10-K 1 a09-36247_310k.htm 10-K

Table of Contents

 

 

 

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, 2009

 

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.)

 

 

 

222 North LaSalle Street

 

 

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:

 

None

 

 

 

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

 

Common Stock, $0.01 Par Value

 

 

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

 

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 No x

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o  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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filero

Non-accelerated filer o

 

Smaller Reporting Company x

 

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 $44 million, based on the closing price of $0.17 per share of such stock on the Pink Sheets Electronic Quotation Service on June 30, 2009.

 

The number of shares outstanding of the registrant’s common stock as of February 26, 2010: 256,811,073

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Document

 

Part of Form 10-K Into Which
Document Is Incorporated

None

 

 

 

 

 



Table of Contents

 

SMURFIT-STONE CONTAINER CORPORATION

ANNUAL REPORT ON FORM 10-K

December 31, 2009

 

TABLE OF CONTENTS

 

 

 

Page No.

PART I

 

 

Item 1.

Business

2

Item 1A.

Risk Factors

14

Item 1B.

Unresolved Staff Comments

19

Item 2.

Properties

20

Item 3.

Legal Proceedings

21

Item 4.

Reserved

22

 

 

 

PART II

 

 

Item 5.

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

23

Item 6.

Selected Financial Data

25

Item 7.

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

27

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 8.

Financial Statements and Supplementary Data

44

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

100

Item 9A(T).

Controls and Procedures

100

Item 9B.

Other Information

100

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

100

Item 11.

Executive Compensation

102

Item 12.

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

126

Item 13.

Certain Relationships and Related Transactions, and Director Independence

127

Item 14.

Principal Accountant Fees and Services

128

 

 

 

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

130

 

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 one of the industry’s leading integrated manufacturers 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, 2009, our net sales were $5,574 million and our net loss attributable to common stockholders was $3 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.

 

BANKRUPTCY PROCEEDINGS

 

Chapter 11 Bankruptcy Filings

 

On January 26, 2009 (the Petition Date), we and our U.S. and Canadian subsidiaries (collectively, the Debtors) filed a voluntary petition (the Chapter 11 Petition) for relief under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court in Wilmington, Delaware (the U.S. Court). On the same day, our Canadian subsidiaries also filed to reorganize (the Canadian Petition) under the Companies’ Creditors Arrangement Act (the CCAA) in the Ontario Superior Court of Justice in Canada (the Canadian Court). Our operations in Mexico and Asia and certain U.S. and Canadian legal entities (the Non-Debtor Subsidiaries) were not included in the filing and will continue to operate outside of the Chapter 11 process.

 

Effective as of the opening of business on February 4, 2009, our common stock and our 7% Series A Cumulative Exchangeable Redeemable Convertible Preferred Stock (Preferred Stock) were delisted from the NASDAQ Global Select Market and the trading of these securities was suspended. Our common stock and Preferred Stock are now quoted on the Pink Sheets Electronic Quotation Service (Pink Sheets) under the ticker symbols “SSCCQ.PK” and “SSCJQ.PK,” respectively.

 

The filing of the Chapter 11 Petition and the Canadian Petition constituted an event of default under our debt obligations, and those debt obligations became automatically and immediately due and payable, although any actions to enforce such payment obligations were stayed as a result of the filing of the Chapter 11 Petition and the Canadian Petition.

 

We and our U.S. and Canadian subsidiaries are currently operating as “debtors-in-possession” under the jurisdiction of the U.S. Court and Canadian Court (the Bankruptcy Courts) and in accordance with the applicable provisions of the Bankruptcy Code and the CCAA. In general, the Debtors are authorized to continue to operate as ongoing businesses, but may not engage in transactions outside the ordinary course of business without the approval of the Bankruptcy Courts.

 

Debtor-In-Possession (DIP) Financing

 

In connection with filing the Chapter 11 Petition and the Canadian Petition on the Petition Date, we and certain of our affiliates filed a motion with the Bankruptcy Courts seeking approval to enter into a Post-Petition Credit Agreement (the DIP Credit Agreement). Final approval of the DIP Credit Agreement was granted by the U.S. Court on February 23, 2009 and by the Canadian Court on February 24, 2009. Amendments to the DIP Credit Agreement were entered into on February 25 and 27, 2009.

 

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The DIP Credit Agreement, as amended, provided for borrowings up to an aggregate committed amount of $750 million, consisting of a $400 million U.S. term loan (U.S. DIP Term Loan) for borrowings by SSCE; a $35 million Canadian term loan (Canadian DIP Term Loan) for borrowings by Smurfit-Stone Container Canada Inc. (SSC Canada); a $250 million U.S. revolving loan (U.S. DIP Revolver) for borrowings by SSCE and/or SSC Canada; and a $65 million Canadian revolving loan (Canadian DIP Revolver) for borrowings by SSCE and/or SSC Canada.

 

Under the DIP Credit Agreement, on January 28, 2009, we borrowed $440 million, consisting of a $400 million U.S. DIP Term Loan, a $35 million Canadian DIP Term loan and $5 million from the Canadian DIP Revolver. In accordance with the terms of the DIP Credit Agreement, on January 28, 2009, we used U.S. DIP Term Loan proceeds of $360 million, net of lenders’ fees of $40 million, and Canadian DIP Term Loan proceeds of $30 million, net of lenders’ fees of $5 million, to terminate the receivables securitization programs and repay all indebtedness outstanding of $385 million and to pay other expenses of $1 million. In addition, other fees and expenses of $17 million related to the DIP Credit Agreement were paid for with proceeds of $5 million from the Canadian DIP Revolver and available cash.

 

The outstanding principal amount of the loans under the DIP Credit Agreement, plus interest accrued and unpaid, were due and payable in full at maturity, which was January 28, 2010. During 2009, we made voluntary prepayments of $383 million on the U.S. DIP Term Loan with available cash provided by operating activities. In addition, during 2009, we repaid $17 million on the U.S. DIP Term Loan with proceeds from property sales. As of December 31, 2009, no borrowings were outstanding under the U.S. DIP Term Loan or the U.S. DIP Revolver.

 

During 2009, we repaid $35 million on the Canadian DIP Term Loan primarily with proceeds from property sales including $27 million from the sale of our Canadian timberlands. In addition, during 2009, we repaid $5 million on the Canadian DIP Revolver. As of December 31, 2009, no borrowings were outstanding under the Canadian DIP Term Loan or the Canadian DIP Revolver.

 

As all borrowings under the DIP Credit Agreement were paid in full as of December 31, 2009, we allowed the DIP Credit Agreement to expire on the maturity date of January 28, 2010.

 

Reorganization Process

 

The Bankruptcy Courts approved payment of certain of our pre-petition obligations, including employee wages, salaries and benefits, and the payment of vendors and other providers in the ordinary course for goods received and services rendered subsequent to the filing of the Chapter 11 Petition and Canadian Petition and other business-related payments necessary to maintain the operation of our business. We have retained legal and financial professionals to advise us on the bankruptcy proceedings.

 

Immediately after filing the Chapter 11 Petition and Canadian Petition, we notified all known current or potential creditors of the bankruptcy filings. Subject to certain exceptions under the Bankruptcy Code and the CCAA, our bankruptcy filings automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against us or our property to recover, collect or secure a claim arising prior to the filing of the Chapter 11 Petition and Canadian Petition. Thus, for example, most creditor actions to obtain possession of property from us, or to create, perfect or enforce any lien against our property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and until the Bankruptcy Courts lift the automatic stay.

 

As required by the Bankruptcy Code, the United States Trustee for the District of Delaware (the U.S. Trustee) appointed an official committee of unsecured creditors (the Creditors’ Committee). The Creditors’ Committee and its legal representatives have a right to be heard on all matters that come before the U.S. Court with respect to us. A monitor was appointed by the Canadian Court with respect to proceedings before the Canadian Court.

 

Under the Bankruptcy Code, the Debtors generally must assume or reject pre-petition executory contracts, including but not limited to real property leases, subject to the approval of the Bankruptcy Courts and certain other conditions. In this context, “assumption” means that we agree to perform our obligations and cure all existing defaults under the contract or lease, and “rejection” means that we are

 

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relieved from our obligations to perform further under the contract or lease, but are subject to a pre-petition claim for damages for the breach thereof subject to certain limitations. Any damages resulting from rejection of executory contracts that are permitted to be recovered under the Bankruptcy Code will be treated as liabilities subject to compromise unless such claims were secured prior to the Petition Date.

 

Since the Petition Date, we received approval from the Bankruptcy Courts to reject a number of leases and other executory contracts of various types. We are continuing to review all of our executory contracts and unexpired leases to determine which additional contracts and leases we will reject. We expect that additional liabilities subject to compromise will arise due to rejection of executory contracts, including leases, and from the determination of the U.S. Court (or agreement by parties in interest) of allowed claims for contingencies and other disputed amounts. We also expect that the assumption of additional executory contracts and unexpired leases will convert certain of the liabilities shown on the accompanying consolidated balance sheet as liabilities subject to compromise to liabilities not subject to compromise. Due to the uncertain nature of many of the potential claims, we cannot project the magnitude of such claims with certainty.

 

In June 2009, the Bankruptcy Courts entered an order establishing August 28, 2009, as the bar date for potential creditors to file claims.  The bar date is the date by which certain claims against us must be filed if the claimants wish to receive any distribution in the bankruptcy cases. Proof of claim forms received after the bar date are typically not eligible for consideration of recovery as part of our bankruptcy cases. Creditors were notified of the bar date and the requirement to file a proof of claim with the Bankruptcy Courts. Differences between liability amounts estimated by us and claims filed by creditors are being investigated and, if necessary, the Bankruptcy Courts will make a final determination of the allowable claim. The determination of how liabilities will ultimately be treated cannot be made until the Bankruptcy Courts approve a plan of reorganization. Accordingly, the ultimate amount or treatment of such liabilities is not determinable at this time.

 

In September 2009, the U.S. Trustee denied a request by certain holders of our common stock and Preferred Stock to form an official equity committee to represent the interests of equity holders on matters before the U.S. Court. The equity holders subsequently filed a motion for the appointment of an equity committee with the U.S. Court. In December 2009, the U.S. Court entered an order denying the motion for an order appointing an official committee of equity security holders.

 

Proposed Plan of Reorganization and Exit Credit Facilities

 

In order to successfully emerge from bankruptcy, we must propose and obtain confirmation by the Bankruptcy Courts of a plan of reorganization that satisfies the requirements of the Bankruptcy Code and the CCAA. A plan of reorganization would resolve our pre-petition obligations, set forth the revised capital structure of the newly reorganized entity and provide for corporate governance subsequent to our exit from bankruptcy.

 

Under the priority scheme established by the Bankruptcy Code and the CCAA, unless creditors agree otherwise, pre-petition liabilities and post-petition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation of a plan or plans of reorganization. No assurance can be given as to what values, if any, will be ascribed to each of these constituencies or what types or amounts of distributions, if any, they would receive. Because of such possibilities, the value of our liabilities and securities, including our common stock, is highly speculative. Appropriate caution should be exercised with respect to existing and future investments in any of our liabilities and/or securities.

 

The Proposed Plan of Reorganization

On December 1, 2009, the Debtors filed their Joint Proposed Plan of Reorganization and Plan of Compromise and Arrangement and Disclosure Statement with the U.S. Court. On December 22, 2009, January 27, 2010 and February 4, 2010 the Debtors filed amendments to the Proposed Plan of Reorganization (the Proposed Plan of Reorganization) and to the Disclosure Statement. Key elements of the Proposed Plan of Reorganization were as follows:

 

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·                  we and our subsidiary, SSCE, would merge and become the reorganized company (Reorganized Smurfit-Stone) that would be governed by a board of directors that will include Patrick J. Moore, our current Chairman and Chief Executive Officer, Steven J. Klinger, our current President and Chief Operating Officer, and a number of independent directors, including a non-executive chairman, to be selected by the Creditors’ Committee in consultation with the Debtors;

 

·                  all of the existing secured debt of the Debtors would be fully repaid with cash;

 

·                  substantially all of the existing unsecured debt and claims against SSCE, including all of the outstanding unsecured senior notes, would be exchanged for common stock of the Reorganized Smurfit-Stone, which would be traded on either the New York Stock Exchange (NYSE) or the NASDAQ market, with holders of unsecured claims against SSCE of less than or equal to $10,000 entitled to receive payment of 100% of such claims in cash, and eligible cash-out participants having the opportunity to indicate on their ballot the percentage amount of their allowed claim they would be willing to receive in cash in lieu of common stock;

 

·                  all of our existing equity securities would be cancelled and existing shareholders of our common and Preferred Stock would receive no distribution on account of their shares;

 

·                  the assets of the Canadian Debtors would be sold to a newly-formed Canadian subsidiary of Reorganized Smurfit-Stone free and clear of existing claims, liens and interests in exchange for (i) the repayment in cash of the secured debt obligations of the Canadian Debtors, (ii) cash to the Canadian Debtors’ unsecured creditors if they vote to accept the Proposed Plan of Reorganization and (iii) the assumption of certain liabilities and obligations of the Canadian Debtors; and

 

·                  Reorganized Smurfit-Stone and our newly-formed Canadian subsidiary would assume all of the existing obligations under the qualified defined benefit pension plans in the United States and Canada sponsored by the Debtors, as well as all of the collective bargaining agreements in the United States and Canada between the Debtors and their labor unions.

 

The Proposed Plan of Reorganization will not become effective until certain conditions are satisfied or waived, including: (i) entry of an order by the Bankruptcy Courts confirming the Proposed Plan of Reorganization, (ii) all actions, documents and agreements necessary to implement the Proposed Plan of Reorganization having been effected or executed, (iii) access of the Debtors to funding under the exit credit facility and (iv) specified claims of the Debtors’ secured lenders having been paid in full pursuant to the Proposed Plan of Reorganization.

