classify interest and penalties related to unrecognized tax benefits in our income tax provision, consistent with our previous accounting policy.  At January 1, 2007, interest and penalties of $14 million related to unrecognized tax benefits was included in other long-term liabilities.  The interest was computed on the difference between the tax position recognized in accordance with FIN No. 48 and the amount previously taken or expected to be taken in our tax returns, adjusted to reflect the impact of net operating loss and other tax carryforward items  (See Note 14 of the Notes to the Consolidated Financial Statements).

 

Effective April 1, 2006, we adopted Emerging Issues Task Force (EITF) Issue No. 04-13, “Accounting for Purchases and Sales of Inventory With the Same Counterparty” (EITF No. 04-13), for new arrangements and modifications or renewals of existing arrangements.  EITF No. 04-13 requires certain inventory buy/sell transactions between counterparties within the same line of business to be viewed as a single exchange transaction.   EITF No. 04-13 required us to prospectively report, beginning in the second quarter of 2006, certain inventory buy/sell transactions of similar containerboard types on a net basis in the consolidated statements of operations.  Had EITF No. 04-13 previously been in effect, net sales and cost of goods sold would have been reduced by an additional $58 million for the first quarter of 2006 and $296 million for 2005.

 

18



 

Segment Financial Data

 

(In millions)

 

2007

 

2006

 

2005

 

 

 

Net
 Sales

 

Profit/
 (Loss)

 

Net
 Sales

 

Profit/
 (Loss)

 

Net
 Sales

 

Profit/
 (Loss)

 

Containerboard, corrugated containers and reclamation operations (Note 1 and 2)

 

$

7,420

 

$

604

 

$

7,157

 

$

522

 

$

6,812

 

$

279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring charges

 

 

 

(16

)

 

 

(43

)

 

 

(321

)

Gain (loss) on sale of assets

 

 

 

(62

)

 

 

24

 

 

 

(1

)

Interest expense, net

 

 

 

(285

)

 

 

(341

)

 

 

(345

)

Loss on early extinguishment of debt

 

 

 

(29

)

 

 

(28

)

 

 

 

 

Foreign currency exchange gains (losses)

 

 

 

(52

)

 

 

1

 

 

 

(9

)

Litigation charges and settlements, net

 

 

 

 

 

 

 

 

 

 

 

(36

)

Corporate expenses and other (Note 1 and 3)

 

 

 

(236

)

 

 

(245

)

 

 

(186

)

Loss from continuing operations before income taxes

 

 

 

$

(76

)

 

 

$

(110

)

 

 

$

(619

)


Note 1:  Effective January 1, 2007, working capital interest is no longer charged to operations.  The financial information for 2006 and 2005 has been restated to conform to the current year presentation.

 

Note 2:  Effective April 1, 2007, results for our reclamation operations have been combined with the Containerboard and Corrugated Containers segment.  The financial information for 2006 and 2005 has been restated to conform to the current year presentation.

 

Note 3: Corporate expenses and other include corporate expenses and other expenses not allocated to operations.

 

2007 COMPARED TO 2006

 

We had a net loss available to common stockholders of $115 million, or $0.45 per diluted share, for 2007 compared to a net loss of $71 million, or $0.28 per diluted share, for 2006.  The higher loss in 2007 compared to 2006 was due primarily to the after-tax loss on the sale of the Brewton, Alabama mill and higher non-cash foreign currency exchange losses.  In 2007, the containerboard, corrugated containers and reclamation operating profit of $604 million was $82 million higher compared to 2006 due primarily to higher average selling prices for our products and benefits from our strategic initiatives.  Operating profits in 2007 were negatively impacted by higher costs for fiber and freight compared to 2006.

 

Net sales increased 3.7% in 2007 compared to last year due primarily to higher average selling prices ($476 million) for containerboard, corrugated containers, market pulp and reclaimed fiber.  Net sales were negatively impacted by $161 million in 2007 as a result of the sale of the Brewton, Alabama mill on September 28, 2007 and a change in the mix of our sales.  As a result of lower corrugated container sales volume, more of our containerboard tons were sold directly to third parties.  In addition, net sales were reduced as a result of the adoption of EITF 04-13 ($52 million), as described in “Recently Adopted Accounting Standards.”  Average domestic linerboard prices for 2007 were 4.9% higher compared to 2006.  Our average North American selling price for corrugated containers increased 3.5% compared to 2006. Third party shipments of containerboard increased 11.9% compared to the same period last year.  Shipments of corrugated containers on a total and per day basis were lower 6.5% and 7.2%, respectively, compared to last year due primarily to container plant closure efforts, actions to improve the profitability of marginal accounts and market conditions.  Our average sales prices for market pulp, SBS/SBL and kraft paper increased 13.8%, 2.4% and 5.5%, respectively, compared to last year.  The average price for old corrugated containers (OCC) increased approximately $45 per ton compared to last year.

 

Our containerboard mills operated at 99.2% of capacity in 2007, while containerboard production was 0.9% lower compared to last year. The lower containerboard production was primarily due to the impact of the mill closures and the sale of the Brewton, Alabama mill, which were partially offset by the restarting of the previously idled machine at the Jacksonville, Florida mill.  Production of SBS decreased by 14.1%

 

19



 

compared to last year due to the sale of the Brewton, Alabama mill. Production of market pulp increased 1.8%, while kraft paper decreased 11.1%.  Total tons of fiber reclaimed and brokered increased 3.4%.

 

Cost of goods sold increased from $6,185 million in 2006 to $6,404 million in 2007 due primarily to higher costs of reclaimed material purchased by our reclamation operations ($275 million), wood fiber ($17 million), freight ($37 million) and other materials ($81 million).  Cost of goods sold in 2007 was favorably impacted by the adoption of EITF No. 04-13 ($52 million) and lower sales volume ($139 million).  Cost of goods sold as a percent of net sales in 2007 was 86.3%, comparable to 2006.

 

Selling and administrative expense decreased $44 million in 2007 compared to 2006 due primarily to lower employee benefits cost and savings achieved from our strategic initiatives plan.  Selling and administrative expense as a percent of net sales decreased from 9.5% in 2006 to 8.5% in 2007 due primarily to the lower employee benefits costs and the higher average sales prices.

 

We recorded a pretax loss of $65 million in the third quarter of 2007 related to the sale of our Brewton, AL mill.  We recorded a gain on sale of assets of $23 million in 2006 related to the divestiture of our Port St. Joe, Florida joint venture interest and related real estate.

 

Interest expense, net was $285 million in 2007.  The $56 million decrease compared to 2006 was the result of lower average borrowings ($46 million) and lower average interest rates ($10 million).  The lower average borrowings were primarily due to debt reduction from the sales of the Consumer Packaging division and the Brewton, Alabama mill.  Our overall average effective interest rate in 2007 was lower than 2006 by approximately 0.27%.

 

In 2007, we recorded a loss on early extinguishment of debt of $29 million, including $23 million for tender premiums and a $6 million non-cash write-off of deferred debt issuance cost.

 

We recorded non-cash foreign currency exchange losses of $52 million in 2007 compared to gains of $1 million in 2006 due to the strengthening of the Canadian dollar.

 

The provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to loss before income taxes due primarily to the non-deductibility of goodwill on the sale of the Brewton, Alabama mill and non-cash foreign currency translation losses, state income taxes and the effect of other permanent differences.

