UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x
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Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
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o
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
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For Quarter Ended March 31, 2010
Commission File Number 0-23876
SMURFIT-STONE
CONTAINER CORPORATION
(Exact name of
registrant as specified in its charter)
Delaware
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43-1531401
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(State or other
jurisdiction of
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(IRS Employer
Identification No.)
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incorporation or
organization)
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222 North LaSalle Street, Chicago, Illinois 60601
(Address of principal executive offices) (Zip
Code)
(312)
346-6600
(Registrants
telephone number, including area code)
Not Applicable
(Former name,
former address and former fiscal year, if
changed since last report)
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 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
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Accelerated
filer
o
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Non-accelerated
filer
o
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Smaller
Reporting Company
x
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(Do not check if
a smaller reporting company)
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Indicate by check mark if the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
APPLICABLE ONLY TO
CORPORATE ISSUERS:
As of May 3, 2010, the
registrant had outstanding 257,261,844 shares of common stock, $.01 par value
per share.
PART I -
FINANCIAL INFORMATION
Item 1.
Financial Statements
SMURFIT-STONE CONTAINER CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31, (In millions, except per share data)
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2010
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2009
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Net sales
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$
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1,461
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$
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1,371
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Costs and expenses
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Cost of goods sold
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1,356
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1,217
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Selling and
administrative expenses
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151
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145
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Restructuring (income)
expense
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(4
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)
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13
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Loss on disposal of
assets
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2
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Other operating income
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(11
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)
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Operating loss
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(31
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)
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(6
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)
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Other income (expense)
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Interest expense, net
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(13
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)
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(71
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)
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Debtor-in-possession
debt issuance costs
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(63
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)
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Loss on early
extinguishment of debt
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(20
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)
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Foreign currency
exchange gains (losses)
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(6
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)
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3
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Other, net
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2
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(2
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)
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Loss before
reorganization items and income taxes
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(48
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)
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(159
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)
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Reorganization items
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(41
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)
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(54
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)
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Loss before income
taxes
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(89
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)
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(213
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)
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Provision for income
taxes
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(1
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)
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Net loss
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(89
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)
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(214
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)
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Preferred stock
dividends and accretion
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(2
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)
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(3
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)
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Net loss attributable
to common stockholders
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$
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(91
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)
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$
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(217
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)
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Basic and diluted
earnings per common share
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Net loss attributable
to common stockholders
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$
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(0.35
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)
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$
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(0.84
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)
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Weighted average shares
outstanding
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258
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257
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See notes to consolidated
financial statements.
1
SMURFIT-STONE CONTAINER CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
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March 31,
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December 31,
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(In millions, except share
data)
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2010
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2009
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(Unaudited)
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Assets
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Current assets
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Cash and cash
equivalents
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$
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702
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$
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704
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Restricted cash
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22
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9
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Receivables, less
allowances of $23 in 2010 and $24 in 2009
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711
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615
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Receivable for
alternative energy tax credits
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11
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59
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Inventories
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Work-in-process and
finished goods
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114
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105
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Materials and supplies
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358
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347
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472
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452
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Refundable income taxes
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25
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23
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Prepaid expenses and
other current assets
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46
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43
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Total current assets
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1,989
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1,905
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Net property, plant and
equipment
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3,029
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3,081
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Timberland, less timber
depletion
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2
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2
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Deferred income taxes
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23
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23
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Other assets
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60
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66
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$
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5,103
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$
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5,077
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Liabilities
and Stockholders Equity (Deficit)
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Liabilities not subject
to compromise
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Current liabilities
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Current maturities of
long-term debt
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$
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1,353
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$
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1,354
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Accounts payable
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463
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387
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Accrued compensation
and payroll taxes
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140
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145
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Interest payable
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14
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12
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Other current
liabilities
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143
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164
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Total current
liabilities
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2,113
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2,062
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Other long-term liabilities
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119
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117
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Total liabilities not
subject to compromise
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2,232
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2,179
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Liabilities subject to
compromise
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4,307
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4,272
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Total liabilities
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6,539
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6,451
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Stockholders equity
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Preferred stock,
aggregate liquidation preference of $126; 25,000,000 shares authorized;
4,599,300 issued and outstanding
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104
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104
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Common stock, par value
$.01 per share; 400,000,000 shares authorized; 257,725,167 and 257,482,839
issued and outstanding in 2010 and 2009, respectively
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3
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3
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Additional paid-in
capital
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4,082
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4,081
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Retained earnings
(deficit)
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(4,972
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)
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(4,883
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)
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Accumulated other
comprehensive income (loss)
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(653
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)
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(679
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)
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Total stockholders
equity (deficit)
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(1,436
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)
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(1,374
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)
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$
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5,103
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$
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5,077
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See notes to consolidated
financial statements.
2
SMURFIT-STONE CONTAINER CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31, (In millions)
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2010
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2009
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Cash
flows from operating activities
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Net loss
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$
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(89
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)
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$
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(214
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)
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Adjustments to
reconcile net loss to net cash provided by operating activities
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Loss on early
extinguishment of debt
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20
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Depreciation, depletion
and amortization
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85
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90
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Debtor-in-possession
debt issuance costs
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63
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Amortization of
deferred debt issuance costs
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2
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Deferred income taxes
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(2
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)
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(1
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)
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Pension and
postretirement benefits
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28
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(7
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)
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Loss on disposal of
assets
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2
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Non-cash restructuring
(income) expense
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(3
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)
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1
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Non-cash stock-based
compensation
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1
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2
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Non-cash foreign
currency exchange (gains) losses
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6
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(3
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)
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Non-cash reorganization
items
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26
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38
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Change in restricted
cash for utility deposits
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2
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Change in operating
assets and liabilities, net of effects from acquisitions and dispositions
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|
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Receivables and
retained interest in receivables sold
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(93
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)
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(61
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)
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Receivable for
alternative energy tax credits
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48
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|
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Inventories
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(19
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)
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(15
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)
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Prepaid expenses and
other current assets
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(3
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)
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(3
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)
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Accounts payable and
accrued liabilities
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46
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159
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Interest payable
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3
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26
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Other, net
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14
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12
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Net cash provided by
operating activities
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50
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111
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Cash
flows from investing activities
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|
|
|
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Expenditures for
property, plant and equipment
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(34
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)
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(39
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)
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Proceeds from property
disposals
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6
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|
1
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Advances to affiliates,
net
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(15
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)
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Net cash used for
investing activities
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(28
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)
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(53
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)
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Cash
flows from financing activities
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|
|
|
|
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Proceeds from
debtor-in-possession financing
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440
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Net borrowings
(repayments) of long-term debt
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(1
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)
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72
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Repurchase of
receivables
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|
|
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(385
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)
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Debtor-in-possession
debt issuance costs
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|
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(63
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)
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Deferred debt issuance
costs
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(9
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)
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|
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Change in restricted
cash for collateralizing outstanding letters of credit
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(15
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)
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Net cash provided by
(used for) financing activities
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(25
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)
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64
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|
|
|
|
|
|
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Effect of exchange rate
changes on cash
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1
|
|
|
|
Increase
(decrease) in cash and cash equivalents
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(2
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)
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122
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|
Cash and cash
equivalents
|
|
|
|
|
|
Beginning of period
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704
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126
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End of period
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$
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702
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$
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248
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|
See notes to consolidated
financial statements.
3
SMURFIT-STONE
CONTAINER CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share data)
1.
Bankruptcy Proceedings
Chapter 11 Bankruptcy Filings
On January 26, 2009 (the Petition Date),
Smurfit-Stone Container Corporation (SSCC or the Company) and its 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, the Companys 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).
The Companys 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, the Companys common stock and its 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.
The Companys common stock and Preferred
Stock are now quoted on the Pink Sheets Electronic Quotation Service 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 the Companys 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.
Since January 26, 2009, the date of the bankruptcy filings, the
Company discontinued interest payments on its unsecured senior notes and certain
other unsecured debt.
The Company and its 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, the Company and certain of its
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.
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
Smurfit-Stone Container Enterprises, Inc. (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, the Company 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
4
Canadian DIP
Revolver. In accordance with the terms of the DIP Credit
Agreement, in January 2009 the Company 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
under the programs 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.
As all borrowings under the DIP Credit Agreement were
paid in full as of December 31, 2009, the Company allowed the DIP Credit
Agreement to expire on the maturity date of January 28, 2010. Prior to the maturity of the DIP Credit
Agreement on January 28, 2010, the Company transferred $15 million of
available cash to a restricted cash account to secure letters of credit under
the DIP Credit Agreement.
Reorganization Process
The Bankruptcy Courts
approved payment of certain of the Companys 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 the
Companys business. The Company retained
legal and financial professionals to advise it on the bankruptcy proceedings.
Immediately after filing
the Chapter 11 Petition and Canadian Petition, the Company notified all known
current or potential creditors of the bankruptcy filings. Subject to certain exceptions under the
Bankruptcy Code and the CCAA, the Companys bankruptcy filings automatically
enjoined, or stayed, the continuation of any judicial or administrative
proceedings or other actions against the Company or its 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 the
Company, or to create, perfect or enforce any lien against its 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 the Company. 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 the Company agrees to perform its obligations
and cure all existing defaults under the contract or lease, and rejection
means that it is relieved from its obligations to perform further under the
contract or lease, but is 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,
the Company received approval from the Bankruptcy Courts to reject a number of
leases and executory contracts of various types. Liabilities subject to compromise have been
recorded related to the rejection of executory contracts and unexpired 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. Due to the uncertain nature of many of the
unresolved claims and rejection damages, the Company cannot project the
magnitude of such claims and rejection damages with certainty.
