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 September 30,
2010
Commission File Number
1-03439
SMURFIT-STONE CONTAINER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
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36-2041256
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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
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60601
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(Address of principal executive offices)
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(Zip Code)
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(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
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court. Yes
x
No
o
APPLICABLE
ONLY TO CORPORATE ISSUERS:
As
of November 4, 2010, the registrant had outstanding 91,628,552 shares of
common stock, $.001 par value per share.
PART I - FINANCIAL INFORMATION
Item
1.
Financial Statements
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Successor
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Predecessor
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Three Months
Ended
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Three Months
Ended
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Six Months
Ended
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Nine Months
Ended
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September 30,
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September 30,
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June 30,
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September 30,
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(In millions, except per share data)
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2010
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2009
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2010
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2009
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Net sales
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$
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1,634
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$
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1,417
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$
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3,024
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$
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4,195
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Costs and expenses
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Cost of goods sold
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1,344
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1,284
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2,763
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3,757
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Selling and administrative expenses
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141
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137
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294
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428
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Restructuring expenses
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7
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14
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15
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38
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Loss on disposal of assets
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2
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3
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Other operating income
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(179
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)
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(11
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)
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(455
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)
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Operating income (loss)
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142
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159
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(37
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)
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424
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Other income (expense)
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Interest expense, net
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(23
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)
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(72
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)
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(23
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)
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(217
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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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(11
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)
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3
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(10
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)
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Other, net
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2
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6
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4
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10
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Income (loss) before reorganization items and
income taxes
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121
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82
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(53
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)
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124
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Reorganization items income (expense), net
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(7
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)
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(16
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)
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1,178
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(109
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Income before income taxes
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114
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66
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1,125
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15
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(Provision for) benefit from income taxes
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(49
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)
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2
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199
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(3
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Net income
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65
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68
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1,324
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12
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Preferred stock dividends and accretion
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(3
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)
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(4
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)
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(9
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Net income attributable to common stockholders
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$
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65
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$
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65
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$
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1,320
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$
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3
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Basic earnings per common share
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Net income attributable to common stockholders
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$
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0.65
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$
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0.25
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$
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5.12
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$
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0.01
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Weighted average shares outstanding
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100
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257
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258
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257
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Diluted earnings per common share
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Net income attributable to common stockholders
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$
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0.65
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$
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0.25
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$
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5.07
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$
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0.01
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Weighted average shares outstanding
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100
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257
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261
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257
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See notes to consolidated financial statements.
1
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED BALANCE SHEETS
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Successor
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Predecessor
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September 30,
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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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464
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$
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704
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Restricted cash
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9
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Receivables, less allowance of $13 in 2010 and $24
in 2009
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750
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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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153
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105
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Materials and supplies
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376
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347
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529
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452
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Refundable income taxes
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16
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23
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Prepaid expenses and other current assets
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35
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43
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Total current assets
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1,805
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1,905
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Net property, plant and equipment
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4,370
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3,081
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Deferred income taxes
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23
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Goodwill
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96
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Intangible assets, net
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76
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Other assets
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162
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68
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$
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6,509
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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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16
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$
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1,354
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Accounts payable
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519
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387
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Accrued compensation and payroll taxes
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165
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145
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Interest payable
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2
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12
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Other current liabilities
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83
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164
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Total current liabilities
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785
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2,062
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Long-term debt, less current maturities
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1,176
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Pension and postretirement benefits, net of
current portion
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1,632
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Other long-term liabilities
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138
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117
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Deferred income taxes
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352
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Total liabilities not subject to compromise
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4,083
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2,179
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Liabilities subject to compromise
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4,272
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Total liabilities
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4,083
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6,451
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Stockholders equity
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Successor preferred stock, par value $.001 per
share; 10,000,000 shares authorized; none issued and outstanding in 2010
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Successor common stock, par value $.001 per share;
150,000,000 shares authorized; 91,062,636 issued and outstanding in 2010
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Predecessor preferred stock, aggregate liquidation
preference of $126; 25,000,000 shares authorized; 4,599,300 issued and
outstanding in 2009
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104
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Predecessor common stock, par value $.01 per
share; 400,000,000 shares authorized; 257,482,839 issued and outstanding in
2009
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3
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Additional paid-in capital
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2,357
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4,081
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Retained earnings (deficit)
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65
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(4,883
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)
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Accumulated other comprehensive income (loss)
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4
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(679
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)
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Total stockholders equity (deficit)
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2,426
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(1,374
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)
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$
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6,509
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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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Successor
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Predecessor
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Three Months
Ended
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Six Months
Ended
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Nine Months
Ended
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September 30,
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June 30,
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September 30,
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(In millions)
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2010
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2010
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2009
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Cash flows from operating
activities
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Net income
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$
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65
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$
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1,324
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$
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12
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Adjustments to reconcile net income to net cash
provided by (used for) 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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84
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168
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273
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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 and
original issue discount
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3
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5
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Deferred income taxes
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58
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(201
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)
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1
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Pension and postretirement benefits
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(16
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)
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50
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49
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Loss on disposal of assets
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3
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Non-cash restructuring expense
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7
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6
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Non-cash stock-based compensation
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5
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3
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7
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Non-cash foreign currency exchange (gains) losses
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(3
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)
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10
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Gain due to plan effects
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(580
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)
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Gain due to fresh start accounting adjustments
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(742
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)
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Payments to settle pre-petition liabilities
excluding debt
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(202
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)
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Non-cash reorganization items
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101
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65
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Change in restricted cash for utility deposits
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7
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2
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(9
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)
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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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(7
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)
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(129
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)
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(50
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)
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Receivable for alternative energy tax credits
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48
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(58
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)
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Inventories
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(30
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)
|
1
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35
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Prepaid expenses and other current assets
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12
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|
1
|
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(13
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)
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Accounts payable and accrued liabilities
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(9
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)
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57
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|
200
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Interest payable
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(2
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)
|
2
|
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128
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Other, net
|
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(9
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)
|
8
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|
46
|
|
Net cash provided by (used for) operating
activities
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161
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|
(85
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)
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793
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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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(39
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)
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(83
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)
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(112
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)
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Proceeds from property disposals
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|
5
|
|
10
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|
16
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Advances to affiliates, net
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|
|
|
|
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(15
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)
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Net cash used for investing activities
|
|
(34
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)
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(73
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)
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(111
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)
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Cash flows from financing
activities
|
|
|
|
|
|
|
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Proceeds from exit credit facilities
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|
|
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1,200
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|
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Original issue discount
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|
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(12
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)
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Net borrowings of debtor-in-possession financing
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|
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130
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Net borrowings (repayments) of long-term debt
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(3
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)
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(1,347
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)
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71
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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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Debt issuance costs on exit credit facilities and
other financing costs
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|
|
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(47
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)
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|
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Net cash used for financing activities
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|
(3
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)
|
(206
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)
|
(247
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)
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
124
|
|
(364
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)
|
435
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|
Cash and cash equivalents
|
|
|
|
|
|
|
|
Beginning of period
|
|
340
|
|
704
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|
126
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End of period
|
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$
|
464
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|
$
|
340
|
|
$
|
561
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|
See notes to consolidated financial statements.
3
SMURFIT-STONE CONTAINER
CORPORATION
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 filings and continued to operate outside of the Chapter 11 and CCAA
processes. As described below, on June 21,
2010, the U.S. Court entered an order (Confirmation Order) approving and
confirming the Joint Plan of Reorganization for Smurfit-Stone Container
Corporation and its Debtor Subsidiaries and Plan of Compromise and Arrangement
for Smurfit-Stone Container Canada Inc. and Affiliated Canadian Debtors (Plan
of Reorganization). The Company emerged
from its Chapter 11 and CCAA bankruptcy proceedings on June 30, 2010 (Effective
Date). As of the Effective Date and
pursuant to the Plan of Reorganization, the Company merged with and into its
wholly-owned subsidiary, Smurfit-Stone Container Enterprises, Inc. (SSCE). SSCE changed its name to Smurfit-Stone
Container Corporation and became the Reorganized Smurfit-Stone Container
Corporation (Reorganized Smurfit-Stone).
The
term Predecessor refers only to the Company and its subsidiaries prior to the
Effective Date, and the term Successor refers only to the Reorganized
Smurfit-Stone and its subsidiaries subsequent to the Effective Date. Unless the context indicates otherwise, the
terms SSCC and the Company are used interchangeably in this Quarterly
Report on Form 10-Q to refer to both the Predecessor and Successor
Company.
Until its emergence on the
Effective Date, the Debtors were operating as debtors-in-possession under the
jurisdiction of the U.S. Court and the Canadian Court (the Bankruptcy Courts)
and in accordance with the applicable provisions of the Bankruptcy Code and the
CCAA. In general, as
debtors-in-possession, the Debtors were authorized to continue to operate as
ongoing businesses, but could 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). Based on interim approval, the Company and certain affiliates
entered into the DIP Credit Agreement on January 28, 2009. 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.
4
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 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 were enjoined unless and until
the Bankruptcy Courts lifted 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 had a right to be heard on all matters that came before the
U.S. Court with respect to the Debtors.
A monitor was appointed by the Canadian Court with respect to
proceedings before the Canadian Court.
Under the Bankruptcy Code,
the Debtors either assumed or rejected pre-petition executory contracts,
including real property leases, subject to the approval of the Bankruptcy
Courts and certain other conditions. In
this context, assumption meant that the Company agreed to perform its
obligations and cure all existing defaults under the contract or lease, and rejection
meant that it was relieved from its obligations to perform further under the
contract or lease, but was subject to a pre-petition claim for damages for the
breach thereof, subject to certain limitations.
Any damages resulting from 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, that were permitted to be recovered under the Bankruptcy Code were
treated as liabilities subject to compromise unless such claims were secured
prior to the Petition Date.
5
Plan of Reorganization and Exit Credit Facilities
In
order for the Debtors to successfully emerge from bankruptcy, the Bankruptcy
Courts had to first confirm a plan of reorganization that satisfied the
requirements of the Bankruptcy Code and the CCAA. A plan of reorganization was required to,
among other things, resolve the Debtors 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.
Plan of
Reorganization
On
December 1, 2009, the Debtors filed their Plan of Reorganization and
Disclosure Statement (Disclosure Statement) with the U.S. Court. On December 22, 2009, January 27,
2010, and February 4, 2010, the Debtors filed amendments to the Plan of
Reorganization and the Disclosure Statement.
On March 19, 2010, the Debtors filed a supplement to the Plan of
Reorganization, and on May 27, 2010, the Debtors filed the final Plan of
Reorganization reflecting the resolution of certain objections by equity
security holders and other non-material modifications.
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 were entitled to vote to accept or reject the Plan of
Reorganization.
The
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 of Canada II. Stone
Container Finance Company of Canada II was removed from the Plan of
Reorganization. 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 Plan of Reorganization by all requisite classes of creditors
other than Stone Container Finance Company of Canada II.
The
Bankruptcy Code required the U.S. Court, after appropriate notice, to hold a
hearing on confirmation of a plan of reorganization. The confirmation hearing on the Plan of Reorganization
began 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. On May 13, 2010, the Canadian
Court issued an order approving the Plan of Reorganization in the CCAA proceedings
in Canada.
On
May 24, 2010, the Debtors announced that they reached a resolution with
certain holders of the Companys preferred and common stock that had filed
objections to the confirmation of the Plan of Reorganization. On May 28, 2010, the U.S. Court approved
notice procedures with respect to this resolution. On June 21, 2010, the U.S. Court entered
the Confirmation Order which approved and confirmed the Plan of
Reorganization. The Company emerged from
its Chapter 11 and CCAA bankruptcy proceedings on June 30, 2010, the
Effective Date.
As
of the Effective Date, the Company substantially consummated the various
transactions contemplated under the Plan of Reorganization and the Confirmation
Order, including the following:
·
the Company merged with and into SSCE, with
SSCE being the survivor entity and renaming itself Smurfit-Stone Container
Corporation, and becoming the Reorganized Smurfit-Stone. Reorganized Smurfit-Stone is governed by a
board of directors that includes Patrick J. Moore, the Companys Chief
Executive Officer, Steven J. Klinger, the Companys President and Chief
Operating Officer, and nine independent directors, including a non-executive
chairman selected by the Creditors Committee in consultation with the Debtors;
·
Reorganized Smurfit-Stone filed the Amended
and Restated Certificate of Incorporation of the Company, which authorized
Reorganized Smurfit-Stone to issue 160,000,000 shares, consisting of
150,000,000 shares of common stock, par value $.001 per share (Common Stock)
and 10,000,000 shares of preferred stock, par value $.001 per share (Preferred
Stock). Reorganized Smurfit-Stone
issued or reserved for issuance 100,000,000 shares of Common Stock for
distribution to creditors and interest holders pursuant to the Plan of
Reorganization;
6
Under the Plan of Reorganization, the Company issued an aggregate of
91,014,189 shares of Common Stock. None
of the Preferred Stock was issued or outstanding as of the Effective Date;
·
all of the existing secured debt of the
Debtors was fully repaid with cash;
·
substantially all of the general unsecured
claims against SSCE, and the Company, including all of the outstanding
unsecured senior notes, were exchanged for Common Stock;
·
holders of unsecured claims against SSCE of
less than or equal to $10,000 received payment of 100% of such claims in cash,
and eligible cash-out participants who so indicated on their ballot received
the percentage amount of their allowed claim they elected to receive in cash in
lieu of Common Stock;
·
holders of the Companys 7% Series A
Cumulative Exchangeable Redeemable Convertible preferred stock received a
pro-rata distribution of 2,172,166 shares of Common Stock and holders of the
Companys common stock received a pro-rata distribution of 2,171,935
shares. All shares of common stock and
preferred stock of the Predecessor Company were cancelled;
·
Reorganized Smurfit-Stone adopted the Equity
Incentive Plan, pursuant to which, among other things, it reserved for issuance
8,695,652 shares of Common Stock representing eight percent of the fully
diluted new Common Stock. In accordance
with the terms of the Equity Incentive Plan, 2,895,909 stock options and
914,498 Restricted Stock Units (RSUs) were granted to executive officers and
other key employees of Reorganized Smurfit-Stone on the Effective Date;
·
the assets of the Canadian Debtors, other
than Stone Container Finance Company of Canada II, were 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 and (iii) the assumption of certain
liabilities and obligations of the Canadian Debtors;
·
Reorganized Smurfit-Stone and its newly-formed
Canadian subsidiary assumed 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;
·
Pursuant to the Plan of Reorganization and
after the initial distribution, the Company reserved approximately 9.0 million
shares of Common Stock for future distribution to holders of unsecured
non-priority claims that were unliquidated or subject to dispute. On or about October 29, 2010, the
Company issued an additional 648,363 shares and cancelled 34,000 shares
previously issued in the first distribution, leaving approximately 8.4 million
shares of Common Stock held in reserve.