 

2006 COMPARED TO 2005

 

For 2006, we had a net loss available to common stockholders of $71 million, or $0.28 per diluted share.  This compares to a net loss available to common stockholders of $342 million, or $1.34 per diluted share in 2005.  Our loss was lower in 2006 due primarily to lower restructuring charges and higher Containerboard, Corrugated Containers and Reclamation segment profit.  In 2006, we recorded pretax restructuring charges of $43 million compared to $321 million in 2005.  In 2006, the Containerboard, Corrugated Containers and Reclamation segment profit of $522 million was $243 million higher compared to 2005 due primarily to higher average selling prices for containerboard and corrugated containers and cost savings achieved from our strategic initiative plan, which were partially offset by higher key input costs.

 

Net sales increased 5.1% in 2006 compared to 2005 primarily due to higher average sales prices ($497 million) for containerboard, corrugated containers and reclaimed fiber.  Net sales were unfavorably impacted by the adoption of EITF No. 04-13 ($194 million) as described in “Recently Adopted Accounting Standards.”  For 2006, average domestic linerboard prices increased 14.8% compared to 2005.  Our average North American selling price for corrugated containers was 5.2% higher compared to 2005.  Shipments of corrugated containers decreased 1.6% compared to 2005 due to one less shipping day and the container plant closures.  On a per day basis, shipments of corrugated containers declined by 1.3%.  Third party containerboard shipments increased 19.4% compared to 2005.  Average sales prices for market pulp, SBS/SBL and kraft paper increased 10.8%, 3.0%, and 8.9%, respectively, compared to 2005.  The average price for OCC decreased approximately $10 per ton compared to 2005.

 

 

20



 

Our containerboard mills operated at 100% of capacity in 2006 and containerboard production increased 2.6% compared to 2005 despite the closure of two containerboard mills in August 2005.  Production of market pulp was comparable to 2005.  Production of SBS/SBL increased 10.6%, while kraft paper decreased by 2.5% compared to 2005.  Total tons of fiber reclaimed and brokered for 2006 was 1.7% higher compared to 2005 as a result of higher external sales volume and higher internal consumption.

 

Cost of goods sold increased from $6,054 million in 2005 to $6,185 million in 2006 due primarily to higher sales volume ($37 million), and higher costs for freight ($47 million), energy ($35 million), wood fiber ($17 million) and chemicals ($16 million).  Cost of goods sold was favorably impacted by adopting EITF No. 04-13 ($194 million) and by lower cost for reclaimed material ($24 million).  Cost of goods sold as a percent of net sales decreased from 88.9% in 2005 to 86.4% in 2006 due primarily to the higher average sales prices.

 

Selling and administrative expense decreased $12 million in 2006 compared to 2005 due primarily to lower litigation charges and settlements, net.  In 2005, we recorded charges of $36 million for the settlement of Direct Action Cases.  See Part I, Item 3, “Legal Proceedings.”  Selling and administrative expense in 2006 was unfavorably impacted by higher stock-based compensation expense ($13 million), including $5 million due to the impact of adopting SFAS No. 123(R) on January 1, 2006, and costs related to the implementation of the strategic initiatives ($13 million).  For information concerning stock-based compensation, see Note 17 of the Notes to Consolidated Financial Statements. Selling and administrative expense as a percent of net sales decreased from 10.1% in 2005 to 9.5% in 2006 due primarily to the higher average sales prices.

 

Interest expense, net was $341 million in 2006.  The $4 million decrease compared to 2005 was the result of lower average borrowings ($28 million), partially offset by higher average interest rates ($24 million).  Our overall average effective interest rate in 2006 was higher than 2005 by approximately 0.57%.

 

We recorded a non-cash foreign currency exchange gain of $1 million in 2006 compared to a loss of $9 million in 2005.  See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk, Foreign Currency Risk.”

 

Benefit from income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to loss before income taxes due primarily to state income taxes and the effect of other permanent differences.  In connection with the sale of the Consumer Packaging division, during the year ended December 31, 2006, we recorded a pretax gain of $171 million, offset by a $174 million income tax provision, resulting in a net loss on sale of discontinued operations of $3 million.  The after-tax loss is the result of a provision for income taxes that is higher than the statutory income tax rate due to the non-deductibility of goodwill.  The sale of the Consumer Packaging division generated a $14 million U.S. federal alternative minimum tax, which was paid in 2006.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The following table presents a summary of our cash flows for the years ended December 31:

 

(In millions)

 

2007

 

2006

 

2005

 

Net cash provided by (used for):

 

 

 

 

 

 

 

Operating activities

 

$

243

 

$

265

 

$

221

 

Investing activities

 

68

 

706

 

(277

)

Financing activities

 

(313

)

(967

)

55

 

Net increase (decrease) in cash

 

$

(2

)

$

4

 

$

(1

)

 

 

21


 


 

Net Cash Provided By (Used For) Operating Activities

The change in net cash provided by operating activities in 2007 compared to 2006 was due primarily to higher working capital, which was partially offset by higher operating profit from our containerboard, corrugated containers and reclamation operations.  The higher working capital was due to increased receivables due primarily to price increases for most of our products.

 

Net Cash Provided By (Used For) Investing Activities

Net cash provided by investing activities was $68 million for 2007.  Expenditures for property, plant and equipment were $384 million for 2007, compared to the $274 million for 2006.  The amount expended for property, plant and equipment in 2007 included $332 million for projects related to upgrades, cost reductions and strategic initiatives, $41 million for environmental projects, and $11 million related to the buyout of leased equipment.  For 2007, we received proceeds of $452 million from property disposals and sale of businesses including $338 million from the sale of the Brewton, Alabama mill and $114 million from properties at previously closed facilities.  In 2006, we received proceeds from the sale of property and businesses of $980 million, principally from the sale of our Consumer Packaging division ($897 million) and from the divestiture of our Port St. Joe, Florida joint venture ($28 million).

 

Net Cash Provided By (Used For) Financing Activities

Net cash used for financing activities for 2007 of $313 million included a net debt repayment of $277 million principally from the application of proceeds from the sale of the Brewton mill.  We paid debt issuance costs of $7 million and tender premiums of $23 million in 2007 related to the refinancing of certain of our debt obligations.  Preferred dividends paid were $8 million for 2007.  We received proceeds from the exercise of stock options of $2 million.

 

We as guarantor, and SSCE and its subsidiary, Smurfit-Stone Container Canada Inc. (SSC Canada), as borrowers, entered into a credit agreement, as amended (the Credit Agreement) on November 1, 2004,   The Credit Agreement, which refinanced and replaced our former credit agreements in their entirety, provides for (i) a revolving credit facility of $600 million to SSCE, of which $310 million was borrowed as of December 31, 2007 and (ii) a revolving credit facility of $200 million to SSCE and SSC Canada, of which none was borrowed as of December 31, 2007.  The revolving credit facilities include sub-limits for the issuance of letters of credit and swingline loans.  Each of these revolving credit facilities matures on November 1, 2009.  The Credit Agreement also provided for a Tranche B term loan to SSCE in the aggregate principal amount of $975 million and a Tranche C term loan to SSC Canada in the aggregate principal amount of $300 million, with outstanding balances of $137 million and $261 million, respectively, at December 31, 2007.  The term loans are payable in quarterly installments ending on November 1, 2011.  In addition, the Credit Agreement provides for a deposit funded letter of credit facility to us, related to our variable rate industrial revenue bonds, for approximately $122 million that matures on November 1, 2010.