 

On January 14, 2010, the U.S. Court granted approval to extend the Debtors’ exclusive right to file a plan of reorganization to July 21, 2010, and granted the Debtors’ approval to solicit acceptance of a plan of reorganization until May 21, 2011. If the Debtors’ exclusivity period lapses, any party in interest would be able to file a plan of reorganization. In addition to being voted on by holders of impaired claims and equity interests, a plan of reorganization must satisfy certain requirements of the Bankruptcy Code and the CCAA and must be approved, or confirmed, by the Bankruptcy Courts in order to become effective.

 

On January 29, 2010, the U.S. Court approved the Debtors’ Disclosure Statement as containing adequate information for the holders of impaired claims and equity interests, who are entitled to vote to accept or reject the Debtors’ Proposed Plan of Reorganization.

 

The Bankruptcy Code requires the U.S. Court, after appropriate notice, to hold a hearing on confirmation of a plan of reorganization. The confirmation hearing on the Proposed Plan of Reorganization is scheduled to begin on April 14, 2010. The confirmation hearing may be adjourned from time to time by the Bankruptcy Court without further notice except for an announcement of the adjourned date made at the confirmation hearing or any subsequent adjourned confirmation hearing. There can be no assurance at this time that the Proposed Plan of Reorganization will be confirmed by the Bankruptcy Courts or that any such plan will be implemented successfully.

 

Exit Credit Facilities

On January 14, 2010, the U.S. Court entered an order authorizing the Debtors to (i) enter into an exit term loan facility engagement and arrangement letter and fee letters, (ii) pay associated fees and expenses

 

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and (iii) furnish related indemnities. On February 1, 2010, we filed a motion with the U.S. Court seeking approval to enter into a senior secured term loan exit facility (Term Loan Facility).

 

On February 16, 2010, the U.S. Court granted the motion and authorized us and certain of our affiliates to enter into the Term Loan Facility. On the same date, the U.S. Court also granted our February 3, 2010 motion seeking approval to enter into a commitment letter and fee letters for an asset-based revolving credit facility (the ABL Revolving Facility) (together with the Term Loan Facility, the Exit Credit Facilities). Based on such approvals, on February 22, 2010, we and certain of our subsidiaries entered into the Term Loan Facility that provides for an aggregate term loan commitment of $1,200 million. In addition, we entered into a commitment letter and related fee letters for the ABL Revolving Facility with aggregate commitments of $650 million (including a $100 million Canadian Tranche), which we expect to enter into prior to exiting bankruptcy. The ABL Revolving Facility will include a $150 million sub-limit for letters of credit. The commitments for the Term Loan Facility and the ABL Revolving Facility will terminate on July 16, 2010 unless our emergence from bankruptcy and satisfaction of certain funding date conditions under the Term Loan Facility and the ABL Revolving Facility occur on or prior to such date, and the Term Loan Facility is funded.

 

We are permitted, subject to obtaining lender commitments, to add one or more incremental facilities to the Term Loan Facility in an aggregate amount up to $400 million. Each incremental facility is conditioned on (a) there existing no defaults, (b) in the case of incremental term loans, such loans have a final maturity no earlier than, and a weighted average life no shorter than, the Term Loan Facility, and (c) after giving effect to one or more incremental facilities, the consolidated senior secured leverage ratio shall be less than 3.00 to 1.00. If the interest rate spread applicable to any incremental facility exceeds the interest rate spread applicable to the Term Loan Facility by more than 0.25%, then the interest rate spread applicable to the Term Loan Facility will be increased to equal the interest rate spread applicable to the incremental facility.

 

On the date we emerge from bankruptcy, the Term Loan will be funded and borrowings are expected to be available under the ABL Revolving Facility. The proceeds of the borrowings under the Term Loan Facility, together with available cash will be used to repay our outstanding secured indebtedness under our pre-petition Credit Facility and pay fees, costs and expenses of approximately $50 million related to and contemplated by the Exit Credit Facilities and the Proposed Plan of Reorganization. Borrowings under the ABL Revolver Facility will be available for working capital purposes, capital expenditures, permitted acquisitions and general corporate purposes.

 

The term loan (Term Loan) matures six years from the funding date of the Term Loan Facility and is repayable in equal quarterly installments of $3 million beginning on September 30, 2010, with the balance payable at maturity. Additionally, following the end of each fiscal year, varying percentages of our excess cash flow, as defined in the Term Loan Facility, based on certain agreed levels of secured leverage ratios, must be used to repay outstanding principal amounts under the Term Loan. Subject to specified exceptions, the Term Loan Facility will also require us to use the net proceeds of asset sales and the net proceeds of the incurrence of indebtedness to repay outstanding borrowings under the Term Loan Facility.

 

The Term Loan will bear interest at our option at a rate equal to: (A) 3.75% plus the alternate base rate (Term Loan ABR) defined as the greater of: (i) the U.S. prime rate, (ii) the overnight federal funds rate plus 0.50%, or (iii) the one month adjusted LIBOR rate plus 1.0%, provided that the Term Loan ABR shall never be lower than 3.00% per annum, or (B) the adjusted LIBOR rate plus 4.75%, provided that the adjusted LIBOR rate shall never be lower than 2.00% per annum.

 

The ABL revolver loan (ABL Revolver) will mature four years from the funding date of the ABL Revolving Facility. We will have the option to borrow at a rate equal to: (A) the base rate, defined as the greater of 2.50% plus:(i) the US Prime Rate, (ii) the overnight federal funds rate plus 0.50% or (iii) LIBOR rate plus 1.0%, or (B) the LIBOR rate plus 3.50% for the first 90 days then 3.25% thereafter. The rate could be adjusted in the future from 3.25% to a rate as high as 3.75% based on the average historical utilization under the ABL Revolving Facility. We would also pay either a 0.50% or 0.75% per annum unused commitment fee based on the average historical utilization under the ABL Revolving Facility. The ABL Revolving Facility borrowings are subject to a borrowing base derived from a formula based on certain eligible accounts receivable and inventory, less certain reserves.

 

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Borrowings under the Exit Credit Facilities will be guaranteed by us and certain of our subsidiaries, and would be secured by first priority liens and second priority liens on substantially all our presently owned and hereafter acquired assets and those of each of our subsidiaries party to the Exit Credit Facilities, subject to certain exceptions and permitted liens.

 

The Exit Credit Facilities contain affirmative and negative covenants that impose restrictions on our financial and business operations and those of certain of our subsidiaries, including their ability to incur indebtedness, incur liens, make investments, sell assets, pay dividends or make acquisitions. The Exit Credit Facilities contain events of default customary for financings of this type.

 

Going Concern Matters

 

The consolidated financial statements and related notes have been prepared assuming that we will continue as a going concern, although our bankruptcy filings raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to restructure our obligations in a manner that allows us to obtain confirmation of a plan of reorganization by the Bankruptcy Courts. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or to the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern.

 

Financial Reporting Considerations

 

For periods subsequent to the bankruptcy filings, we have applied the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 852, Reorganizations (ASC 852), in preparing the consolidated financial statements. ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred in the bankruptcy proceedings have been recorded in reorganization items in the consolidated statement of operations. In addition, pre-petition obligations that may be impacted by the bankruptcy reorganization process have been classified on the consolidated balance sheet in liabilities subject to compromise. These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Courts, even if they may be settled for lesser or greater amounts.

 

Reorganization Items

Our reorganization items directly related to the process of our reorganizing under Chapter 11 and the CCAA, as recorded in our 2009 consolidated statement of operations, consist of the following:

 

 

 

2009

 

 

 

 

 

Provision for rejected/settled executory contracts and leases

 

$

(78

)

Professional fees

 

(56

)

Accounts payable settlement gains

 

11

 

Reversal of accrued post-petition unsecured interest expense

 

163

 

Total reorganization items

 

$

40

 

 

Provision for rejected/settled executory contracts and leases for 2009 includes a $9 million special termination benefits charge due to funding obligations related to certain non-qualified pension plans.

 

Professional fees directly related to the reorganization include fees associated with advisors to us, the Creditors’ Committee and certain secured creditors.

 

Under the Proposed Plan of Reorganization, interest expense on the unsecured senior notes subsequent to the Petition Date would not be paid. In addition, holders of our Preferred Stock would not be entitled to receive any amounts under the Proposed Plan of Reorganization. As a result, we concluded it is not probable that interest expense or Preferred Stock dividends that were accrued from the Petition Date

 

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through November 30, 2009 would be allowed claims. In December 2009, we recorded income in reorganization items for the reversal of $163 million of accrued post-petition unsecured interest expense in the consolidated statement of operations. Preferred stock dividends that were accrued post-petition and included in liabilities subject to compromise were reversed in December 2009.

 

Net cash paid for reorganization items for 2009 totaled $41 million related to professional fees.

 

Reorganization items exclude employee severance and other restructuring charges recorded during 2009.

 

Other Bankruptcy Related Costs

Debtor-in-possession debt issuance costs of $63 million were incurred and paid during 2009 in connection with entering into the DIP Credit Agreement, and are separately presented in the 2009 consolidated statement of operations.

 

Liabilities Subject to Compromise

Liabilities subject to compromise consist of the following:

 

 

 

December 31, 2009

 

 

 

 

 

Unsecured debt

 

$

2,439

 

Accounts payable

 

339

 

Interest payable

 

47

 

Retiree medical obligations

 

176

 

Pension obligations

 

1,136

 

Unrecognized tax benefits

 

46

 

Executory contracts and leases

 

72

 

Other

 

17

 

Liabilities subject to compromise

 

$

4,272

 

 

Liabilities subject to compromise represent pre-petition unsecured obligations that will be settled under a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-Chapter 11 or CCAA liabilities are stayed. Pre-petition liabilities that are subject to compromise are reported at the amounts expected to be allowed, even if they may be settled for lesser or greater amounts. These liabilities represent the amounts expected to be allowed on known or potential claims to be resolved through the Chapter 11 and CCAA process, and remain subject to future adjustments arising from negotiated settlements, actions of the Bankruptcy Courts, rejection of executory contracts and unexpired leases, the determination as to the value of collateral securing the claims, proofs of claim, or other events. Liabilities subject to compromise also include certain items, such as qualified defined benefit pension and retiree medical obligations that may be assumed under the Proposed Plan of Reorganization, and as such, may be subsequently reclassified to liabilities not subject to compromise.

 

The Bankruptcy Courts approved payment of certain pre-petition obligations, including employee wages, salaries and benefits, and the payment of vendors and other providers in the ordinary course for goods and services received after the filing of the Chapter 11 Petition and the Canadian Petition and other business-related payments necessary to maintain the operation of our business. Obligations associated with these matters are not classified as liabilities subject to compromise.

 

We have rejected certain pre-petition executory contracts and unexpired leases with respect to our operations with the approval of the Bankruptcy Courts and may reject additional contracts or unexpired leases in the future. Damages resulting from rejection of executory contracts and unexpired leases are generally treated as general unsecured claims and are classified as liabilities subject to compromise.

 

FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS

 

We operate as one segment. For financial information 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
 

Our operations include 12 paper mills (10 located in the United States and two in Canada), 110 container plants (90 located in the United States, 14 in Canada, three in Mexico, two in China and one in Puerto Rico), 29 reclamation plants located in the United States and one lamination plant located in Canada.  Also, we operate wood harvesting facilities in Canada and the United States.  Our primary products include:

 

·                  containerboard;

·                  corrugated containers;

·                  market pulp;

·                  kraft paper; 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 2009, 2008 and 2007 represented 71%, 63% and 60%, respectively, of our total net sales.

 

Our containerboard mills produce a full line of containerboard, which is used primarily in the production of corrugated packaging.  We produced 3,395,000 tons of unbleached kraft linerboard, 794,000 tons of white top linerboard and 1,844,000 tons of medium in 2009.  Our containerboard mills and corrugated container operations are highly integrated, with the majority of our containerboard used internally by our corrugated container operations.  In 2009, our corrugated container plants consumed 4,406,000 tons of containerboard.  Net sales of containerboard to third parties for 2009, 2008 and 2007 represented 17%, 20% and 21%, respectively, of our total net sales.

 

Our paper mills also produce market pulp, solid bleached liner (SBL), kraft paper, and other specialty products.  We produce southern hardwood pulp, bleached southern softwood pulp and fluff pulp, which are sold to manufacturers of paper products, including 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 29 reclamation facilities 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 2009, our paper mills consumed 1,952,000 tons of the fiber reclaimed and brokered by our reclamation operations, representing an integration level of approximately 38%.

 

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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)

 

 

 

2009

 

2008

 

2007

 

Mill Production

 

 

 

 

 

 

 

Containerboard

 

6,033

 

6,853

 

7,336

 

Market pulp

 

294

 

470

 

574

 

Solid bleached sulfate (SBS/SBL)

 

130

 

125

 

269

 

Kraft paper

 

110

 

145

 

177

 

Corrugated containers sold (in billion square feet)

 

67.1

 

71.5

 

74.8

 

Fiber reclaimed and brokered

 

5,182

 

6,462

 

6,842

 

 

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 to third parties in 2009, 2008 and 2007 were 2,245,000, 3,024,000 and 3,381,000, 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.

 

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.

 

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RESEARCH AND NEW PRODUCT DEVELOPMENT

 

The majority of our research and new product 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 each of 2009, 2008 and 2007, we spent approximately $3 million 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 19,000 employees at December 31, 2009, of which approximately 11,000 (58%) were employees represented by collective bargaining units.  Approximately 15,400 (81%) of our total employees are employed at U.S. operations.  The expiration dates of union contracts for our paper mills are as follows:

 

·                  Florence, South Carolina - August 2009

·                  La Tuque, Quebec, Canada - August 2009

·                  West Point, Virginia - September 2009

·                  Hodge, Louisiana - June 2010

·                  Jacksonville, Florida -  June 2010

·                  Matane, Quebec, Canada — April 2011

·                  Hopewell, Virginia - July 2011

·                  Panama City, Florida - March 2012

·                  Fernandina Beach, Florida - June 2012

·                  Coshocton, Ohio - July 2012

 

Labor agreements covering approximately 1,200 employees at our Florence, South Carolina, La Tuque, Quebec and West Point, Virginia paper mills expired in 2009.  Negotiations to reach new agreements have been unsuccessful.  While we consider relations with these employees to be good and we do not expect a work stoppage to occur, the outcome of the negotiations regarding the expired labor agreements are not entirely within our control and, therefore, we can provide no assurance regarding the outcome or the timing of the negotiations or their effect on our results of operations.