These shares will be distributed as these claims are liquidated or
resolved, in accordance with the Plan of Reorganization and Confirmation
Order. To the extent that such
unliquidated or disputed claims are settled for less than the number of shares
reserved, additional distributions may also be made with respect to previously
allowed claims under the terms and conditions of the Plan of Reorganization and
Confirmation Order.
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
7
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 the 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 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
June 30, 2010, the Term Loan Facility was funded and borrowings became
available under the ABL Revolving Facility.
The proceeds of the borrowings under the Term Loan Facility of $1,200
million, together with available cash, were used to repay the Companys
outstanding secured indebtedness under its pre-petition Credit Facility and pay
remaining fees, costs and expenses related to and contemplated by the Exit
Credit Facilities and the Plan of Reorganization. See Fresh Start Accounting below for
sources and uses of funds. On September 30,
2010, the Company had no borrowings under the ABL Revolving Facility. Borrowings under the ABL Revolving Facility
are available for working capital purposes, capital expenditures, permitted
acquisitions and general corporate purposes.
As of September 30, 2010, the Companys borrowing base under the
ABL Revolving Facility was $625 million and the amount available for borrowings
after considering outstanding letters of credit was $528 million.
As of September 30, 2010, the Company also had
available unrestricted cash and cash equivalents of $464 million primarily
invested in money market funds at a variable interest rate of 0.18%.
The
term loan (the Term Loan) is repayable in equal quarterly installments of $3
million beginning on September 30, 2010, with the balance payable at
maturity on June 30, 2016.
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 also requires 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 bears 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
8
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 interest
rate at September 30, 2010 was 6.75%
The
ABL revolver loan (the ABL Revolver) matures on June 30, 2014. The
Company has 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, which is the
applicable margin as of September 30, 2010. The applicable margin can 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 will 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 are guaranteed by the Company and certain of
its subsidiaries, and are 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.
Financial
Reporting Considerations
Subsequent
to the Petition Date, the Company 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
were impacted by the bankruptcy reorganization process were classified on the
consolidated balance sheet at December 31, 2009 in liabilities subject to
compromise.
9
Reorganization
Items
The
Companys reorganization items directly related to the process of reorganizing
the Company under Chapter 11 and the CCAA, and its emergence on June 30,
2010, as recorded in its consolidated statements of operations, consist of the
following:
|
|
Successor
|
|
Predecessor
|
|
|
|
Three Months
Ended
September 30,
|
|
Three Months
Ended
September 30,
|
|
Six Months
Ended
June 30,
|
|
Nine Months
Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Income (Expense)
|
|
|
|
|
|
|
|
|
|
Provision for rejected/settled executory contracts
and leases
|
|
$
|
|
|
$
|
(9
|
)
|
$
|
(106
|
)
|
$
|
(73
|
)
|
Professional fees
|
|
(7
|
)
|
(12
|
)
|
(43
|
)
|
(44
|
)
|
Accounts payable settlement gains
|
|
|
|
5
|
|
5
|
|
8
|
|
Gain due to plan effects
|
|
|
|
|
|
580
|
|
|
|
Gain due to fresh start accounting adjustments
|
|
|
|
|
|
742
|
|
|
|
Total reorganization items
|
|
$
|
(7
|
)
|
$
|
(16
|
)
|
$
|
1,178
|
|
$
|
(109
|
)
|
In
addition, an income tax benefit of $200 million related to plan effect
adjustments was recorded in the six months ended June 30, 2010.
Professional
fees directly related to the reorganization include fees associated with
advisors to the Company, the Creditors Committee and certain secured
creditors. During the three months ended
September 30, 2010, the Company continued to incur costs related to
professional fees that are directly attributable to the reorganization.
Net
cash paid for reorganization items related to professional fees for the three
months ended September 30, 2010 and six months ended June 30, 2010
totaled $30 million and $32 million, respectively, and $9 million and $26
million for the three and nine months ended September 30, 2009,
respectively.
Reorganization
items exclude employee severance and other restructuring charges recorded
during 2009 and 2010.
Interest
expense recorded on the Predecessor unsecured debt was zero for the six months
ended June 30, 2010, and $49 million and $147 million for the three and
nine months ended September 30, 2009, respectively. Contractual interest expense on unsecured
debt was $98 million for the six months ended June 30, 2010. Under the Plan of Reorganization, interest
expense on the unsecured senior notes subsequent to the Petition Date was not
paid. In the fourth quarter of 2009, the
Company concluded it was not probable that interest expense on the Predecessor
unsecured senior notes subsequent to the Petition Date would be an allowed
claim. As a result, 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.
In
addition, 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. Preferred Stock dividends in
arrears were $13 million at the Effective Date and $9 million as of December 31,
2009. The Preferred Stock dividends in
arrears since the Petition Date are presented in the Predecessor consolidated
statements of operations only to reflect preferred stockholders rights to
dividends over common stockholders and are not reflected in the Preferred Stock
value in the December 31, 2009 consolidated balance sheet.
10
Other
Bankruptcy Related Costs
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 represent pre-petition unsecured obligations that were
settled under the Plan of Reorganization. These liabilities represented the
amounts expected to be allowed on known or potential claims to be resolved
through the Chapter 11 and CCAA process.
Liabilities subject to compromise also included certain items, such as
qualified defined benefit pension and retiree medical obligations that were
assumed under the Plan of Reorganization, and as such, have been recorded in
liabilities under the Reorganized Smurfit-Stone.
The Company 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 were classified as liabilities subject to compromise.
Liabilities
subject to compromise at December 31, 2009 consisted of the following:
|
|
Predecessor
|
|
|
|
December 31, 2009
|
|
|
|
|
|
Unsecured debt
|
|
$
|
2,439
|
|
Accounts payable
|
|
339
|
|
Interest payable
|
|
47
|
|
Retiree medical obligations
|
|
176
|
|
Pension obligations
|
|
1,136
|
|
Unrecognized tax benefits
|
|
46
|
|
Executory contracts and leases
|
|
72
|
|
Other
|
|
17
|
|
Liabilities subject to compromise
|
|
$
|
4,272
|
|
For
information regarding the discharge of liabilities subject to compromise, see Fresh
Start Accounting below.
Fresh Start Accounting
The Company, in accordance with ASC 852, adopted
fresh start accounting as of the close of business on June 30, 2010,
because the reorganization value of the assets of the Predecessor Company
immediately before the date of confirmation of the Plan of Reorganization was
less than the total of all post-petition liabilities and allowed claims, and
the holders of the Predecessor Companys voting shares immediately before
confirmation of the Plan of Reorganization received less than 50 percent of the
voting shares of the Successor Company.
Upon adoption of fresh start accounting, the Company became a new entity
for financial reporting purposes reflecting the Successor capital
structure. As such, a new accounting
basis in the identifiable assets and liabilities assumed was established with
no retained earnings or accumulated other comprehensive income (loss) (OCI).
The Successor reorganized consolidated balance
sheet as of June 30, 2010, included herein, reflects the implementation of
the Plan of Reorganization, including the discharge of liabilities subject to
compromise and the adoption of fresh start accounting. The Predecessor results of operations of the
Company for the six months ended June 30, 2010 include $1,178 million of
reorganization items, net, including a pre-tax emergence gain on plan effects
of $580 million, a gain related to fresh start accounting adjustments of $742
million, and other reorganization expenses of $144 million. In addition, the benefit from income taxes
includes a $200 million benefit related to the plan effect adjustments.
11
Fresh start accounting provides, among other
things, for a determination of the value to be assigned to the equity of the
emerging company as of a date selected for financial reporting purposes. In conjunction with the bankruptcy
proceedings, a third party financial advisor provided an enterprise value of
the Company of approximately $3,145 million to $3,445 million with a midpoint
of $3,295 million. The preliminary
equity value set forth by the third party was $2,360 million, using the
midpoint enterprise value of $3,295 million and adjusting for expected cash and
debt balances upon emergence and expected cash proceeds from the sale of
non-operating assets.
The final equity value of $2,352 was determined
consistent with the third party methodology using the midpoint enterprise value
of $3,295 million. See reconciliation of
the enterprise value to the final equity value below in Note 10 of the
Explanatory Notes to the reorganized consolidated balance sheet. Reorganization value, comprised of equity and
debt, represents the amount of resources available for the satisfaction of
post-petition liabilities and allowed claims, as negotiated between the Debtors
and creditors. Reorganization value is
intended to approximate the amount a willing buyer would pay for the assets of
the Company immediately after reorganization.
Enterprise value of the Company was estimated using
various valuation methods including: (i) comparable public company
analysis, (ii) discounted cash flow analysis (DCF) and (iii) precedent
transaction analysis. Due to the Companys
significant pension obligations, the comparable company and DCF valuations
included scenarios designed to account for the Companys pension liabilities
and expense.
The comparable public company analysis identified a
group of comparable companies giving considerations to lines of business,
markets, similar business risks, growth prospects, maturity of business and
size and scale of business. This
analysis involved the selection of the appropriate earnings before interest,
taxes, depreciation and amortization (EBITDA) market multiples to be the most
relevant when analyzing the peer group.
A range of valuation multiples was then identified and applied to the
Companys projections to derive a range of implied enterprise value.
The basis of the discounted cash flow analysis used
in developing the enterprise value was based on Company prepared projections
which included a variety of estimates and assumptions. While the Company considers such estimates
and assumptions reasonable, they are inherently subject to significant business,
economic and competitive uncertainties, many of which are beyond the Companys
control and, therefore, may not be realized.
Changes in these estimates and assumptions may have had a significant
effect on the determination of the Companys enterprise value. The assumptions
used in the calculations for the discounted cash flow analysis included
projected revenue, cost and cash flows for the years ending December 31,
2010 through 2014 and represented the Companys best estimates at the time the
analysis was prepared. The DCF analysis
was completed using discount rates of 9.0% through 11.0%. There can be no assurance that the estimates,
assumptions and values reflected in the valuations will be realized and actual
results could vary materially.
The precedent transactions analysis identified relevant
merger and acquisition transactions in the paperboard and containerboard
industry. This analysis involved
calculating the total enterprise value of the acquired company as a multiple of
EBITDA for the last twelve months prior to announcement. A range of valuation multiples was then
identified and applied to the Companys projected EBITDA for the 12 month
period ended April 30, 2010, to determine an estimate of enterprise
values.
The Companys reorganization value was allocated to
its assets and liabilities in conformity with the procedures specified by ASC
805, Business Combinations. The
significant assumptions related to the valuation of the Companys assets and
liabilities in connection with fresh start accounting include the following:
Inventories
Raw materials were valued at current replacement cost. Work-in-process was valued at estimated
selling prices of finished goods less the sum of costs to complete, selling
costs, shipping costs and a reasonable profit allowance for completing and
selling effort based on profit for similar finished
12
goods.
Finished goods were valued at estimated selling prices less the sum of
selling costs, shipping costs and a reasonable profit allowance for the selling
effort.
Prior to emerging from bankruptcy, the Company
recorded long-lived storeroom supplies as an inventory item and charged expense
when the storeroom item was issued from the storeroom into production. Under
fresh start accounting, the Company determined the long-lived storeroom
supplies principally represent critical spares which have the physical
characteristics of property, plant, and equipment. As a result, new purchases of long-lived
storeroom supplies will be classified as property, plant and equipment on the
consolidated balance sheet and depreciated over 12 years. Upon emergence, the Company included
long-lived storeroom supplies with a fair value of approximately $36 million in
property, plant and equipment with a depreciable life of 7 years.
Property, plant and equipment
Property, plant and equipment was valued at fair value of $4,405 million as of June 30,
2010 based on a third party valuation.
In establishing fair value for the vast majority of the Companys
property, plant and equipment, the cost approach was utilized. The cost approach considers the amount
required to replace an asset by constructing or purchasing a new asset with
similar utility, adjusted for depreciation as of the appraisal date as
described below:
·
Physical depreciation the loss in value or usefulness attributable
solely to the use of the asset and physical causes such as wear and tear and
exposure to the elements.
·
Functional obsolescence the loss in value due to changes in
technology, discovery of new materials and improved manufacturing processes.
·
Economic obsolescence the loss in value caused by external forces
such as legislative enactments, overcapacity in the industry, low commodity pricing,
changes in the supply and demand relationships in the marketplace and other
market inadequacies.
The cost approach relies on managements
assumptions regarding current material and labor costs required to rebuild and
repurchase significant components of the Companys property, plant and
equipment along with assumptions regarding the age and estimated useful lives
of the Companys property, plant and equipment.
For property, plant and equipment existing at June 30,
2010, the depreciable lives were revised to reflect the estimated remaining
useful lives as follows:
Buildings
and leasehold improvements
|
|
20 years
|
Papermill
machines
|
|
14 years
|
Major
converting equipment
|
|
10 15 years
|
Intangible Assets
The Company identified the following intangible assets to be valued based upon
a third party valuation: (i) trade name, (ii) proprietary technology
and (iii) non-compete agreements.
Trade name and proprietary technology were valued
using the relief from royalty method under the income approach. Under this method, the asset value was
determined by estimating the royalty income that could be generated if it was
licensed to a third party in an arms-length transaction. The royalty income rate was selected based on
consideration of several factors, including recent prevailing royalty rates
used by companies in similar industries, profit margins and independent
research of comparable royalty agreements, among other considerations. The Companys trade name was valued at $56
million under this approach using a discount rate of 12% and assigned an
indefinite life. The Companys
proprietary technology was valued at $15 million under this approach using a
discount rate of 12% and assigned a life of 8 years.