On May 4, 2010, the
U.S. Court granted the Companys motion for an order authorizing the assumption
of certain executory contracts and unexpired leases and finalizing all but an
insignificant amount of the cure amounts related to these assumed executory
contracts and unexpired leases. As a
result, the Company concluded its review of its executory contracts and
unexpired leases and does not expect to reject any additional executory
contracts or unexpired leases. The
Company expects that the assumption of the executory contracts and unexpired
leases in the May 4, 2010 court order will convert certain of the
liabilities shown on the accompanying consolidated balance sheets as
liabilities subject to compromise to liabilities not subject to compromise.
5
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 the Company 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
the Companys 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 the Company 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 the Companys 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, the Company 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 the Companys pre-petition obligations,
set forth the revised capital structure of the newly reorganized entity and
provide for corporate governance subsequent to the Companys 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 the Companys liabilities and securities, including its common stock,
is highly speculative. Appropriate
caution should be exercised with respect to existing and future investments in
any of the Companys liabilities and/or securities.
The Proposed Plan of
Reorganization
On December 1, 2009,
the Debtors filed their Joint 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 (the Disclosure Statement).
Also, on March 19, 2010, the Debtors filed a Supplement to the
Proposed Plan of Reorganization. Key
elements of the Proposed Plan of Reorganization were as follows:
·
the Company and its subsidiary, SSCE,
would merge and become the Reorganized Smurfit-Stone that would be governed by
a board of directors that will include Patrick J. Moore, the Companys current
Chairman and Chief Executive Officer, Steven J. Klinger, the Companys current
President and Chief Operating Officer, and a number of independent directors,
including a non-executive chairman 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;
6
·
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 is expected to be traded on the New York Stock Exchange,
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 the Companys existing equity
securities would be cancelled and existing shareholders of the Companys common
and Preferred Stock would receive no distribution on account of their shares;
·
the assets of the Canadian Debtors, other
than Stone Container Finance Company II, 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 its
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 Proposed Plan of
Reorganization.
The deadline for voting
and objections to the Proposed Plan of Reorganization was March 29,
2010. The Proposed Plan of Reorganization was overwhelmingly approved
by number and dollar amount of the required classes of creditors of
each of the Debtors, with the exception of Stone Container Finance Company
II. Stone Container Finance Company II will be removed from the Proposed
Plan of Reorganization. The failure to confirm the Proposed Plan of
Reorganization of Stone Container Finance Company II will not impact the
ability of the Debtors to confirm the Proposed Plan of Reorganization for all
other Debtors. A meeting of creditors was held for the Canadian debtor
subsidiaries on April 6, 2010, at which the necessary votes were received
to confirm the Proposed Plan of Reorganization by all requisite classes of
creditors other than Stone Container Finance Company II.
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 with respect to the Proposed Plan of
7
Reorganization commenced
in the U.S. Court on April 15, 2010, and concluded on May 4, 2010,
and a hearing was conducted in the Canadian Court on May 3, 2010. The Company anticipates that rulings from the
U.S. Court and the Canadian Court on the confirmation will be issued and the
Debtors will emerge from Chapter 11 and CCAA proceedings during the second
quarter of 2010, following the issuance of orders confirming the Proposed Plan
of Reorganization. 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 and (iii) furnish related indemnities. On February 1, 2010, the Company filed
a motion with the U.S. Court seeking approval to enter into a senior secured
term loan exit facility (the Term Loan Facility).
On February 16,
2010, the U.S. Court granted the motion and authorized the Company and certain
of its affiliates to enter into the Term Loan Facility. On the same date, the U.S. Court also granted
the Companys 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, the Company and certain of its
subsidiaries entered into the Term Loan Facility that provides for an aggregate
term loan commitment of $1,200 million.
In addition, the Company entered into an ABL Revolving Facility with
aggregate commitments of $650 million (including a $100 million Canadian
Tranche) on April 15, 2010. The
ABL Revolving Facility includes 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 the Companys 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.
The Company is 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.
The Company is permitted,
subject to obtaining lender commitments, to add incremental commitments under
the ABL Revolving Facility in an aggregate amount up to $150 million. Each incremental commitment is conditioned on
(a) there existing no defaults, (b) any new lender providing an
incremental commitment shall require the consent of the Administrative Agent,
each Issuing Lender, the Swingline Lender and the Fronting Lender, (c) the
minimum amount of any increase must be at least $25 million, (d) the
Company shall not increase the commitments more than three times in the
aggregate, (e) if the interest rate margins and commitment fees with
respect to the incremental commitments are higher than those applicable to the
existing commitments under the ABL Revolving facility, then the interest rate
margins and commitment fees for the existing commitments under the ABL
Revolving Facility will be increased to match those for the incremental
commitments, and (f) the satisfaction of other customary closing
conditions.
On the date the Company
emerges from bankruptcy, the Term Loan will be funded and borrowings will 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 the Companys outstanding secured
indebtedness under its pre-petition Credit Facility and pay remaining fees,
costs and expenses related to
8
and contemplated by the
Exit Credit Facilities and the Proposed Plan of Reorganization. Total fees,
costs and expenses related to the Exit Credit Facilities are estimated to be
approximately $50 million, of which $9 million was paid during the first
quarter of 2010. Borrowings under the
ABL Revolver Facility will be available for working capital purposes, capital expenditures,
permitted acquisitions and general corporate purposes.
The term loan (the 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 the Companys 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 the Company 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 the Companys option at a rate equal to: (A) 3.75% plus the
alternate base rate (the 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
(the ABL Revolver) will mature four years from the funding date of the ABL
Revolving Facility. The Company 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 applicable margin could be adjusted in the future
from 2.25% to a rate as high as 2.75% for base loans and 3.25% to a rate as
high as 3.75% for LIBOR loans based on the average historical utilization under
the ABL Revolving Facility. The Company
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.
Borrowings under the Exit
Credit Facilities will be guaranteed by the Company and certain of its
subsidiaries, and would be secured by first priority liens and second priority
liens on substantially all its presently owned and hereafter acquired assets
and those of each of its 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 the Companys financial and business operations and those of certain of its
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 the
Company will continue as a going concern, although its bankruptcy filings raise
substantial doubt about its ability to continue as a going concern. The Companys ability to continue as a going
concern is dependent on restructuring its obligations in a manner that allows
it to obtain confirmation of the Proposed 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 the Company be unable to continue as a going concern.
9
Financial Reporting
Considerations
For periods subsequent to
the bankruptcy filings, the Company has 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 statements of
operations. In addition, pre-petition
obligations that may be impacted by the bankruptcy reorganization process have
been classified on the consolidated balance sheets 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
The Companys
reorganization items directly related to the process of reorganizing the
Company under Chapter 11 and the CCAA, as recorded in its consolidated
statements of operations, consist of the following:
|
|
Three months ended
March 31,
|
|
(Income) Expense
|
|
2010
|
|
2009
|
|
Provision for
rejected/settled executory contracts and leases
|
|
$
|
29
|
|
$
|
39
|
|
Professional
fees
|
|
15
|
|
16
|
|
Accounts payable
settlement gains
|
|
(3
|
)
|
(1
|
)
|
Total
reorganization items
|
|
$
|
41
|
|
$
|
54
|
|
Professional fees
directly related to the reorganization include fees associated with advisors to
the Company, the Creditors Committee and certain secured creditors.
Net cash paid for
reorganization items related to professional fees totaled $16 million and $6
million, respectively, for the three months ended March 31, 2010 and 2009.
Reorganization items
exclude employee severance and other restructuring charges recorded during 2009
and 2010.
Under the Proposed Plan
of Reorganization, interest expense on the unsecured senior notes subsequent to
the Petition Date would not be paid. As
a result, in the fourth quarter of 2009, the Company concluded it was not
probable that interest expense on the unsecured senior notes subsequent to the
Petition Date would be an allowed claim.
During the fourth quarter of 2009, the Company recorded income in
reorganization items for the reversal of accrued post-petition unsecured
interest expense and discontinued recording unsecured interest expense. Interest expense recorded on unsecured debt
was zero and $48 million for the first quarter of 2010 and 2009, respectively.
In addition, holders of
the Companys Preferred Stock would not be entitled to receive any amounts
under the Proposed Plan of Reorganization.
As a result, in the fourth quarter of 2009, the Company concluded it was
not probable that Preferred Stock dividends that were accrued subsequent to the
Petition Date would be allowed claims.
Preferred Stock dividends that were accrued post-petition and included
in liabilities subject to compromise were reversed in the fourth quarter of
2009. ASC 505-10-50-5, Equity, requires
entities to disclose in the financial statements the aggregate amount of
cumulative preferred dividends in arrears.
Preferred Stock dividends in arrears were $11 million as of March 31,
2010, and $9 million as of December 31, 2009. The Preferred Stock dividends in arrears
since the Petition Date are
10
presented only to reflect
preferred stockholders rights to dividends over common stockholders and are
not reflected in the Preferred Stock value in the consolidated balance sheets.
Other Bankruptcy Related Costs
During the first quarter
of 2010, the Company recorded $6 million in selling and administrative expenses
related to amounts accrued under the Companys 2009 long-term incentive plan.
Debtor-in-possession debt
issuance costs of $63 million were incurred and paid during the first quarter
of 2009 in connection with entering into the DIP Credit Agreement, and are
separately presented in the 2009 consolidated statements of operations.
Liabilities Subject to Compromise
Liabilities subject to
compromise consist of the following:
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
|
|
|
|
Unsecured
debt
|
|
$
|
2,439
|
|
$
|
2,439
|
|
Accounts
payable
|
|
325
|
|
339
|
|
Interest
payable
|
|
47
|
|
47
|
|
Retiree
medical obligations
|
|
178
|
|
176
|
|
Pension
obligations
|
|
1,146
|
|
1,136
|
|
Unrecognized
tax benefits
|
|
47
|
|
46
|
|
Executory
contracts and leases
|
|
102
|
|
72
|
|
Other
|
|
23
|
|
17
|
|
Liabilities
subject to compromise
|
|
$
|
4,307
|
|
$
|
4,272
|
|
Liabilities subject to
compromise represent pre-petition unsecured obligations that will be settled
under the Proposed 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 the Companys business. Obligations
associated with these matters are not classified as liabilities subject to
compromise.