 

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 U.S. Congress and several states in which we operate are considering legislation that would mandate the reduction of greenhouse gas emissions from facilities in various sectors of the economy, including manufacturing. The United States Environmental Protection Agency (EPA) is also taking steps to regulate greenhouse gas emissions under certain Clean Air Act programs.  Enactment of new climate change laws or regulations may require capital expenditures to modify assets to meet greenhouse gas reduction requirements, increase energy costs above the level of general inflation, and could result in direct compliance and other costs.  It is not yet known when such greenhouse gas emission laws or regulations may come into effect, nor is it currently possible to estimate the costs of compliance with such laws or regulations.  We have taken voluntary actions to reduce greenhouse gas emissions from our manufacturing operations and, with our membership in the Chicago Climate Exchange, have committed to reduce these emissions by 6% over baseline (emissions from 1998 to 2001) by the end of 2010.  We expect that we will not be disproportionately affected by new climate change laws or regulations as compared to our competitors who have comparable, energy-intensive operations in the United States.

 

In 2004, EPA promulgated a Maximum Achievable Control Technology (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.  All projects required to bring us into compliance with the now vacated Boiler MACT requirements were completed.  We spent approximately $80 million on Boiler MACT projects principally through 2007 with insignificant amounts spent in 2008 and 2009 as the projects neared completion.  It is presently unclear whether future rulemaking will require us to install additional pollution control equipment on industrial boilers at our facilities.

 

Excluding the spending on Boiler MACT projects described above and other one-time compliance costs, for the past three years we spent an average of approximately $4 million annually on capital expenditures for environmental purposes. We anticipate additional capital expenditures related to environmental compliance in the future.  Since our principal competitors are subject to comparable environmental standards, it is our opinion, based on current information, that compliance with existing 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

 

Set forth below is certain information relating to our current executive officers:

 

Mathew Blanchard, born September 9, 1959, was appointed Senior Vice President and General Manager - Board Sales Division in March 2008, and prior to that had been Vice President and General Manager — Board Sales Division since July 2000.

 

Matthew T. Denton, born December 11, 1962, was appointed Senior Vice President - Business Planning and Analysis in February 2010.  He had been Vice President - Business Planning and Analysis since January 2007 and prior to that had been Vice President of Business Transformation since he joined Smurfit-Stone in June 2006.  Prior to joining Smurfit-Stone, Mr. Denton was employed by Georgia-Pacific Corporation from 1992 to 2006, where he held positions of increasing responsibility, including Vice President of Strategic Sourcing for Georgia-Pacific’s North American consumer products and bleached pulp and paper operations, and Vice President of Finance for the containerboard and packaging segment and pulp division.

 

Michael P. Exner, born June 20, 1954, was appointed Senior Vice President and General Manager — Containerboard Mill Division on January 1, 2010.  Prior to joining Smurfit-Stone, Mr. Exner was employed by International Paper Company, most recently as the Vice President of Manufacturing — Containerboard since July 2003, Director of Manufacturing — Commercial Printing and Imaging Papers from February 1997 to June 2003 and Mill Manager from June 1992 to January 1997.

 

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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.

 

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.

 

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.

 

Steven J. Klinger, born March 5, 1959, was appointed President and Chief Operating Officer on May 11, 2006. He was appointed to the board of Smurfit-Stone Container Corporation on December 11, 2008 and is a director of Navistar International Corporation.  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 Corporate Strategy in November 2008. He had been Senior Vice President of Manufacturing for the Container Division since 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. Mr. Moore has announced his intention to retire as Chairman and Chief Executive Officer within one year after our emergence from bankruptcy.  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.

 

John R. Murphy, born June 28, 1950, was appointed Senior Vice President and Chief Financial Officer on May 18, 2009.  Mr. Murphy announced his resignation, which was effective as of February 25, 2010.  Prior to joining Smurfit-Stone, Mr. Murphy was employed by Accuride Corporation, most recently as the President, Chief Executive Officer and Director from October 2007 to September 2008, President and Chief Operating Officer from January 2007 to October 2007, President and Chief Financial Officer from February 2006 to December 2006 and Executive Vice President/Finance and Chief Financial Officer from March 1998 to January 2006.  Mr. Murphy is a director of O’Reilly Automotive, Inc..

 

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.

 

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Steven C. Strickland, born July 12, 1952, was appointed Senior Vice President of Container Operations in November 2008.  He had been Senior Vice President of Sales for the Container Division since 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.

 

On January 26, 2009, the date of the filing of the Chapter 11 Petition and the Canadian Petition, each of the executive officers listed, other than Messrs. Denton, Exner and Murphy, served as an executive officer of the Company.

 

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

 

Bankruptcy Related Risk Factors

 

We filed for protection under Chapter 11 of the Bankruptcy Code and our Canadian subsidiaries filed to reorganize under the CCAA on January 26, 2009.

 

During our bankruptcy proceedings, our operations and our ability to execute our business plan are subject to the risks and uncertainties associated with bankruptcy. Risks and uncertainties associated with our bankruptcy proceedings include the following:

·                  Our ability to obtain court approval with respect to motions filed in the bankruptcy proceedings from time to time;

·                  Our ability to obtain confirmation and consummate our Proposed Plan of Reorganization with respect to the bankruptcy proceedings;

·                  Our ability to obtain and maintain commercially reasonable terms with vendors and service providers;

·                  Our ability to renew contracts that are critical to our operations;

·                  Our ability to retain management and other key individuals;

·                  There can be no assurance that the Creditors’ Committee will support our positions on matters to be presented to the Bankruptcy Courts in the future; and

·                  Disagreements between us and the Creditors’ Committee could protract the Chapter 11 proceedings, negatively impact our ability to operate and delay our emergence from the Chapter 11 proceedings.

·                  Objections to the Plan of Reorganization could protract the Chapter 11 proceedings.

 

These risks and uncertainties could affect our business and operations in various ways. For example, negative events or publicity associated with our bankruptcy proceedings could adversely affect our sales and relationships with our customers, as well as with vendors and employees, which in turn could adversely affect our operations and financial condition, particularly if the bankruptcy proceedings are protracted. Also, transactions outside the ordinary course of business are subject to the prior approval of the Bankruptcy Courts, which may limit our ability to respond timely to certain events or take advantage of certain opportunities.

 

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Because of the risks and uncertainties associated with our bankruptcy proceedings, the ultimate impact that events that occur during these proceedings will have on our business, financial condition and results of operations cannot be accurately predicted or quantified. We cannot provide any assurance as to what values, if any, will be ascribed in our bankruptcy proceedings to our various pre-petition liabilities, common stock and other securities. As a result of the bankruptcy proceedings, our currently outstanding common and Preferred Stock is expected to have no value and would be canceled under our Proposed Plan of Reorganization and, therefore, we believe that the value of our various pre-petition liabilities and other securities is highly speculative. Accordingly, caution should be exercised with respect to existing and future investments in any of these liabilities or securities.

 

Our stock is no longer listed on a national securities exchange. It will likely be more difficult for stockholders and investors to sell our common stock or to obtain accurate quotations of the share price of our common stock.

 

Effective February 4, 2009, the NASDAQ Global Select Market delisted our common stock from trading. Our stock is now traded over the counter and is quoted on the Pink Sheets.  The trading of our common stock over the counter negatively impacts the trading price of our common stock.  In addition, securities that trade on the Pink Sheets are not eligible for margin loans and make our common stock subject to the provisions of Rule 15g-9 of the Securities Exchange Act of 1934, commonly referred to as the “penny stock rule.” In connection with the delisting of our stock, there may also be other negative implications, including the potential loss of confidence in our Company by suppliers, customers and employees and the loss of institutional investor interest in our common stock.

 

Failure to obtain confirmation of the Proposed Plan of Reorganization may result in liquidation or alternative plan on less favorable terms.

 

Although we believe that the Proposed Plan of Reorganization will satisfy all requirements for confirmation under the Bankruptcy Code and sanction under the CCAA, there can be no assurance that the Bankruptcy Courts will reach the same conclusion.  In addition, confirmation of the Proposed Plan of Reorganization is subject to certain conditions.  Failure to meet any of these conditions could result in the Proposed Plan of Reorganization not being confirmed.  If the Proposed Plan of Reorganization is not confirmed there can be no assurance that the Chapter 11 Petition will continue rather than be converted into Chapter 7 liquidation cases or that any alternative plan or plans of reorganization would be on terms as favorable to the holders of claims.  If a liquidation or protracted reorganization of our business or operations were to occur, there is a substantial risk that our going concern value would be substantially eroded to the detriment of all stakeholders.

 

The market for the new common stock of the Reorganized Smurfit-Stone may not develop.  The common stock might also have certain restrictions and could incur significant price fluctuations, depression, dilution or liquidity.

 

There can be no assurance that an active market for the Reorganized Smurfit-Stone common stock (New Common Stock) will develop, nor can any assurance be given as to the prices at which New Common Stock will trade.  It is not known to what extent some stockholders will sell our New Common Stock shortly after issuance.  Any sales of substantial amounts of the New Common Stock in the public market, or the perception that such sales might occur, could cause declines in the market price.  We do not anticipate that cash dividends or other distributions will be made by Reorganized Smurfit-Stone with respect to the New Common Stock in the near future.  Further, such restrictions on dividends may have an adverse impact on the market demand for the New Common Stock as certain institutional investors may invest only in dividend-paying equity securities or may operate under other restrictions that may prohibit or limit their ability to invest in the New Common Stock.  The trading prices of our New Common Stock may fluctuate significantly, depending on these and many other factors, some of which may be beyond our control and may not be directly related to our operating performance.

 

Although we have agreed to use our reasonable efforts to obtain the listing of New Common Stock for trading on the NYSE or the NASDAQ Stock Market, there can be no assurance that we will be able to

 

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obtain this listing or, even if such listing is obtained, that an active or liquid trading market will develop for our New Common Stock.

 

The New Common Stock to be issued under the Proposed Plan of Reorganization has not been registered under the Securities Act of 1933, as amended, any state securities laws or “blue sky” laws or the laws of any other jurisdiction.  Absent such registration, the New Common Stock may be offered or sold only in certain transactions.   In addition, the New Common Stock to be issued to any Canadian residents would be issued under an exemption from the prospectus requirements under applicable Canadian securities laws.  Any resale of our New Common Stock may be subject to resale restrictions under applicable Canadian securities laws.

 

Other Risk Factors

 

Global economic conditions and credit tightening materially and adversely affect our business.

 

Our business has been materially and adversely affected by changes in regional, national and global economic conditions. Such changes have included or may include reduced consumer spending, reduced availability of capital, inflation, deflation, adverse changes in interest rates, reduced energy availability and increased energy costs and government initiatives to manage economic conditions. Continuing instability in financial markets and the deterioration of other national and global economic conditions may have further materially adverse effects on our operations, financial results or liquidity, including the following:

 

·                  the financial stability of our customers or suppliers may be compromised, which could result in additional bad debts for us or non-performance by suppliers; or

·                  one or more of the financial institutions that make available our Exit Credit Facilities may become unable to fulfill their funding obligations, which could materially and adversely affect our liquidity.

 

Uncertainty about current economic conditions may cause consumers of our products to postpone or refrain from spending in response to tighter credit, negative financial news, declines in income or asset values, or other adverse economic events or conditions, which could materially reduce demand for our products and materially and adversely affect our financial condition and operating results. Further deterioration of economic conditions would likely exacerbate these adverse effects, result in wide-ranging, adverse and prolonged effects on general business conditions, and materially and adversely affect our operations, financial results and liquidity.

 

Our industry is cyclical and highly competitive.

 

Our operating results reflect the industry’s general cyclical pattern. In addition, the industry is capital intensive, which leads to high fixed costs.  These conditions have contributed to substantial price competition and volatility in the industry.  The majority of our products have been and are likely to continue to be subject to extreme price competition. Some segments of our industry have capacity in excess of demand, which may require us to take downtime periodically to reduce inventory levels during periods of weak demand. Decreases in prices for our products 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. Some 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. In addition, our filing the Chapter 11 Petition and the Canadian Petition and the associated risks and uncertainties may be used by competitors in an attempt to divert our existing customers or may discourage future customers from purchasing our products under long-term

 

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arrangements. 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 resulting reduction in our revenues.

 

Our capital structure in our Proposed Plan of Reorganization will include a significant amount of indebtedness.

 

Although the Proposed Plan of Reorganization will result in the reduction of debt, we will continue to have a significant amount of indebtedness that could have significant consequences for us.  A substantial portion of our cash flow from operations may be needed to meet the payment of principal and interest on our indebtedness and other obligations and may not be available for our working capital, capital expenditures and other general corporate purposes.  In addition our level of debt makes us vulnerable to economic downturns and may reduce our operational and business flexibility in responding to changing business and economic conditions and opportunities, including obtaining additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes important to our growth and productivity improvement programs.  To the extent that we are more highly leveraged than our competitors, this may place us at a competitive disadvantage.

 

Our Exit Credit Facilities may limit our ability to plan for or respond to changes in our business.

 

Our Exit Credit Facilities may include financial and other covenants that impose restrictions on our financial and business operations and those of our subsidiaries.  These covenants may have a material adverse impact on our operations.  Our failure to comply with any of these covenants could result in an event of default that, if not cured or waived, requires us to repay the borrowings under the Exit Credit Facilities before their due date.  The Exit Credit Facilities may also contain other events of default customary for similar financings.  If we are unable to repay or otherwise refinance our borrowings when due, the lenders could foreclose on our assets.  If we are unable to refinance these borrowings on favorable terms, our costs of borrowing could increase significantly.

 

There can be no assurance that we will have sufficient liquidity to repay or refinance borrowings under the Exit Credit Facilities if such borrowings were accelerated upon an event of default.