Non-compete agreements were valued using the lost profit
method under the income approach which seeks to measure the profit that would
be lost if the non-compete agreement did not exist. The Companys non-compete agreements were
valued at $5 million under this approach using a 10.5% discount rate and assigned
a definite life of two years.
13
Equity Investments
Equity investments were valued, based upon a third party valuation, at fair
value of approximately $34 million as of June 30, 2010, using the guideline
transaction and guideline public companies methods under the market
approach. Under these approaches,
valuation multiples were determined based on capital market data and market
capitalization of peer companies and acquisition transactions within the
industry. The step-up in fair value over
the Companys current carrying value will be amortized over 10 years.
Long-Term Debt
Long-term debt was valued at fair value using quoted market prices.
Pension and postretirement benefits
Pension and post-retirement benefits were fair valued based on plan
assets and employee benefit obligations at June 30, 2010. The benefit obligations were computed using
the applicable June 30, 2010 discount rate. In conjunction with fresh start accounting,
the Company updated its mortality rate table assumptions which increased its
employer benefit liabilities by approximately $58 million.
As a result of adopting fresh start accounting, the
Company recorded goodwill of $93 million which represents the excess of
reorganization value over amounts assigned to the other assets. Goodwill allocated to the Companys Canadian
operations is adjusted quarterly to record the effect of currency translation
adjustments.
The adjustments presented below relate to the
Companys June 30, 2010 balance sheet.
The balance sheet reorganization adjustments presented below summarize
the impact of the Plan of Reorganization and the adoption of fresh start
accounting as of the Effective Date.
14
SMURFIT-STONE
CONTAINER CORPORATION
REORGANIZED
CONSOLIDATED BALANCE SHEET
|
|
June 30, 2010
|
|
(In millions)
|
|
Predecessor
|
|
Plan Effect
Adjustments
(1)
|
|
Fresh Start
Adjustments
|
|
Successor
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
721
|
|
$
|
(381
|
)(2)
|
$
|
|
|
$
|
340
|
|
Restricted cash
|
|
18
|
|
(11
|
)(2)
|
|
|
7
|
|
Receivables
|
|
739
|
|
|
|
|
|
739
|
|
Receivable for alternative energy tax credits
|
|
11
|
|
|
|
|
|
11
|
|
Inventories
|
|
449
|
|
|
|
47
|
(12)
|
496
|
|
Refundable income taxes
|
|
24
|
|
7
|
(3)
|
|
|
31
|
|
Prepaid expenses and other current assets
|
|
42
|
|
|
|
5
|
(12)
|
47
|
|
Total current assets
|
|
2,004
|
|
(385
|
)
|
52
|
|
1,671
|
|
Net property, plant and equipment
|
|
2,979
|
|
|
|
1,426
|
(12)
|
4,405
|
|
Deferred income taxes
|
|
22
|
|
148
|
(3)
|
(170
|
)(12)
|
|
|
Goodwill
|
|
|
|
|
|
93
|
(12)
|
93
|
|
Intangible assets, net
|
|
|
|
|
|
77
|
(12)
|
77
|
|
Other assets
|
|
75
|
|
31
|
(4)
|
57
|
(12)
|
163
|
|
|
|
$
|
5,080
|
|
$
|
(206
|
)
|
$
|
1,535
|
|
$
|
6,409
|
|
Liabilities and Stockholders
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities not subject to compromise
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
1,352
|
|
$
|
(1,334
|
)(5)
|
$
|
|
|
$
|
18
|
|
Accounts payable
|
|
488
|
|
27
|
(6)
|
|
|
515
|
|
Accrued compensation and payroll taxes
|
|
139
|
|
34
|
(7)
|
3
|
(12)
|
176
|
|
Interest payable
|
|
12
|
|
(7
|
)(2)
|
|
|
5
|
|
Other current liabilities
|
|
141
|
|
(59
|
)(2)
|
(1
|
)(12)
|
81
|
|
Total current liabilities
|
|
2,132
|
|
(1,339
|
)
|
2
|
|
795
|
|
Long-term debt, less current maturities
|
|
|
|
1,176
|
(5)
|
|
|
1,176
|
|
Pension and postretirement benefits, net of
current portion
|
|
|
|
1,179
|
(8)
|
460
|
(12)
|
1,639
|
|
Other long-term liabilities
|
|
116
|
|
|
(3)
|
24
|
(12)
|
140
|
|
Deferred income taxes
|
|
|
|
|
|
307
|
(12)
|
307
|
|
Total liabilities not subject to compromise
|
|
2,248
|
|
1,016
|
|
793
|
|
4,057
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities subject to compromise
|
|
4,354
|
|
(4,354
|
)(9)
|
|
|
|
|
Total liabilities
|
|
6,602
|
|
(3,338
|
)
|
793
|
|
4,057
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
Preferred stock successor
|
|
|
|
|
(10)
|
|
|
|
|
Common stock successor
|
|
|
|
|
(10)
|
|
|
|
|
Preferred stock predecessor
|
|
104
|
|
(104
|
)(11)
|
|
|
|
|
Common stock predecessor
|
|
3
|
|
(3
|
)(11)
|
|
|
|
|
Additional paid-in capital
|
|
4,084
|
|
(1,732
|
)(10)(11)
|
|
|
2,352
|
(10)
|
Retained earnings (deficit)
|
|
(5,081
|
)
|
4,971
|
(11)
|
110
|
(13)
|
|
|
Accumulated other comprehensive income (loss)
|
|
(632
|
)
|
|
|
632
|
(13)
|
|
|
Total stockholders equity (deficit)
|
|
(1,522
|
)
|
3,132
|
|
742
|
(13)
|
2,352
|
|
|
|
$
|
5,080
|
|
$
|
(206
|
)
|
$
|
1,535
|
|
$
|
6,409
|
|
15
Explanatory Notes
(1)
Represents amounts recorded on the Effective Date for the
implementation of the Plan of Reorganization, including the settlement of
liabilities subject to compromise and related payments, the issuance of new
debt and repayment of old debt, distribution of cash and new shares of common
stock, and the cancellation of Predecessor Companys common and preferred
stock.
(2)
Cash effects of the Plan of Reorganization:
Amounts borrowed under the Exit Credit Facilities
|
|
$
|
1,200
|
|
Less: original issue discount
|
|
(12
|
)
|
Net proceeds from borrowings
|
|
1,188
|
|
|
|
|
|
Repayment of secured Bank Credit Facilities
|
|
(1,139
|
)
|
Repayment of other secured debt
|
|
(207
|
)
|
Repayment of interest on secured debt
|
|
(7
|
)
|
Payment of derivative contract termination
liabilities
|
|
(59
|
)
|
Payment of liabilities subject to compromise
claims
|
|
(136
|
)
|
Payment of debt issuance costs on Exit Credit
Facilities and other financing costs
|
|
(32
|
)
|
Net change in cash and cash equivalents
|
|
$
|
(392
|
)
|
On June 30, 2010, $11 million of restricted
cash for collateralizing outstanding letters of credit was released to the
Companys operating cash funds.
(3)
Represents income tax adjustments resulting from the Plan of
Reorganization. Unrecognized tax
benefits of $45 million were reclassified from liabilities subject to
compromise to other long-term liabilities and were subsequently eliminated as
part of the income tax adjustments from plan effects (See Note 11 Income
Taxes).
(4)
Represents payment of debt issuance costs on the Exit Credit Facilities
and other financing costs at emergence of $32 million, net of write-off of
remaining deferred debt issuance costs on Predecessor secured debt of $1
million.
(5)
Represents the repayment of Predecessor secured debt and borrowings
under the Exit Credit Facilities.
Repayment of secured term loan debt
|
|
$
|
(503
|
)
|
Repayment of secured revolver debt
|
|
(636
|
)
|
Repayment of drawn letters of credit
|
|
(44
|
)
|
Repayment of Stevenson IRB
|
|
(120
|
)
|
Repayment of other secured debt
|
|
(43
|
)
|
Borrowings under Exit Credit Facilities
|
|
1,200
|
|
Original issue discount
|
|
(12
|
)
|
|
|
$
|
(158
|
)
|
(6)
Primarily represents accrued professional fees.
(7)
Represents accrual under the Companys 2009 long-term incentive plan
and other employee compensation benefits of $19 million and the
reclassification of the current portion of pension and postretirement benefits
of $15 million from liabilities subject to compromise.
16
(8)
Reinstatement of pension and postretirement obligations, net of
settlement.
Reclassification from liabilities subject to
compromise
|
|
$
|
1,306
|
|
Settlement of non-qualified pension liabilities
upon emergence
|
|
(112
|
)
|
Successor pension and postretirement benefits
|
|
1,194
|
|
Less current portion
|
|
(15
|
)
|
Successor pension and postretirement benefits, net
of current portion
|
|
$
|
1,179
|
|
(9) Represents the disposition of
liabilities subject to compromise:
Liabilities subject to compromise discharged at
emergence
|
|
|
|
Unsecured debt
|
|
$
|
(2,439
|
)
|
Accounts payable
|
|
(184
|
)
|
Interest payable
|
|
(47
|
)
|
Non-qualified pension obligations
|
|
(110
|
)
|
Executory contracts and leases and other
|
|
(196
|
)
|
|
|
(2,976
|
)
|
|
|
|
|
Liabilities subject to compromise paid in cash or
reinstated at emergence
|
|
|
|
Accounts payable
|
|
(130
|
)
|
Retiree medical obligations
|
|
(176
|
)
|
Pension obligations
|
|
(1,027
|
)
|
Unrecognized tax benefits
|
|
(45
|
)
|
|
|
(1,378
|
)
|
|
|
$
|
(4,354
|
)
|
(10) Reconciliation of enterprise
value to determination of equity:
Total enterprise value
|
|
$
|
3,295
|
|
Plus:
|
Cash
|
|
347
|
|
|
Expected net proceeds from sale of non-operating
assets
|
|
10
|
|
Less:
|
Fair value of debt
|
|
(1,206
|
)
|
|
Accrued emergence fees and expenses
|
|
(94
|
)
|
Common stock and additional paid-in-capital
|
|
$
|
2,352
|
|
17
(11) As a
result of the Plan of Reorganization, the adjustment to retained earnings
(deficit) reflects the elimination of the Predecessor Companys preferred
stock, common stock, and additional paid-in-capital, in addition to the
after-tax gain due to plan effects.
Pre-tax gain due to plan effects
|
|
$
|
580
|
|
Tax benefit due to plan effects
|
|
200
|
|
Gain due to plan effects, net of tax
|
|
780
|
|
|
|
|
|
Elimination of Predecessor preferred stock
|
|
104
|
|
Elimination of Predecessor common stock
|
|
3
|
|
Elimination of Predecessor additional paid-in-capital
|
|
4,084
|
|
|
|
$
|
4,971
|
|
(12) The following table summarizes the allocation
of the reorganization value to the Companys assets at the date of emergence as
shown in the reorganized consolidated balance sheet as of June 30, 2010.
Enterprise value
|
|
$
|
3,295
|
|
Add:
|
Cash
|
|
347
|
|
|
Expected net proceeds from sale of non-operating
assets
|
|
10
|
|
Less:
|
Accrued emergence fees and expenses
|
|
(94
|
)
|
Reorganization value
|
|
3,558
|
|
|
|
|
|
Add fair value of non-debt liabilities
|
|
2,851
|
|
|
|
|
|
Less fair value of:
|
|
|
|
Property, plant and equipment
|
|
4,405
|
|
Intangibles
|
|
77
|
|
Current assets
|
|
1,671
|
|
Other non-current assets
|
|
163
|
|
|
|
6,316
|
|
|
|
|
|
Reorganization value of assets in excess of fair
value (goodwill)
|
|
$
|
93
|
|
Liabilities were also adjusted to fair value in the
application of fresh start accounting resulting in an increase in liabilities
of $793 million.
(13) The adjustments required to report assets and
liabilities at fair value under fresh start accounting resulted in a gain of
$742 million, which was reported in reorganization items income (expense), net
in the consolidated statements of operations for the six months ended June 30,
2010. The gain includes the write-off of
OCI losses of $632 million, resulting in a net impact on retained earnings
(deficit) of $110 million.
18
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.
As of the Effective Date, the Company merged with and into SSCE, with
SSCE being the survivor entity and renaming itself Smurfit-Stone Container Corporation,
and becoming the Reorganized Smurfit-Stone.
The Company 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.
Foreign Currency
Prior to emerging from bankruptcy, the Companys
functional currency for its Canadian operations was the U.S. dollar. Fluctuations in Canadian dollar monetary
assets and liabilities resulted in gains or losses which were credited or
charged to income. Upon emergence, the
Company reviewed the primary economic indicators for its Canadian operations
under the Reorganized Smurfit-Stone, including cash flow indicators, sales
price indicators, sales market indicators, expense indicators, financing
indicators and intercompany transactions as required by ASC 830, Foreign
Currency Matters. Based on its analysis, including current operations and
financing availability within Canada, the Company determined the functional
currency for its Canadian operations to be the local currency. As a result, effective July 1, 2010, the
assets and liabilities for the Canadian operations are translated at the
exchange rate in effect at the balance sheet date and income and expenses are
translated at average exchange rates prevailing during the year. Translation gains or losses are included
within stockholders equity as part of OCI.
Stock-Based Compensation
Prior to emerging from bankruptcy, the Company used
a lattice option pricing model to estimate the fair value of stock
options. The Company elected to use the
Black-Scholes valuation method for stock option grants issued during the third
quarter 2010 under the Equity Incentive Plan, as it provided a better estimate
of fair value because historical patterns for the Successor Companys common
stock have not yet been established, as required for the assumptions used by
the lattice model.