The Company has rejected certain executory contracts
and unexpired leases with respect to the Companys operations with the approval
of the Bankruptcy Courts. 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.
11
Debtor Financial Statements
The following condensed
combined financial statements
represent the financial statements for the Debtors
only. The Companys Non-Debtor
Subsidiaries are accounted for as non-consolidated subsidiaries in these
financial statements and, as such, their net loss is included in equity in
losses of Non-Debtor Subsidiaries, in the condensed combined statements of
operations and their net assets are included as Investments in and advances to
Non-Debtor Subsidiaries in the condensed combined balance sheets. The Debtors financial statements have been
prepared in accordance with the guidance in ASC 852.
Intercompany transactions
between the Debtors have been eliminated in the financial statements.
Intercompany transactions between the Debtors and Non-Debtor Subsidiaries have
not been eliminated in the Debtors financial statements
.
12
SMURFIT-STONE
CONTAINER CORPORATION
CONDENSED COMBINED STATEMENTS OF OPERATIONS DEBTORS
(Unaudited)
Three Months Ended
March 31, (In millions)
|
|
2010
|
|
2009
|
|
Net
sales
|
|
$
|
1,436
|
|
$
|
1,338
|
|
Costs
and expenses
|
|
|
|
|
|
Cost
of goods sold
|
|
1,336
|
|
1,186
|
|
Selling
and administrative expenses
|
|
146
|
|
141
|
|
Restructuring
(income) expense
|
|
(4
|
)
|
12
|
|
Loss
on disposal of assets
|
|
|
|
2
|
|
Other
operating income
|
|
(11
|
)
|
|
|
Operating
loss
|
|
(31
|
)
|
(3
|
)
|
Other
income (expense)
|
|
|
|
|
|
Interest
expense, net
|
|
(12
|
)
|
(71
|
)
|
Debtor-in-possession
debt issuance costs
|
|
|
|
(63
|
)
|
Loss
on early extinguishment of debt
|
|
|
|
(20
|
)
|
Foreign
currency exchange gains (losses)
|
|
(6
|
)
|
3
|
|
Equity
in losses of non-debtor subsidiaries
|
|
|
|
(4
|
)
|
Other,
net
|
|
1
|
|
(1
|
)
|
Loss
before reorganization items and income taxes
|
|
(48
|
)
|
(159
|
)
|
Reorganization
items
|
|
(41
|
)
|
(54
|
)
|
Loss
before income taxes
|
|
(89
|
)
|
(213
|
)
|
Provision
for income taxes
|
|
|
|
(1
|
)
|
Net
loss
|
|
(89
|
)
|
(214
|
)
|
Preferred
stock dividends and accretion
|
|
(2
|
)
|
(3
|
)
|
Net
loss attributable to common stockholders
|
|
$
|
(91
|
)
|
$
|
(217
|
)
|
13
SMURFIT-STONE CONTAINER CORPORATION
CONDENSED COMBINED BALANCE SHEETS
DEBTORS
|
|
March 31,
|
|
December 31,
|
|
(In millions)
|
|
2010
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
684
|
|
$
|
683
|
|
Restricted cash
|
|
22
|
|
9
|
|
Receivables
|
|
677
|
|
583
|
|
Receivable for
alternative energy tax credits
|
|
11
|
|
59
|
|
Inventories
|
|
452
|
|
436
|
|
Refundable income taxes
|
|
24
|
|
23
|
|
Prepaid expenses and
other current assets
|
|
44
|
|
41
|
|
Total current assets
|
|
1,914
|
|
1,834
|
|
Net property, plant and
equipment
|
|
2,997
|
|
3,049
|
|
Timberland, less timber
depletion
|
|
2
|
|
2
|
|
Deferred income taxes
|
|
22
|
|
21
|
|
Investments in and
advances to non-debtor subsidiaries
|
|
80
|
|
76
|
|
Other assets
|
|
60
|
|
66
|
|
|
|
$
|
5,075
|
|
$
|
5,048
|
|
Liabilities
and Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities not subject
to compromise
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Current maturities of
long-term debt
|
|
$
|
1,348
|
|
$
|
1,350
|
|
Accounts payable
|
|
446
|
|
370
|
|
Accrued compensation
and payroll taxes
|
|
138
|
|
142
|
|
Interest payable
|
|
14
|
|
12
|
|
Other current
liabilities
|
|
139
|
|
159
|
|
Total current
liabilities
|
|
2,085
|
|
2,033
|
|
Other long-term
liabilities
|
|
119
|
|
117
|
|
Total liabilities not
subject to compromise
|
|
2,204
|
|
2,150
|
|
|
|
|
|
|
|
Liabilities subject to
compromise
|
|
4,307
|
|
4,272
|
|
Total liabilities
|
|
6,511
|
|
6,422
|
|
|
|
|
|
|
|
Total equity (deficit)
|
|
(1,436
|
)
|
(1,374
|
)
|
|
|
$
|
5,075
|
|
$
|
5,048
|
|
14
SMURFIT-STONE
CONTAINER CORPORATION
CONDENSED
COMBINED STATEMENTS OF CASH FLOWS DEBTORS
(Unaudited)
Three Months Ended
March 31, (In millions)
|
|
2010
|
|
2009
|
|
Cash flows from operating activities
|
|
|
|
|
|
Net
loss
|
|
$
|
(89
|
)
|
$
|
(214
|
)
|
Adjustments
to reconcile net loss to net cash provided by operating activities
|
|
|
|
|
|
Loss
on early extinguishment of debt
|
|
|
|
20
|
|
Depreciation,
depletion and amortization
|
|
83
|
|
89
|
|
Debtor-in-possession
debt issuance costs
|
|
|
|
63
|
|
Amortization
of deferred debt issuance costs
|
|
|
|
2
|
|
Deferred
income taxes
|
|
(2
|
)
|
|
|
Pension
and postretirement benefits
|
|
28
|
|
(7
|
)
|
Loss
on disposal of assets
|
|
|
|
2
|
|
Non-cash
restructuring (income) expense
|
|
(3
|
)
|
1
|
|
Non-cash
stock-based compensation
|
|
1
|
|
2
|
|
Non-cash
foreign currency exchange (gains) losses
|
|
6
|
|
(3
|
)
|
Non-cash
reorganization items
|
|
26
|
|
38
|
|
Change
in restricted cash for utility deposits
|
|
2
|
|
|
|
Change
in operating assets and liabilities, net of effects from acquisitions and
dispositions
|
|
|
|
|
|
Receivables
and retained interest in receivables sold
|
|
(91
|
)
|
(65
|
)
|
Receivable
for alternative energy tax credit
|
|
48
|
|
|
|
Inventories
|
|
(15
|
)
|
(12
|
)
|
Prepaid
expenses and other current assets
|
|
(3
|
)
|
(5
|
)
|
Accounts
payable and accrued liabilities
|
|
47
|
|
166
|
|
Intercompany
receivable with non-debtors
|
|
(1
|
)
|
(21
|
)
|
Interest
payable
|
|
3
|
|
26
|
|
Other,
net
|
|
13
|
|
15
|
|
Net
cash provided by operating activities
|
|
53
|
|
97
|
|
Cash flows from investing activities
|
|
|
|
|
|
Expenditures
for property, plant and equipment
|
|
(33
|
)
|
(38
|
)
|
Proceeds
from property disposals
|
|
6
|
|
1
|
|
Advances
to affiliates
|
|
|
|
(18
|
)
|
Net
cash used for investing activities
|
|
(27
|
)
|
(55
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
Proceeds
from debtor-in-possession financing
|
|
|
|
440
|
|
Net
borrowings (repayments) of long-term debt
|
|
(1
|
)
|
72
|
|
Repurchase
of receivables
|
|
|
|
(385
|
)
|
Debtor-in-possession
debt issuance costs
|
|
|
|
(63
|
)
|
Deferred
debt issuance costs
|
|
(9
|
)
|
|
|
Change
in restricted cash for collateralizing outstanding letters of credit
|
|
(15
|
)
|
|
|
Net
cash provided by (used for) financing activities
|
|
(25
|
)
|
64
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
1
|
|
106
|
|
Cash
and cash equivalents
|
|
|
|
|
|
Beginning
of period
|
|
683
|
|
120
|
|
End
of period
|
|
$
|
684
|
|
$
|
226
|
|
15
2.
Significant Accounting Policies
Basis of Presentation:
The accompanying
consolidated financial statements and notes of the Company have been prepared
in accordance with the instructions to Form 10-Q and reflect all
adjustments which management believes necessary (which include only normal
recurring accruals) to present fairly the Companys financial position, results
of operations and cash flows. These
statements, however, do not include all information and notes necessary for a
complete presentation of financial position, results of operations and cash
flows in conformity with U.S. generally accepted accounting principles. Interim results may not necessarily be
indicative of results that may be expected for any other interim period or for
the year as a whole. These financial
statements should be read in conjunction with the audited consolidated
financial statements and notes included in the SSCC Annual Report on Form 10-K
for the year ended December 31, 2009 (2009 Form 10-K) filed March 2,
2010 with the Securities and Exchange Commission.
SSCC
is a holding company that owns 100% of the equity interest in SSCE. The Company has no operations other than its
investment in SSCE. SSCE has domestic
and international operations.
Recently Adopted Accounting Standards:
Effective January 1, 2010, the
Company adopted the amendments to ASC 860, Transfers and Servicing (ASC 860). The amendments removed 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. The amendments to ASC 860 did not impact the
Companys consolidated financial statements.