 

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 terms 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.

 

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.

 

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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.

 

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 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. Future contributions to our pension and other postretirement plans will be dependent on future regulatory changes, future changes in discount rates, the earnings performance of our plan assets, and the impact of the bankruptcy filings. These contributions reduce the amount of cash available for us to repay indebtedness or make capital investments.

 

At December 31, 2009, the qualified defined benefit retirement plans maintained by us were under funded by approximately $1,129 million.  We will likely be required to make significant cash contributions to these plans under applicable U.S. and Canadian laws over the next several years following emergence from bankruptcy in order to amortize the existing under funding and satisfy current service obligations under the plans.  These contributions will significantly impact future cash flows that might otherwise be available for repayment of debt, capital expenditures, and other corporate purposes.  We currently estimate that these cash contributions under the United States and Canadian qualified pension plans will be approximately $77 million in 2010, and potentially up to approximately $107 million depending upon how unpaid Canadian contributions for 2009 are impacted by the Proposed Plan of Reorganization.  We currently estimate that contributions will be in the range of approximately $290 million to $330 million annually in 2011 through 2013, and will then decrease to approximately $280 million in 2014, approximately $240 million in 2015, $170 million in 2016 and $60 million in 2017, at which point almost all of the shortfall would be funded.  The actual required amounts and timing of such future cash contributions will be highly sensitive to changes in the applicable discount rates and returns on plan assets, and could also be impacted by future changes in the laws and regulations applicable to plan funding.

 

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 and transportation 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.

 

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.  If we are not able to obtain wood fiber and reclaimed fiber at favorable prices or at all, our results of operations may be materially adversely affected.

 

Work stoppage and other labor relations matters may have an adverse effect on our financial results.

 

A significant number of our employees in North America are governed by collective bargaining agreements that have either already expired or will do so before 2013.  Expired contracts are in the process of renegotiation.  We may not be able to successfully negotiate new union contracts without work stoppages or labor difficulties.  If we are unable to successfully renegotiate the terms of any of these agreements or an industry association is unable to successfully negotiate a national agreement when

 

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they expire, or if we experience any extended interruption of operations at any of our facilities as a result of strikes or other work stoppages, our results of operations and financial condition could be materially adversely affected.

 

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, including greenhouse gas emissions, 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 strengthens. 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.

 

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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. 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 - “Restructuring Activities.”  Our manufacturing facilities as of December 31, 2009 are summarized below:

 

 

 

Number of Facilities

 

State

 

 

 

Total

 

Owned

 

Leased

 

Locations(a)

 

United States

 

 

 

 

 

 

 

 

 

Paper mills

 

10

 

10

 

 

 

7

 

Corrugated container plants

 

90

 

62

 

28

 

29

 

Reclamation plants

 

29

 

15

 

14

 

14

 

Subtotal

 

129

 

87

 

42

 

34

 

 

 

 

 

 

 

 

 

 

 

Canada and Other North America

 

 

 

 

 

 

 

 

 

Paper mills

 

2

 

2

 

 

 

N/A

 

Corrugated container plants

 

18

 

14

 

4

 

N/A

 

Laminating plant

 

1

 

1

 

 

 

N/A

 

Subtotal

 

21

 

17

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

China

 

 

 

 

 

 

 

 

 

Corrugated container plants

 

2

 

2

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

Total

 

152

 

106

 

46

 

N/A

 

 


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

 

Our paper mills represent approximately 66% of our investment in property, plant and equipment.  In addition to manufacturing facilities, we operate wood harvesting facilities in Canada and the United States.  The approximate annual tons of productive capacity of our paper mills at December 31, 2009 were:

 

 

 

Annual Capacity (in thousands)

 

 

 

United States

 

Canada

 

Total

 

Containerboard

 

5,723

 

492

 

6,215

 

Market pulp

 

276

 

 

 

276

 

SBL

 

 

 

129

 

129

 

Kraft paper

 

114

 

 

 

114

 

Total

 

6,113

 

621

 

6,734

 

 

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.”

 

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ITEM 3.      LEGAL PROCEEDINGS
 

LITIGATION

 

On January 26, 2009, we and our U.S. and Canadian subsidiaries filed the Chapter 11 Petition for relief under Chapter 11 of the Bankruptcy Code in the U.S. Court.  On the same day, our Canadian subsidiaries also filed the Canadian Petition under the CCAA in the Canadian Court.  Our operations in Mexico and Asia were not included in the filing and will continue to operate outside of the Chapter 11 process.  See Part I, Item 1. Business — “Bankruptcy Proceedings.”

 

In January 2009, we settled two putative class action cases filed in California state court on behalf of current and former hourly employees at our California corrugated container facilities.  These cases alleged violations of the California on-duty meal break and rest period statutes.  The court approved a settlement for a total of $9 million for both cases on January 21, 2009.  The cases were automatically stayed due to the filing of the Chapter 11 Petition on January 26, 2009.  We had established reserves of $9 million during 2008 related to these matters.  It is anticipated that our liability for the settlement of these cases will be satisfied as an unsecured claim in the U.S. bankruptcy proceedings.

 

In May 2009, a lawsuit was filed in the United States District Court for the Northern District of Illinois against the four individual committee members of the Administrative Committee (Administrative Committee) of our savings plans and Patrick Moore, our Chief Executive Officer (together, the Defendants).  The suit alleges violations of the Employee Retirement Income Security Act (ERISA) (the 2009 ERISA Case) between January 2008 and the date it was filed.  The plaintiffs in the 2009 ERISA Case brought the complaint on behalf of themselves and a class of similarly situated participants and beneficiaries of four of our savings plans (the Savings Plans).  The plaintiffs assert that the Defendants breached their fiduciary duties to the Savings Plans’ participants and beneficiaries by allegedly making imprudent investments with the Savings Plans’ assets, making misrepresentations and failing to disclose material adverse facts concerning our business conditions, debt management and viability, and not taking appropriate action to protect the Savings Plans’ assets.  Even though we are not a named defendant in the 2009 ERISA Case, management believes that any indemnification obligations to the Defendants would be covered by applicable insurance.

 

On January 11, 2010, a second ERISA class action lawsuit was filed in the United States District Court for the Western District of Missouri.  The defendants in this case are the individual committee members of the Administrative Committee, several of our other executives and the individual members of our Board of Directors.  The suit has similar allegations as the 2009 ERISA Case described above, with the addition of breach of fiduciary duty claims related to our pension plans.  We expect that both of these matters will be consolidated in some manner as they purport to represent a similar class of employees and former employees and seek recovery under similar allegations and any of our indemnification obligations would be covered by applicable insurance.

 

We are a defendant in a number of other lawsuits and claims arising out of the conduct of our business.  All litigation that arose or may arise out of pre-petition conduct or acts is subject to the automatic stay provision of the bankruptcy laws and any recovery by plaintiffs in those matters will be paid consistent with all other general unsecured claims in bankruptcy.  As a result, we believe that these matters will not have a material adverse effect on our consolidated financial condition, results of our operations or cash flows.

 

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

 

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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 are conducting 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, 2009, we had approximately $28 million reserved for environmental liabilities.  We believe our liability for these matters was adequately reserved at December 31, 2009, and that the possibility is remote that we would incur any material liabilities for which we have not recorded adequate reserves.

 

The U.S. Congress and several states in which we operate are considering legislation that would mandate the reduction of greenhouse gas emissions from facilities in various sectors of the economy, including manufacturing. The EPA is also taking steps to regulate greenhouse gas emissions under certain Clean Air Act programs.  Enactment of new climate change laws or regulations may require capital expenditures to modify assets to meet greenhouse gas reduction requirements, increase energy costs above the level of general inflation, and could result in direct compliance and other costs.  It is not yet known, when such greenhouse gas emission laws or regulations may come into effect, nor is it currently possible to estimate the costs of compliance with such laws or regulations.  We have taken voluntary actions to reduce greenhouse gas emissions from our manufacturing operations and, with our membership in the Chicago Climate Exchange, have committed to reduce these emissions by 6% over baseline (emissions from 1998 to 2001) by the end of 2010.  We expect that we will not be disproportionately affected by new climate change laws or regulations as compared to our competitors who have comparable, energy-intensive operations in the United States.

 

ITEM 4.          RESERVED

 

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PART II

 

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

 

MARKET INFORMATION

 

Effective February 4, 2009, the NASDAQ delisted our common stock as a result of our filing of the Chapter 11 Petition.  Our common stock is now quoted on the Pink Sheets under the ticker symbol “SSCCQ.PK.”  Prior to February 4, 2009, our common stock traded on the NASDAQ under the symbol “SSCC.”

 

At February 24, 2010, approximately 9,077 stockholders of record held our common stock.  In addition, there were approximately 140 nominee shareholders on such date representing the beneficial owners of 252,903,598 shares of our common stock.  The high and low sales prices of our common stock in 2009 and 2008 were:

 

 

 

2009

 

2008

 

 

 

High

 

Low

 

High

 

Low

 

First Quarter

 

$

0.43

 

$

0.02

 

$

10.66

 

$

7.49

 

Second Quarter

 

$

0.27

 

$

0.04

 

$

7.91

 

$

4.07

 

Third Quarter

 

$

0.56

 

$

0.11

 

$

6.80

 

$

3.89

 

Fourth Quarter

 

$

0.99

 

$

0.09

 

$

4.19

 

$

0.24

 

 

DIVIDENDS ON COMMON STOCK

 

During the period covered by this report, we have not paid cash dividends on our common stock.  Under applicable bankruptcy law, we may not pay dividends on our common stock while we are in bankruptcy.

 

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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 for the five-year period ended December 31, 2009 in the Common Stock, the S&P 500 Index, a new peer group of four companies, which are International Paper Company, Packaging Corporation of America, Rock-Tenn Company and Temple-Inland, Inc. (New Peer Group) and our old peer group of four companies, which were International Paper Company, Packaging Corporation of America, Temple-Inland Inc. and Weyerhaeuser Company (Old Peer Group).  The New Peer Group is comprised of the four medium- to large-sized companies whose primary business is the manufacture and sale of paper products and packaging. In determining the New Peer Group, Weyerhaeuser Company was removed from the Old Peer Group comparison due to the sale of its containerboard, packaging and recycling business in August 2008 and Rock-Tenn was added due to its recent acquisition of a company with similar lines of business as ours.  The graph assumes the value of an investment in the Common Stock and each index was $100.00 at December 31, 2004 and that all dividends were reinvested.

 

GRAPHIC

 

INDEXED RETURNS

 

 

 

Base

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

 

 

 

 

 

 

 

 

 

 

Company Name / Index

 

12/31/04

 

12/31/05

 

12/31/06

 

12/31/07

 

12/31/08

 

12/31/09

 

Smurfit-Stone Container Corporation

 

100

 

75.86

 

56.53

 

56.53

 

1.37

 

1.47

 

S&P 500 Index

 

100

 

104.91

 

121.48

 

128.16

 

80.74

 

102.11

 

New Peer Group

 

100

 

91.74

 

97.45

 

98.08

 

42.40

 

96.35

 

Old Peer Group

 

100

 

95.43

 

101.74

 

107.00

 

43.57

 

84.74

 

 

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ITEM 6.          SELECTED FINANCIAL DATA

(In millions, except per share and statistical data)

 

 

 

2009(a)

 

2008(b)

 

2007(c)

 

2006

 

2005

 

Summary of Operations

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

5,574

 

$

7,042

 

$

7,420

 

$

7,157

 

$

6,812

 

Operating income (loss)(d)

 

293

 

(2,764

)

295

 

276

 

(253

)

Income (loss) from continuing operations

 

8

 

(2,818

)

(103

)

(70

)

(381

)

Discontinued operations, net of income tax provision

 

 

 

 

 

 

 

11

 

51

 

Net loss attributable to common stockholders

 

(3

)

(2,830

)

(115

)

(71

)

(342

)

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share of common stock

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

(.01

)

(11.01

)

(.45

)

(.32

)

(1.54

)

Discontinued operations

 

 

 

 

 

 

 

.04

 

.20

 

Net loss attributable to common stockholders

 

(.01

)

(11.01

)

(.45

)

(.28

)

(1.34

)

Weighted average basic and diluted shares outstanding

 

257

 

257

 

256

 

255

 

255

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Financial Data

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

1,094

 

$

198

 

$

243

 

$

265

 

$

221

 

Net cash provided by (used for) investing activities

 

(139

)

(385

)

68

 

706

 

(277

)

Net cash provided by (used for) financing activities

 

(377

)

306

 

(313

)

(967

)

55

 

Depreciation, depletion and amortization

 

364

 

357

 

360

 

377

 

408

 

Capital investments and acquisitions

 

172

 

394

 

384

 

274

 

285

 

Working capital, net (e)

 

(157

)

(3,798

)

13

 

(141

)

(4

)

Net property, plant, equipment and timberland

 

3,083

 

3,541

 

3,486

 

3,774

 

4,289

 

Total assets

 

5,077

 

4,594

 

7,387

 

7,777

 

9,114

 

Total debt (e)(f)

 

3,793

 

3,718

 

3,359

 

3,634

 

4,571

 

Redeemable Preferred Stock

 

105

 

101

 

97

 

93

 

89

 

Stockholders’ equity (deficit)

 

(1,374

)

(1,405

)

1,855

 

1,779

 

1,854

 

 

 

 

 

 

 

 

 

 

 

 

 

Statistical Data (tons in thousands)

 

 

 

 

 

 

 

 

 

 

 

Containerboard production (tons)

 

6,033

 

6,853

 

7,336

 

7,402

 

7,215

 

Market pulp production (tons)

 

294

 

470

 

574

 

564

 

563

 

SBS/SBL production (tons)

 

130

 

125

 

269

 

313

 

283

 

Kraft paper production (tons)

 

110

 

145

 

177

 

199

 

204

 

Corrugated containers sold (billion square feet)

 

67.1

 

71.5

 

74.8

 

80.0

 

81.3

 

Fiber reclaimed and brokered (tons)

 

5,182

 

6,462

 

6,842

 

6,614

 

6,501

 

Number of employees (g)

 

19,000

 

21,300

 

22,700

 

25,200

 

33,500

 

 

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Notes to Selected Financial Data

 

(a)   In 2009, we recorded other operating income of $633 million, net of fees and expenses, associated with an excise tax credit for alternative fuel mixtures produced.  See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Alternative Fuel Tax Credit.”