19
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 third quarter of 2010, the Company announced the closure of two converting
facilities and sold two previously closed facilities. In addition, the Company initiated a plan to
reduce its selling, general and administrative costs, primarily through reductions
in its workforce in these functions. The
Company recorded restructuring charges of $7 million, primarily for severance
and benefits and reduced its headcount by approximately 460 employees. The net sales of the announced converting
facilities in 2010 prior to closure and for the year ended December 31,
2009 were $48 million and $44 million, respectively. The majority of these net sales are expected
to be transferred to other operating facilities. Additional charges of approximately $20
million are expected to be recorded in the fourth quarter of 2010, primarily
for severance and benefits related to the closure of these facilities and the
reductions in the selling and administrative workforce, including charges
related to the October 27, 2010 announced resignation of Steven J.
Klinger, the Companys President and Chief Operating Officer, which is
effective December 31, 2010.
For
the six months ended June 30, 2010, the Company closed four converting
facilities and sold five previously closed facilities. As a result of these closure activities and
other ongoing initiatives, the Company reduced its headcount by approximately
900 employees. The Company recorded
restructuring charges of $15 million, including a $12 million gain related to
the sale of previously closed facilities, of which $8 million resulted from the
legal release of environmental liability obligations. Restructuring charges included non-cash
charges of $11 million related to the acceleration of depreciation for
converting equipment abandoned or taken out of service. The remaining charges of $16 million were for
severance and benefits, lease commitments and facility closure costs. The net sales of these closed converting
facilities in 2010 prior to closure and for the year ended December 31,
2009 were $21 million and $97 million, respectively. The majority of these net sales are expected
to be transferred to other operating facilities.
The
Company recorded restructuring charges of $14 million and $38 million for the
three and nine months ended September 30, 2009, respectively, which were
net of a $2 million gain on the sale of previously closed facilities in the
third quarter of 2009. Restructuring
charges included non-cash charges of $4 million and $8 million for the three
and nine months ended September 30, 2009, respectively, related to the
write-down of assets, primarily property, plant and equipment, to estimated net
realizable values and the acceleration of depreciation for converting equipment
expected to be abandoned or taken out of service. The remaining charges were
primarily for severance and benefits, including pension settlement costs of $3
million.
20
The
following is a summary of the restructuring liabilities, including the
termination of employees and liabilities for environmental and lease
commitments at the closed facilities.
|
|
Write-down of
Property,
Equipment and
Inventory to
Net Realizable
Value
|
|
Severance
and
Benefits
|
|
Lease
Commitments
|
|
Facility
Closure
Costs
|
|
Other
|
|
Total
|
|
Balance at January 1, 2010 (Predecessor)
|
|
$
|
|
|
$
|
34
|
|
$
|
1
|
|
$
|
19
|
|
$
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) expense
|
|
11
|
|
7
|
|
4
|
|
5
|
|
(12
|
)
|
15
|
|
Payments
|
|
|
|
(28
|
)
|
(1
|
)
|
(5
|
)
|
|
|
(34
|
)
|
Non-cash reduction
|
|
(11
|
)
|
(3
|
)
|
|
|
(8
|
)
|
|
|
(22
|
)
|
Net gain on sale of assets
|
|
|
|
|
|
|
|
|
|
12
|
|
12
|
|
Balance at June 30, 2010 (Successor)
|
|
|
|
10
|
|
4
|
|
11
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
Payments
|
|
|
|
(7
|
)
|
(1
|
)
|
(2
|
)
|
|
|
(10
|
)
|
Balance at September 30, 2010 (Successor)
|
|
$
|
|
|
$
|
10
|
|
$
|
3
|
|
$
|
9
|
|
$
|
|
|
$
|
22
|
|
The
$3 million non-cash reduction to severance and benefits is due to the
Predecessor Company reclassification of multi-employer pension plan liabilities
to liabilities subject to compromise.
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, the Company 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 the three and nine months ended September 30, 2009, the
Company recorded other operating income of $179 million and $455 million,
respectively, 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 $11 million refund claim adjustment
in the fourth quarter of 2010.
6.
(Gain)
Loss on Disposal of Assets
In
September 2009, the Company completed the sale of its Canadian
timberlands. The net proceeds from the
sale of approximately $28 million were used to prepay a portion of the Canadian
DIP Term Loan. The Company recorded a
pretax loss of $2 million.
21
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 nine months ended September 30, 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 September 30, 2010,
the maximum potential amount of future payments related to these guarantees was
approximately $23 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.
9.
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 benefit 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.
At June 30, 2010, the qualified defined benefit
plans, which were assumed under the Plan of Reorganization, were underfunded by
approximately $1,450 million based on actual asset values and the discount
rates effective on June 30, 2010.
The weighted average discount rates used at June 30, 2010 for the
U.S. and Canadian qualified defined benefit plans were 5.31% and 5.23%,
respectively.
The Company
currently estimates that its minimum required cash contributions under the U.S.
and Canadian qualified pension plans will be approximately $100 million in
2010, of which $31 million and $12 million were paid during the three months
ended September 30, 2010 and six months ended June 30, 2010,
respectively; and an additional $57 million, which is expected to be paid in
the fourth quarter of 2010.
Contributions are expected to be in the range of $235 million to $305
million annually in 2011 through 2015.
Projected pension contributions assume the Company elects funding relief
under the Preservation of Access to Care for Medicare Beneficiaries and Pension
Relief Act of 2010, enacted in June 2010.
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.
22
The components of net periodic costs for the defined benefit plans and
the components of the postretirement benefit costs are as follows:
|
|
Successor
|
|
Predecessor
|
|
Defined Benefit Plans
|
|
Three Months
Ended
September 30,
2010
|
|
Three Months
Ended
September 30,
2009
|
|
Six Months
Ended
June 30,
2010
|
|
Nine Months
Ended
September 30,
2009
|
|
Service cost
|
|
$
|
10
|
|
$
|
8
|
|
$
|
15
|
|
$
|
19
|
|
Interest cost
|
|
50
|
|
52
|
|
106
|
|
153
|
|
Expected return on plan assets
|
|
(46
|
)
|
(51
|
)
|
(105
|
)
|
(150
|
)
|
Amortization of prior service cost
|
|
|
|
1
|
|
1
|
|
2
|
|
Amortization of net loss
|
|
|
|
22
|
|
48
|
|
64
|
|
Special termination benefits charge
|
|
|
|
|
|
|
|
9
|
|
Settlements
|
|
|
|
3
|
|
1
|
|
3
|
|
Multi-employer plans
|
|
|
|
1
|
|
3
|
|
3
|
|
Multi-employer plan adjustments
|
|
4
|
|
|
|
3
|
|
|
|
Net periodic benefit cost
|
|
$
|
18
|
|
$
|
36
|
|
$
|
72
|
|
$
|
103
|
|
|
|
Successor
|
|
Predecessor
|
|
Post Retirement Plans
|
|
Three Months
Ended
September 30,
2010
|
|
Three Months
Ended
September 30,
2009
|
|
Six Months
Ended
June 30,
2010
|
|
Nine Months
Ended
September 30,
2009
|
|
Service cost
|
|
$
|
1
|
|
$
|
1
|
|
$
|
1
|
|
$
|
2
|
|
Interest cost
|
|
2
|
|
2
|
|
5
|
|
7
|
|
Amortization of prior service benefit
|
|
|
|
(1
|
)
|
(2
|
)
|
(2
|
)
|
Amortization of net gain
|
|
|
|
(1
|
)
|
(1
|
)
|
(3
|
)
|
Net periodic benefit cost
|
|
$
|
3
|
|
$
|
1
|
|
$
|
3
|
|
$
|
4
|
|
The 2009 special termination
benefits charge is due to funding obligations related to certain non-qualified
pension plans and is included in reorganization items in the consolidated
statements of operations (See Note 1).
The
2010 and 2009 settlement losses are related to closed facilities and are
included as part of restructuring charges (See Note 4).
The
2010 multi-employer plan adjustments for the three months ended September 30,
2010, include a $4 million charge related to the withdrawal from a
multi-employer pension plan through a collective bargaining agreement. The 2010 multi-employer plan adjustments for
the six months ended June 30, 2010, include a $3 million charge related to
settlements of various multi-employer pension plans in connection with the
Companys bankruptcy proceedings and is included in reorganization items in the
consolidated statements of operations (See Note 1).
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.
23
The
Company has analyzed this legislation to determine the impact of the required
plan standard changes on its employee healthcare plans and the resulting
costs. The Company does not expect this
legislation to have a material impact on the Companys consolidated financial
statements through 2013.
10.
Derivative Instruments and
Hedging Activities
Successor Company
During
the three months ended September 30, 2010, the Company entered into
foreign currency exchange derivative contracts to minimize the exposure to
currency exchange rate fluctuations on a $255 million Canadian dollar
denominated inter-company note established upon emergence between a U.S.
subsidiary and a Canadian subsidiary, whereby the U.S subsidiary is the
lender. The inter-company note matures
on June 29, 2015 and the interest is payable quarterly. The derivative contracts are monthly or
quarterly instruments with a notional amount equal to the inter-company note
principal, plus accrued interest. The
derivative contracts are marked-to-market through earnings on a quarterly
basis.
For
the three months ended September 30, 2010, the Companys U.S subsidiary
recorded a $4 million foreign currency gain (net of tax) in other, net in the
consolidated statements of operations related to the revaluation of the
inter-company note.
For
the three months ended September 30, 2010, the Company recorded a $4
million loss (net of tax) in other, net in the consolidated statements of operations
on the settlement of the derivative contracts.
For
the three months ended September 30, 2010, the Company recorded an
immaterial amount in other, net in the consolidated statements of operations
related to the change in fair value of the derivative contracts.
Predecessor Company
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 $59 million. These
derivative liabilities were stayed due to the filing of the Chapter 11 Petition
and the Canadian Petition, at which time these liabilities were adjusted
through OCI for derivative instruments qualifying for hedge accounting and cost
of goods sold for derivative instruments not qualifying for hedge
accounting. Subsequently, the amounts
adjusted through OCI were recorded in earnings during the period when the
underlying transaction was recognized or when the underlying transaction was no
longer expected to occur. As of June 30,
2010, all amounts in OCI were recognized through earnings. On June 30, 2010, the derivative
contract termination liabilities of $59 million were paid in connection with
the Companys emergence from its Chapter 11 and CCAA bankruptcy proceedings
(See Note 1 Fresh Start Accounting).
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. The
derivative instruments and hedging activities for all periods presented below
relate to the Predecessor Company.
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.
24
For the six months ended June 30, 2010, the Company reclassified
an immaterial amount from OCI to cost of goods sold when the hedged items were
recognized. For the three and nine
months ended September 30, 2009, the Company reclassified a $5 million
loss (net of tax) and a $24 million loss (net of tax), respectively, from OCI
to cost of goods sold when the hedged items were recognized.
For the nine months ended September 30, 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 nine months ended September 30, 2009, the Company recorded
a $3 million loss (net of tax) in cost of goods sold on commodity derivative
instruments, settled prior to the Petition Date, 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 nine months ended September 30, 2009, the Company
reclassified a $4 million loss (net of tax) from OCI to cost of goods sold when
the hedged items were recognized.
Additionally, the Company reclassified the remaining foreign currency
derivative instruments from OCI to cost of goods sold since the underlying
transactions were no longer expected to occur, resulting in an additional loss
of $2 million (net of tax).
Interest
Rate Swap Contracts
The
Company used interest rate swap contracts to manage interest rate exposure on
$300 million of the Tranche B and Tranche C floating rate bank term debt which
was paid on June 30, 2010 in connection with the Companys emergence from
Chapter 11 and CCAA bankruptcy proceedings.
The accounting for the cash flow impact of the swap contracts was
recorded as an adjustment to interest expense each period.
For
the six months ended June 30, 2010, the Company reclassified a $1 million
loss (net of tax) from OCI to interest expense when the hedged items were
recognized. For the three and nine
months ended September 30, 2009, the Company reclassified a $1 million
loss (net of tax) and a $3 million loss (net of tax), respectively, from OCI to
interest expense when the hedged items were recognized.
11.
Income Taxes
Successor Company
The
Company recorded an income tax provision of $49 million for the three months
ended September 30, 2010. The
provision for income taxes differed from the amount computed by applying the
statutory U.S. federal income tax rate to income before income taxes due
primarily to adjustments resulting from reconciling filed tax returns to
recorded tax provision, state income taxes, and the effects of foreign tax
rates.
Predecessor Company
The
Company recorded a net tax benefit of $199 million for the six months ended June 30,
2010. This included $200 million of net
benefit related to the effects of the Plan of Reorganization, which included
adjustments for valuation allowance ($427 million benefit), unrecognized tax
benefits ($39 million benefit) and cancellation of indebtedness and other plan
effects ($266 million provision).
Certain
debt obligations of the Company were discharged upon emergence from
bankruptcy. Discharge of a debt
obligation for an amount less than the adjusted issue price generally creates
cancellation of indebtedness income (CODI), which must be included in taxable
income. However, CODI is excluded from
taxable income for a taxpayer that is a debtor in a reorganization case if the
discharge is granted by the court or pursuant to a plan of reorganization approved
by the court. The Plan of Reorganization
filed
25
by
the Company enabled it and its debtor subsidiaries to qualify for this
bankruptcy exclusion rule. Based upon
current projections, the CODI triggered by discharge of debt under the Plan of
Reorganization will not create current taxable income, but will reduce the
Companys net operating losses (NOLs) for the year of discharge and net
operating loss carryforwards. None of
the Companys other U.S. income tax attributes are expected to be reduced.
Pursuant
to the Plan of Reorganization, the assets of all Canadian subsidiaries were
sold to a new wholly-owned Canadian subsidiary for fair value. All pre-emergence Canadian subsidiaries will
be liquidated in accordance with the Plan of Reorganization and all
pre-emergence Canadian income tax attributes will be eliminated following their
dissolution.
Due
to the effects of the Plan of Reorganization, the Company concluded it is more
likely than not that the majority of deferred income tax assets will be
realized. Management considered the
reversal of deferred tax liabilities in making this assessment. As a result, the Company recognized an income
tax benefit for release of pre-emergence valuation allowance on its net
deferred tax assets in the U.S. and Canada.