Effective January 1, 2010, the Company
adopted the amendments to ASC 820, Fair Value Measurements and Disclosures (ASC
820). The amendments require new
disclosures for transfers in and out of fair value hierarchy Levels 1 and 2 and
activity within fair value hierarchy Level 3.
The amendments also clarify existing disclosures regarding the
disaggregation for each class of assets and liabilities, and the disclosures
about inputs and valuation techniques.
The amendments to ASC 820 did not have a material impact on the Companys
consolidated financial statements.
3.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
4.
Restructuring Activities
The Company continues to
review and evaluate various restructuring and other alternatives to streamline
operations, improve efficiencies and reduce costs. These actions subject the Company to
additional short-term costs, which may include facility shutdown costs, asset
impairment charges, lease commitment costs, severance costs and other closing
costs.
During the first quarter
of 2010, the Company closed one converting facility, announced the closure of
two additional converting facilities and sold four previously closed
facilities. The Company recorded
restructuring income of $4 million, including an $11 million gain related to
the sale of previously closed facilities, of which $8 million resulted from the
legal release of environmental liability obligations. The remaining offsetting charges of $7
million were primarily for severance and benefits. As a result of the closure activities in the
first quarter of 2010 and other ongoing initiatives, the Company reduced its
headcount by approximately 760 employees.
The net sales of the announced and closed converting facilities in 2010
prior to closure and for the year ended December 31, 2009 were $16 million
and $92 million, respectively. The
majority of these net sales are expected to be transferred to other operating
facilities. Additional charges of up to
$3 million are expected to be recorded in future periods for severance and
benefits related to the closure of these and previously closed facilities.
16
During the first quarter
of 2009, the Company recorded restructuring charges of $13 million, including
non-cash charges of $1 million related to the acceleration of depreciation for
converting equipment expected to be abandoned or taken out of service. The
remaining charges of $12 million were primarily for severance and benefits.
At December 31,
2009, the Company had $54 million of accrued exit liabilities related to the
restructuring of operations. For the
three months ended March 31, 2010, the Company incurred $20 million of
cash disbursements, primarily severance and benefits, related to these exit
liabilities. In addition, these exit
liabilities decreased by $8 million resulting from the release of environmental
liability obligations upon the sale of previously closed facilities. During the three months ended March 31,
2010, the Company incurred $4 million of cash disbursements, primarily
severance and benefits, related to exit liabilities established during 2010.
5.
Alternative Energy Tax Credits
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 taxpayers trade or business through December 31, 2009,
at which time the credit expired. In May 2009,
SSCE was notified that its registration as an alternative fuel mixer was approved
by the Internal Revenue Service. The
Company subsequently submitted refund claims of approximately $654 million for
2009 related to production at ten of its U.S. mills. The Company received refund claims of $595
million in 2009 and $59 million during the first quarter of 2010. During 2009, the Company recorded other
operating income of $633 million, net of fees and expenses, in its consolidated
statements of operations related to this matter. In March 2010, the Company recorded
other operating income of $11 million relating to an adjustment of refund
claims submitted in 2009. The Company
expects to receive the refund claim in the fourth quarter of 2010.
6.
Restricted Cash
At March 31, 2010,
the Company had restricted cash of $22 million as approved by the U.S. Court,
including $7 million to provide financial assurance to certain utility vendors
and $15 million to collateralize outstanding letters of credit.
7.
Accounts Receivable
Securitization Programs
On January 28, 2009,
in conjunction with the filing of the Chapter 11 Petition and the Canadian
Petition, the accounts receivable securitization programs were terminated and
all outstanding receivables previously sold to the non-consolidated financing
entities were repurchased with proceeds from borrowings under the DIP Credit
Agreement (See Note 1). The repurchase
of receivables of $385 million was included in the cash flows from financing
activities in the consolidated statement of cash flows for the three months
ended March 31, 2009.
8.
Guarantees and Commitments
The Company has certain
wood chip processing contracts extending from 2012 through 2018 with minimum
purchase commitments. As part of the
agreements, the Company guarantees the third party contractors debt
outstanding and has a security interest in the chipping equipment. At March 31, 2010, the maximum potential
amount of future payments related to these guarantees was approximately $24
million, which decreases ratably over the life of the contracts. In the event the guarantees on these
contracts are called, proceeds from the liquidation of the chipping equipment
would be based on current market conditions and the Company may not recover in
full the guarantee payments made.
17
The Company was
contingently liable for $18 million under a one year letter of credit, which
was to expire in April 2009, which supported the borrowings of a
previously non-consolidated affiliate.
On March 4, 2009, this letter of credit was drawn on, which increased
borrowings under the Companys pre-petition credit facilities by $18 million.
9.
Long-Term Debt
As of March 31,
2010, as a result of the Companys default, the Company had no availability for
borrowings under SSCEs revolving credit facilities, after giving consideration
to outstanding letters of credit of $87 million. As of March 31, 2010, the
Company had available unrestricted cash and cash equivalents of $702 million
primarily invested in money market funds at a variable interest rate of 0.10%.
10.
Employee Benefit Plans
The Company sponsors
noncontributory defined benefit pension plans for its U.S. employees and also
sponsors noncontributory and contributory defined benefit pension plans for its
Canadian employees. The Companys
defined benefit pension plans cover substantially all hourly employees, as well
as salaried employees hired prior to January 1, 2006. The U.S. and Canadian defined benefit pension
plans for salaried employees were frozen effective January 1, 2009 and March 1,
2009, respectively.
The Companys
postretirement plans provide certain health care and life insurance benefits
for all retired salaried and certain retired hourly employees, and for salaried
and certain hourly employees who reached the age of 60 with ten years of service
as of January 1, 2007.
The components of
net periodic costs for the defined benefit plans and the components of the
postretirement benefit costs are as follows:
|
|
Three months ended March 31,
|
|
|
|
Defined
Benefit Plans
|
|
Postretirement
Plans
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Service
cost
|
|
$
|
7
|
|
$
|
6
|
|
$
|
1
|
|
$
|
1
|
|
Interest
cost
|
|
51
|
|
50
|
|
2
|
|
3
|
|
Expected
return on plan assets
|
|
(51
|
)
|
(50
|
)
|
|
|
|
|
Amortization
of prior service cost (benefit)
|
|
1
|
|
1
|
|
(1
|
)
|
(1
|
)
|
Amortization
of net (gain) loss
|
|
23
|
|
20
|
|
|
|
(1
|
)
|
Multi-employer
plans
|
|
1
|
|
1
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
32
|
|
$
|
28
|
|
$
|
2
|
|
$
|
2
|
|
Patient
Protection and Affordable Care Act
In March 2010,
the Patient Protection and Affordable Care Act (PPACA) was enacted,
potentially impacting the Companys cost to provide healthcare benefits to its
eligible active and retired employees.
The PPACA has both short-term and long-term implications on benefit plan
standards. Implementation of this legislation
is planned to occur in phases, beginning in 2010, but to a greater extent with
the 2011 benefit plan year and extending through 2018.
The
Company is currently analyzing this legislation to determine the full extent of
the impact of the required plan standard changes on its employee healthcare
plans and the resulting costs. While the
Company anticipates that costs to provide healthcare to eligible active
employees and certain retired employees will increase in future years, it is
uncertain at this time, how significant the increase will be.
18
11.
Derivative Instruments and Hedging Activities
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. The
Companys termination value related to its remaining derivative liabilities was
approximately $60 million, recorded in other current liabilities in the
consolidated balance sheet at March 31, 2010. 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 other comprehensive income (loss)
(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 the period when the underlying transaction
was recognized or when the underlying transaction was no longer expected to
occur. As of March 31, 2010, all
amounts in OCI have been recognized through earnings.
The
Companys derivative instruments previously used for its hedging activities
were designed as cash flow hedges and related to minimizing exposures to
fluctuations in the price of commodities used in its operations, the movement
in foreign currency exchange rates and the fluctuations in the interest rate on
variable rate debt. All cash flows
associated with the Companys derivative instruments were classified as
operating activities in the consolidated statements of cash flows.
Commodity
Derivative Instruments
The Company used
derivative instruments, including fixed price swaps, to manage fluctuations in
cash flows resulting from commodity price risk in the procurement of natural
gas and other commodities, including fuel oil and diesel fuel. The objective was to fix the price of a
portion of the Companys purchases of these commodities used in the
manufacturing process. The changes in
the market value of such derivative instruments historically offset the changes
in the price of the hedged item.
For the three
months ended March 31, 2010 and 2009, the Company reclassified an
immaterial amount and an $11 million loss (net of tax), respectively, from OCI
to cost of goods sold when the hedged items were recognized.
For the three
months ended March 31, 2009, the Company recorded a $3 million gain (net
of tax) in cost of goods sold related to the change in fair value, prior to the
Petition Date, of certain commodity derivative instruments not qualifying for
hedge accounting.
For the three
months ended March 31, 2009, the Company recorded a $3 million loss (net
of tax) in cost of goods sold, prior to the Petition Date, on settled commodity
derivative instruments not qualifying for hedge accounting.
Foreign
Currency Derivative Instruments
The Companys principal foreign exchange exposure is the
Canadian dollar. The Company used
foreign currency derivative instruments, including forward contracts and options,
primarily to protect against Canadian currency exchange risk associated with
expected future cash flows.
For the three months ended March 31, 2009, the
Company reclassified a $2 million loss (net of tax) from OCI to cost of goods
sold when the hedged items were recognized.
Interest
Rate Swap Contracts
The Company used interest
rate swap contracts to manage interest rate exposure on $300 million of the
current Tranche B and Tranche C floating rate bank term debt. The accounting for the cash flow impact of
the swap contracts is recorded as an adjustment to interest expense each
period.
19
For each of the three
months ended March 31, 2010 and 2009, the Company reclassified a $1
million loss (net of tax) from OCI to interest expense when the hedged items
were recognized.
12.