(b)   In 2008, we recorded goodwill and other intangible assets impairment charges of $2,757 million, net of an income tax benefit of $4 million. See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Goodwill and Other Intangible Assets Impairment Charges in 2008.”

(c)   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.  As a result, we no longer produce solid bleached sulfate (SBS).

(d)   In 2009, 2008, 2007, 2006, and 2005, we recorded restructuring charges of $319 million, $67 million, $16 million, $43 million, and $321 million, respectively.

(e)   The filing of the Chapter 11 Petition and the Canadian Petition constituted an event of default under our debt obligations, and those debt obligations became automatically and immediately due and payable.  As a result, the accompanying consolidated balance sheet as of December 31, 2008 includes a reclassification of $3,032 million to current maturities of long-term debt from long-term debt.  As of December 31, 2009, secured debt of $1,354 million is classified as a current liability in the accompanying consolidated balance sheet.  At December 31, 2009, total debt includes unsecured debt of $2,439 million which is recorded in liabilities subject to compromise.

(f)    In 2009, 2008, 2007, 2006, and 2005, debt includes obligations under capital leases of $3 million, $5 million, $7 million, $7 million, and $12 million, respectively.

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

 

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

 

OVERVIEW

 

On January 26, 2009, Smurfit-Stone and its U.S. and Canadian subsidiaries filed for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court in Wilmington, Delaware.  On the same day, our Canadian subsidiaries also filed to reorganize under the Companies’ Creditors Arrangement Act in the Ontario Superior Court of Justice in Canada.  Our operations in Mexico and Asia were not included in the filing and will continue to operate outside of the Chapter 11 process. See Part I, Item 1. Business - “Bankruptcy Proceedings.”

 

Smurfit-Stone Container Corporation is an integrated manufacturer of paperboard and paper-based packaging.  Our major products are containerboard, corrugated containers, market pulp, reclaimed 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 loss of domestic manufacturing to offshore competition and the changing retail environment in the U.S. has played a key role in reducing growth in domestic packaging demand.  The influence of superstores and discount retailing giants, as well as the impact 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.

 

The U.S. economy experienced a severe downturn in the fourth quarter of 2008 with minimal improvement seen in 2009.  Industry-wide shipments of corrugated products decreased 7.7% in 2009 compared to 2008.  Reported 2009 industry containerboard production decreased 7.3% compared to 2008.  In 2009, industry published prices for containerboard declined during the first half of 2009 and were down $70 per ton for the year compared to the December 2008 price. Reported industry containerboard inventories at the end of December 2009 were approximately 345,000 tons, or 13.9% below December 2008 levels.

 

Our operating results improved in 2009 compared to 2008 primarily as a result of the alternative fuel tax credit and lower costs, but were significantly impacted by lower sales volume and lower average sales prices as a result of the weak economic conditions.  We experienced significant declines in sales volume and sales prices for containerboard, corrugated containers and reclaimed material. In response to the weak economic conditions, we took approximately one million tons of market related downtime in 2009.

 

For 2009, we had a net loss attributable to common stockholders of $3 million, or $0.01 per share, compared to a net loss of $2,830 million, or $11.01 per share, for 2008.  The 2009 results benefited from the alternative fuel tax credit income of $633 million, or $2.46 per share, and lower costs, but were negatively impacted by the lower sales volumes, lower average selling prices and higher restructuring expense. The higher restructuring expense was due primarily to the permanent closure of two containerboard mills.  The 2008 loss includes goodwill and other intangible asset impairment charges of $2,761 million, or $10.74 per share, but includes a benefit of $84 million, or $0.33 per share, from the resolution of Canadian income tax examination matters, and $36 million of foreign currency exchange gains.

 

In the second quarter of 2010, we expect to emerge from bankruptcy. Excluding the impact of the alternative fuel tax credit, which expired in December 2009, we expect our operating performance to improve in 2010.  As the economy continues to improve, we expect higher selling prices for containerboard and corrugated containers compared to December 2009 levels. In 2010, we project slightly higher production of containerboard and shipments of corrugated containers.  We expect our 2010 results to benefit from lower costs related to operating improvements and reduced market related

 

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downtime. However, we expect the improvement will be partially offset by higher costs, including reclaimed fiber and energy.

 

ALTERNATIVE FUEL TAX CREDIT

 

The U.S. Internal Revenue Code allowed an excise tax credit for alternative fuel mixtures produced by a taxpayer for sale, or for use as a fuel in a taxpayer’s trade or business through December 31, 2009, at which time the credit expired.  In May 2009, we were notified that our registration as an alternative fuel mixer was approved by the Internal Revenue Service.  We subsequently submitted refund claims of approximately $654 million for the period December 1, 2008 through December 31, 2009 related to production at ten of our U.S. mills, of which $595 million of this refund request was received during 2009.  We recorded other operating income of $633 million, net of fees and expenses, in our consolidated statements of operations related to this matter during 2009.

 

RESTRUCTURING ACTIVITIES

 

We continue to review and evaluate various restructuring and other alternatives to streamline operations, improve efficiencies and reduce costs.   These actions subject us to additional short-term costs, which may include facility shutdown costs, asset impairment charges, lease commitment costs, severance costs and other closing costs.

 

In 2009, we closed 11 converting facilities and permanently ceased production at the Ontonagon, Michigan medium mill and the Missoula, Montana linerboard mill.  As a result of these closures and other ongoing initiatives, we reduced our headcount by approximately 2,350 employees.  We recorded restructuring charges of $319 million, net of gains of $4 million from the sale of properties related to previously closed facilities.  Restructuring charges included non-cash charges of $254 million related to the write-down of assets, primarily property, plant and equipment, to estimated net realizable values and the acceleration of depreciation for converting equipment expected to be abandoned or taken out of service.  The remaining charges of $69 million were primarily for severance and benefits.  The net sales of the closed converting facilities in 2009 prior to closure and for the years ended December 31, 2008 and 2007 were $62 million, $217 million and $258 million, respectively.  The majority of these net sales are expected to be transferred to other operating facilities.  The Ontonagon, Michigan medium mill had annual production capacity of 280,000 tons and the Missoula, Montana linerboard mill had annual production capacity of 620,000 tons.  Additional charges of up to $2 million are expected to be recorded in future periods for severance and benefits related to the closure of mill and converting facilities.

 

In 2008, we closed eight converting facilities, announced the closure of two additional converting facilities and permanently ceased operations of our containerboard machine at the Snowflake, Arizona mill and production at the Pontiac pulp mill located in Portage-du-Fort, Quebec.  As a result of these closures and other ongoing strategic initiatives, the Company reduced its headcount by approximately 1,230 employees.  We recorded restructuring charges of $67 million, net of a gain of $2 million from the sale of a previously closed facility.  Restructuring charges included 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 mill and converting equipment expected to be abandoned or taken out of service.  The remaining charges of $46 million were primarily for severance and benefits.  The net sales of the announced and closed converting facilities in 2008 prior to closure and for the year ended December 31, 2007 were $264 million and $393 million, respectively.  The Snowflake, Arizona containerboard machine had the capacity to produce 135,000 tons of medium annually.  The Pontiac pulp mill had annual production capacity of 253,000 tons of northern bleached hardwood kraft paper-grade pulp, which was non-core to our primary business.

 

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.  We recorded restructuring charges of $16 million, net of gains of $69 million from 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 net sales of the closed converting facilities in 2007 prior to closure were $65 million.  The production of the two medium mills, which had combined

 

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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.

 

REORGANIZATION ITEMS AND OTHER BANKRUPTCY COSTS

 

During 2009, we recorded income for reorganization items of $40 million which was directly related to the process of our reorganizing under Chapter 11 and the CCAA.  Debtor-in-possession debt issuance costs of $63 million were incurred and paid during 2009 in connection with entering into the DIP Credit Agreement, and are separately disclosed in the consolidated statements of operations.  For additional information, see Part I, Item 1. Business — Bankruptcy Proceedings — Financial Reporting Considerations- “Reorganization Items” and “Other Bankruptcy Related Costs.”

 

GOODWILL AND OTHER INTANGIBLE ASSETS IMPAIRMENT CHARGES IN 2008

 

As the result of the significant decline in value of our equity securities and our debt instruments and downward pressure placed on earnings by the weakening U.S. economy, we evaluated the carrying amount of our goodwill and other intangible assets for potential impairment in the fourth quarter of 2008.  We obtained third-party valuation reports as of December 31, 2008 that indicated the carrying amounts of our goodwill and other intangible assets were fully impaired based on declines in current and projected operating results and cash flows due to the current economic conditions. As a result, we recognized pretax impairment charges on goodwill and other intangible assets of $2,727 million and $34 million, respectively, during 2008.  The goodwill consisted primarily of amounts recorded in connection with our merger with Stone Container Corporation in November of 1998.

 

SALE OF ASSETS IN 2007

 

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 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 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

 

Recently Adopted Accounting Standards

 

The FASB’s ASC 105 was released on July 1, 2009 and became the single source of authoritative U.S. Generally Accepted Accounting Principles (GAAP).  The change was established by ASC 105, Generally Accepted Accounting Principles (ASC 105).  Pursuant to the provisions of ASC 105, we have updated our references to GAAP in our consolidated financial statements issued for the period ended December 31, 2009.  The adoption of ASC 105 did not impact our financial position, results of operations or cash flows.

 

Effective June 15, 2009, we adopted the provisions of ASC 855, Subsequent Events (ASC 855).  ASC 855 requires entities to evaluate subsequent events through the date the consolidated financial statements were issued. We have determined that no material subsequent events have occurred.

 

Effective January 1, 2009, we adopted the provisions of ASC 810-10-65-1, Transition Related to FASB Statement No. 160, Non-controlling Interest in Consolidated Financial Statements — An Amendment of ARB No. 51 (ASC 810-10-65-1).  ASC 810-10-65-1 changes the accounting for non-controlling (minority) interests in consolidated financial statements, requires non-controlling interests to be reported as part of equity and changes the income statement presentation of income or losses attributable to non-controlling interests.  ASC 810-10-65-1 did not have a material impact on our consolidated financial statements.

 

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Effective December 31, 2009, we adopted the provisions of ASC 715-20-65-2, Compensation - Retirement Benefits, which requires further disclosures about plan assets of a defined benefit pension or other post-retirement plan, including the employer’s investment policies and strategies, major categories of plan assets, inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and concentrations of risk within plan assets.

 

Financial Data

 

 

 

2009

 

2008

 

2007

 

(In millions)

 

Net
Sales

 

Profit/
(Loss)

 

Net
Sales

 

Profit/
(Loss)

 

Net
Sales

 

Profit/
(Loss)

 

Containerboard, corrugated containers and reclamation operations

 

$

5,574

 

$

243

 

$

7,042

 

$

317

 

$

7,420

 

$

604

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring expense

 

 

 

(319

)

 

 

(67

)

 

 

(16

)

Goodwill and intangible asset impairment charges

 

 

 

 

 

 

 

(2,761

)

 

 

 

 

Gain (loss) on sale of assets

 

 

 

(3

)

 

 

5

 

 

 

(62

)

Alternative fuel tax credit

 

 

 

633

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

(265

)

 

 

(262

)

 

 

(285

)

Debtor-in-possession debt issuance costs

 

 

 

(63

)

 

 

 

 

 

 

 

 

Loss on early extinguishment of debt

 

 

 

(20

)

 

 

 

 

 

 

(29

)

Foreign currency exchange gains (losses)

 

 

 

(14

)

 

 

36

 

 

 

(52

)

Reorganization items

 

 

 

40

 

 

 

 

 

 

 

 

 

Corporate expenses and other (Note 1)

 

 

 

(247

)

 

 

(263

)

 

 

(236

)

Loss before income taxes

 

 

 

$

(15

)

 

 

$

(2,995

)

 

 

$

(76

)

 


Note 1: Corporate expenses and other include corporate expenses and other expenses that are not allocated to operations.

 

2009 COMPARED TO 2008

 

We had a net loss attributable to common stockholders of $3 million, or $0.01 per share, compared to a net loss of $2,830 million, or $11.01 per share, for 2008.  The 2009 results benefited from the alternative fuel tax credit income of $633 million and lower costs, but were negatively impacted by higher restructuring expense of $252 million and lower sales prices and sales volume for corrugated containers and containerboard.  The 2008 loss includes goodwill and other intangible assets impairment charges of $2,761 million, or $10.74 per share, but includes a benefit of $84 million, or $0.33 per share, from the resolution of Canadian income tax examination matters and $36 million of foreign currency exchange gains.

 

Net sales decreased 20.8% in 2009 compared to last year.  Net sales were $846 million lower in 2009, as a result of lower third-party sales volume of containerboard, corrugated containers and reclaimed fiber.  Third-party shipments of containerboard were lower due primarily to weaker demand in the markets in which we operate.  North American shipments of corrugated containers in 2009 were negatively impacted by weaker market conditions and container plant closures.  Net sales were also impacted by lower average selling prices ($622 million) for containerboard, corrugated containers and reclaimed fiber.  The average price for old corrugated containers (OCC) decreased approximately $45 per ton compared to last year.

 

Our containerboard mills operated at 85.4% of capacity in 2009, compared to 95.5% in 2008.  Containerboard production was 12.0% lower compared to last year due primarily due to the market related downtime taken by our mills as a result of lower demand in 2009.  In response to the weaker market conditions in 2009, we took approximately 1,029,000 tons of containerboard market related downtime compared to 245,000 tons in 2008.  Production of market pulp decreased by 37.4% compared to last year due primarily to the closure of the Pontiac pulp mill in October 2008. Production of kraft paper decreased 24.1% compared to last year due primarily to lower demand, which resulted in market related

 

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downtime incurred during the first half of 2009.  Total tons of fiber reclaimed and brokered decreased 19.8% compared to last year due to the lower containerboard production and weaker demand.