At September 30, 2010, a valuation allowance remains in place
related to certain state NOLs.
As
previously reported, the Company entered into an agreement with the Canada
Revenue Agency and other provincial tax authorities that took effect upon the
Companys emergence from bankruptcy.
This agreement settled the open Canadian income tax matters through January 26,
2009. As a result of this agreement, the
Company reported a $39 million net income tax benefit for the six months ended June 30,
2010 related to the final settlement of the Canadian tax claims and the release
of the previously accrued unrecognized tax benefits related to the Canadian
audit.
Based
on the Companys current tax position that the alternative fuel mixture credits
are not taxable, the Company increased the tax value of its federal NOL
carryforwards by $254 million during the six months ended June 30,
2010. A reserve of $254 million was
recorded related to this unrecognized tax benefit.
Deferred
Income Tax Assets and Liabilities
At
June 30, 2010, the Company had federal NOL carryforwards net of
unrecognized tax benefits of $722 million, with a tax value of $253
million. The Company had NOL
carryforwards for state purposes with a tax value of $61 million. Additionally, the Company had $68 million of
alternative minimum tax credit carryforwards and $6 million of other federal
and state tax credit carryforwards available.
As
a result of the issuance of new common shares upon emergence from bankruptcy,
the Company realized a change of ownership for purposes of Section 382 of
the U.S. Internal Revenue Code, which can impose annual limitations on
utilization of NOLs and tax credits. The
Company does not expect the provisions of Section 382 to significantly
limit its ability to utilize NOLs or tax credits in the carryforward periods.
26
12.
Comprehensive Income
Comprehensive
income is as follows:
|
|
Successor
|
|
Predecessor
|
|
|
|
Three Months
Ended
September 30,
|
|
Three Months
Ended
September 30,
|
|
Six Months
Ended
June 30,
|
|
Nine Months
Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net income
|
|
$
|
65
|
|
$
|
68
|
|
$
|
1,324
|
|
$
|
12
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
Net changes in fair value of hedging instruments
|
|
|
|
|
|
|
|
(1
|
)
|
Net hedging loss reclassified into earnings
|
|
|
|
6
|
|
1
|
|
33
|
|
Net deferred employee benefit plan expense
reclassified into earnings
|
|
|
|
11
|
|
46
|
|
35
|
|
Foreign currency translation adjustment
|
|
4
|
|
|
|
|
|
1
|
|
Fresh start accounting adjustments
|
|
|
|
|
|
632
|
|
|
|
Comprehensive income
|
|
$
|
69
|
|
$
|
85
|
|
$
|
2,003
|
|
$
|
80
|
|
27
13.
Earnings Per Share
As
discussed in Note 1, Bankruptcy Proceedings, Predecessor Company preferred
and common stock were cancelled as a result of the Companys emergence from
Chapter 11 and CCAA bankruptcy proceedings on the Effective Date. The Successor Company common stock was issued
on June 30, 2010. As such, the
earnings per share information for the Predecessor Company is not meaningful to
shareholders of the Successor Companys common shares, or to potential
investors in such common shares.
The
following table sets forth the computation of the Companys basic and diluted
earnings per share:
|
|
Successor
|
|
Predecessor
|
|
|
|
Three Months
Ended
September 30,
|
|
Three Months
Ended
September 30,
|
|
Six Months
Ended
June 30,
|
|
Nine Months
Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
65
|
|
$
|
68
|
|
$
|
1,324
|
|
$
|
12
|
|
Preferred stock dividends and accretion
|
|
|
|
(3
|
)
|
(4
|
)
|
(9
|
)
|
Net income attributable to common stockholders
|
|
65
|
|
65
|
|
1,320
|
|
3
|
|
Effect of dilutive securities: Preferred stock
dividends
|
|
|
|
|
|
4
|
|
|
|
Net income attributable to common stockholders and
assumed conversion
|
|
$
|
65
|
|
$
|
65
|
|
$
|
1,324
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share -
weighted average shares
|
|
100
|
|
257
|
|
258
|
|
257
|
|
Effect of dilutive securities: Preferred Stock
|
|
|
|
|
|
3
|
|
|
|
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed conversion
|
|
100
|
|
257
|
|
261
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.65
|
|
$
|
0.25
|
|
$
|
5.12
|
|
$
|
0.01
|
|
Diluted earnings per share
|
|
$
|
0.65
|
|
$
|
0.25
|
|
$
|
5.07
|
|
$
|
0.01
|
|
Total
weighted average shares of 100 million for the Successor Company include
reserved, but unissued shares of approximately 9 million. These reserved shares will be distributed as
claims are liquidated or resolved in accordance with the Plan of Reorganization
and Confirmation Order.
Shares
of SSCC preferred stock convertible into three million shares of common stock
with an earnings effect of $3 million and $9 million were excluded from the
Predecessor Company diluted earnings per share computations for the three and
nine months ended September 30, 2009 because they were antidilutive.
Employee
stock options and non-vested restricted stock were excluded from the diluted
earnings per share calculations for all periods presented because they were
antidilutive.
28
ASC
260, Earnings Per Share (ASC 260), addresses whether instruments granted in
share-based payment awards that entitle their holders to receive nonforfeitable
dividends or dividend equivalents before vesting should be considered
participating securities, and as a result, included in the earnings allocation
in computing earnings per share under the two-class method. The two-class method is an earnings
allocation formula that determines earnings per share for each class of common
stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. In accordance with ASC 260, the Successor
Companys unvested RSUs are considered participating securities because they
entitle holders to receive nonforfeitable dividends during the vesting
term. In applying the two-class method,
undistributed earnings are allocated between common shares and unvested RSUs. ASC 260 did not have a material impact on the
Companys earnings per share calculation for the three months ended September 30,
2010.
14.
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 9) and
the Companys residual interest in the Timber Note Holdings (TNH) investment.
As
discussed in Note 1, Bankruptcy Proceedings Fresh Start Accounting, all of
the Companys assets and liabilities were fair valued as of June 30, 2010
in connection with the Companys adoption of fresh start accounting. The gains and losses related to these fair
value adjustments were recorded in the statements of operations of the
Predecessor Company.
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.
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 material 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.
29
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.
|
|
Successor
|
|
|
|
September 30, 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 September 30,
2010 and the six months ended June 30, 2010:
|
|
Residual
Interest in
TNH
Investment
|
|
Balance at January 1, 2010 (Predecessor)
|
|
$
|
36
|
|
Dividend received
|
|
(15
|
)
|
Balance at March 31, 2010 (Predecessor)
|
|
21
|
|
Realized gains (losses)
|
|
|
|
Balance at June 30, 2010 (Successor)
|
|
21
|
|
Realized gains (losses)
|
|
|
|
Balance at September 30, 2010 (Successor)
|
|
$
|
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.
Prior to emergence, the Predecessor Companys borrowings were recorded
at historical amounts. On the Effective
Date, the Successor Companys debt was adjusted to fair value of $1,194
million, net of original issue discount of $12 million, using quoted market
prices which is consistent with par value (Level 1) (See Note 1, Bankruptcy
Proceedings Fresh Start Accounting). At September 30, 2010, the carrying
value and fair value of the Companys borrowings were $1,192 million and $1,201
million, respectively.
15.
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 faced 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 faced 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. The matters relating to the third party PRP
sites and certain formerly owned facilities will be satisfied as unsecured
claims in the Companys bankruptcy proceedings. As of September 30,
2010, the Company had approximately $12 million reserved for environmental
liabilities, of which $5 million is included in other long-term liabilities and
$7 million in other current liabilities in the consolidated balance
sheets. The Company believes the liability for these matters was
adequately reserved at September 30, 2010.
30
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 one in the United States District Court for the District of Delaware. 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 the Predecessor Company
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 continues to 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 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 out of pre-petition conduct or acts was subject to the
automatic stay provision of the bankruptcy laws and any recovery by plaintiffs
in those matters was 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.
31
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 (SSCC or the Company), incorporated in Delaware in 1989,
was a holding company with no business operations of its own. SSCC conducted its business operations
through its wholly-owned subsidiary, Smurfit-Stone Container Enterprises, Inc.
(SSCE), a Delaware corporation. On June 30,
2010 (Effective Date), SSCC emerged from its Chapter 11 and Companies
Creditors Arrangement Act (CCAA) bankruptcy proceedings. As of the Effective Date and pursuant to the
Plan of Reorganization, the Company merged with and into SSCE. SSCE changed its name to Smurfit-Stone
Container Corporation and became the Reorganized Smurfit-Stone Container
Corporation (Reorganized Smurfit-Stone).
RECENTLY
ADOPTED ACCOUNTING STANDARDS
Effective
January 1, 2010, we adopted the amendments to Accounting Standards
Codification (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.
32
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 CCAA in the Ontario
Superior Court of Justice in Canada (the Canadian Court). Our
operations in Mexico and
Asia and certain U.S. and Canadian legal entities (the Non-Debtor Subsidiaries)
were not included in the filings and continued to operate outside of the
Chapter 11 and CCAA processes. As described below, on June 21, 2010, the
U.S. Court entered an order (Confirmation Order) approving and confirming the
Joint Plan of Reorganization for Smurfit-Stone Container Corporation and its
Debtor Subsidiaries and Plan of Compromise and Arrangement for Smurfit-Stone
Container Canada Inc. and Affiliated Canadian Debtors (Plan of
Reorganization). We emerged from our
Chapter 11 and CCAA bankruptcy proceedings on June 30, 2010 (Effective
Date). As of the Effective Date and
pursuant to the Plan of Reorganization, we merged with and into our
wholly-owned subsidiary, SSCE. SSCE
changed its name to Smurfit-Stone Container Corporation and became the
Reorganized Smurfit-Stone.
The
term Predecessor refers only to us and our subsidiaries prior to the
Effective Date, and the term Successor refers only to the Reorganized
Smurfit-Stone and our subsidiaries subsequent to the Effective Date. Unless the context indicates otherwise, the
terms we, us, SSCC and the Company are used interchangeably in this
Quarterly Report on Form 10-Q to refer to both the Predecessor and
Successor Company.
Until emergence from
bankruptcy on the Effective Date, the Debtors were operating as
debtors-in-possession under the jurisdiction of the U.S. Court and the Canadian
Court (the Bankruptcy Courts) and in accordance with the applicable provisions
of the Bankruptcy Code and the CCAA. In
general, as debtors-in-possession, the Debtors were authorized to continue to
operate as ongoing businesses, but could 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). Based on interim approval,
we and certain of our affiliates entered into the DIP Credit Agreement on January 28,
2009. 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 our
receivables securitization programs and repay all indebtedness outstanding of
$385 million and to pay other expenses of $1 million.
33
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.
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 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 were
enjoined unless and until the Bankruptcy Courts lifted 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 had a right to be
heard on all matters that came 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 either assumed or rejected pre-petition
executory contracts, including real property leases, subject to the approval of
the Bankruptcy Courts and certain other conditions. In this context, assumption meant that we
agreed to perform our obligations and cure all existing defaults under the
contract or lease, and rejection meant that we were relieved from our
obligations to perform further under the contract or lease, but were subject to
a pre-petition claim for damages for the breach thereof, subject to certain
limitations. Any damages resulting from
rejection of executory contracts and unexpired leases, and from the
determination of the U.S. Court (or agreement by parties of interest) of
allowed claims for contingencies and other disputed amounts, that were
permitted to be recovered under the Bankruptcy Code were treated as liabilities
subject to compromise unless such claims were secured prior to the Petition
Date.
Plan of Reorganization and Exit Credit Facilities
In
order for the Debtors to successfully emerge from bankruptcy, the Bankruptcy
Courts had to first confirm a plan of reorganization that satisfied the
requirements of the Bankruptcy Code and the CCAA. A plan of reorganization was required to,
among other things, resolve the Debtors 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.
34
Plan of
Reorganization
On
December 1, 2009, the Debtors filed their Plan of Reorganization and
Disclosure Statement (Disclosure Statement) with the U.S. Court. On December 22, 2009, January 27,
2010, and February 4, 2010, the Debtors filed amendments to the Plan of
Reorganization and the Disclosure Statement.
On March 19, 2010, the Debtors filed a supplement to the Plan of
Reorganization, and on May 27, 2010, the Debtors filed the final Plan of
Reorganization reflecting the resolution of certain objections by equity
security holders and other non-material modifications.
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 were entitled to vote to accept or reject the Plan of
Reorganization.
The
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 of Canada II. Stone
Container Finance Company of Canada II was removed from the Plan of
Reorganization. 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 Plan of Reorganization by all requisite classes of creditors
other than Stone Container Finance Company of Canada II.
The
Bankruptcy Code required the U.S. Court, after appropriate notice, to hold a
hearing on confirmation of a plan of reorganization. The confirmation hearing on the Plan of
Reorganization began 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. On May 13, 2010, the Canadian
Court issued an order approving the Plan of Reorganization in the CCAA
proceedings in Canada.
On
May 24, 2010, the Debtors announced that they reached a resolution with
certain holders of the Companys preferred and common stock that had filed
objections to the confirmation of the Plan of Reorganization. On May 28, 2010, the U.S. Court approved
notice procedures with respect to this resolution. On June 21, 2010, the U.S. Court entered
the Confirmation Order which approved and confirmed the Plan of
Reorganization. We emerged from our
Chapter 11 and CCAA bankruptcy proceedings on June 30, 2010, the Effective
Date.
As
of the Effective Date, we substantially consummated the various transactions
contemplated under the Plan of Reorganization and the Confirmation Order,
including the following:
·
we merged with and into SSCE, with SSCE being
the survivor entity and renaming itself Smurfit-Stone Container Corporation,
and becoming the Reorganized Smurfit-Stone.