 

We have the option to borrow at a rate equal to LIBOR plus 2.00% or alternate base rate (“ABR”) plus 1.00% for the term loan facilities and LIBOR plus 2.25% or ABR plus 1.25% for the revolving credit facilities (the “Applicable Rate”).  The Applicable Rate will increase by 0.25% if at any time the Company’s senior secured indebtedness is rated lower than BB- by Standard & Poor’s and Ba3 by Moody’s Investors Service.

 

In June 2006, we, as guarantor, and SSCE and its subsidiary, SSC Canada, as borrowers, entered into an amendment to the senior credit facility with our lending group permitting us to use a portion of the net cash proceeds to be received from the sale of our Consumer Packaging division and additional borrowings, if necessary, to prepay certain unsecured debt.  In addition, the amendment provided for the release of the lien on the assets of the Consumer Packaging division.  The amendment (i) required the use of $240 million of the proceeds to prepay Tranche B term loans, (ii) permitted the use of up to $400 million of the proceeds to prepay the unsecured senior notes and (iii) permitted the reinvestment of up to $250 million of the balance of the proceeds in the business of the Company and its subsidiaries.

 

In December 2005, we and our lenders entered into an agreement and amendment (Incremental Term Loan Assumption Agreement and Amendment No. 2) to the Credit Agreement to ease certain financial covenant requirements as of December 31, 2005 and for future periods through September 30, 2007 and provided for a new term loan. The other material terms of the Credit Agreement, including security and

 

22



 

final maturity, remained the same as under the original Credit Agreement.  The Incremental Term Loan Assumption Agreement and Amendment No. 2 provided for a new SSC Canada Incremental Term Loan (Tranche C-1) in the aggregate principal amount of $90 million, with an outstanding balance of $79 million at December 31, 2007.  The term loan is payable in quarterly installments and matures on November 1, 2011.

 

The obligations of SSCE under the Credit Agreement are unconditionally guaranteed by us and the material U.S. subsidiaries of SSCE.  The obligations of SSC Canada under the Credit Agreement are unconditionally guaranteed by us, SSCE, the material U.S. subsidiaries of SSCE and the material Canadian subsidiaries of SSC Canada.  The obligations of SSCE under the Credit Agreement are secured by a security interest in substantially all of our assets and properties, and those of SSCE and the material U.S. subsidiaries of SSCE, by a pledge of all of the capital stock of SSCE and the material U.S. subsidiaries of SSCE and by a pledge of 65% of the capital stock of SSC Canada that is directly owned by SSCE.  The security interests securing SSCE’s obligation under the Credit Agreement exclude cash, cash equivalents, certain trade receivables, three paper mills and the land and buildings of certain corrugated container facilities.  The obligations of SSC Canada under the Credit Agreement are secured by a security interest in substantially all of the assets and properties of SSC Canada and the material Canadian subsidiaries of SSC Canada, by a pledge of all of the capital stock of the material Canadian subsidiaries of SSC Canada and by the same U.S. assets, properties and capital stock that secure SSCE’s obligations under the Credit Agreement.  The security interests securing SSC Canada’s obligation under the Credit Agreement exclude three mills and property related thereto and certain other real property located in New Brunswick and Quebec.

 

The Credit Agreement contains various covenants and restrictions including (i) limitations on dividends, redemptions and repurchases of capital stock, (ii) limitations on the incurrence of indebtedness, liens, leases and sale-leaseback transactions, (iii) limitations on capital expenditures and (iv) maintenance of certain financial covenants.  The Credit Agreement also requires prepayments if we have excess cash flows, as defined therein, or receive proceeds from certain asset sales, insurance or incurrence of certain indebtedness.  Our failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in us being required to repay these borrowings before their due date.  If we were unable to make this repayment or otherwise refinance these borrowings, our lenders could foreclose on our assets.  If we were unable to refinance these borrowings on favorable terms, our costs of borrowing could increase significantly.  At December 31, 2007, we were in compliance with the financial covenants required by the Credit Agreement.  As of December 31, 2007, subject to the above limitations, we have unused borrowing capacity under SSCE’s revolving credit facilities of $344 million, after giving consideration to outstanding letters of credit.

 

For the year ended December 31, 2007, SSCE used $114 million of net proceeds received from the sale of properties related principally to previously closed facilities to prepay $45 million of its Tranche B term loan, $30 million of its Tranche C term loan, $9 million of its Tranche C-1 term loan and $30 million of its revolving credit facility.

 

In September 2007, we completed the sale of the Brewton, Alabama, mill assets and used the net proceeds of $338 million to prepay $301 million of Tranche B term loans and $21 million of revolving credit facility. In addition, we paid fees and expenses of $16 million related to this transaction.

 

In March 2007, SSCE completed an offering of $675 million of 8.00% unsecured senior notes due March 15, 2017 (the 8.00% Senior Notes).  We used the proceeds of this issuance to repay $546 million of 9.75% senior notes due 2011 (the 9.75% Senior Notes), which were purchased in connection with a cash tender offer, pay related tender premiums and accrued interest of $19 million and $8 million, respectively, and repay $95 million of the SSCE revolving credit facility.  In addition, we used the proceeds to pay fees and expenses of $7 million related to this transaction.  A loss on early extinguishment of debt of $23 million was recorded, including $19 million for tender premiums and a $4 million write-off of unamortized deferred debt issuance cost.  In May 2007, we redeemed the remaining $102 million of the 9.75% Senior Notes at a redemption price of 103.25% plus accrued interest.  Borrowings under the SSCE revolving credit facility were used to redeem the notes and pay related call premiums and accrued interest.  In June 2007, SSCE completed a registered exchange offer of all of the then outstanding 8.00% Senior Notes for

 

23



 

a like principal amount of senior notes which have been registered under the Securities Act of 1933.  SSCE did not receive any proceeds from the exchange offer.

 

In March 2007, we used approximately $66 million in borrowings against our revolving credit facility together with an escrow balance of $3 million to prepay the $69 million outstanding aggregate principal balance of our 8.45% mortgage notes, which were payable on September 1, 2007.

 

FUTURE CASH FLOWS

 

Contractual Obligations and Commitments

 

At December 31, 2007, our contractual obligations and commitments were as follows:

 

 

 

 

 

Amounts Payable During

 


(In millions)

 


Total

 


 2008

 


 2009-10

 


 2011-12

 

2013 &  Beyond

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, including capital leases (1)

 

$

3,359

 

$

11

 

$

441

 

$

1,567

 

$

1,340

 

Operating leases

 

290

 

62

 

87

 

45

 

96

 

Purchase obligations (2)

 

1,274

 

398

 

518

 

217

 

141

 

Commitments for capital expenditures (3)

 

393

 

310

 

83

 

 

 

 

 

Net unrecognized tax benefits (4)

 

9

 

9

 

 

 

 

 

 

 

Other long-term liabilities (5)

 

463

 

81

 

119

 

240

 

23

 

Total contractual obligations

 

$

5,788

 

$

871

 

$

1,248

 

$

2,069

 

$

1,600

 


(1)          Projected contractual interest payments are excluded.  Based on interest rates in effect and long-term debt balances outstanding as of December 31, 2007, hypothetical projected contractual interest payments would be approximately $259 million in 2008 and for each future year.  For the purpose of this disclosure, our variable and fixed rate long-term debt would be replaced at maturity with similar long-term debt. This disclosure does not attempt to predict future cash flows or changes in interest rates.  See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk, Interest Rate Risk.”