 

Cost of goods sold as a percent of net sales in 2009 was 90.1%, comparable to 90.0% last year.  Cost of goods sold decreased from $6,338 million in 2008 to $5,023 million in 2009 due primarily to lower sales volumes ($761 million) for containerboard, corrugated containers and reclaimed materials and lower costs as a result of the additional market related downtime taken in 2009.  In addition, we had lower costs of reclaimed material ($268 million), freight ($64 million) and energy ($53 million).

 

Selling and administrative expense decreased $76 million in 2009 compared to 2008 primarily due to cost reductions from ongoing and prior year initiatives.  In addition, 2008 includes the impact of the Calpine Corrugated charges totaling $22 million (See Note 6 of the Notes to Consolidated Financial Statements).  Selling and administrative expense as a percent of net sales increased to 10.2% in 2009 from 9.2% in 2008 due primarily to the lower sales volume.

 

Interest expense, net was $265 million in 2009.  The $3 million increase compared to 2008 was impacted by higher average borrowings ($35 million), which were partially offset by lower average interest rates ($20 million) in 2009.  The higher average borrowings in 2009 were primarily due to borrowings under the DIP Credit Agreement, which were repaid in the second half of 2009.  Our overall average effective interest rate in 2009 was lower than 2008 by 0.50%.  In 2009, interest expense on unsecured debt of $180 million was stayed and not paid as a result of the bankruptcy proceedings.  In December 2009, we recorded income in reorganization items for the reversal of $163 million of accrued post-petition unsecured interest expense in the consolidated statement of operations. For additional information on reorganization items, see Part I, Item 1. Business — Bankruptcy Proceedings — Financial Reporting Considerations — “Reorganization Items.” In 2008, a portion of our interest rate swap contracts were deemed to be ineffective and were marked-to-market, resulting in $12 million of additional interest expense.

 

In 2009, we recorded a loss on early extinguishment of debt of $20 million for the non-cash write-off of deferred debt issuance costs related to the Stevenson, Alabama mill industrial revenue bonds, which were repaid.

 

In 2009, we recorded non-cash foreign currency exchange losses of $14 million compared to gains of $36 million for the same period in 2008.

 

For 2009, we recorded a gain of $40 million related to the process of reorganizing under Chapter 11 and the CCAA.  For additional information on reorganization items, see Part I, Item 1. Business — Bankruptcy Proceedings — Financial Reporting Considerations — “Reorganization Items.”

 

The benefit from income taxes for the year ended December 31, 2009 of $23 million differed from the amount computed by applying the statutory U.S. federal income tax rate to loss before income taxes due primarily to the effect of refunds for previously unrecognized alternative minimum tax (AMT) credits that we expect to receive in 2010.

 

2008 COMPARED TO 2007

 

We had a net loss attributable to common stockholders of $2,830 million, or $11.01 per diluted share, for 2008 compared to a net loss of $115 million, or $0.45 per diluted share, for 2007.  The higher loss in 2008 compared to 2007 was due primarily to the goodwill and other intangible asset impairment charges of $2,761 million, lower segment operating profits of $287 million and higher restructuring charges of $51 million. The 2008 results benefited $84 million from the resolution of certain Canadian income tax examination matters and from $36 million of foreign currency exchange gains.  The 2007 results were negatively impacted by the after-tax loss on the sale of our Brewton, Alabama mill and from $52 million of foreign currency exchange losses.

 

Net sales decreased 5.1% in 2008 compared to 2007.  Net sales were negatively impacted by $623 million in 2008 as a result of the sale of the Brewton, Alabama mill in September 2007, lower corrugated container sales volume and lower third-party sales of containerboard.  Net sales were favorably impacted by higher average selling prices ($245 million) for corrugated containers and containerboard.  Average domestic linerboard prices for 2008 were 7.1% higher compared to 2007.  Our average North American selling price for corrugated containers increased by 3.6% compared to 2007.  Our average sales prices for market pulp, SBS/SBL and kraft paper increased 2.4%, 1.8% and 6.2%, respectively, compared to

 

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2007.  The average price for OCC decreased approximately $10 per ton compared to 2007. Third party shipments of containerboard decreased 8.8% compared to 2007.  North American shipments of corrugated containers on a total and a per day basis were 4.3% and 4.7% lower, respectively, compared to 2007 due primarily to container plant closures, actions to improve margins by exiting unprofitable accounts and weaker market conditions.

 

Our containerboard mills operated at 95.5% of capacity in 2008, while containerboard production was 6.6% lower compared to 2007 due primarily to the sale of the Brewton, Alabama mill, other mill closures and the market related downtime taken by our mills in the fourth quarter of 2008.  In the fourth quarter of 2008, our containerboard mill operating rate declined to 83.6% due to lower demand.  Production of market pulp decreased by 18.1% compared to 2007 due primarily to the closure of the Pontiac pulp mill in October 2008 and market related downtime taken in the fourth quarter of 2008. Production of kraft paper decreased 18.1% compared to 2007.  Production of SBS/SBL decreased by 53.5% compared to 2007 due primarily to the sale of the Brewton, Alabama mill.  Total tons of fiber reclaimed and brokered decreased 5.6% compared to 2007 due to weakening export market conditions.

 

Cost of goods sold as a percent of net sales in 2008 was 90.0%, compared to 86.3% in 2007.  The increase was due primarily to higher costs for our major inputs and the negative impact of lower sales volume and market related downtime.  Cost of goods sold decreased from $6,404 million in 2007 to $6,338 million in 2008 due primarily to cost reductions resulting from the sale of the Brewton, Alabama mill and the market related downtime taken at our mills in the fourth quarter of 2008, and lower costs of reclaimed material ($26 million), which was offset by higher costs of energy ($142 million), freight ($63 million), wood fiber ($77 million), and chemicals ($41 million).

 

Selling and administrative expense increased $2 million in 2008 compared to 2007.  Selling and administrative expense as a percent of net sales increased from 8.7% in 2007 to 9.2% in 2008 due primarily to the lower sales volume.

 

Interest expense, net was $262 million in 2008.  The $23 million decrease compared to 2007 was positively impacted by lower average borrowings ($7 million) and lower average interest rates ($28 million).  The lower average borrowings were primarily due to debt reduction from the sale of the Brewton, Alabama mill.  Our overall average effective interest rate in 2008 was lower than 2007 by 0.85%.  Our Tranche B and Tranche C term loans were expected to be refinanced prior to their current maturity.  As a result, a portion of our interest rate swap contracts were deemed to be ineffective and were marked-to-market, resulting in $12 million of additional interest expense during 2008.

 

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

 

In 2008, we recorded non-cash foreign currency exchange gains of $36 million compared to losses of $52 million for the same period in 2007.

 

The benefit from income taxes for the year ended December 31, 2008 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 and other intangible assets impairment charges, the $84 million benefit related to the favorable resolution of the Canadian income tax examination matters, non-cash foreign currency exchange gains, state income taxes, lower effective tax rates in certain foreign jurisdictions and the effect of other permanent differences.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Since the Petition Date, our liquidity position has improved significantly.  At December 31, 2009, we had unrestricted cash and cash equivalents of $704 million compared to $126 million at December 31, 2008. As of December 31, 2009, we had no outstanding borrowings under the DIP Credit Agreement.  The improvement in liquidity primarily resulted from the favorable impact from the receipt of $595 million for the alternative fuel tax credit and the stay of payment of liabilities subject to compromise resulting from the bankruptcy filings.

 

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

 

(In millions)

 

2009

 

2008

 

2007

 

Net cash provided by (used for):

 

 

 

 

 

 

 

Operating activities

 

$

1,094

 

$

198

 

$

243

 

Investing activities

 

(139

)

(385

)

68

 

Financing activities

 

(377

)

306

 

(313

)

Net increase (decrease) in cash

 

$

578

 

$

119

 

$

(2

)

 

Net Cash Provided By (Used For) Operating Activities

The net cash provided by operating activities for the year ended December 31, 2009 was higher than 2008 due primarily to the alternative fuel tax credit receipts of $595 million and the impact of the bankruptcy filing.  Our 2009 cash flow from operating activities was favorably impacted by the stay of payment of liabilities subject to compromise, including accounts payable and interest payable, resulting from the bankruptcy filings.  In addition, we discontinued interest payments since the Petition Date on our unsecured senior notes and certain other unsecured debt.

 

Net Cash Provided By (Used For) Investing Activities

Net cash used for investing activities was $139 million for the year ended December 31, 2009.  Expenditures for property, plant and equipment were $172 million for 2009, compared to $394 million for 2008.  The amount expended for property, plant and equipment in 2009 included $169 million for projects related to upgrades, cost reductions and ongoing initiatives and $3 million for environmental projects.  During 2009, we received proceeds of $48 million primarily related to the sale of our Canadian timberlands ($27 million) and previously closed facilities.  In 2008, we received proceeds of $9 million primarily from the sale of properties of previously closed facilities.   Advances to affiliates, net in 2009 of $15 million are principally related to funding an obligation pertaining to a guarantee for a previously non-consolidated affiliate.

 

Net Cash Provided By (Used For) Financing Activities

Net cash used for financing activities for 2009 was $377 million.  Proceeds from the DIP Credit Agreement of $440 million were used to terminate our receivables securitization programs and repay all indebtedness under the programs of $385 million.  DIP debt issuance costs of $63 million were incurred and paid with the DIP Credit Agreement proceeds and available cash.  During 2009, letters of credit in the amount of $71 million were drawn on to fund obligations principally related to non-qualified pension plans, commodity derivative instruments and a guarantee for a previously non-consolidated affiliate which increased borrowings under our credit agreement.  During 2009, amounts borrowed under the DIP Credit Agreement were repaid in full.  In 2008, we had net increase of debt of $314 million. The net increase in debt primarily funded our capital investments.  No dividends were paid in 2009 as we were prohibited from paying dividends under the DIP Credit Agreement.  Preferred dividends paid in 2008 were $8 million.

 

Event of Default

The filing of the Chapter 11 Petition and the Canadian Petition constituted an event of default under our debt obligations, and those debt obligations became automatically and immediately due and payable.  Any efforts to enforce such payment obligations are stayed as a result of the filing of the Chapter 11 Petition and the Canadian Petition.  The accompanying consolidated balance sheet as of December 31, 2008 includes a reclassification of $3,032 million to current maturities of long-term debt from long-term debt.  Due to the filing of the bankruptcy petitions, our unsecured long-term debt of $2,439 million is included in liabilities subject to compromise at December 31, 2009.

 

Bank Credit Facilities

We as guarantor, and SSCE and its subsidiary, SSC Canada, as borrowers, entered into a credit agreement, as amended (the Credit Agreement) on November 1, 2004.   The Credit Agreement provided for (i) a revolving credit facility of $600 million to SSCE (U.S. Revolver), of which $512 million was borrowed as of December 31, 2009 and (ii) a revolving credit facility of $200 million to SSCE and SSC Canada (SSC Canada Revolver), of which $198 million was borrowed as of December 31, 2009.  Each of these revolving credit facilities matured on November 1, 2009.  The Credit Agreement provided for a Tranche B term loan to SSCE in the aggregate principal amount of $975 million, with an outstanding balance of $137 million at December 31, 2009.  The Credit Agreement also provided to SSC Canada a

 

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Tranche C term loan in the aggregate principal amount of $300 million and a Tranche C-1 term loan in the aggregate principal amount of $90 million, with outstanding balances of $258 million and $78 million, respectively, at December 31, 2009.  The term loans are payable in quarterly installments ending on November 1, 2011.  Borrowings at a rate equal to LIBOR plus 2.25% or alternate base rate (ABR) plus 1.25% for the term loan facilities and LIBOR plus 2.50% or ABR plus 1.50% for the revolving credit facilities (the Applicable Rate).

 

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 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 excludes 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.

 

As of December 31, 2009, as a result of our default, we had no availability for borrowings under SSCE’s revolving credit facilities after giving consideration to outstanding letters of credit of $87 million.  As of December 31, 2009, we had available unrestricted cash and cash equivalents of $704 million primarily invested in money market funds at a variable interest rate of 0.13%.

 

The Credit Agreement provided for a deposit funded letter of credit facility, related to the variable rate industrial revenue bonds, for approximately $122 million that was due to mature on November 1, 2010.  In February 2009, due to an event of default under the bond indentures, this credit facility was drawn on to fully repay the industrial revenue bonds in the aggregate principal amount of $120 million.

 

DIP Credit Agreement

In connection with filing the Chapter 11 Petition and the Canadian Petition, on January 26, 2009 we and certain of our affiliates filed a motion with the Bankruptcy Courts seeking approval to enter into a DIP Credit Agreement.  Final approval of the DIP Credit Agreement was granted by the U.S. Court on February 23, 2009 and by the Canadian Court on February 24, 2009.  Amendments to the DIP Credit Agreement were entered into on February 25 and 27, 2009.

 

The DIP Credit Agreement, as amended, provided for borrowings up to an aggregate committed amount of $750 million, consisting of a $400 million U.S. DIP Term Loan for borrowings by SSCE; a $35 million Canadian DIP Term Loan for borrowings by SSC Canada; a $250 million U.S. DIP Revolver for borrowings by SSCE and/or SSC Canada; and a $65 million Canadian DIP Revolver for borrowings by SSCE and/or SSC Canada.

 

The use of proceeds under the DIP Credit Agreement was limited to (i) working capital, letters of credit and capital expenditures; (ii) other general corporate purposes of ours and certain of our subsidiaries (including certain intercompany loans); (iii) the refinancing in full of indebtedness outstanding under our receivables securitization programs; (iv) payment of any related transaction costs, fees and expenses;

 

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and (v) the costs of administration of the cases arising out of the Chapter 11 Petition and the Canadian Petition.