Reorganized Smurfit-Stone is governed by a board of directors that
includes Patrick J. Moore, our Chief Executive Officer, Steven J. Klinger, our
President and Chief Operating Officer, and nine independent directors,
including a non-executive chairman selected by the Creditors Committee in
consultation with the Debtors;
·
Reorganized Smurfit-Stone filed the Amended
and Restated Certificate of Incorporation of the Company, which authorized
Reorganized Smurfit-Stone to issue 160,000,000 shares, consisting of
150,000,000 shares of common stock, par value $.001 per share (Common Stock)
and 10,000,000 shares of preferred stock, par value $.001 per share (Preferred
Stock). Reorganized Smurfit-Stone issued
or reserved for issuance 100,000,000 shares of Common Stock for distribution to
creditors and interest holders pursuant to the Plan of Reorganization. Under the Plan of Reorganization, we issued
an aggregate of 91,014,189 shares of Common Stock. None of the Preferred Stock was issued or
outstanding as of the Effective Date;
·
all of the existing secured debt of the
Debtors was fully repaid with cash;
·
substantially all of the general unsecured
claims against SSCE, and us, including all of the outstanding unsecured senior
notes, were exchanged for Common Stock;
35
·
holders of unsecured claims against SSCE of
less than or equal to $10,000 received payment of 100% of such claims in cash,
and eligible cash-out participants who so indicated on their ballot received
the percentage amount of their allowed claim they elected to receive in cash in
lieu of Common Stock;
·
holders of our 7% Series A Cumulative
Exchangeable Redeemable Convertible preferred stock received a pro-rata
distribution of 2,172,166 shares of Common Stock and holders of our common
stock received a pro-rata distribution of 2,171,935 shares. All shares of common stock and preferred
stock of the Predecessor Company were cancelled;
·
Reorganized Smurfit-Stone adopted the Equity
Incentive Plan, pursuant to which, among other things, it reserved for issuance
8,695,652 shares of Common Stock representing eight percent of the fully
diluted new Common Stock. In accordance
with the terms of the Equity Incentive Plan, 2,895,909 stock options and
914,498 Restricted Stock Units (RSUs) were granted to executive officers and
other key employees of Reorganized Smurfit-Stone on the Effective Date;
·
the assets of the Canadian Debtors, other
than Stone Container Finance Company of Canada II, were 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 and (iii) the assumption of certain
liabilities and obligations of the Canadian Debtors;
·
Reorganized Smurfit-Stone and its newly-formed
Canadian subsidiary assumed 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;
·
Pursuant to the Plan of Reorganization and
after the initial distribution, we reserved approximately 9.0 million shares of
Common Stock for future distribution to holders of unsecured non-priority
claims that were unliquidated or subject to dispute. On or about October 29, 2010, we issued
an additional 648,363 shares and cancelled 34,000 shares previously issued in
the first distribution, leaving approximately 8.4 million shares of Common
Stock held in reserve. These shares will be distributed as these claims are
liquidated or resolved, in accordance with the Plan of Reorganization and
Confirmation Order. To the extent that
such unliquidated or disputed claims are settled for less than the number of
shares reserved, additional distributions may also be made with respect to
previously allowed claims under the terms and conditions of the Plan of
Reorganization and Confirmation Order.
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).
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 the 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.
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
36
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 June 30, 2010, the
Term Loan Facility was funded and borrowings became available under the ABL
Revolving Facility. The proceeds of the
borrowings under the Term Loan Facility of $1,200 million, together with
available cash, were 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 Plan of
Reorganization. See Note 1 of the Notes
to Consolidated Financial Statements - Fresh Start Accounting. On September 30, 2010 we had no
borrowings under the ABL Revolving Facility.
Borrowings under the ABL Revolving Facility are available for working
capital purposes, capital expenditures, permitted acquisitions and general
corporate purposes. As of September 30,
2010, our borrowing base under the ABL Revolving Facility was $625 million and
the amount available for borrowings after considering outstanding letters of
credit was $528 million.
As of September 30, 2010, we also had available
unrestricted cash and cash equivalents of $464 million primarily invested in
money market funds at a variable interest rate of 0.18%.
The
term loan (Term Loan) is repayable in equal quarterly installments of $3
million beginning on September 30, 2010, with the balance payable at
maturity on June 30, 2016.
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 also requires us to use the net proceeds of asset sales and the
net proceeds of the incurrence of indebtedness to repay outstanding borrowings
under the Term Loan Facility.
The
Term Loan bears 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 interest rate at September 30,
2010 was 6.75%.
The
ABL revolver loan (ABL Revolver) matures on June 30, 2014. We 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, which is the applicable margin as of September 30,
2010. The applicable margin can 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 will also pay either a
0.50% or 0.75% per annum unused commitment fee based
37
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 are guaranteed by us and certain of our subsidiaries, and are
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.
Financial
Reporting Considerations
Subsequent
to the Petition Date, we applied the Financial Accounting Standards Board
(FASB) 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 were impacted by the bankruptcy reorganization
process were classified on the consolidated balance sheet at December 31, 2009
in liabilities subject to compromise.
Reorganization
Items
Our
reorganization items directly related to the process of our reorganizing under
Chapter 11 and the CCAA, and our emergence on June 30, 2010, as recorded in our
consolidated statements of operations, consist of the following:
|
|
Successor
|
|
Predecessor
|
|
|
|
Three Months
Ended
September 30,
|
|
Three Months
Ended
September 30,
|
|
Six Months
Ended
June 30,
|
|
Nine Months
Ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Income (Expense)
|
|
|
|
|
|
|
|
|
|
Provision for rejected/settled executory contracts
and leases
|
|
$
|
|
|
$
|
(9
|
)
|
$
|
(106
|
)
|
$
|
(73
|
)
|
Professional fees
|
|
(7
|
)
|
(12
|
)
|
(43
|
)
|
(44
|
)
|
Accounts payable settlement gains
|
|
|
|
5
|
|
5
|
|
8
|
|
Gain due to plan effects
|
|
|
|
|
|
580
|
|
|
|
Gain due to fresh start accounting adjustments
|
|
|
|
|
|
742
|
|
|
|
Total reorganization items
|
|
$
|
(7
|
)
|
$
|
(16
|
)
|
$
|
1,178
|
|
$
|
(109
|
)
|
In
addition, an income tax benefit of $200 million related to plan effect
adjustments was recorded in the six months ended June 30, 2010.
Professional
fees directly related to the reorganization include fees associated with
advisors to us, the Creditors Committee and certain secured creditors. During the three months ended September 30,
2010, the Company continued to incur costs related to professional fees that
are directly attributable to the reorganization.
38
Net
cash paid for reorganization items related to professional fees for the three
months ended September 30, 2010 and six months ended June 30, 2010 totaled $30
million and $32 million, respectively, and $9 million and $26 million for the
three and nine months ended September 30, 2009, respectively.
Reorganization
items exclude employee severance and other restructuring charges recorded
during 2009 and 2010.
Interest
expense recorded on the Predecessor unsecured debt was zero for the six months
ended June 30, 2010, and $49 million and $147 million for the three and nine
months ended September 30, 2009, respectively.
Contractual interest expense on unsecured debt was $98 million for the
six months ended June 30, 2010. Under
the Plan of Reorganization, interest expense on the Predecessor unsecured
senior notes subsequent to the Petition Date was not paid. In the fourth quarter of 2009, we concluded
it was not probable that interest expense on the Predecessor unsecured senior
notes subsequent to the Petition Date would be an allowed claim. As a result, 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.
In
addition, 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. Preferred Stock dividends in arrears were $13
million at the Effective Date and $9 million as of December 31, 2009. The Preferred Stock dividends in arrears
since the Petition Date are presented in the Predecessor consolidated statements
of operations only to reflect preferred stockholders rights to dividends over
common stockholders and are not reflected in the Preferred Stock value in the
December 31, 2009 consolidated balance sheet.
Other
Bankruptcy Related Costs
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 represent pre-petition unsecured obligations that were
settled under the Plan of Reorganization. These liabilities represented the
amounts expected to be allowed on known or potential claims to be resolved
through the Chapter 11 and CCAA process.
Liabilities subject to compromise also included certain items, such as
qualified defined benefit pension and retiree medical obligations that were
assumed under the Plan of Reorganization, and as such, have been recorded in
liabilities under the Reorganized Smurfit-Stone.
We 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 were classified as
liabilities subject to compromise.
39
Liabilities
subject to compromise at December 31, 2009 consisted of the following:
|
|
Predecessor
|
|
|
|
December 31, 2009
|
|
|
|
|
|
Unsecured debt
|
|
$
|
2,439
|
|
Accounts payable
|
|
339
|
|
Interest payable
|
|
47
|
|
Retiree medical obligations
|
|
176
|
|
Pension obligations
|
|
1,136
|
|
Unrecognized tax benefits
|
|
46
|
|
Executory contracts and leases
|
|
72
|
|
Other
|
|
17
|
|
Liabilities subject to compromise
|
|
$
|
4,272
|
|
For
information regarding the discharge of liabilities subject to compromise, see
Note 1 of the Notes to Consolidated Financial Statements - Fresh Start
Accounting.
Fresh Start Accounting
In
accordance with ASC 852, we adopted fresh start accounting as of the close of
business on June 30, 2010, because the reorganization value of the assets of
the Predecessor Company immediately before the date of confirmation of the Plan
of Reorganization was less than the total of all post-petition liabilities and
allowed claims, and the holders of the Predecessor Companys voting shares
immediately before confirmation of the Plan of Reorganization received less
than 50 percent of the voting shares of the Successor Company. Upon adoption of fresh start accounting, the
Company became a new entity for financial reporting purposes reflecting the
Successor capital structure. As such, a new accounting basis in the
identifiable assets and liabilities assumed was established with no retained
earnings or accumulated other comprehensive income (loss) (OCI).
40
RESULTS
OF OPERATIONS
Non-GAAP
Financial Measures
In
the accompanying analysis of financial information, we use the financial
measures adjusted net income (loss) attributable to common stockholders
(adjusted net income (loss)), adjusted net income (loss) per diluted share
attributable to common stockholders (adjusted net income (loss) per diluted
share), EBITDA and adjusted EBITDA which are derived from our consolidated
financial information but are not presented in our financial statements
prepared in accordance with U.S. generally accepted accounting principles
(GAAP). These measures are considered non-GAAP financial measures under the
U.S. Securities and Exchange Commission (SEC) rules. Adjusted net income
(loss) and adjusted net income (loss) per diluted share are non-GAAP financial
measures that exclude from net income attributable to common stockholders the
effects of reorganization items (income) expense, debtor-in-possession
financing costs, alternative fuel mixture tax credits, loss on early
extinguishment of debt, non-cash foreign currency exchange (gains) losses,
interest on Predecessor unsecured debt, restructuring charges, loss on disposal
of assets and a multi-employer pension plan withdrawal charge. EBITDA is defined as net income before
(provision for) benefit from income taxes, interest expense, net and
depreciation, depletion and amortization.
Adjusted EBITDA is defined as EBITDA adjusted for reorganization items
(income) expense, debtor-in-possession financing costs, alternative fuel
mixture tax credits, loss on early extinguishment of debt, non-cash foreign
currency exchange (gains) losses, restructuring charges, loss on disposal of
assets, a multi-employer pension plan withdrawal charge and other adjustments.
We
use these supplemental non-GAAP measures to evaluate performance period over
period, to analyze the underlying trends in our business, to assess our
performance relative to our competitors and to establish operational goals and
forecasts that are used in allocating resources. These non-GAAP measures of
operating results are reported to our board of directors, chief executive
officer and our president and chief operating officer and are used to make
strategic and operating decisions and assess performance. These non-GAAP
measures are presented to enhance an understanding of our operating results and
are not intended to represent cash flows or results of operations. We
also believe these non-GAAP measures are beneficial to investors, potential
investors and other key stakeholders, including analysts and creditors who use
these measures in their evaluations of our performance from period to period
and against the performance of other companies in our industry. Our creditors
also use these measures to evaluate our ability to service our debt. The use of these non-GAAP financial measures
is beneficial to these stakeholders because they exclude certain items that
management believes are not indicative of the ongoing operating performance of
our business, and including them would distort comparisons to our past
operating performance. Accordingly, we have excluded the adjustments, as
detailed below, for the purpose of calculating these non-GAAP measures.
The
following is an explanation of each of the adjustments that we have made to
arrive at these non-GAAP measures for (1) the three months ended September 30,
2010 of the Successor, (2) the six months ended June 30, 2010 of the Predecessor
and (3) the three and nine months ended September 30, 2009 of the Predecessor,
as well as the reasons management believes each of these items is not
indicative of operating performance:
·
Reorganization items
(income) expense, net of income taxes - These income and expense items are
directly related to the process of our reorganizing under Chapter 11 and the
CCAA. The items include gain due to plan
effects, gain due to fresh start accounting adjustments, provision for
rejected/settled executory contracts and leases, accounts payable settlement
gains and professional fees. These
income and expense items are not considered indicative of ongoing operating
performance and are not used by us to assess our operating performance.
·
Debtor-in-possession
financing costs - These expenses were incurred and paid during the first
quarter of 2009 in connection with entering into the DIP Credit Agreement. These expense items are not considered
indicative of ongoing operating performance and are not used by us to assess
our operating performance.
41
·
Alternative fuel mixture tax
credits - These amounts represent 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. These items are not considered
indicative of ongoing operating performance and are not used by us to assess
our operating performance.
·
Loss on early extinguishment
of debt - These losses represent unamortized deferred debt issuance cost and
call premiums charged to expense in connection with our financing
activities. These losses were not considered indicative of ongoing
operating performance because they related to specific financing activities and
were not used by us to assess our operating performance.
·
Non-cash foreign currency
(gains) losses - Through June 30, 2010, the functional currency for our
Canadian operations was the U.S. dollar. Fluctuations in Canadian
dollar-denominated monetary assets and liabilities resulted in non-cash gains
or losses. We excluded the impact of foreign currency exchange gains and
losses because the impact of foreign exchange is highly variable and difficult
to predict from period to period and is not tied to our operating
performance. These gains or losses are not considered indicative of
ongoing operating performance and are not used by us to assess our operating
performance.
·
Interest on Predecessor
unsecured debt - These amounts represent the post-petition interest accrued on
unsecured debt from the time of our bankruptcy filing, which was stayed and not
paid as a result of the bankruptcy proceedings.