(2)          Amounts shown consist primarily of national supply contracts to purchase containerboard, wood, reclaimed fiber, natural gas and other energy resources for which value is received.  We do not aggregate open purchase orders executed in the normal course of business by each of our operating locations and such purchase orders are therefore excluded from the table.

(3)          Amounts shown are estimates of future spending on capital projects which were committed to prior to December 31, 2007, but were not completed by December 31, 2007.  We expect capital expenditures for 2008 to be approximately $400 million.

(4)          As of December 31, 2007, our FIN No. 48 net unrecognized tax benefits totaled $139 million.  The amount shown represents the current portion of our net unrecognized tax benefits and is included in current income taxes payable in the 2007 consolidated balance sheet.  The non-current portion of our net unrecognized tax benefits of $130 million is excluded from the table since we cannot make a reasonably reliable estimate of the timing of future payments.

(5)          Amounts shown consist primarily of minimum pension contribution obligations, severance costs and other rationalization expenditures and environmental liabilities which have been recorded in our December 31, 2007 balance sheet.  The table does not include our deferred income tax liability and accruals for self-insured losses because it is not certain when these liabilities will become due.  We contributed $129 million to our pension plans and $12 million to other postretirement plans in 2007 and expect to contribute approximately $75 million and $15 million, respectively, to such plans in 2008.  Future contributions to our pension and other postretirement plans will be dependent upon pending legislation, future changes in discount rates and the earnings performance of our plan assets.

 

Scheduled debt payments, including capital lease payments, for 2008 and 2009 are $11 million and $316 million, respectively.  We expect further improvement in our cash flow from operations in 2008.  We expect that our cash flow from operations and our unused borrowing capacity under SSCE’s revolving credit facilities, in combination, will be sufficient for the next several years to meet our obligations and

 

24



 

commitments, including debt service, pension funding, costs related to the strategic initiative plan, preferred stock dividends, expenditures related to environmental compliance and other capital expenditures.

 

Contingent Obligations

We issue standby letters of credit primarily for performance bonds and for self-insurance.  Letters of credit are issued under SSCE’s revolving credit facilities, generally have a one-year maturity and are renewed annually.  As of December 31, 2007, SSCE had $146 million of letters of credit outstanding.  In addition, we have a deposit funded letter of credit facility, related to our variable rate industrial revenue bonds, for approximately $122 million that matures on November 1, 2010.

 

We have certain woodchip processing contracts, which provide for guarantees of third party contractors’ debt outstanding, with a security interest in the chipping equipment.  Guarantee payments would be triggered in the event of a loan default by any of the contractors.  The maximum potential amount of future payments related to all of such arrangements as of December 31, 2007 was $31 million.  Cash proceeds received from liquidation of the chipping equipment would be based on market conditions at the time of sale, and we may not recover in full the guarantee payments made.

 

In 2006, we entered into an agreement to guarantee a portion of a third party’s debt in decreasing amounts through January 2010.  The guarantee was entered into in connection with the third party’s progress payment financing for the purchase and installation of machinery and equipment for the manufacture of corrugated containerboard.  We and the third party are parties to a supply agreement through 2021, whereby we sell containerboard to the third party, and a purchase agreement through 2014, whereby the third party sells corrugated sheets to us.  At December 31, 2007, the maximum potential amount of the future payments related to this guarantee was approximately $12 million.  We have no recourse to the assets of the third party, other than that of a general unsecured creditor.  The fair value of this guarantee at December 31, 2007 was an immaterial amount and is included in other assets, with an offset in other long-term liabilities in the accompanying consolidated balance sheets.

 

We are contingently liable for $18 million under a one year letter of credit issued in April 2007 to support borrowings of one of our non-consolidated affiliates.  The letter of credit is collateralized by a pledge of affiliate stock owned by the other shareholder of the affiliate in the event the letter of credit is drawn upon and the other shareholder is unable to reimburse us for their 50% share of the letter of credit obligation.

 

Pension Obligations

As of December 31, 2007, our pension benefit obligations exceeded the fair value of pension plan assets by $407 million, down from $633 million at the end of 2006. The majority of the reduction was due to higher discount rates at December 31, 2007 ($144 million) and plan changes made during 2007 to the defined benefit pension plans for salaried employees ($43 million). In August 2007, we announced the freeze of our defined benefit pension plans for salaried employees.  As a result, effective January 1, 2009, U.S. and Canadian salaried employees will no longer accrue additional years of service and U.S. salaried employees will no longer recognize future increases in compensation under the existing defined benefit pension plans for benefit purposes.  In accordance with SFAS No. 88, “Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” we accounted for this freeze as a plan curtailment, remeasured our assets and obligation as of August 31, 2007 and recognized a curtailment gain of approximately $3 million during the third quarter of 2007.  See the information set forth in Note 15 of the Notes to Consolidated Financial Statements.

 

Exit Liabilities

We recorded restructuring charges of $16 million in 2007, net of gains of $69 million from sale of properties related to previously closed facilities.  Restructuring charges include $37 million for exit liabilities, which were principally for severance and benefits.  In 2007, we incurred cash expenditures of $29 million for these exit liabilities.

 

We had $47 million of exit liabilities as of December 31, 2006, related to the restructuring of our operations.  During 2007, we incurred cash expenditures of $26 million for these exit liabilities.  The exit liabilities remaining as of December 31, 2007, including the 2007 restructuring activities, totaled $29 million.  Future cash outlays, principally for severance and benefits cost and long-term lease commitments and facility closure cost, are expected to be $16 million in 2008, $7 million in 2009 and $6 million thereafter.  We intend to continue funding exit liabilities through operations as originally planned.

 

 

25



 

Environmental Matters

As discussed in Part I Item 1, “Business, Environmental Compliance,” during 2007 all projects required for compliance with Phase II of MACT I of the Cluster Rule were completed.  In addition, we substantially completed all projects required to bring us into compliance with the now vacated Boiler MACT.  However, we could incur significant expenditures due to changes in law or discovery of new information.  Excluding the spending on the Cluster Rule and Boiler MACT projects, we have spent an average of approximately $9 million in each of the last three years on capital expenditures for environmental purposes.  We anticipate that environmental capital expenditures, exclusive of the Cluster Rule and Boiler MACT projects, will be approximately $6 million in 2008.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

At December 31, 2007, we had three off-balance sheet financing arrangements.

 

SSCE has a $475 million accounts receivable securitization program whereby it sells, without recourse, on an ongoing basis, certain of its accounts receivable to SRC.  SRC is a wholly-owned non-consolidated subsidiary of SSCE and a qualified special-purpose entity under the provisions of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”  Accordingly, accounts receivable sold to SRC for which we do not retain an interest are not included in our consolidated balance sheets.  SRC transfers the receivables to a non-consolidated subsidiary, a limited liability company, which has issued notes to third-party investors.  At December 31, 2007, $585 million of accounts receivable had been sold under the program, of which $223 million was retained by SSCE as a subordinated interest and recorded in retained interest in receivables sold in the accompanying consolidated balance sheet.  We recognized a loss on sales of receivables to SRC of $25 million and $23 million in 2007 and 2006, respectively, which is included in other, net in the consolidated statements of operations.  The off-balance sheet SRC debt at December 31, 2007 and 2006 was $379 million and $398 million, respectively.  The investors and the limited liability company have no recourse to SSCE for failure of debtors to pay when due.