Income Taxes
During
the first quarter of 2009, the Company recorded a $1 million income tax
provision for Canadian withholding taxes and interest on unrecognized tax
benefits. The Company has recorded valuation allowances related to the tax
benefits generated for the three months ended March 31, 2010 and 2009
because it is more likely than not that substantially all of the deferred tax
assets generated in 2010 and 2009 may not be realized.
As previously disclosed
in the Companys 2009 Form 10-K, the Canada Revenue Agency (CRA)
examined the Companys income tax returns for tax years 1999 through 2005. In connection with the examination, the CRA
issued assessments of additional income taxes, interest and penalties related
to transfer prices of inventory sold by the Companys Canadian subsidiaries to
its U.S. subsidiaries. Additionally, the
CRA considered certain significant adjustments related principally to taxable
income related to the Companys acquisition of a Canadian company.
In April 2010, the
Company entered into an agreement with the CRA and other provincial tax
authorities to settle all Canadian income tax matters through January 26,
2009. As a result of this agreement, the
CRA will retain approximately $20 million of a tax deposit made by the Company
in 2008 to appeal the transfer price assessments. The remainder of the tax deposit,
approximately $10 million, will be refunded to the Company. In addition, the Company will pay the Province
of Quebec approximately $3 million to settle their claims. GST and QST tax withholdings subsequent to January 26,
2009 will be refunded to the Company.
The settlement agreement will become effective at the time the Canadian
subsidiaries emerge from CCAA proceedings, and transfers of funds are expected
to take place as soon as possible thereafter. Upon emergence from bankruptcy,
the Company expects to record an income tax benefit of approximately $17
million to reflect the outcome of this agreement.
13.
Comprehensive Income (Loss)
Comprehensive
income (loss) is as follows:
|
|
Three months ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Net
loss
|
|
$
|
(89
|
)
|
$
|
(214
|
)
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
Net
changes in fair value of hedging instruments
|
|
|
|
(1
|
)
|
Net
hedging loss reclassified into earnings
|
|
1
|
|
14
|
|
Net
deferred employee benefit plan expense reclassified into earnings
|
|
23
|
|
11
|
|
Foreign
currency translation adjustment
|
|
2
|
|
|
|
Comprehensive
loss
|
|
$
|
(63
|
)
|
$
|
(190
|
)
|
20
14.
Earnings Per Share
The following table
sets forth the computation of basic and diluted earnings per share:
|
|
Three months ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
Net loss
|
|
$
|
(89
|
)
|
$
|
(214
|
)
|
Preferred
stock dividends and accretion
|
|
(2
|
)
|
(3
|
)
|
Net
loss attributable to common stockholders
|
|
$
|
(91
|
)
|
$
|
(217
|
)
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Denominator for
basic and diluted earnings per share adjusted weighted average shares
|
|
258
|
|
257
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share
|
|
$
|
(0.35
|
)
|
$
|
(0.84
|
)
|
Shares of SSCC preferred
stock convertible into three million shares of common stock with an earnings
effect of $2 million and $3 million are excluded from the diluted earnings per
share computations for the three months ended March 31, 2010 and 2009,
respectively, because they are antidilutive.
The Preferred Stock dividends in arrears since the Petition Date are
presented only to reflect preferred stockholders rights to dividends over
common stockholders (See Note 1 - Financial Reporting Considerations).
Employee
stock options and non-vested restricted stock are excluded from the diluted
earnings per share calculations for the three months ended March 31, 2010
and 2009, respectively, because they are antidilutive.
15.
Fair Value Measurements
Certain financial assets
and liabilities are recorded at fair value on a recurring basis, including
derivative instruments prior to termination (See Note 11) and the Companys
residual interest in the Timber Note Holdings (TNH) investment.
Fair value is defined as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. In determining fair
value, the Company uses various valuation approaches, including market, income
and/or cost approaches. ASC 820
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when available. Observable inputs are inputs that market
participants would use in pricing the asset or liability based on market data
obtained from sources independent of the Company. Unobservable inputs are inputs that reflect
the Companys assumptions about the assumptions market participants would use
in pricing the asset or liability developed based on the best information
available in the circumstances. The
hierarchy for inputs is broken down into three levels based on their
reliability as follows:
Level 1
Valuations based on quoted prices in
active markets for identical assets or liabilities that the Company has the
ability to access. The Company has no
assets or liabilities measured at fair value on a recurring basis utilizing
Level 1 inputs.
21
Level 2
Valuations based on quoted prices in
markets that are not active or for which all significant inputs are observable,
either directly or indirectly. The
Company has no assets or liabilities measured at fair value on a recurring
basis utilizing Level 2 inputs.
Level 3
Valuations based on inputs that are
unobservable and significant to the overall fair value measurement. The Companys assets and liabilities
utilizing Level 3 inputs include the residual interest in the TNH
investment. The fair value of the
residual interest in the TNH investment is estimated using discounted residual
cash flows.
Fair Value on a Recurring Basis
Assets and liabilities
measured at fair value on a recurring basis are categorized in the table below
based upon the level of input to the valuations.
|
|
March 31, 2010
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Residual
interest in TNH investment
|
|
$
|
|
$
|
|
|
$
|
21
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table
presents the changes in Level 3 assets (liabilities) measured at fair value on
a recurring basis for the three months ended March 31, 2010:
|
|
Residual
Interest in
TNH
Investment
|
|
Balance
at January 1, 2010
|
|
$
|
36
|
|
Dividend
received
|
|
(15
|
)
|
Balance
at March 31, 2010
|
|
$
|
21
|
|
Financial Instruments Not
Measured At Fair Value
Some of the Companys financial instruments are not
measured at fair value on a recurring basis but are recorded at amounts that
approximate fair value due to their liquid or short-term nature. The carrying amount of cash equivalents approximates
fair value because of the short maturity of those instruments. The fair values of notes receivable are based
on discounted future cash flows or the applicable quoted market price.
The Companys borrowings are recorded at historical
amounts. The fair value of the Companys
debt is estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
remaining maturities. At March 31,
2010, the carrying value and fair value of the Companys secured borrowings
were $1,353 million and $1,349 million, respectively. At March 31, 2010, the carrying value
and the fair value of the Companys unsecured borrowings, included in
liabilities subject to compromise, were $2,439 and $2,193, respectively.
16.
Contingencies
The Companys past and
present operations include activities which are subject to federal, state and
local environmental requirements, particularly relating to air and water
quality. The Company faces potential
environmental liability as a result of violations of these environmental
requirements, environmental permit terms and similar authorizations that have
occurred from time to time at its facilities.
In addition, the Company faces potential liability for remediation at
certain owned and formerly owned facilities, as well as response costs at
various sites for which it has received notice as being a potentially
responsible party (PRP) concerning hazardous substance contamination. In estimating its reserves for
22
environmental remediation
and future costs, the Companys estimated liability of $6 million reflects the
Companys 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. As of March 31,
2010, the Company had approximately $20 million reserved for environmental
liabilities, of which $5 million is included in other long-term liabilities, $9
million in other current liabilities and $6 million in liabilities subject to
compromise in the consolidated balance sheets.
The Company believes the liability for these matters was adequately
reserved at March 31, 2010.
If all or most of the
other PRPs are unable to satisfy their portion of the clean-up costs at one or
more of the significant sites in which the Company is involved or the Companys
expected share increases, the resulting liability could have a material adverse
effect on the Companys consolidated financial condition, results of operations
or cash flows.
In January 2009, the
Company settled two putative class action cases filed in California state court
on behalf of current and former hourly employees at the Companys 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
(See Note 1). The Company established
reserves of $9 million during 2008 related to these matters. It is anticipated that the Companys
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 the Companys savings plans and Patrick Moore, the Companys
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 the
Companys 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 the Companys
business conditions, debt management and viability, and not taking appropriate
action to protect the Savings Plans assets.
Even though the Company is not a named defendant in the 2009 ERISA Case,
management believes that any indemnification obligations to the Defendants
would be covered by applicable insurance.
During the first quarter
of 2010, two additional ERISA class action lawsuits were filed in the United
States District Court for the Western District of Missouri and the United
States District Court for the District of Delaware, respectively. The defendants in these cases are the
individual committee members of the Administrative Committee, several other of
the Companys executives and the individual members of its Board of
Directors. The suits have similar
allegations as the 2009 ERISA Case described above, with the addition of breach
of fiduciary duty claims related to the Companys pension plans. The Company expects that all 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 the Companys indemnification obligations would be
covered by applicable insurance.
The Company is a
defendant in a number of other lawsuits and claims arising out of the conduct
of its 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 the bankruptcy. As a result,
the Company believes that these matters will not have a material adverse effect
on its consolidated financial condition, results of operations or cash flows.
23
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Some information included
in this report may 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
statement may be influenced by factors that could cause actual outcomes and
results to be materially different from those projected. When used in this document, the words anticipates,
believes, expects, intends and similar expressions as they relate to
Smurfit-Stone Container Corporation 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 our Annual
Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K)
filed with the Securities and Exchange Commission.
Our actual results,
performance or achievements 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 occur, or if any of them do,
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.
GENERAL
Smurfit-Stone Container
Corporation, incorporated in Delaware in 1989, is a holding company with no
business operations of its own. We
conduct our business operations through our wholly-owned subsidiary
Smurfit-Stone Container Enterprises, Inc. (SSCE), a Delaware corporation.
RECENTLY ADOPTED ACCOUNTING
STANDARDS
Effective January 1, 2010, we adopted the
amendments to ASC 860, Transfers and Servicing (ASC 860). The amendments removed 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. The amendments to ASC 860 did not impact our
consolidated financial statements.
Effective January 1, 2010, we adopted the
amendments to ASC 820, Fair Value Measurements and Disclosures (ASC
820). The amendments require new
disclosures for transfers in and out of fair value hierarchy Levels 1 and 2 and
activity within fair value hierarchy Level 3.