In the fourth quarter of 2009, we concluded it was not probable that
interest expense that was accrued from the Petition Date through November 30,
2009, would be an allowed claim. This
expense was not considered indicative of our ongoing operating performance and
was excluded by management in assessing our operating performance.
·
Restructuring charges -
These adjustments represent the write-down of assets, primarily property, plant
and equipment, to estimated net realizable values, the acceleration of
depreciation for equipment to be abandoned or taken out of service, severance costs
and other costs associated with our restructuring activities. These income and
expense items were not considered indicative of our ongoing operating
performance and were excluded by management in assessing our operating
performance.
·
Loss on disposal of assets -
These amounts represent losses we recognized related to the sale of
non-strategic assets. These losses were
not considered indicative of ongoing operating performance and were excluded by
management in assessing our operating profit.
·
Multi-employer pension plan
withdrawal charge - This amount represents the charge associated with the
withdrawal from a multi-employer pension plan.
This expense item was not considered indicative of our ongoing operating
performance and was excluded by management in assessing our operating
performance.
·
Other - These adjustments
principally represent amounts accrued under our 2009 long-term incentive
plan. These income and expense items
were not considered indicative of our ongoing operating performance and were excluded
by management in assessing our operating performance.
Adjusted
net income (loss), adjusted net income (loss) per diluted share, EBITDA and
adjusted EBITDA have certain material limitations associated with their use as
compared to net income. These limitations are primarily due to the exclusion
of certain amounts that are material to our consolidated results of operations,
as discussed above. In addition, these adjusted net income (loss) and
EBITDA measures may differ from adjusted net income (loss) and EBITDA
calculations of other companies in our industry, limiting their usefulness as
comparative measures. Because of these
limitations, adjusted net income (loss), adjusted net income (loss) per diluted
share, EBITDA and adjusted EBITDA should be read in conjunction with our
consolidated financial statements prepared in accordance with GAAP. We
compensate for these limitations by relying primarily on our GAAP results and
using adjusted net income (loss), adjusted net income (loss) per diluted share,
EBITDA and adjusted EBITDA only as supplemental
42
measures
of our operating performance. The presentation of this additional
information is not meant to be considered in isolation or as a substitute for
financial statements prepared in accordance with GAAP.
We
believe that providing these non-GAAP measures in addition to the related GAAP
measures provides investors greater transparency to the information our
management uses for financial and operational decision-making and allows
investors to see our results as management sees them. We also believe that
providing this information better enables investors to understand our operating
performance and to evaluate the methodology used by our management to evaluate
and measure our operating performance, and the methodology and financial
measures used by our board of directors to assess managements performance.
The
following financial presentation includes a reconciliation of net income
attributable to common stockholders and net income per diluted share
attributable to common stockholders, the most directly comparable GAAP
financial measures, to adjusted net income (loss) attributable to common
stockholders and adjusted net income (loss) per diluted share attributable to
common stockholders, respectively. The
adjustments to GAAP net income attributable to common stockholders for the
Predecessor periods, other than reorganization items (income) expense, were not
tax effected because it was more likely than not that substantially all of the
deferred tax assets that were generated during bankruptcy would not be realized
and we did not record any additional tax benefit for 2009 and the six months
ended June 30, 2010. Due to the effects
of the Plan of Reorganization, we concluded that it was more likely than not
that substantially all of the deferred tax assets would be realized and we
recognized an income tax benefit related to reorganization items in the six
months ended June 30, 2010. For the
three months ended September 30, 2010, we recorded a provision for income taxes
related to the Successor statement of operations. As a result, the Successor period adjustments
to net income attributable to stockholders are presented on a net of tax basis.
A
reconciliation of net income to EBITDA and adjusted EBITDA is also presented.
43
Reconciliation to GAAP Financial Measures
|
|
Successor
|
|
Predecessor
|
|
|
|
Three Months
Ended
September 30,
|
|
Three Months
Ended
September 30,
|
|
Six Months
Ended
June 30,
|
|
Nine Months
Ended
September 30,
|
|
(In millions, except per share data)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
common stockholders (GAAP)
|
|
$
|
65
|
|
$
|
65
|
|
$
|
1,320
|
|
$
|
3
|
|
Reorganization items (income) expense, net of
income taxes
|
|
4
|
|
16
|
|
(1,378
|
)
|
109
|
|
Debtor-in-possession financing costs
|
|
|
|
|
|
|
|
63
|
|
Alternative fuel mixture tax credits
|
|
|
|
(179
|
)
|
(11
|
)
|
(455
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
20
|
|
Non-cash foreign currency exchange (gains) losses
|
|
|
|
11
|
|
(3
|
)
|
10
|
|
Interest on Predecessor unsecured debt
|
|
|
|
48
|
|
|
|
131
|
|
Restructuring charges, net of income taxes
|
|
4
|
|
14
|
|
15
|
|
38
|
|
Loss on disposal of assets
|
|
|
|
2
|
|
|
|
2
|
|
Multi-employer pension plan withdrawal charge, net
of income taxes
|
|
3
|
|
|
|
|
|
|
|
Adjusted net income (loss) attributable to common
stockholders
|
|
$
|
76
|
|
$
|
(23
|
)
|
$
|
(57
|
)
|
$
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share
attributable to common stockholders (GAAP)
|
|
$
|
0.65
|
|
$
|
0.25
|
|
$
|
5.07
|
|
$
|
0.01
|
|
Reorganization items (income) expense, net of
income taxes
|
|
0.04
|
|
0.06
|
|
(5.28
|
)
|
0.42
|
|
Debtor-in-possession financing costs
|
|
|
|
|
|
|
|
0.24
|
|
Alternative fuel mixture tax credits
|
|
|
|
(0.70
|
)
|
(0.04
|
)
|
(1.77
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
0.08
|
|
Non-cash foreign currency exchange (gains) losses
|
|
|
|
0.04
|
|
(0.01
|
)
|
0.04
|
|
Interest on Predecessor unsecured debt
|
|
|
|
0.19
|
|
|
|
0.51
|
|
Restructuring charges, net of income taxes
|
|
0.04
|
|
0.06
|
|
0.06
|
|
0.15
|
|
Loss on disposal of assets
|
|
|
|
0.01
|
|
|
|
0.01
|
|
Multi-employer pension plan withdrawal charge, net
of income taxes
|
|
0.03
|
|
|
|
|
|
|
|
Adjusted net income (loss) per diluted share
attributable to common stockholders
|
|
$
|
0.76
|
|
$
|
(0.09
|
)
|
$
|
(0.20
|
)
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (GAAP)
|
|
$
|
65
|
|
$
|
68
|
|
$
|
1,324
|
|
$
|
12
|
|
(Benefit from) provision for income taxes
|
|
49
|
|
(2
|
)
|
(199
|
)
|
3
|
|
Interest expense net
|
|
23
|
|
72
|
|
23
|
|
217
|
|
Depreciation, depletion and amortization
|
|
84
|
|
91
|
|
168
|
|
273
|
|
EBITDA
|
|
221
|
|
229
|
|
1,316
|
|
505
|
|
Reorganization items (income) expense
|
|
7
|
|
16
|
|
(1,178
|
)
|
109
|
|
Debtor-in-possession financing costs
|
|
|
|
|
|
|
|
63
|
|
Alternative fuel mixture tax credits
|
|
|
|
(179
|
)
|
(11
|
)
|
(455
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
20
|
|
Non-cash foreign currency exchange (gains) losses
|
|
|
|
11
|
|
(3
|
)
|
10
|
|
Restructuring charges
|
|
7
|
|
14
|
|
15
|
|
38
|
|
Loss on disposal of assets
|
|
|
|
2
|
|
|
|
3
|
|
Multi-employer pension plan withdrawal charge
|
|
4
|
|
|
|
|
|
|
|
Other
|
|
|
|
1
|
|
9
|
|
2
|
|
Adjusted EBITDA
|
|
$
|
239
|
|
$
|
94
|
|
$
|
148
|
|
$
|
295
|
|
44
Combined Financial Results of the Predecessor and Successor
In
connection with our emergence from Chapter 11 and CCAA bankruptcy proceedings
and the adoption of fresh start accounting on June 30, 2010, the
accompanying consolidated statements of operations include the results of
operations for (1) the three months ended September 30, 2010 of the
Successor, (2) the six months ended June 30, 2010 of the Predecessor
and (3) the three and nine months ended September 30, 2009 of the
Predecessor.
Although
the 2010 Successor and Predecessor Periods are distinct reporting periods, for
purposes of Managements Discussion and Analysis of the results of operations
for the nine months ended September 30, 2010 in this Form 10-Q, we
combined the results of operations for the six months ended June 30, 2010
of the Predecessor with the three months ended September 30, 2010 of the
Successor. We then compared the combined
results of operations for the nine months ended September 30, 2010 with
the corresponding period in the prior year of the Predecessor.
We
believe that combining the results of operations for the nine months ended September 30,
2010 enhances the comparability for management and investors of Smurfit-Stones
ongoing financial and operational performance and trends than if we did not
combine the results of operations of the Predecessor and Successor in this
manner. Similarly, we combined the
financial results of the Predecessor and Successor when discussing our
liquidity and capital resources for the nine months ended September 30,
2010.
Overview
We
had net income of $65 million, or $0.65 per diluted share, for the third
quarter of 2010 compared to net income attributable to common stockholders of
$65 million, or $0.25 per diluted share, for the third quarter of 2009. The 2010 results compared to the third
quarter of 2009 were positively impacted by higher segment profits of $156
million, lower interest expense of $49 million, lower restructuring expenses of
$7 million and lower reorganization items, net of $9 million. The 2010 segment
profits benefited from a decrease in pension and postretirement benefit expense
of $16 million due primarily to elimination of the amortization of net losses
associated with the plans underfunded levels upon emergence. These benefits were partially offset by lower
other operating income related to the alternative fuel tax credit of $179
million recorded in 2009. We recorded an income tax provision of $49 million in
2010 compared to an income tax benefit of $2 million in 2009.
We
had operating income of $142 million for the third quarter of 2010, compared to
operating income of $159 million in the third quarter of 2009. The third quarter of 2010 operating income
was positively impacted by higher segment profits principally due to higher
average selling prices for containerboard and corrugated containers and reduced
market-related downtime, which were partially offset by higher costs for
reclaimed fiber. The third quarter of
2009 was positively impacted by other operating income of $179 million related
to the alternative fuel tax credits.
We
had adjusted net income of $76 million, or $0.76 per diluted share, for the
third quarter of 2010 compared to an adjusted net loss attributable to common
stockholders of $23 million, or $0.09 per diluted share, for the third quarter
of 2009. Adjusted EBITDA for the third quarter of 2010 was $239 million
compared with $94 million in the third quarter of 2009.
We
had combined operating income of $105 million for the nine months ended September 30,
2010, compared to operating income of $424 million for the same period last
year. The 2010 operating income was
positively impacted by higher segment profits principally due to higher average
selling prices for containerboard, higher third-party sales volume of
containerboard and corrugated containers and reduced market-related downtime,
which were offset by higher costs for reclaimed fiber and slightly lower
average sales prices for corrugated containers.
The 2009 operating profit was positively impacted by other operating
income of $455 million related to the alternative fuel tax credits.
For
the nine months ended September 30, 2010, we had adjusted net income
attributable to common stockholders of $19 million compared to an adjusted net
loss attributable to common stockholders of $79
45
million
for the nine months ended September 30, 2009. Adjusted EBITDA for the nine months ended September 30,
2010 was $387 million compared with $295 million for the nine months ended September 30,
2009.
We
expect moderately lower sequential earnings in the fourth quarter from the
third quarter, as continued price improvement will be more than offset by
additional mill maintenance costs, normal seasonal demand declines and higher
energy usage. We also expect higher
recycled fiber costs in the fourth quarter.
Reorganization Items Income
(Expense), Net
For the three months ended September 30,
2010, we recorded reorganization items expense of $7 million as we continued to
incur costs related to professional fees that are directly attributable to the
reorganization.
Reorganization items income
of $1,178 million for the six months ended June 30, 2010, include a gain
from the bankruptcy emergence plan effects of $580 million and a gain on fresh
start accounting adjustments of $742 million, which were partially offset by
other reorganization charges including provision for rejected/settled executory
contracts and leases and professional fees.
The gain due to plan effects represents the net gains recorded as a
result of implementing the Plan of Reorganization, including eliminating
approximately $2,439 million of debt.
The gain due to fresh start accounting represents the net gains
recognized as a result of adjusting all assets and liabilities to fair
value. See Note 1 of the Notes to Consolidated
Financial Statements.
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 the three and nine
months ended September 30, 2009, we recorded other operating income of
$179 million and $455 million, respectively, 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 $11 million refund claim adjustment 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, severance costs and other closing costs.
During
the third quarter of 2010, we announced the closure of two converting
facilities and sold two previously closed facilities. In addition, we initiated a plan to reduce
our selling, general and administrative costs, primarily through reductions in
our workforce in these functions. We
recorded restructuring charges of $7 million, primarily for severance and
benefits and reduced our headcount by approximately 460 employees. The net sales of the announced converting
facilities in 2010 prior to closure and for the year ended December 31,
2009 were $48 million and $44 million, respectively. The majority of these net sales are expected
to be transferred to other operating facilities. Additional charges of approximately $20
million are expected to be recorded in the fourth quarter of 2010, primarily
for severance and benefits related to the closure of these facilities and the
reductions in the selling and administrative workforce, including charges
related to the October 27, 2010 announced resignation of Steven J.
Klinger, the Companys President and Chief Operating Officer, which is
effective December 31,
46
2010.
We expect to realize net savings of more than $50 million in our selling,
general and administrative costs in 2011 compared to 2010 and have identified
opportunities for additional savings impacting 2012.
For
the six months ended June 30, 2010, we closed four converting facilities
and sold five previously closed facilities.
As a result of these closure activities and other ongoing initiatives,
we reduced our headcount by approximately 900 employees. We recorded restructuring charges of $15
million, including a $12 million gain related to the sale of previously closed
facilities, of which $8 million resulted from the legal release of
environmental liability obligations.