 

SSCE, through Smurfit-MBI, has a $70 million Canadian (approximately $71 million U.S.) accounts receivable securitization program whereby it sells, without recourse, on an ongoing basis, certain of its Canadian accounts receivable to a trust in which SSCE holds a variable interest, but is not the primary beneficiary.  Accordingly, under Financial Accounting Standards Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities,” accounts receivable sold to the trust, for which SSCE is not the primary beneficiary, are not included in the accompanying consolidated balance sheets.  At December 31, 2007, $71 million of accounts receivable had been sold under the program, of which $26 million was retained by SSCE as a subordinated interest and recorded in retained interest in receivables sold in the accompanying consolidated balance sheet.  We recognized a loss on sales of receivables to the trust of $2 million in each of 2007 and 2006, which is included in other, net in the consolidated statements of operations.  The amount funded to us at December 31, 2007 and 2006, was $43 million and $50 million, respectively.  The investors and the securitization trust have no recourse to SSCE for failure of debtors to pay when due.

 

We sold 980,000 acres of owned and leased timberland in October 1999.  The final purchase price, after adjustments, was $710 million. We received $225 million in cash and $485 million in the form of installment notes, which mature from December 31, 2007 to December 31, 2014.  Under our program to monetize the installment notes receivable, the notes were sold, without recourse, to Timber Note Holdings LLC (TNH), a qualified special purpose entity under the provisions of SFAS No. 140, for $430 million in cash proceeds and a residual interest in the notes.  The residual interest included in other assets in the accompanying consolidated balance sheet was $44 million at December 31, 2007.  TNH and its creditors have no recourse to us in the event of a default on the installment notes.

 

26



 
EFFECTS OF INFLATION
 

Increases in costs for fiber, energy, freight and other materials including corn starch and ink have had an adverse impact on our operating results during the past three years.  Fiber, energy and freight cost increases are strongly influenced by supply and demand factors including competition in global markets and from hurricanes or other natural disasters in certain regions of the United States, and when supplies become tight, we have experienced increases in the cost of these items.  We continue to seek ways to mitigate the impact of such cost increases and, to the extent permitted by competition, pass the increased cost on to customers by increasing sales prices over time.

 

We used the last-in, first-out method of accounting for approximately 41% of our inventories at December 31, 2007.  Under this method, the cost of goods sold reported in the financial statements approximates current cost and thus provides a closer matching of revenue and expenses in periods of increasing costs.

 

Replacement of existing fixed assets in future years will be at higher costs, but this will take place over many years.  New assets will result in higher depreciation charges; but, in many cases, due to technological improvements, there may be operating cost savings as well.

 

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
 

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP).  The preparation of financial statements in accordance with U.S. GAAP requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Our estimates and assumptions are based on historical experiences and changes in the business environment.  However, actual results may differ from these estimates.  Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management’s most subjective judgments.  Our most critical accounting policies and use of estimates are described below.

 

Long-Lived Assets Including Goodwill

We conduct impairment reviews of long-lived assets including goodwill in accordance with SFAS No. 144 and  SFAS No. 142, “Goodwill and Other Intangible Assets.”  Such reviews require us to make estimates of future cash flows and fair values.  Our cash flow projections include significant assumptions about economic conditions, demand and pricing for our products and cost as well as estimates of the achievement of the strategic initiatives as described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Strategic Initiatives.”  Our estimates of fair value are determined using a variety of valuation techniques, including discounted cash flows, our market capitalization and pricing of recent industry acquisitions.  While significant judgment is required, we believe that our estimates of future cash flows and fair value are reasonable.  However, should our assumptions change in future years, our fair value models could indicate lower fair values for long-lived assets and goodwill, which could materially affect the carrying value of property, plant and equipment and goodwill and results of operations.

 

Restructurings

In recent years, we have closed a number of operating facilities and exited non-core businesses.  Identifying and calculating the cost to exit these businesses requires certain assumptions to be made, the most significant of which are anticipated future liabilities, including leases and other contractual obligations, and the adjustment of property, plant and equipment to net realizable value.  We believe our estimates are reasonable, considering our knowledge of the paper industry, previous experience in exiting activities and valuations received from independent third parties in the calculation of such estimates.  Although our estimates have been reasonably accurate in the past, significant judgment is required, and these estimates and assumptions may change as additional information becomes available and facts or circumstances change.

 

Our strategic initiative plan includes future closures of converting facilities or shutdowns of long-lived assets.  Once we commit to a plan to abandon a long-lived asset before the end of its previously

 

27



 

estimated useful life, depreciation estimates are revised to reflect the use of the asset over its shortened useful life.

 

Allowance for Doubtful Accounts

We evaluate the collectibility of accounts receivable on a case-by-case basis and make adjustments to the bad debt reserve for expected losses.  We also estimate reserves for bad debts based on historical experience and past due status of the accounts.  We perform credit evaluations and adjust credit limits based upon each customer’s payment history and credit worthiness.  While credit losses have historically been within our expectations and the provisions established, actual bad debt write-offs may differ from our estimates, resulting in higher or lower charges in the future for our allowance for doubtful accounts.

 

Pension and Postretirement Benefits

We have significant long-term liabilities related to our defined benefit pension and postretirement benefit plans.

 

The determination of pension obligations and expense is dependent upon our selection of certain assumptions, the most significant of which are the expected long-term rate of return on plan assets and the discount rates applied to plan liabilities.  Consulting actuaries assist us in determining these assumptions, which are described in Note 15 of the Notes to Consolidated Financial Statements.  In 2007, we adjusted the expected long-term rate of return on our U.S. plan assets to 8.50% from 8.75% and foreign plan assets generally to 7.5% from 7.75%, which increased retirement plan expense approximately $8 million for 2007.  The weighted average discount rates used to determine the benefit obligations for the U.S. and foreign retirement plans at December 31, 2007 were 6.19% and 5.50%, respectively.  The assumed rate for the long-term return on plan assets was determined based upon target asset allocations and expected long-term rates of return by asset class.  Our assumed discount rate was developed using a portfolio of Moody’s Aa-rated fixed income securities that approximate the duration of our pension liabilities.  A decrease in the assumed rate of return of 0.50% would increase pension expense by approximately $15 million.  A decrease in the discount rate of 0.50% would increase our pension expense by approximately $22 million and our pension benefit obligations by approximately $186 million.

 

Related to our postretirement benefit plans, we make assumptions for future trends for medical care costs.  The effect of a 1% change in the assumed health care cost trend rate would increase our accumulated postretirement benefit obligation as of December 31, 2007 by $13 million and would increase the annual net periodic postretirement benefits cost by $1 million for 2007.

 

Income Taxes

Effective January 1, 2007, we adopted the provisions of FIN No. 48.  Upon adoption, we reduced our existing reserves for uncertain tax positions by $2 million.  This reduction was recorded as a cumulative effect adjustment to retained deficit.  As of January 1, 2007, we had $120 million of net unrecognized tax benefits ($169 million gross unrecognized tax benefits), of which $38 million was classified as a reduction to the amount of our net operating loss carryforwards and $82 million was classified as a liability for unrecognized tax benefits and included in other long-term liabilities.  At December 31, 2007, we have $139 million of net unrecognized tax benefits ($185 million gross unrecognized tax benefits).  All net unrecognized tax benefits, if recognized, would affect our effective tax rate.  See Note 14 of Notes to Consolidated Financial Statements for a reconciliation of 2007 activity.