The amendments also clarify existing disclosures regarding the
disaggregation for each class of assets and liabilities, and the disclosures
about inputs and valuation techniques.
The amendments to ASC 820 did not have a material impact on our
consolidated financial statements.
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.
24
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.
Since January 26, 2009, the date of the bankruptcy filings, we
discontinued interest payments on our unsecured senior notes and certain other
unsecured debt.
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.
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, in January 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.
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. 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 letters of credit under the DIP
Credit Agreement.
25
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 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 executory contracts of various types.
Liabilities subject to compromise have been recorded related to the
rejection of executory contracts and unexpired 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. Due to the uncertain nature of many of the
unresolved claims and rejection damages, we cannot project the magnitude of
such claims and rejection damages with certainty.
On May 4, 2010, the
U.S. Court granted our motion for an order authorizing the assumption of
certain executory contracts and unexpired leases and finalizing all but an
insignificant amount of the cure amounts related to these assumed executory
contracts and unexpired leases. As a
result, we concluded our review of our executory contracts and unexpired leases
and do not expect to reject any additional executory contracts or unexpired
leases. We expect that the assumption of
the executory contracts and unexpired leases in the May 4, 2010 court
order will convert certain of the liabilities shown on the accompanying
consolidated balance sheets as liabilities subject to compromise to liabilities
not subject to compromise.
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.
26
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 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 (the Disclosure Statement). Also, on March 19, 2010, the Debtors
filed a Supplement to the Proposed Plan of Reorganization. Key elements of the Proposed Plan of
Reorganization were as follows:
·
we and our subsidiary, SSCE, would merge
and become the 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 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 is expected to be traded on the New York Stock Exchange
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;
27
·
the assets of the Canadian Debtors, other
than Stone Container Finance Company II, 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 deadline for voting
and objections to the Proposed Plan of Reorganization was March 29,
2010. The Proposed Plan of Reorganization was overwhelmingly approved
by number and dollar amount of the required classes of creditors of
each of the Debtors, with the exception of Stone Container Finance Company
II. Stone Container Finance Company II will be removed from the Proposed
Plan of Reorganization. The failure to confirm the Proposed Plan of
Reorganization of Stone Container Finance Company II will not impact the
ability of the Debtors to confirm the Proposed Plan of Reorganization for all
other Debtors. A meeting of creditors was held for the Canadian debtor
subsidiaries on April 6, 2010, at which the necessary votes were received
to confirm the Proposed Plan of Reorganization by all requisite classes of
creditors other than Stone Container Finance Company II.
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 with respect to the Proposed Plan of
Reorganization commenced in the U.S Court on April 15, 2010, and concluded
on May 4, 2010, and a hearing was conducted in the Canadian Court on May 3,
2010. We anticipate that rulings from the
U.S. Court and the Canadian Court on the confirmation will be issued and the
Debtors will emerge from Chapter 11 and CCAA proceedings during the second
quarter of 2010, following the issuance of orders confirming the Proposed Plan
of Reorganization. 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 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).
28
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 an ABL Revolving Facility with aggregate commitments of $650 million
(including a $100 million Canadian Tranche), on April 15, 2010. The ABL Revolving Facility includes 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.
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.
We are permitted, subject to obtaining lender
commitments, to add incremental commitments under the ABL Revolving Facility in
an aggregate amount up to $150 million.
Each incremental commitment is conditioned on (a) there existing no
defaults, (b) any new lender providing an incremental commitment shall
require the consent of the Administrative Agent, each Issuing Lender, the
Swingline Lender and the Fronting Lender, (c) the minimum amount of any
increase must be at least $25 million, (d) we shall not increase the
commitments more than three times in the aggregate, (e) if the interest
rate margins and commitment fees with respect to the incremental commitments
are higher than those applicable to the existing commitments under the ABL
Revolving Facility, then the interest rate margins and commitment fees for the
existing commitments under the ABL Revolving Facility will be increased to
match those for the incremental commitments, and (f) the satisfaction of
other customary closing conditions.
On the date we emerge
from bankruptcy, the Term Loan will be funded and borrowings will 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 remaining fees, costs and
expenses related to and contemplated by the Exit Credit Facilities and the
Proposed Plan of Reorganization. Total
fees, costs and expenses related to the Exit Credit Facilities are estimated to
be approximately $50 million, of which $9 million was paid during the first
quarter of 2010. 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.
29
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
applicable margin could be adjusted in the future from 2.25% to a rate as high
as 2.75% for base loans and 3.25% to a rate as high as 3.75% for LIBOR loans
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.
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 the Proposed 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 statements of
operations. In addition, pre-petition
obligations that may be impacted by the bankruptcy reorganization process have
been classified on the consolidated balance sheets 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.
30
Reorganization Items
Our reorganization items
directly related to the process of our reorganizing under Chapter 11 and the
CCAA, as recorded in our consolidated statements of operations, consist of the
following:
|
|
Three months ended March 31,
|
|
(Income)
Expense
|
|
2010
|
|
2009
|
|
Provision
for rejected/settled executory contracts and leases
|
|
$
|
29
|
|
$
|
39
|
|
Professional
fees
|
|
15
|
|
16
|
|
Accounts
payable settlement gains
|
|
(3
|
)
|
(1
|
)
|
Total
reorganization items
|
|
$
|
41
|
|
$
|
54
|
|
Professional fees
directly related to the reorganization include fees associated with advisors to
us, the Creditors Committee and certain secured creditors.
Net cash paid for
reorganization items related to professional fees totaled $16 million and $6
million, respectively, for the three months ended March 31, 2010 and 2009.
Reorganization items exclude
employee severance and other restructuring charges recorded during 2009 and
2010.
Under the Proposed Plan
of Reorganization, interest expense on the unsecured senior notes subsequent to
the Petition Date would not be paid. As
a result, in the fourth quarter of 2009, we concluded it was not probable that
interest expense on the unsecured senior notes subsequent to the Petition Date
would be an allowed claim. During the
fourth quarter of 2009, we recorded income in reorganization items for the
reversal of accrued post-petition unsecured interest expense and discontinued
recording unsecured interest expense.
Interest expense recorded on unsecured debt was zero and $48 million for
the first quarter of 2010 and 2009, respectively.
In addition, holders of
our Preferred Stock would not be entitled to receive any amounts under the
Proposed Plan of Reorganization. As a
result, in the fourth quarter of 2009 we concluded it was not probable that
Preferred Stock dividends that were accrued subsequent to the Petition Date
would be allowed claims. Preferred Stock
dividends that were accrued post-petition and included in liabilities subject
to compromise were reversed in the fourth quarter of 2009. ASC 505-10-50-5, Equity, requires entities
to disclose in the financial statements the aggregate amount of cumulative
preferred dividends in arrears.
Preferred Stock dividends in arrears were $11 million as of March 31,
2010, and $9 million as of December 31, 2009. The Preferred Stock dividends in arrears
since the Petition Date are presented only to reflect preferred stockholders
rights to dividends over common stockholders and are not reflected in the
Preferred Stock value in the consolidated balance sheets.
Other Bankruptcy Related Costs
During the first quarter
of 2010, we recorded $6 million in selling and administrative expenses related
to amounts accrued under our 2009 long-term incentive plan.
Debtor-in-possession debt
issuance costs of $63 million were incurred and paid during the first quarter
of 2009 in connection with entering into the DIP Credit Agreement, and are
separately presented in the 2009 consolidated statement of operations.
31
Liabilities Subject to Compromise
Liabilities subject to
compromise consist of the following:
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
|
|
|
|
Unsecured
debt
|
|
$
|
2,439
|
|
$
|
2,439
|
|
Accounts
payable
|
|
325
|
|
339
|
|
Interest
payable
|
|
47
|
|
47
|
|
Retiree
medical obligations
|
|
178
|
|
176
|
|
Pension
obligations
|
|
1,146
|
|
1,136
|
|
Unrecognized
tax benefits
|
|
47
|
|
46
|
|
Executory
contracts and leases
|
|
102
|
|
72
|
|
Other
|
|
23
|
|
17
|
|
Liabilities
subject to compromise
|
|
$
|
4,307
|
|
$
|
4,272
|
|
Liabilities subject to
compromise represent pre-petition unsecured obligations that will be settled
under the Proposed 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 executory contracts and
unexpired leases with respect to our operations with the approval of the
Bankruptcy Courts. 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.
32
RESULTS OF OPERATIONS
Overview
We had a net loss
attributable to common stockholders of $91 million, or $0.35 per diluted share,
for the first quarter of 2010 compared to a net loss of $217 million, or $0.84
per diluted share, for the first quarter of 2009. The 2010 results were favorably impacted by
lower interest expense ($58 million), lower restructuring charges ($17
million), lower reorganization cost ($13 million) and higher other operating
income related to the alternative fuel tax credit ($11 million). The 2009 results included
debtor-in-possession debt issuance cost of $63 million and a loss on early
extinguishment of debt of $20 million.
The 2010 segment profits decreased $32 million compared to 2009. The segment operating results for 2010 were
negatively impacted by lower average sales prices for containerboard and
corrugated containers and higher costs for reclaimed fiber, which were
partially offset by operating improvements and reduced market related downtime.
In the second quarter of
2010, we expect to emerge from bankruptcy.
We expect our operating performance to improve compared to the first
quarter of 2010 levels due to higher selling prices for containerboard and
corrugated containers, which are expected to be partially offset by higher
costs, including reclaimed fiber. In the
second quarter of 2010, we project slightly higher shipments of corrugated
containers while projecting slightly lower production of containerboard, due to
planned maintenance downtime. Assuming
our Proposed Plan of Reorganization is confirmed and we emerge from bankruptcy,
our second quarter 2010 results will be significantly impacted by the
accounting for the effects of the Proposed Plan of Reorganization and adoption
of fresh start accounting.