 

Under the DIP Credit Agreement, on January 28, 2009, we borrowed $440 million, consisting of a $400 million U.S. DIP Term Loan, a $35 million Canadian DIP Term loan and $5 million from the Canadian DIP Revolver.  In accordance with the terms of the DIP Credit Agreement, on January 28, 2009, we used U.S. DIP Term Loan proceeds of $360 million, net of lenders fees of $40 million, and Canadian DIP Term Loan proceeds of $30 million, net of lenders fees of $5 million, to terminate the receivables securitization programs and repay all indebtedness outstanding of $385 million and to pay other expenses of $1 million.  In addition, other fees and expenses of $17 million related to the DIP Credit Agreement were paid for with proceeds of $5 million from the Canadian DIP Revolver and available cash.

 

During 2009, we made voluntary prepayments of $383 million on the U.S. DIP Term Loan with available cash provided by operating activities.  In addition, during 2009, we repaid $17 million of the U.S. DIP Term Loan with proceeds from property sales.  As of December 31, 2009, no borrowings were outstanding under the U.S. DIP Term Loan or the U.S. DIP Revolver.

 

During 2009, we repaid $35 million on the Canadian DIP Term Loan primarily with proceeds from property sales including $27 million from the sale of our Canadian Timberlands.  In addition, we repaid $5 million on the Canadian DIP Revolver.  As of December 31, 2009, no borrowings are outstanding under the Canadian DIP Term Loan or the Canadian DIP Revolver.

 

At December 31, 2009, we had outstanding letters of credit of $15 million under the DIP Credit Agreement.  Prior to the maturity of the DIP Credit Agreement on January 28, 2010, we transferred $15 million of available cash to a restricted cash account to secure these letters of credit.

 

U.S. and Canadian borrowings were each subject to a borrowing base derived from a formula based on certain eligible accounts receivable and inventory, and an amount attributable to real property and equipment, less certain reserves.  As of December 31, 2009, the applicable borrowing base was $680 million and the amount available for borrowings under the DIP Credit Agreement was $300 million.  As all borrowings under the DIP Credit Agreement were paid in full, we allowed the DIP Credit Agreement to expire on the maturity date of January 28, 2010.

 

Exit Credit Facilities

On February 16, 2010, the U.S. Court granted the motion and authorized us and certain of our affiliates to enter into the Term Loan Facility.  On the same date, the U.S. Court also granted our February 3, 2010 motion seeking approval to enter into a commitment letter and fee letters for an asset-based revolving credit facility (the ABL Revolving Facility) (together with the Term Loan Facility, the Exit Credit Facilities).  Based on such approvals, on February 22, 2010, we and certain of our subsidiaries entered into the Term Loan Facility that provides for an aggregate term loan commitment of $1,200 million.  In addition, we entered into a commitment letter and related fee letters for the ABL Revolving Facility with aggregate commitments of $650 million (including a $100 million Canadian Tranche), which we expect to enter into prior to exiting bankruptcy.   The ABL Revolving Facility will include a $150 million sub-limit for letters of credit.  The commitments for the Term Loan Facility and the ABL Revolving Facility will terminate on July 16, 2010 unless our emergence from bankruptcy and satisfaction of certain funding date conditions under the Term Loan Facility and the ABL Revolving Facility occur on or prior to such date, and the Term Loan Facility is funded.

 

We are permitted, subject to obtaining lender commitments, to add one or more incremental facilities to the Term Loan Facility in an aggregate amount up to $400 million.  Each incremental facility is conditioned on (a) there existing no defaults, (b) in the case of incremental term loans, such loans have a final maturity no earlier than, and a weighted average life no shorter than, the Term Loan Facility, and (c) after giving effect to one or more incremental facilities, the consolidated senior secured leverage ratio shall be less than 3.00 to 1.00.  If the interest rate spread applicable to any incremental facility exceeds the interest rate spread applicable to the Term Loan Facility by more than 0.25%, then the interest rate spread applicable to the Term Loan Facility will be increased to equal the interest rate spread applicable to the incremental facility.

 

On the date we emerge from bankruptcy, the Term Loan will be funded and borrowings are expected to be available under the ABL Revolving Facility.   The proceeds of the borrowings under the Term Loan

 

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Facility, together with available cash will be used to repay our outstanding secured indebtedness under our pre-petition Credit Facility and pay fees, costs and expenses of approximately $50 million related to and contemplated by the Exit Credit Facilities and the Proposed Plan of Reorganization. Borrowings under the ABL Revolver Facility will be available for working capital purposes, capital expenditures, permitted acquisitions and general corporate purposes.

 

For additional information on the Exit Credit Facilities, see Part I, Item 1. Business - Bankruptcy Proceedings - Proposed Plan of Reorganization and Exit Credit Facilities - “Exit Credit Facilities”.

 

FUTURE CASH FLOWS

 

Contractual Obligations and Commitments

In addition to our debt commitments at December 31, 2009, we had other commitments and contractual obligations that require us to make specified payments in the future. The filing of the Chapter 11 Petition and Canadian Petition constituted an event of default under our debt obligations, and those debt obligations became automatically and immediately due and payable, subject to an automatic stay of any action to collect, assert, or recover a claim against us and the application of applicable bankruptcy law. The following table summarizes the total amounts due as of December 31, 2009 under all debt agreements, commitments and other contractual obligations.  We are in the process of evaluating our executory contracts in order to determine which contracts will be assumed in our bankruptcy proceedings. The table indicates the years in which payments are due under the contractual obligations.

 

 

 

 

 

Amounts Payable During

 

(In millions)

 

Total

 

2010

 

2011-12

 

2013-14

 

2015 &
Beyond

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, including capital leases (1)

 

$

3,793

 

$

3,793

 

$

 

$

 

$

 

Operating leases

 

333

 

61

 

86

 

58

 

128

 

Purchase obligations (2)

 

338

 

109

 

103

 

62

 

64

 

Commitments for capital expenditures (3)

 

147

 

147

 

 

 

 

 

 

 

Net unrecognized tax benefits (4)

 

 

 

 

 

 

 

 

 

 

 

Other long-term liabilities (5)

 

1,212

 

128

 

657

 

411

 

16

 

Total contractual obligations

 

$

5,823

 

$

4,238

 

$

846

 

$

531

 

$

208

 

 


(1)          Projected contractual interest payments are excluded.  Based on interest rates in effect and long-term debt balances outstanding as of December 31, 2009, hypothetical projected contractual interest payments would be approximately $232 million in 2010 and for each future year.  However, due to the bankruptcy proceedings, we do not expect to pay interest on our unsecured senior notes ($182 million) and certain other unsecured debt ($10 million).  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.”  Outstanding secured debt of $1,354 million at December 31, 2009 is expected to be paid in cash with proceeds from our Exit Credit Facilities.  In addition, unsecured debt of $2,439 million is expected to be exchanged for common stock of Reorganized Smurfit-Stone upon our emergence from bankruptcy in the second quarter of 2010.

(2)          Amounts shown consist primarily of national supply contracts to purchase steam and other energy resources, the processing of wood and to purchase containerboard. Compared to 2008, our purchase obligations have declined significantly due primarily to the rejection of executory contracts for electricity, natural gas and coal.   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, 2009, but were not completed by December 31, 2009.

(4)          As of December 31, 2009, our ASC 740, Income Taxes (ASC 740), net unrecognized tax benefits totaled $37 million, which are excluded from the table since we cannot make a reasonably reliable estimate of the timing of future payments.

 

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(5)          Amounts shown consist primarily of future minimum pension contributions, severance costs and other rationalization expenditures and environmental liabilities which have been recorded in our December 31, 2009 consolidated 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.  See Future Cash Flows - “Pension Obligations.”

 

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, 2009, SSCE had approximately $102 million of letters of credit outstanding, including $15 million under our DIP Credit Agreement.

 

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, 2009 was $25 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.

 

Pension Obligations

As of December 31, 2009, our pension benefit obligations exceeded the fair value of pension plan assets by $1,129 million, an increase of $123 million from $1,006 million at the end December 31, 2008.  The majority of the increase was due to lower discount rates in 2009.  Approximately $1,020 million of this amount relates to qualified defined benefit pension plans, which are expected to be assumed under the Proposed Plan of Reorganization. We currently estimate that these cash contributions under the U.S. and Canadian qualified pension plans will be approximately $77 million in 2010, and potentially up to approximately $107 million depending upon how unpaid Canadian contributions for 2009 are impacted by the Proposed Plan of Reorganization.  We currently estimate that contributions will be in the range of approximately $290 million to $330 million annually in 2011 through 2013, and will then decrease to approximately $280 million in 2014, approximately $240 million in 2015, $170 million in 2016 and $60 million in 2017, at which point almost all of the shortfall would be funded.  The actual required amounts and timing of such future cash contributions will be highly sensitive to changes in the applicable discount rates and returns on plan assets, and could also be impacted by future changes in the laws and regulations applicable to plan funding.

 

Exit Liabilities

We recorded restructuring charges of $319 million in 2009, net of gains of $4 million from the sale of properties related to previously closed facilities.  Restructuring charges include non-cash charges of $254 million related to the write-down of assets, primarily property, plant and equipment, to estimated net realizable values and the acceleration of depreciation for converting equipment expected to be abandoned or taken out of service.  The remaining charges of $69 million were primarily for severance and benefits.  In 2009, we incurred cash expenditures of $31 million for these exit liabilities.

 

We had $33 million of exit liabilities as of December 31, 2008, related to the restructuring of our operations.  During 2009, we incurred cash expenditures of $10 million for these exit liabilities and reduced lease commitment exit liabilities by $7 million.  The exit liabilities remaining as of December 31, 2009, including the 2009 restructuring activities, totaled $54 million. Future cash outlays, principally for severance and benefits cost and long-term lease commitments and facility closure cost, are expected to be $49 million in 2010, $3 million in 2011, an insignificant amount in 2012 and $2 million thereafter.  We intend to continue funding exit liabilities through operations as originally planned.

 

Environmental Matters

As discussed in Part I, Item 1.  Business, “Environmental Compliance,” we 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.  In addition, it is not yet known when greenhouse gas emission laws or regulations may come into effect, nor is it currently possible to estimate the cost of compliance with such laws or regulations.  Excluding the spending on the Boiler MACT projects and other one-time compliance costs, we have spent an average of approximately $4 million in each of the last three years on capital expenditures for environmental purposes and, we expect to spend approximately $6 million in 2010.

 

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OFF-BALANCE SHEET ARRANGEMENT

 

At December 31, 2009, we had one off-balance sheet financing arrangement.

 

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.  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 ASC 860, Transfers and Servicing (ASC 860), 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 $36 million at December 31, 2009.  TNH and its creditors have no recourse to us in the event of a default on the installment notes.

 

EFFECTS OF INFLATION
 

Increases in costs for fiber, energy, freight, chemicals and other materials including corn starch and ink have had an adverse impact on our operating results. Although we experienced lower costs for these items in 2009, we expect to see increases in these costs in 2010.  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, 2009.  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. 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.

 

Going Concern

The consolidated financial statements and related notes have been prepared assuming that we will continue as a going concern, although our bankruptcy filings raise substantial doubt about our ability to continue as a going concern.  The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or to the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern.

 

Long-Lived Assets

We conduct impairment reviews of long-lived assets in accordance with ASC 360-10, Impairment or Disposal of Long-Lived Assets.  Based upon our review as of December 31, 2009, we determined that there was no impairment of long-lived 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 costs. Our estimates of fair value are determined using a variety of valuation techniques, including cash flows. While significant judgment is required, we

 

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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, which could materially affect the carrying value of property, plant and equipment and results of operations.

 

Restructurings

In recent years, we have closed a number of operating facilities, including paper mills, 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.

 

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 2009, the expected long-term rates of return on our U.S. plan assets and foreign plan assets were 8.50% and 7.50%, respectively, which were consistent with 2008.  The weighted average discount rates used to determine the benefit obligations for the U.S. and foreign retirement plans at December 31, 2009 were 5.88% and 6.30%, 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.  For determination of the discount rate, the present value of the cash flows as of the measurement date is determined using the spot rates from the Mercer Yield Curve, and based on the present values, a single equivalent discount rate is developed. This rate is the single uniform discount rate that, when applied to the same cash flows, results in the same present value of the cash flows as of the measurement date.  A decrease in the assumed rate of return of 0.50% would increase pension expense by approximately $12 million.  A decrease in the discount rate of 0.50% would increase our pension expense by approximately $17 million and our pension benefit obligations by approximately $182 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, 2009 by $10 million and would increase the annual net periodic postretirement benefits cost by $1 million for 2009.

 

Income Taxes

We apply the provisions of ASC 740 which 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.  Under the provisions of ASC 740, we elected to classify interest and penalties related to our unrecognized tax benefits in the income tax provision (See Note 14 of the Notes to Consolidated Financial Statements).

 

At December 31, 2009, we had $37 million of net unrecognized tax benefits.  The primary differences between gross unrecognized tax benefits and net unrecognized tax benefits are associated with offsetting benefits in other jurisdictions related to transfer pricing and the U.S. federal tax benefit from state tax

 

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deductions. (See Note 14 of the Notes to Consolidated Financial Statements for a reconciliation of 2009 activity).

 

For the year ended December 31, 2009, $3 million of interest was recorded related to tax positions taken during the current and prior years. The interest was computed on the difference between the tax position recognized in accordance with ASC 740 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.  During 2009, no penalties were recorded related to current and prior year tax positions.  At December 31, 2009, $25 million of interest and penalties are recognized in the consolidated balance sheet.  All net unrecognized tax benefits, if recognized, would affect our effective tax rate.

 

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 items for tax and accounting purposes.  In addition, unrecognized tax benefits under the provisions of ASC 740 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, 2009.

 

At December 31, 2009, we had deferred tax assets of $1,353 million.  A valuation allowance of $382 million has been established on a portion of these deferred tax assets based on the expected timing of deferred tax liability reversals and the expiration dates of the tax loss carryforwards. The valuation allowance increased during 2009, primarily to offset higher deferred tax assets related to tax losses on our investment in our Canadian subsidiaries. At December 31, 2009, we expect our deferred tax assets, net of the valuation allowance, will be fully realized through the reversal of net taxable temporary differences.