 

At January 1, 2007, interest and penalties of $14 million related to unrecognized tax benefits was included in other long-term liabilities in the consolidated balance sheet.  The interest was computed on the difference between the tax position recognized in accordance with FIN No. 48 and the amount previously taken or expected to be taken in the Company’s tax returns, adjusted to reflect the impact of net operating loss and other tax carryforward items.  For the year ended December 31, 2007, an additional $11 million of interest was recorded related to tax positions taken during the current and prior years.  No penalties were recorded during the year related to these tax positions.  At December 31, 2007, $25 million of interest and penalties is recognized in the consolidated balance sheet.

 

Deferred tax assets and liabilities reflect our assessment of future taxes to be paid in the jurisdictions in which we operate.  These assessments involve temporary differences resulting from differing treatment of

 

28



 

items for tax and accounting purposes.  In addition, unrecognized tax benefits under the provisions of FIN No. 48 reflect estimates of our current tax exposures.  Based on our evaluation of our tax positions, we believe we were adequately reserved for these matters at December 31, 2007.

 

At December 31, 2007, we had deferred tax assets related to net operating loss, alternative minimum tax and other tax credit carryforwards in the amount of $471 million.  A valuation allowance of $31 million has been established for a portion of these deferred tax assets based on projected future taxable income, the expected timing of deferred tax liability reversals and the expiration dates of these carryforwards.  See Note 14 of the Notes to Consolidated Financial Statements.  We expect our deferred tax assets, net of the valuation allowance, will be fully realized through the reversal of net taxable temporary differences at December 31, 2007, in combination with expected improvement in our operating results.  Substantially all of our valuation allowance was recorded in connection with a prior purchase business combination and a reduction in the valuation allowance would result principally in a corresponding reduction to goodwill.  Should additional valuation allowances be necessary because of changes in economic circumstances, those allowances would be established through a charge to income tax expense.

 

The Canada Revenue Agency (CRA) is currently examining our tax returns for the tax years 1999 through 2005.  In connection with the examination of our Canadian income tax returns for these years, the CRA is considering certain significant adjustments to taxable income related to the acquisition of a Canadian company and to transfer prices of inventory sold by the our Canadian subsidiaries to our U.S. subsidiaries.  These matters may be resolved at the examination level or subsequently upon appeal within the next twelve months.  While the final outcome of the examination or subsequent appeal, including an estimate of the range of the reasonably possible changes to unrecognized tax benefits, is not yet determinable, we believe that the examination will not have a material adverse effect on our consolidated financial condition or results of operations.

 

We have settled the Internal Revenue Service examinations of our tax returns for tax years through 2003.  The federal statute of limitations is closed through 2003, except for any potential correlative adjustments for the years 1999 through 2003 relating to the CRA examinations noted above.  There are currently no federal examinations in progress.  In addition, we file tax returns in numerous states.  The states’ statutes of limitations are generally open for the same years as the federal statute of limitations.

 

In October 2004, the American Jobs Creation Act (the AJCA) was signed into law.  The AJCA includes a temporary incentive for U.S. multinationals to repatriate foreign earnings by providing an elective 85% dividends received deduction for certain cash dividends from controlled foreign corporations.  Under this law, in December 2005, we repatriated dividends of $483 million from earnings of foreign subsidiaries previously considered indefinitely reinvested.  The income tax expense associated with the repatriation was $34 million.  Excluding the repatriation discussed above, through December 31, 2007, no provision has been made for income taxes on the remaining undistributed earnings of our foreign subsidiaries, as we intend to indefinitely reinvest such earnings in our foreign subsidiaries.

 

Legal and Environmental Contingencies

Accruals for legal and environmental matters are recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.  Such liabilities are developed based on currently available information and require judgments as to probable outcomes.  Assumptions are based on historical experience and recommendations of legal counsel.  Environmental estimates include assumptions and judgments about particular sites, remediation alternatives and environmental regulations.  We believe our accruals are adequate.  However, due to uncertainties associated with these assumptions and judgments, as well as potential changes to governmental regulations and environmental technologies, actual costs could differ materially from the estimated amounts.

 

Self-Insurance

We self-insure a majority of our workers’ compensation costs.  Other workers’ compensation and general liability costs are subject to specific retention levels for certain policies and coverage.  Losses above these retention levels are transferred to insurance companies.  In addition, we self-insure the majority of our group health care costs.  All of the workers’ compensation, general liability and group health care claims are handled by third-party administrators. Consulting actuaries and administrators assist us in determining our liability for self-insured claims.  Losses are accrued based upon the aggregate self-insured claims determined by the third-party administrators, actuarial assumptions and our historical

 

29



 

experience.  While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our workers’ compensation, general liability and group health care costs.

 

PROSPECTIVE ACCOUNTING STANDARDS

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157), effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities and after November 15, 2008 for non-financial assets and liabilities.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements, but does not require additional fair value measurements.  We are currently evaluating the impact of SFAS No. 157, but do not expect it to have a material impact on our financial statements.

 

ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to various market risks, including commodity price risk, foreign currency risk and interest rate risk. To manage the volatility related to these risks, we enter into various derivative contracts.  The majority of these contracts are settled in cash.  However, such settlements have not had a significant effect on our liquidity in the past, nor are they expected to be significant in the future. We do not use derivatives for speculative or trading purposes.
 

Commodity Price Risk

We use financial derivative instruments, including fixed price swaps and options, to manage fluctuations in cash flows resulting from commodity price risk in the procurement of natural gas and other commodities including fuel and heating oil.  Our objective is to fix the price of a portion of the purchases of these commodities used in the manufacturing process.  The changes in the market value of such derivative instruments have historically been, and are expected to continue to be, highly effective at offsetting changes in price of the hedged item.  As of December 31, 2007, the maximum length of time over which we are hedging our exposure to the variability in future cash flows associated with natural gas forecasted transactions is one year.  As of December 31, 2007, we had monthly derivative instruments to hedge approximately 45% of our expected natural gas requirements in the first quarter of 2008 and approximately 25% for the remainder of 2008.  Excluding the impact of derivative instruments, the potential change in our expected 2008 and 2007 natural gas cost, based upon our expected annual usage and unit cost, resulting from a hypothetical 10% adverse price change, would be approximately $13 million for both years.  The changes in energy cost discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” include the impact of the natural gas derivative instruments.  See Note 10 of the Notes to Consolidated Financial Statements.

 

Foreign Currency Risk

Our principal foreign exchange exposure is the Canadian dollar.  Assets and liabilities outside the United States are primarily located in Canada. The functional currency for our Canadian operations is the U.S. dollar.  The Canadian dollar has strengthened against the U.S. dollar in each of the last three years.  In 2007, 2006 and 2005, the average exchange rates for the Canadian dollar strengthened against the U.S. dollar by 5.2%, 6.4% and 6.9%, respectively.  Our investments in foreign subsidiaries with a functional currency other than the U.S. dollar are not hedged.

 

We use financial derivative instruments, including forward contracts and options, primarily to protect against Canadian currency exchange risk associated with expected future cash flows.  These instruments typically have maturities of twelve months or less.  As of December 31, 2007, we had monthly Canadian dollar forward purchase contracts to hedge approximately 40% of our estimated requirements for 2008.

 

We performed a sensitivity analysis as of December 31, 2007 and 2006 that measures the change in the book value of our net monetary Canadian liability arising from a hypothetical 10% adverse movement in the exchange rate of the Canadian dollar relative to the U.S. dollar with all other variables held constant.  The potential change in fair value resulting from a hypothetical 10% adverse change in the Canadian dollar exchange rate at December 31, 2007 and 2006, would be $30 million and $29 million, respectively.  Fluctuations in Canadian dollar monetary assets and liabilities result in gains or losses, which are credited or charged to income.