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 taxpayers 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 2009 related to production at ten of our U.S. mills. We received refund claims of $595 million in
2009 and $59 million during the first quarter of 2010. 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. In March 2010, we recorded other
operating income of $11 million relating to an adjustment of refund claims
submitted in 2009. We expect to receive
the refund claim in the fourth quarter of 2010.
Restructuring
Activities
We continue to review and
evaluate various restructuring and other alternatives to streamline our
operations, improve efficiencies and reduce cost. These actions will subject us to additional
short-term costs, which may include facility shutdown costs, asset impairment
charges, lease commitment costs, employee retention and severance costs and other
closing costs.
During the first quarter
of 2010, we closed one converting facility, announced the closure of two
additional converting facilities and sold four previously closed
facilities. We recorded restructuring
income of $4 million, including an $11 million gain related to the sale of
previously closed facilities, of which $8 million resulted from the legal
release of environmental liability obligations.
The remaining offsetting charges of $7 million were primarily for
severance and benefits. As a result of
the closures in the first quarter of 2010 and other ongoing initiatives, we
reduced our headcount by approximately 760 employees. The net sales of the announced and closed
converting facilities as of March 31, 2010 prior to closure and for the
year ended December 31, 2009 were $16 million and $92 million,
respectively. The majority of these net
sales are expected to be transferred to other operating facilities. Additional charges of up to $3 million are
expected to be recorded in future periods for severance and benefits related to
the closure of these and previously closed facilities.
33
First
Quarter 2010 Compared to First Quarter 2009
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
2009
|
|
(In
millions)
|
|
Net
Sales
|
|
Profit/
(Loss)
|
|
Net
Sales
|
|
Profit/
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Containerboard,
corrugated containers and reclamation operations
|
|
$
|
1,461
|
|
$
|
34
|
|
$
|
1,371
|
|
$
|
66
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
income (charges)
|
|
|
|
4
|
|
|
|
(13
|
)
|
Loss
on sale of assets
|
|
|
|
|
|
|
|
(2
|
)
|
Other
operating income
|
|
|
|
11
|
|
|
|
|
|
Interest
expense, net
|
|
|
|
(13
|
)
|
|
|
(71
|
)
|
Loss
on early extinguishment of debt
|
|
|
|
|
|
|
|
(20
|
)
|
Non-cash
foreign currency exchange gains (losses)
|
|
|
|
(6
|
)
|
|
|
3
|
|
Debtor-in-possession
debt issuance costs
|
|
|
|
|
|
|
|
(63
|
)
|
Reorganization
items
|
|
|
|
(41
|
)
|
|
|
(54
|
)
|
Corporate
expenses and other (Note 1)
|
|
|
|
(78
|
)
|
|
|
(59
|
)
|
Loss
before income taxes
|
|
|
|
$
|
(89
|
)
|
|
|
$
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 1: Amounts include
corporate expenses and other expenses not allocated to operations.
Net sales increased 6.6%
in the first quarter of 2010 compared to last year. Net sales were positively impacted by $112
million in 2010 as a result of higher third-party sales volume of
containerboard and corrugated containers. Third party shipments of
containerboard were higher due primarily to stronger demand in both the
domestic and export market. Net sales
were negatively impacted by lower average selling prices ($99 million)
primarily for containerboard and corrugated containers, which were partially
offset by higher average selling prices for reclaimed material ($77 million).
The average price for old corrugated containers (OCC) increased approximately
$110 per ton compared to last year.
Our containerboard mills
operated at 100% of capacity in the first quarter of 2010, compared to 82.4% of
capacity in the first quarter of 2009.
As a result of less market related downtime, containerboard production
was 10.5% higher compared to last year despite the closure of two
containerboard mills in December 2009.
Production of market pulp decreased by 6.1% compared to last year due
primarily to maintenance downtime taken in the first quarter of 2010. Production of kraft paper increased 52.6%
compared to last year due primarily to higher demand and no market related
downtime in 2010.
Total
tons of fiber reclaimed and brokered increased 14.7% compared to last year due
to higher demand.
Cost of goods sold
as a percent of net sales in the first quarter of 2010 was 92.8%, compared to
88.8% last year. Cost of goods sold
increased from $1,217 million in 2009 to $1,356 million in 2010 due primarily
to higher costs of reclaimed material ($132 million) in 2010.
Selling and
administrative expense increased $6 million in the first quarter of 2010
compared to the first quarter of 2009 primarily due to amounts accrued under
our 2009 long-term incentive plan.
Interest expense, net was
$13 million in the first quarter of 2010.
The $58 million decrease compared to the first quarter of 2009 was
impacted by the discontinuation of accrued interest on unsecured debt ($48
million), lower average borrowings ($7 million) and lower average interest
rates ($3 million). Since the Petition
Date, we discontinued interest payments on our unsecured notes and certain
other unsecured debt. The lower average
borrowings were primarily due to the repayment of the DIP Credit Facility. Our overall average effective interest rate
in the first quarter of 2010 was lower than the first quarter of 2009 by
1.75%. For additional information on the
discontinuation of accrued interest on unsecured debt, see Part I, Item 2.
Managements Discussion and Analysis of Financial Condition and Results of
Operations Bankruptcy Proceedings Financial Reporting Considerations
Reorganization Items.
34
In the first quarter of
2009, we recorded debtor-in-possession debt issuance costs of $63 million in
connection with entering into the DIP Credit Agreement.
In the first quarter of
2009, we recorded a loss on early extinguishment of debt of $20 million for the
non-cash write-off of deferred debt issuance cost related to the Stevenson,
Alabama mill industrial revenue bonds, which were repaid.
In the first quarter of
2010, we recorded non-cash foreign currency exchange losses of $6 million
compared to gains of $3 million for the same period in 2009.
Reorganization items
expense decreased $13 million in the first quarter of 2010 compared to the
first quarter of 2009 due primarily to a lower provision for rejected/settled
executory contracts and leases.
In
the first quarter of 2009, we recorded a $1 million income tax provision for
Canadian withholding taxes and interest on unrecognized tax benefits.
We recorded valuation allowances related to the tax
benefits generated for the three months ended March 31, 2010 and 2009 because
it is more likely than not that substantially all of the deferred tax assets
generated in 2010 and 2009 may not be realized.
Statistical
Data
|
|
Three months ended
March 31,
|
|
(In
thousands of tons, except as noted)
|
|
2010
|
|
2009
|
|
Mill
production
|
|
|
|
|
|
Containerboard
(1)
|
|
1,585
|
|
1,435
|
|
Market
pulp
|
|
62
|
|
66
|
|
SBL
|
|
35
|
|
33
|
|
Kraft
paper
|
|
29
|
|
19
|
|
North
American corrugated containers sold (billion sq. ft.)
|
|
16.4
|
|
16.6
|
|
Fiber
reclaimed and brokered
|
|
1,423
|
|
1,241
|
|
(1) For
the three months ended March 31, 2010 and 2009, our corrugated container
plants consumed 1,116,000 tons and 1,135,000 tons of containerboard,
respectively.
35
LIQUIDITY
AND CAPITAL RESOURCES
At March 31, 2010, we had unrestricted cash and
cash equivalents of $702 million compared to $704 million at December 31,
2009.
The following table
summarizes our cash flows for the three months ended March 31:
(In
millions)
|
|
2010
|
|
2009
|
|
Net
cash provided by (used for):
|
|
|
|
|
|
Operating
activities
|
|
$
|
50
|
|
$
|
111
|
|
Investing
activities
|
|
(28
|
)
|
(53
|
)
|
Financing
activities
|
|
(25
|
)
|
64
|
|
Effect
of exchange rate changes on cash
|
|
1
|
|
|
|
Net
increase (decrease) in cash
|
|
$
|
(2
|
)
|
$
|
122
|
|
Net Cash Provided By (Used For)
Operating Activities
The net cash provided by operating
activities for the three months ended March 31, 2010 was lower compared to
the same period in 2009 due primarily to lower segment profits and less
favorable working capital changes.
Working capital, principally accounts payable, was favorably impacted in
the first quarter of 2009 by the stay of payment of liabilities subject to
compromise resulting from the bankruptcy filings. The first quarter of 2010 was favorably
impacted by a reduction of $48 million in the receivable for alternative fuel
tax credits.
Net Cash Provided By (Used For)
Investing Activities
Net cash used for
investing activities was $28 million for the three months ended March 31,
2010. Expenditures for property, plant
and equipment were $34 million for the first three months of 2010, compared to
$39 million for the same period last year.
The amount expended for property, plant and equipment in the first three
months of 2010 was principally for projects related to upgrades, cost reductions
and ongoing initiatives. The net proceeds
from sales of previously closed facilities were $6 million in the first quarter
of 2010 compared to $1 million in the first quarter of 2009. Advances to affiliates, net in the first
quarter of 2009 of $15 million is principally related to funding an obligation
pertaining to a guarantee for a previously non-consolidated affiliate. See Note 8 of the Notes to Consolidated
Financial Statements.
Net Cash Provided By (Used For)
Financing Activities
Net cash used for
financing activities for the three months ended March 31, 2010 of $25
million included $9 million for debt issuance cost related to our Exit Credit
Facilities and $15 million transferred to restricted cash to collateralize
outstanding letters of credit. Net cash
provided by financing activities for the three months ended March 31, 2009
was $64 million. Proceeds from the DIP
Credit Agreement of $440 million were used to terminate our receivables
securitization programs and repay all indebtedness outstanding under the
programs of $385 million. Debt issuance
cost of $63 million was incurred and paid with the proceeds and available
cash. In addition, 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.
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 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
36
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 SSCEs
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 SSCEs obligations under the Credit
Agreement. The security interests
securing SSC Canadas obligation under the Credit Agreement excluded certain
other real properties located in New Brunswick and Quebec, which were sold
during the first quarter of 2010.