 

As previously disclosed, the Canada Revenue Agency (CRA) is examining our income tax returns for tax years 1999 through 2005.  In connection with the examination, the CRA has issued assessments of additional income taxes, interest and penalties related to transfer prices of inventory sold by our Canadian subsidiaries to our U.S. subsidiaries.  Additionally, the CRA is considering certain significant adjustments related principally to taxable income related to our acquisition of a Canadian company.  We have appealed the assessments related to the transfer pricing matter.  In order to appeal the assessments, we made payments of $25 million to the CRA in 2008.  The remaining matters may be resolved at the examination level or subsequently upon appeal within the next twelve months.  While the final outcome of the remaining CRA examination matters, including an estimate of the range of the reasonably possible changes to unrecognized tax benefits, is not yet determinable, we believe that the examination or subsequent appeals will not have a material adverse effect on our consolidated financial condition or results of operations.

 

The U.S. federal statute of limitations is closed through 2005, except for any potential correlative adjustments for the years 1999 through 2005 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.

 

Federal income taxes have not been provided on undistributed earnings of our foreign subsidiaries during 2007 through 2009, as we intend to indefinitely reinvest such earnings into our foreign subsidiaries.  The restrictions on remittance of these earnings, pursuant to our bankruptcy status, make it not practicable to determine the amount of the unrecognized deferred tax liability on these undistributed foreign earnings.

 

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, and the impact of our bankruptcy on these matters, actual costs could differ materially from the estimated amounts.

 

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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 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.

 

Liabilities Subject to Compromise

Liabilities subject to compromise represent unsecured obligations that will be accounted for under a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-Chapter 11 or CCAA liabilities are stayed.  Pre-petition liabilities that are subject to compromise are reported at the amounts expected to be allowed, even if they may be settled for lesser amounts.  These liabilities represent the amounts expected to be allowed on known or potential claims to be resolved through the Chapter 11 and CCAA process, and remain subject to future adjustments arising from negotiated settlements, actions of the Bankruptcy Courts, rejection of executory contracts and unexpired leases, the determination as to the value of collateral securing the claims, proofs of claim, or other events.  Liabilities subject to compromise also include certain items that may be assumed under the Proposed Plan of Reorganization, and as such, may be subsequently reclassified to liabilities not subject to compromise.  Differences between liability amounts estimated by us and claims filed by creditors are being investigated and, if necessary, the Bankruptcy Courts will make a final determination of the allowable claim.  The determination of how liabilities will ultimately be treated cannot be made until the Bankruptcy Courts approve a plan of reorganization.  Accordingly, the ultimate amount or treatment of such liabilities is not determinable at this time.

 

PROSPECTIVE ACCOUNTING STANDARDS

 

In June 2009, the FASB issued amendments to ASC 860, effective for fiscal years beginning after November 15, 2009.  The amendments remove the concept of a qualifying special-purpose entity and the related impact on consolidation, thereby potentially requiring consolidation of such special-purpose entities previously excluded from the consolidated financial statements.  We do not expect these amendments to have a material impact on our consolidated 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 have on a periodic basis entered 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.

 

On January 26, 2009, the Chapter 11 Petition and the Canadian Petition effectively terminated all existing derivative instruments.  Termination fair values were calculated based on the potential settlement value.  During 2009, a letter of credit in the amount of $18 million was drawn on related to the settlement of certain commodity derivative instruments.  Excluding these settled liabilities, the Company’s termination value related to its remaining derivative liabilities was approximately $60 million, recorded in other current liabilities in the consolidated balance sheet at December 31, 2009.  These derivative liabilities were stayed due to the filing of the Chapter 11 Petition and the Canadian Petition at which time, these liabilities were adjusted through OCI for derivative instruments qualifying for hedge accounting and cost of goods sold for derivative instruments not qualifying for hedge accounting.  Subsequently, the amounts adjusted through OCI were recorded in earnings during 2009 when the underlying transaction was recognized or when the underlying transaction was no longer expected to occur, except for a $1 million loss (net of tax) which remained in OCI at December 31, 2009.  See Note 10 of the Notes to Consolidated Financial Statements.

 

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Commodity Price Risk

We historically used 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 was 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.  Excluding the impact of derivative instruments, the potential change in our expected 2009 and 2008 natural gas cost, based upon our expected annual usage and unit cost, resulting from a hypothetical 10% adverse price change, would be approximately $9 million and $9 million, respectively.  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.  Our investments in foreign subsidiaries with a functional currency other than the U.S. dollar are not hedged.

 

We have historically used 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.  In 2009, 2008 and 2007, the average exchange rates for the Canadian dollar strengthened (weakened) against the U.S. dollar by 7.1%, (1.0)% and 5.2%, respectively.

 

We performed a sensitivity analysis as of December 31, 2009 and 2008 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.  Excluding the impact of derivative instruments, the potential change in fair value resulting from a hypothetical 10% adverse change in the Canadian dollar exchange rate at December 31, 2009 and 2008, would be $11 million and $10 million, respectively.  Fluctuations in Canadian dollar monetary assets and liabilities result in gains or losses, which are credited or charged to income.

 

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 have historically entered 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 performed a sensitivity analysis as of December 31, 2009 and 2008 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, 2009 and 2008, a hypothetical 100 basis point adverse change in interest rates would increase interest expense by approximately $14 million and $10 million, respectively.

 

The filing of the Chapter 11 Petition and Canadian Petition constituted an event of default under our debt obligations, and those debt obligations became automatically and immediately due and payable, subject to an automatic stay of any action to collect, assert, or recover a claim against us and the application of applicable bankruptcy law. The following table presents principal amounts 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

 

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impact of our interest rate swap contracts.  This information should be read in conjunction with Note 9 of the Notes to Consolidated Financial Statements.

 

Current Maturities of Debt

 

As of December 31, 2009 (in millions)

 

Outstanding

 

Fair
Value

 

Bank term loans and revolver 3.2% average interest rate (variable)

 

$

1,303

 

$

1,296

 

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

 

2,275

 

2,008

 

U.S. industrial revenue bonds 6.4% average interest rate (fixed)

 

164

 

164

 

Other U.S

 

51

 

51

 

Total debt

 

$

3,793

 

$

3,519

 

 

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ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

Page No.

Index to Financial Statements:

 

 

 

Management’s Report on Internal Control Over Financial Reporting

45

Reports of Independent Registered Public Accounting Firm

46

Consolidated Balance Sheets - December 31, 2009 and 2008

48

For the years ended December 31, 2009, 2008 and 2007:

 

Consolidated Statements of Operations

49

Consolidated Statements of Stockholders’ Equity

50

Consolidated Statements of Cash Flows

51

Notes to Consolidated Financial Statements

52

 

 

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

 

 

 

II: Valuation and Qualifying Accounts and Reserves

99

 

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.

 

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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, 2009.

 

The effectiveness of our internal control over financial reporting as of December 31, 2009 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, 2009, is included herein.

 

 

/s/ Patrick J. Moore

 

Patrick J. Moore

 

Chairman and Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

 

 

/s/ Paul K. Kaufmann

 

Paul K. Kaufmann

 

Senior Vice President and Corporate Controller

 

(Principal Financial and Accounting Officer)

 

 

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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, 2009, based on criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’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, 2009, 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 as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows of the Company for each of the three years in the period ended December 31, 2009. Our report dated March 2, 2010, expressed an unqualified opinion thereon and included an explanatory paragraph related to the Company’s ability to continue as a going concern.

 

 

/s/ Ernst & Young LLP

 

Ernst & Young LLP

St. Louis, Missouri

March 2, 2010

 

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Table of Contents

 

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, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. 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, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, 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.

 

The accompanying consolidated financial statements have been prepared assuming that Smurfit Stone Container Corporation will continue as a going concern. As more fully described in Note 1 to the consolidated financial statements, the Company filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code and Companies’ Creditors Arrangement Act in Canada on January 26, 2009, which raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 1. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of the liabilities that may result from the outcome of this uncertainty.

 

We have also 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, 2009, based on criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 2, 2010, expressed an unqualified opinion thereon.

 

 

/s/ Ernst & Young LLP

 

Ernst & Young LLP

 

St. Louis, Missouri

March 2, 2010

 

47



Table of Contents

 

SMURFIT-STONE CONTAINER CORPORATION

(DEBTOR-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS

 

December 31, (In millions, except share data)

 

2009

 

2008

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

704

 

$

126

 

Restricted cash

 

9

 

 

 

Receivables, less allowances of $24 in 2009 and $7 in 2008

 

615

 

96

 

Receivable for alternative energy tax credits

 

59

 

 

 

Retained interest in receivables sold

 

 

 

120

 

Inventories

 

 

 

 

 

Work-in-process and finished goods

 

105

 

112

 

Materials and supplies

 

347

 

400

 

 

 

452

 

512

 

Refundable income taxes

 

23

 

 

 

Prepaid expenses and other current assets

 

43

 

27

 

Total current assets

 

1,905

 

881

 

Net property, plant and equipment

 

3,081

 

3,509

 

Timberland, less timber depletion

 

2

 

32

 

Deferred income taxes

 

23

 

55

 

Other assets

 

66

 

117

 

 

 

$

5,077

 

$

4,594

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

Liabilities not subject to compromise

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current maturities of long-term debt

 

$

1,354

 

$

3,718

 

Accounts payable

 

387

 

506

 

Accrued compensation and payroll taxes

 

145

 

164

 

Interest payable

 

12

 

66

 

Income taxes payable

 

 

 

9

 

Current deferred income taxes

 

 

 

21

 

Other current liabilities

 

164

 

195

 

Total current liabilities

 

2,062

 

4,679

 

Other long-term liabilities

 

117

 

1,320

 

Total liabilities not subject to compromise

 

2,179

 

5,999

 

 

 

 

 

 

 

Liabilities subject to compromise

 

4,272

 

 

 

Total liabilities

 

6,451

 

5,999

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, aggregate liquidation preference of $124; 25,000,000 shares authorized; 4,599,300 issued and outstanding

 

104

 

101

 

Common stock, par value $.01 per share; 400,000,000 shares authorized, 257,482,839 and 257,087,296 issued and outstanding in 2009 and 2008, respectively

 

3

 

3

 

Additional paid-in capital

 

4,081

 

4,073

 

Retained earnings (deficit)

 

(4,883

)

(4,888

)

Accumulated other comprehensive income (loss)

 

(679

)

(694

)

Total stockholders’ equity (deficit)

 

(1,374

)

(1,405

)

 

 

$

5,077

 

$

4,594

 

 

See notes to consolidated financial statements

 

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Table of Contents

 

SMURFIT-STONE CONTAINER CORPORATION

(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF OPERATIONS

 

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

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Net sales

 

$

5,574

 

$

7,042

 

$

7,420

 

Costs and expenses

 

 

 

 

 

 

 

Cost of goods sold

 

5,023

 

6,338

 

6,404

 

Selling and administrative expenses

 

569

 

645

 

643

 

Restructuring expense

 

319

 

67

 

16

 

Goodwill and intangible asset impairment charges

 

 

 

2,761

 

 

 

(Gain) loss on disposal of assets

 

3

 

(5

)

62

 

Other operating income

 

(633

)

 

 

 

 

Operating income (loss)

 

293

 

(2,764

)

295

 

Other income (expense)

 

 

 

 

 

 

 

Interest expense, net

 

(265

)

(262

)

(285

)

Debtor-in-possession debt issuance costs

 

(63

)

 

 

 

 

Loss on early extinguishment of debt

 

(20

)

 

 

(29

)

Foreign currency exchange gains (losses)

 

(14

)

36

 

(52

)

Other, net

 

14

 

(5

)

(5

)

Loss before reorganization items and income taxes

 

(55

)

(2,995

)

(76

)

Reorganization items

 

40

 

 

 

 

 

Loss before income taxes

 

(15

)

(2,995

)

(76

)

(Provision for) benefit from income taxes

 

23

 

177

 

(27

)

Net income (loss)

 

8

 

(2,818

)

(103

)

Preferred stock dividends and accretion

 

(11

)

(12

)

(12

)

Net loss attributable to common stockholders

 

$

(3

)

$

(2,830

)

$

(115

)

 

 

 

 

 

 

 

 

Basic and diluted earnings per common share

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(.01

)

$

(11.01

)

$

(.45

)

Weighted average shares outstanding

 

257

 

257

 

256

 

 

See notes to consolidated financial statements.

 

49



Table of Contents

 

SMURFIT-STONE CONTAINER CORPORATION

(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

Common Stock

 

Preferred Stock

 

 

 

 

 

Accumulated

 

 

 

 

 

Number

 

Par

 

Number

 

 

 

Additional

 

Retained

 

Other

 

 

 

 

 

of

 

Value,

 

of

 

 

 

Paid-In

 

Earnings

 

Comprehensive

 

 

 

(In millions, except share data)

 

Shares

 

$.01

 

Shares

 

Amount

 

Capital

 

(Deficit)

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2007

 

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

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,818

)

 

 

(2,818

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred hedge adjustments, net of tax benefit of $22

 

 

 

 

 

 

 

 

 

 

 

 

 

(34

)

(34

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

(6

)

(6

)

Employee benefit plan liability adjustments, net of tax benefit of $241

 

 

 

 

 

 

 

 

 

 

 

 

 

(401

)

(401

)

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,259

)

Issuance of common stock under stock option and restricted stock plans

 

885,517

 

 

 

 

 

 

 

7

 

 

 

 

 

7

 

Preferred stock dividends and accretion

 

 

 

 

 

 

 

4

 

 

 

(12

)

 

 

(8

)

Balance at December 31, 2008

 

257,087,296

 

3

 

4,599,300

 

101

 

4,073

 

(4,888

)

(694

)

(1,405

)

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

8

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred hedge adjustments, net of tax expense of $23

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 

36

 

Foreign currency translation adjustment, net of tax expense of $1

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

3

 

Employee benefit plan liability adjustments, net of tax benefit of $6

 

 

 

 

 

 

 

 

 

 

 

 

 

(24

)

(24

)

Comprehensive income