 

 

30



 

Interest Rate Risk

Our earnings and cash flow are significantly affected by the amount of interest on our indebtedness.  Our financing arrangements include both fixed and variable rate debt in which changes in interest rates will impact the fixed and variable rate debt differently.  A change in the interest rate of fixed rate debt will impact the fair value of the debt, whereas a change in the interest rate on the variable rate debt will impact interest expense and cash flows.  Our objective is to mitigate interest rate volatility and reduce or cap interest expense within acceptable levels of market risk.  We periodically enter into interest rate swaps, caps or options to hedge interest rate exposure and manage risk within Company policy.  Any derivative would be specific to the debt instrument, contract or transaction, which would determine the specifics of the hedge.

 

We have entered into interest rate swap contracts effectively fixing the interest rate at 4.3% for $300 million of the Tranche B and Tranche C variable rate term loans.  These contracts extend until 2011, consistent with the maturity on our Tranche B and Tranche C term loans.  Changes in the fair value of the interest rate swap contracts are expected to be highly effective in offsetting the fluctuations in the variable interest rate, and are recorded in other comprehensive income until the underlying transaction is recorded. The accounting for the cash flow impact of the swap contracts is recorded as an adjustment to interest expense each period.  The fair value of our interest rate swap contracts at December 31, 2007 was a $3 million liability, included in other long-term liabilities.

 

We performed a sensitivity analysis as of December 31, 2007 and 2006 that measures the change in interest expense on our variable rate debt arising from a hypothetical 100 basis point adverse movement in interest rates.  Based on our outstanding variable rate debt as of December 31, 2007 and 2006, a hypothetical 100 basis point adverse change in interest rates would increase interest expense by approximately $6 million and $8 million, respectively.

 

The table below presents principal amounts by year of anticipated maturity for our debt obligations and related average interest rates based on the weighted average interest rates at the end of the period.  Variable interest rates disclosed do not attempt to project future interest rates and do not reflect the impact of our interest rate swap contracts.  This information should be read in conjunction with Note 9 of the Notes to Consolidated Financial Statements.

 

Short and Long-Term Debt

Outstanding as of December 31, 2007
(U.S. $, in millions)

 


2008

 


2009

 


2010

 


2011

 


2012

 

There-after

 


Total

 

Fair
Value

 

Bank term loans and revolver 7.3% average interest rate (variable)

 

$

4

 

$

313

 

$

4

 

$

466

 

$

 

 

$

 

 

$

787

 

$

771

 

U.S. senior notes 8.0% average interest rate (fixed)

 

2

 

 

 

 

 

 

 

1,100

 

1,175

 

2,277

 

2,215

 

U.S. industrial revenue bonds 6.5% average interest rate (fixed)

 

 

 

 

 

 

 

 

 

 

 

164

 

164

 

164

 

U.S. industrial revenue bonds 6.0% average interest rate (variable)

 

 

 

 

 

120

 

 

 

 

 

 

 

120

 

120

 

Other U.S.

 

5

 

3

 

1

 

1

 

 

 

1

 

11

 

11

 

Total debt

 

$

11

 

$

316

 

$

125

 

$

467

 

$

1,100

 

$

1,340

 

$

3,359

 

$

3,281

 

 

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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Financial Statements:

 

Page No.

 

 

 

Management’s Report on Internal Control Over Financial Reporting

 

33

Reports of Independent Registered Public Accounting Firm

 

34

Consolidated Balance Sheets - December 31, 2007 and 2006

 

36

For the years ended December 31, 2007, 2006 and 2005:

 

 

Consolidated Statements of Operations

 

37

Consolidated Statements of Stockholders’ Equity

 

38

Consolidated Statements of Cash Flows

 

39

Notes to Consolidated Financial Statements

 

40

 

The following consolidated financial statement schedule is included in Item 15(a):

 

II:  Valuation and Qualifying Accounts and Reserves

 

78

 

All other schedules specified under Regulation S-X have been omitted because they are not applicable, because they are not required or because the information required is included in the financial statements or notes thereto.

 

32



 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for Smurfit-Stone Container Corporation, as such term is defined in Rule 13a-15(f) under the Exchange Act.  As required by Rule 13a-15(c) under the Exchange Act, we carried out an evaluation, with the participation of our principal executive officer and principal financial officer, of the effectiveness of our internal control over financial reporting as of the end of the latest fiscal year.  The framework on which such evaluation was based is contained in the report entitled “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.  This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation.  Although there are inherent limitations in the effectiveness of any system of internal control over financial reporting, based on our evaluation, we have concluded that our internal control over financial reporting was effective as of December 31, 2007.

 

The effectiveness of our internal control over financial reporting as of December 31, 2007 has been audited by Ernst & Young LLP, our independent registered public accounting firm. Their report, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2007, is included herein.

 

/s/ Patrick J. Moore

 

Patrick J. Moore

 

Chairman and Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

 

 

 

 

/s/ Charles A. Hinrichs

 

Charles A. Hinrichs

 

Senior Vice President and Chief Financial Officer

 

(Principal Financial Officer)

 

 

 

 

 

 

 

/s/ Paul K. Kaufmann

 

Paul K. Kaufmann

 

Senior Vice President and Corporate Controller

 

(Principal Accounting Officer)

 

 

33



 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders of

Smurfit-Stone Container Corporation

 

We have audited Smurfit-Stone Container Corporation’s (the Company’s) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Smurfit-Stone Container Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Smurfit-Stone Container Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Smurfit-Stone Container Corporation as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007, and our report dated February 27, 2008, expressed an unqualified opinion thereon.

 

 

 /s/ Ernst & Young LLP

 

 Ernst & Young LLP

 

St. Louis, Missouri

February 27, 2008

 

34



 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders of

Smurfit-Stone Container Corporation

 

We have audited the accompanying consolidated balance sheets of Smurfit-Stone Container Corporation (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007.  Our audits also included the financial statement schedule listed in the Index at Item 15(a).  These financial statements and schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Smurfit-Stone Container Corporation at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

As discussed in Note 1 to the financial statements, in 2007 the Company changed its method of accounting for uncertain tax positions, and in 2006 the Company changed its method of accounting for purchases and sales of inventory with the same counterparty, share-based payments, and its method of accounting for defined benefit pension and other postretirement plans.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Smurfit-Stone Container Corporation’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2008, expressed an unqualified opinion thereon.