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 March 31,
2010, as a result of our default, we had no availability for borrowings under
SSCEs revolving credit facilities after giving consideration to outstanding
letters of credit of $87 million. As of March 31, 2010, we had available
unrestricted cash and cash equivalents of $702 million primarily invested in
money market funds at a variable interest rate of 0.10%.
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.
As of December 31,
2009, no borrowings were outstanding under the U.S. DIP Term Loan, the U.S. DIP
Revolver, 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.
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 an ABL Revolving Facility with aggregate commitments of $650 million
(including a $100 million Canadian Tranche), on April 15, 2010. The ABL Revolving Facility includes 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.
37
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.
We are permitted, subject to obtaining lender
commitments, to add incremental commitments under the ABL Revolving Facility in
an aggregate amount up to $150 million.
Each incremental commitment is conditioned on (a) there existing no
defaults, (b) any new lender providing an incremental commitment shall
require the consent of the Administrative Agent, each Issuing Lender, the
Swingline Lender and the Fronting Lender, (c) the minimum amount of any
increase must be at least $25 million, (d) we shall not increase the
commitments more than three times in the aggregate, (e) if the interest
rate margins and commitment fees with respect to the incremental commitments
are higher than those applicable to the existing commitments under the ABL
Revolving Facility, then the interest rate margins and commitment fees for the
existing commitments under the ABL Revolving Facility will be increased to
match those for the incremental commitments, and (f) the satisfaction of
other customary closing conditions.
On the date we emerge
from bankruptcy, the Term Loan will be funded and borrowings will 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
remaining fees, costs and expenses related to and contemplated by the Exit
Credit Facilities and the Proposed Plan of Reorganization. Total fees, costs and expenses related to the
Exit Credit Facilities are estimated to be approximately $50 million, of which
$9 million was paid during the first quarter of 2010.
For additional
information on the Exit Credit Facilities, see Part I, Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
Bankruptcy Proceedings Proposed Plan of Reorganization and Exit Credit
Facilities Exit Credit Facilities.
Future
Cash Flows
We recorded restructuring
income of $4 million during the first quarter of 2010, including an $11 million
gain related to the sale of previously closed facilities of which $8 million
resulted from the release of legal environmental liability obligations. The remaining offsetting charges of $7
million were principally for severance and benefits. During the three months ended March 31,
2010, we incurred cash expenditures of $4 million for these exit
liabilities. The remaining exit
liabilities are expected to be paid principally in the second quarter of 2010.
At December 31,
2009, we had $54 million of exit liabilities related principally to
restructuring activities. During the
three months ended March 31, 2010, we incurred cash expenditures of $20
million for these exit liabilities. The
remaining cash expenditures in connection with our restructuring activities
will continue to be funded through operations as originally planned.
In March 2010, we
recorded other operating income of $11 million relating to an adjustment of
refund claims for the alternative fuel tax credit submitted in 2009. We expect to receive the refund claim in the fourth
quarter of 2010.
In the first quarter of 2010, we contributed
approximately $2 million to our defined benefit plans.
38
Pension Plan Contributions
At
December 31, 2009, the qualified defined benefit plans, which are expected
to be assumed under the Proposed Plan of Reorganization, were underfunded by approximately
$1,020 million. We estimate that this
level of under funding increased by approximately $40 million during the three
months ended March 31, 2010, due primarily to a decrease in the Canadian discount
rate assumption used to determine the amount of benefit obligations, which was
partially offset by positive returns on plan assets.
We currently
estimate that cash contributions under the U.S. and Canadian qualified pension
plans will be approximately $82 million in 2010, and potentially up to approximately
$112 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 $300 million to $330 million annually in 2011
through 2013, and will then decrease to approximately $280 million in 2014,
approximately $230 million in 2015 and $130 million in 2016, 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.
INCOME
TAXES
During the first quarter of 2009, we recorded a $1
million income tax provision for Canadian withholding taxes and interest on
unrecognized tax benefits. We recorded
valuation allowances related to the tax benefits generated for the three months
ended March 31, 2010 and 2009 because it is more likely than not that
substantially all of the deferred tax assets generated in 2010 and 2009 may not
be realized.
As previously disclosed
in our 2009 Form 10-K, the Canada Revenue Agency (CRA) examined our income
tax returns for tax years 1999 through 2005.
In connection with the examination, the CRA 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 considered certain
significant adjustments related principally to taxable income related to our
acquisition of a Canadian company.
In April 2010, we
entered into an agreement with the CRA and other provincial tax authorities to
settle all Canadian income tax matters through January 26, 2009. As a result of this agreement, the CRA will
retain approximately $20 million of a tax deposit made by us in 2008 to appeal
the transfer price assessments. The
remainder of the tax deposit, approximately $10 million, will be refunded to
us. In addition, we will pay the Province
of Quebec approximately $3 million to settle their claims. GST and QST tax withholdings subsequent to January 26,
2009 will be refunded to us. The
settlement agreement will become effective at the time the Canadian
subsidiaries emerge from CCAA proceedings, and transfers of funds are expected
to take place as soon as possible thereafter. Upon emergence from bankruptcy,
we expect to record an income tax benefit of approximately $17 million to
reflect the outcome of this agreement.
ITEM 3.
|
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.
In January 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. Our termination value related to our
remaining derivative liabilities was approximately $60 million, recorded in
other current liabilities in the consolidated balance sheet at March 31,
2010. These derivative liabilities were
stayed due to the filing of the Chapter 11 Petition and the Canadian Petition
at which time,
39
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 when the underlying transaction was recognized or
when the underlying transaction was no longer expected to occur. As of March 31, 2010, all amounts in OCI
have been recognized through earnings.
See Note 11 of the Notes to Consolidated Financial Statements.
Commodity Price Risk
We used derivative
instruments, including fixed price swaps, to manage fluctuations in cash flows
resulting from commodity price risk in the procurement of natural gas and other
commodities, including fuel oil and diesel fuel. The objective was to fix the price of a
portion of our purchases of these commodities used in the manufacturing
process. The changes in the market value
of such derivative instruments historically offset the changes in the price of
the hedged item.
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 used financial
derivative instruments, including forward contracts and options, primarily to
protect against Canadian currency exchange risk associated with expected future
cash flows. The Canadian dollar as of March 31,
2010, compared to December 31, 2009, strengthened 2.96% against the U.S.
dollar. We recognized non-cash foreign
currency exchange losses of $6 million for the three month period ended March 31,
2010 compared to gains of $3 million for the same period in 2009.
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 market
interest rate of fixed rate debt will impact the fair value of the debt,
whereas a change in the interest rate on the variable rate debt will impact
interest expense and cash flows. Our
objective is to mitigate interest rate volatility and reduce or cap interest
expense within acceptable levels of market risk. We periodically enter into interest rate
swaps, caps or options to hedge interest rate exposure and manage risk within
Company policy. Any derivative would be
specific to the debt instrument, contract or transaction, which would determine
the specifics of the hedge.
ITEM 4.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls
and Procedures
Our management, with the
participation of our principal executive officer and our principal financial
officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the
end of the period covered by this report and concluded that, as of such date,
our disclosure controls and procedures were adequate and effective.
Changes in Internal Control
There have not been any
changes in our internal control over financial reporting during the most recent
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
40
PART II - OTHER INFORMATION
ITEM 1.
|
LEGAL PROCEEDINGS
|
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 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations Bankruptcy Proceedings.
During the first quarter
of 2010, an Employee Retirement Income Security Act (ERISA) class action
lawsuit was filed in the United States District Court for the District of
Delaware. Two other such ERISA cases
were previously disclosed in our 2009 Form 10-K. The defendants in this case are the
individual committee members of the Administrative Committee of our savings
plans, several of our other executives and the individual members of our Board
of Directors. The suit has similar
allegations as the two other ERISA class action lawsuits. We expect that all 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. Even though we are not a named defendant in
these cases, management believes that any indemnification obligations to the
named defendants would be covered by applicable insurance.
There are no material
changes to the risk factors as disclosed in our 2009 Form 10-K.
ITEM 2.
|
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
|
None
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
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.
See Part I, Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations Bankruptcy Proceedings Chapter
11 Bankruptcy Filings.
ITEM 4.
|
RESERVED
|
|
|
ITEM 5.
|
OTHER INFORMATION
|
|
|
(b)
|
There have been no
material changes to the procedures by which security holders may recommend
nominees to the Companys Board of Directors implemented since the filing of
our 2009 Form 10-K.
|
41
ITEM 6.
|
EXHIBITS
|
|
|
|
The following exhibits
are included in this Form 10-Q:
|
|
|
10.1
|
Credit Agreement dated
as of February 22, 2010 among Smurfit-Stone Container Corporation and
Smurfit-Stone Container Enterprises, Inc., as Borrowers, J.P. Morgan
Chase Bank, N.A., as administrative agent, J.P. Morgan Securities Inc.,
Deutsche Bank Securities Inc. (DBSI) and Banc of America Securities LLC (BAS)
as Joint Bookrunners and Co-Lead Arrangers, DBSI as syndication agent, BAS as
documentation agent, and other lenders party thereto (incorporated by
reference to Exhibit 10.1 to SSCCs Current Report on Form 8-K
filed February 25, 2010 (File No. 0-23876)).
|
|
|
31.1
|
Certification pursuant
to Rules 13a14(a) and 15d14(a) under the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
31.2
|
Certification pursuant
to Rules 13a14(a) and 15d14(a) under the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
32.1
|
Certification pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
42
Signature
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
SMURFIT-STONE CONTAINER
CORPORATION
|
|
(Registrant)
|
|
|
|
|
Date: May 5, 2010
|
/s/ Paul K. Kaufmann
|
|
Paul K. Kaufmann
|
|
Senior Vice President
and Corporate Controller
|
|
(Principal Accounting
Officer)
|
43
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