 

 

 /s/ Ernst & Young LLP

 

 Ernst & Young LLP

 

St. Louis, Missouri

February 27, 2008

 

 

35


 


SMURFIT-STONE CONTAINER CORPORATION

CONSOLIDATED BALANCE SHEETS

 

December 31, (In millions, except share data)

 

2007

 

2006

 

Assets

 

 

 

(Restated)

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

7

 

$

9

 

Receivables, less allowances of $7 in 2007 and 2006

 

170

 

166

 

Retained interest in receivables sold

 

249

 

179

 

Inventories

 

 

 

 

 

Work-in-process and finished goods

 

145

 

155

 

Materials and supplies

 

395

 

383

 

 

 

540

 

538

 

Prepaid expenses and other current assets

 

36

 

34

 

Total current assets

 

1,002

 

926

 

Net property, plant and equipment

 

3,454

 

3,731

 

Timberland, less timber depletion

 

32

 

43

 

Goodwill

 

2,727

 

2,873

 

Other assets

 

172

 

204

 

 

 

$

7,387

 

$

7,777

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current maturities of long-term debt

 

$

11

 

$

84

 

Accounts payable

 

582

 

542

 

Accrued compensation and payroll taxes

 

193

 

211

 

Interest payable

 

66

 

79

 

Income taxes payable

 

10

 

2

 

Current deferred income taxes

 

21

 

2

 

Other current liabilities

 

106

 

147

 

Total current liabilities

 

989

 

1,067

 

Long-term debt, less current maturities

 

3,348

 

3,550

 

Other long-term liabilities

 

834

 

1,010

 

Deferred income taxes

 

361

 

371

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, aggregate liquidation preference of $116; 25,000,000 shares authorized; 4,599,300 issued and outstanding

 

97

 

93

 

Common stock, par value $.01 per share; 400,000,000 shares authorized, 256,201,779 and 255,300,904 issued and outstanding in 2007 and 2006, respectively

 

3

 

3

 

Additional paid-in capital

 

4,066

 

4,040

 

Retained earnings (deficit)

 

(2,058

)

(1,945

)

Accumulated other comprehensive income (loss)

 

(253

)

(412

)

Total stockholders’ equity

 

1,855

 

1,779

 

 

 

$

7,387

 

$

7,777

 

 

See notes to consolidated financial statements.

 

36



 

SMURFIT-STONE CONTAINER CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

Year Ended December 31, (In millions, except per share data)

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

(Restated)

 

 

 

 

 

 

 

 

 

 

 

Net sales .

 

 

 

$

7,420

 

$

7,157

 

$

6,812

 

Costs and expenses

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

 

6,404

 

6,185

 

6,054

 

Selling and administrative expenses

 

 

 

633

 

677

 

689

 

Restructuring expense

 

 

 

16

 

43

 

321

 

(Gain) loss on disposal of assets

 

 

 

62

 

(24

)

1

 

Operating income (loss)

 

 

 

305

 

276

 

(253

)

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

(285

)

(341

)

(345

)

Loss on early extinguishment of debt

 

 

 

(29

)

(28

)

 

 

Foreign currency exchange gains (losses)

 

 

 

(52

)

1

 

(9

)

Other, net

 

 

 

(15

)

(18

)

(12

)

Loss from continuing operations before income taxes

 

 

 

(76

)

(110

)

(619

)

(Provision for) benefit from income taxes

 

 

 

(27

)

40

 

238

 

Loss from continuing operations

 

 

 

(103

)

(70

)

(381

)

Discontinued operations

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of income tax provisions of $9 in 2006 and $34 in 2005

 

 

 

 

 

14

 

51

 

Loss on disposition of discontinued operations, net of income tax provision of $174

 

 

 

 

 

(3

)

 

 

Net loss

 

 

 

(103

)

(59

)

(330

)

Preferred stock dividends and accretion

 

 

 

(12

)

(12

)

(12

)

Net loss available to common stockholders

 

 

 

$

(115

)

$

(71

)

$

(342

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per common share

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

 

 

$

(.45

)

$

(.32

)

$

(1.54

)

Income from discontinued operations

 

 

 

 

 

.05

 

.20

 

Loss on disposition of discontinued operations

 

 

 

 

 

(.01

)

 

 

Net loss available to common stockholders

 

 

 

$

(.45

)

$

(.28

)

$

(1.34

)

Weighted average shares outstanding

 

 

 

256

 

255

 

255

 

 

See notes to consolidated financial statements.

 

37



SMURFIT-STONE CONTAINER CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

(In millions, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Number

 

 

 

Number

 

 

 

Additional

 

Retained

 

Other

 

 

 

 

 

of

 

Par

 

of

 

 

 

Paid-In

 

Earnings

 

Comprehensive

 

 

 

 

 

Shares

 

Value, $ .01

 

Shares

 

Amount

 

Capital

 

(Deficit)

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2005, as reported

 

254,238,645

 

$

3

 

4,599,300

 

$

85

 

$

3,992

 

$

(1,507

)

$

(314

)

$

2,259

 

Restatement adjustments (See Note 2)

 

 

 

 

 

 

 

 

 

 

 

(25

)

 

 

(25

)

Balance at January 1, 2005, as restated

 

254,238,645

 

3

 

4,599,300

 

85

 

3,992

 

(1,532

)

(314

)

2,234

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss, as restated

 

 

 

 

 

 

 

 

 

 

 

(330

)

 

 

(330

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred hedge adjustments, net of tax expense of $18

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

29

 

Foreign currency translation adjustment, net of tax benefit of $4

 

 

 

 

 

 

 

 

 

 

 

 

 

(7

)

(7

)

Minimum pension liability adjustment, net of tax benefit of $44

 

 

 

 

 

 

 

 

 

 

 

 

 

(81

)

(81

)

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(389

)

Issuance of common stock under stock option and restricted stock plans

 

413,676

 

 

 

 

 

 

 

17

 

 

 

 

 

17

 

Preferred stock dividends and accretion

 

 

 

 

 

 

 

4

 

 

 

(12

)

 

 

(8

)

Balance at December 31, 2005

 

254,652,321

 

3

 

4,599,300

 

89

 

4,009

 

(1,874

)

(373

)

1,854

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(59

)

 

 

(59

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred hedge adjustments, net of tax benefit of $20

 

 

 

 

 

 

 

 

 

 

 

 

 

(31

)

(31

)

Minimum pension liability adjustment, net of tax expense of $64

 

 

 

 

 

 

 

 

 

 

 

 

 

107

 

107

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17

 

Adjustment to initially apply SFAS No. 158, net of tax benefit of $66

 

 

 

 

 

 

 

 

 

 

 

 

 

(115

)

(115

)

Issuance of common stock under stock option and restricted stock plans.

 

648,583

 

 

 

 

 

 

 

31

 

 

 

 

 

31

 

Preferred stock dividends and accretion

 

 

 

 

 

 

 

4

 

 

 

(12

)

 

 

(8

)

Balance at December 31, 2006

 

255,300,904

 

3

 

4,599,300

 

93

 

4,040

 

(1,945

)

(412

)

1,779

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(103

)

 

 

(103

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred hedge adjustments, net of tax expense of $3

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

5

 

Employee benefit plan liability adjustments, net of tax expense of $99

 

 

 

 

 

 

 

 

 

 

 

 

 

154

 

154

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56

 

Adjustment to initially apply FIN No. 48

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

2

 

Issuance of common stock under stock option and restricted stock plans

 

900,875

 

 

 

 

 

 

 

26

 

 

 

 

 

26

 

Preferred stock dividends and accretion

 

 

 

 

 

 

 

4

 

 

 

(12

)

 

 

(8

)

Balance at December 31, 2007

 

256,201,779

 

$

3

 

4,599,300

 

$

97

 

$

4,066

 

$

(2,058

)

$

(253

)

$

1,855

 

 

See notes to consolidated financial statements.

 

38



 

SMURFIT-STONE CONTAINER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Year Ended December 31, (In millions)

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

(Restated)

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(103

)

$

(59

)

$

(330

)

Adjustments to reconcile net loss to net cash provided by operating activities

 

 

 

 

 

 

 

Gain on disposition of discontinued operations

 

 

 

(171

)

 

 

Loss on early extinguishment of debt

 

29

 

28

 

 

 

Depreciation, depletion and amortization

 

360

 

377

 

408

 

Amortization of deferred debt issuance costs