Restructuring charges included non-cash charges of $11 million related
to the acceleration of depreciation for converting equipment abandoned or taken
out of service. The remaining charges of
$16 million were for severance and benefits, lease commitments and facility
closure costs. The net sales of these
closed converting facilities in 2010 prior to closure and for the year ended December 31,
2009 were $21 million and $97 million, respectively. The majority of these net sales are expected
to be transferred to other operating facilities.
We
recorded restructuring charges of $14 million and $38 million for the three and
nine months ended September 30, 2009, respectively, which were net of a $2
million gain on the sale of previously closed facilities in the third quarter
of 2009. Restructuring charges included
non-cash charges of $4 million and $8 million for the three and nine months
ended September 30, 2009, respectively, related to the write-down of
assets, primarily property, plant and equipment, to estimated net realizable
values and the acceleration of depreciation for converting equipment expected
to be abandoned or taken out of service. The remaining charges were primarily
for severance and benefits, including pension settlement costs of $3 million.
47
Third Quarter 2010 Compared to Third Quarter 2009
|
|
Successor
|
|
Predecessor
|
|
|
|
Three Months
Ended
September 30,
2010
|
|
Three Months
Ended
September 30,
2009
|
|
(In millions)
|
|
Net
Sales
|
|
Profit/
(Loss)
|
|
Net
Sales
|
|
Profit/
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Containerboard, corrugated containers and
reclamation operations
|
|
$
|
1,634
|
|
$
|
216
|
|
$
|
1,417
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring expenses
|
|
|
|
(7
|
)
|
|
|
(14
|
)
|
Loss on disposal of assets
|
|
|
|
|
|
|
|
(2
|
)
|
Other operating income
|
|
|
|
|
|
|
|
179
|
|
Interest expense, net
|
|
|
|
(23
|
)
|
|
|
(72
|
)
|
Non-cash foreign currency exchange losses
|
|
|
|
|
|
|
|
(11
|
)
|
Reorganization items expense, net
|
|
|
|
(7
|
)
|
|
|
(16
|
)
|
Corporate expenses and other (Note 1)
|
|
|
|
(65
|
)
|
|
|
(58
|
)
|
Income before income taxes
|
|
|
|
$
|
114
|
|
|
|
$
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
1: Amounts include corporate expenses and other expenses not allocated to
operations.
Net
sales increased 15.3% in the third quarter of 2010 compared to last year. Net sales were positively impacted by higher
average selling prices ($178 million) for containerboard, corrugated containers
and reclaimed material. The average price for old corrugated containers (OCC)
increased approximately $50 per ton compared to last year. Net sales were also favorably impacted by $39
million in 2010 as a result of higher third-party sales volume of
containerboard and corrugated containers.
Our
containerboard mills operated at 99.7% of capacity in the third quarter of
2010, compared to 87.2% of capacity in the third quarter of 2009. As a result of less market related downtime,
containerboard production was 3.4% higher compared to last year despite the
closure of two containerboard mills in December 2009. Total tons of fiber reclaimed and brokered
increased 13.4% compared to last year due to higher demand.
Cost of goods sold as a percent of net sales in the third quarter of
2010 was 82.3%, compared to 90.6% for the same period last year due primarily
to the impact of higher average selling prices.
Cost of goods sold increased from $1,284 million in the third quarter of
2009 to $1,344 million in third quarter of 2010 due primarily to higher costs
of reclaimed material ($62 million).
Selling
and administrative expenses increased $4 million in the third quarter of 2010
compared to the third quarter of 2009 primarily due to an increase in outside
services and stock compensation expense recorded for the newly issued shares
under the Equity Incentive Plan.
In
the third quarter of 2009, we recorded other operating income of $179 million,
net of expected fees, related to the alternative fuel tax credit.
Interest
expense, net was $23 million in the third quarter of 2010. The $49 million decrease compared to the
third quarter of 2009 was due to lower average borrowings. The lower average borrowings were primarily
due to the repayment of our secured borrowings and the DIP Credit Facility, and
discharge of our unsecured debt upon emergence.
Our overall average effective interest rate in the third quarter of 2010
was higher than the third quarter of 2009, excluding the Predecessor unsecured
debt, by 1.6%.
48
In
the third quarter of 2009, we recorded non-cash foreign currency exchange
losses of $11 million. Upon emergence
from bankruptcy, we reviewed the primary economic indicators as defined by ASC 830, Foreign Currency Matters and
determined the functional currency for our Canadian operations to be the local
currency. Beginning in third quarter of
2010, translation gains or losses are included in stockholders equity as part
of OCI. For additional information on
the change in functional currency for our Canadian operations, see Part I, Item
3. Quantitative and Qualitative Disclosures About Market Risk Foreign
Currency Risk.
We
recorded an income tax provision of $49 million for the three months ended September 30,
2010. The provision for income taxes
differed from the amount computed by applying the statutory U.S. federal income
tax rate to income before income taxes due primarily to adjustments resulting
from reconciling filed tax returns to recorded tax provision, state income
taxes, and the effects of foreign tax rates.
Nine Months 2010 Compared to Nine Months 2009
|
|
Successor
|
|
Predecessor
|
|
|
|
Three Months
Ended
September 30,
2010
|
|
Six Months
Ended
June 30,
2010
|
|
Nine Months
Ended
September 30,
2009
|
|
(In millions)
|
|
Net
Sales
|
|
Profit/
(Loss)
|
|
Net
Sales
|
|
Profit/
(Loss)
|
|
Net
Sales
|
|
Profit/
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Containerboard, corrugated containers and
reclamation operations
|
|
$
|
1,634
|
|
$
|
216
|
|
$
|
3,024
|
|
$
|
116
|
|
$
|
4,195
|
|
$
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring expenses
|
|
|
|
(7
|
)
|
|
|
(15
|
)
|
|
|
(38
|
)
|
Loss on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Other operating income
|
|
|
|
|
|
|
|
11
|
|
|
|
455
|
|
Interest expense, net
|
|
|
|
(23
|
)
|
|
|
(23
|
)
|
|
|
(217
|
)
|
Debtor-in-possession debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
Non-cash foreign currency exchange gains (losses)
|
|
|
|
|
|
|
|
3
|
|
|
|
(10
|
)
|
Reorganization items income (expense), net
|
|
|
|
(7
|
)
|
|
|
1,178
|
|
|
|
(109
|
)
|
Corporate expenses and other (Note 1)
|
|
|
|
(65
|
)
|
|
|
(145
|
)
|
|
|
(182
|
)
|
Income before income taxes
|
|
|
|
$
|
114
|
|
|
|
$
|
1,125
|
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
1: Amounts include corporate expenses and other expenses not allocated to
operations.
Net
sales increased 11.0% in the first nine months of 2010 compared to last
year. Net sales were positively impacted
by higher average selling prices ($267 million) for containerboard and
reclaimed material. The average price
for old corrugated containers (OCC) increased approximately $80 per ton
compared to last year. Net sales were
also favorably impacted by $196 million in the first nine months of 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 the domestic market.
Our
containerboard mills operated at 99.2% of capacity in the first nine months of
2010, compared to 84.9% in the first nine months of 2009. As a result of less market related downtime,
containerboard production was 5.6% higher compared to last year despite the closure
of two containerboard mills in December 2009. Total tons of fiber reclaimed and brokered
increased 14.3% compared to last year due to higher demand.
Cost of goods sold as a percent of net sales in the first nine months
of 2010 was 88.2%, compared to 89.6% for the first nine months of 2009. Cost of goods sold increased from $3,757
million in 2009 to
49
$4,107 million in 2010 due primarily to higher costs of reclaimed
material ($308 million) in the first nine months of 2010.
Selling
and administrative expenses increased $7 million in the first nine months of
2010 compared to the first nine months of 2009 primarily due to an increase in
outside services and amounts accrued under our 2009 long-term incentive plan.
During
the nine months ended September 30, 2010, we recorded other operating
income of $11 million related to the alternative fuel tax credit compared to
$455 million for the same period last year.
Interest
expense, net was $46 million in the first nine months of 2010. The $171 million decrease compared to the
first nine months of 2009 was impacted by the discontinuation of recording
interest on unsecured debt ($98 million) of the Predecessor Company, lower
average borrowings ($66 million), lower average interest rates ($2 million) and
$5 million in other interest expense reductions, including negotiated
settlements on default interest rates. During
bankruptcy, we discontinued interest payments on our unsecured notes and
certain other unsecured debt. The lower
average borrowings were primarily due to the repayment of our secured
borrowings and the DIP Credit Facility, and discharge of our unsecured debt
upon emergence. Our overall average
effective interest rate in the first nine months of 2010 was lower than the
first nine months of 2009, excluding the Predecessor unsecured debt, by 0.76%. For additional information on the
discontinuation of recording 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.
In
the first nine months of 2009, we recorded debtor-in-possession debt issuance
costs of $63 million in connection with entering into the DIP Credit
Agreement. We also recorded a loss on
early extinguishment of debt of $20 million for the non-cash write-off of
deferred debt issuance costs related to the Stevenson, Alabama mill industrial
revenue bonds, which were repaid.
In
the first nine months of 2010, we recorded non-cash foreign currency exchange
gains of $3 million compared to losses of $10 million for the same period in 2009. Upon emergence from bankruptcy, we reviewed
the primary economic indicators as defined by ASC 830, Foreign Currency Matters and determined the
functional currency for our Canadian operations to be the local currency. Beginning in third quarter of 2010,
translation gains or losses are included in stockholders equity as part of
OCI.
During the nine months ended September 30, 2010
, we recorded a
$150 million income tax benefit primarily due to the $200 million income tax
benefit related to the effects of the plan of reorganization which principally
includes adjustments for cancellation of indebtedness, valuation allowances and
unrecognized tax benefits. During the nine months ended September 30,
2009, we recorded a provision for income taxes of $3 million related to
Canadian withholding taxes and interest on unrecognized tax benefits previously
recorded. For additional
information on income taxes see Part I, Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
Income Taxes.
50
Statistical Data
|
|
Successor
|
|
Predecessor
|
|
|
|
Three Months
Ended
September 30,
|
|
Three Months
Ended
September 30,
|
|
Six Months
Ended
June 30,
|
|
Nine Months
Ended
September 30,
|
|
(In thousands of tons, except as noted)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Mill Production
|
|
|
|
|
|
|
|
|
|
Containerboard (1)
|
|
1,603
|
|
1,551
|
|
3,130
|
|
4,483
|
|
Kraft paper
|
|
26
|
|
34
|
|
55
|
|
81
|
|
Market pulp
|
|
73
|
|
78
|
|
134
|
|
220
|
|
SBL
|
|
32
|
|
29
|
|
66
|
|
94
|
|
North American corrugated containers sold (billion
sq. ft.)
|
|
17.1
|
|
16.7
|
|
33.7
|
|
50.0
|
|
Fiber reclaimed and brokered
|
|
1,494
|
|
1,317
|
|
2,891
|
|
3,838
|
|
(1) For the three months ended September 30,
2010 and 2009, our corrugated container plants consumed 1,150,000 tons and
1,107,000 tons of containerboard, respectively.
For the nine months ended September 30, 2010 and 2009, our
corrugated container plants consumed 3,415,000 tons and 3,354,000 tons of
containerboard, respectively.
51
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2010,
we had cash and cash equivalents of $464 million compared to $704 million at December 31,
2009 and $340 million at June 30, 2010.
Related to our Plan of Reorganization, our long-term debt was reduced
from $3,793 million at December 31, 2009 to $1,194 million upon emergence
at June 30, 2010. Long-term debt at
September 30, 2010 was $1,192 million.
As of September 30, 2010, the amount available for borrowings under
the ABL Revolving Facility after considering outstanding letters of credit was
$528 million.
The
following table summarizes our cash flows:
|
|
Successor
|
|
Predecessor
|
|
|
|
Three Months
Ended
September 30,
|
|
Six Months
Ended
June 30,
|
|
Nine Months
Ended
September 30,
|
|
(In millions)
|
|
2010
|
|
2010
|
|
2009
|
|
Net cash provided by (used for):
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
161
|
|
$
|
(85
|
)
|
$
|
793
|
|
Investing activities
|
|
(34
|
)
|
(73
|
)
|
(111
|
)
|
Financing activities
|
|
(3
|
)
|
(206
|
)
|
(247
|
)
|
Net increase (decrease) in cash
|
|
$
|
124
|
|
$
|
(364
|
)
|
$
|
435
|
|
Net
Cash Provided By (Used For) Operating Activities
The
net cash provided by operating activities was $161 million for the three months
ended September 30, 2010 as a result of operating income of $142
million. The net cash provided by
operating activities for the nine months ended September 30, 2010 was
lower compared to the same period in 2009 due primarily to lower alternative
fuel tax credit receipts of $356 million, operating cash payments under the
Plan of Reorganization of $202 million and unfavorable working capital changes
of $63 million, which were partially offset by higher segment profits of $130
million. The unfavorable working capital
change in 2010 was due to an increase in accounts receivable principally caused
by the increase in selling prices and was partially offset by a reduction of
$48 million in the receivable for alternative fuel tax credit. Working capital, principally accounts
payable, was favorably impacted in the first nine months of 2009 by the stay of
payment of liabilities subject to compromise resulting from the bankruptcy
filings.
Net
Cash Used For Investing Activities
Net
cash used for investing activities was $107 million for the nine months ended September 30,
2010. Expenditures for property, plant
and equipment were $122 million for the first nine months of 2010, compared to
$112 million for the same period last year.
The amount expended for property, plant and equipment in the first nine
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 $15 million in the
first nine months of 2010 compared to $16 million in the first nine months of
2009. Advances to affiliates, net in the
first nine months of 2009 of $15 million is principally related to funding an
obligation pertaining to a guarantee for a previously non-consolidated
affiliate.
Net
Cash Used For Financing Activities
Net
cash used for financing activities for the nine months ended September 30,
2010 was $209 million. During the third
quarter 2010, we paid $3 million on the Term Loan as required under the Term
Loan Facility. At emergence from
bankruptcy on June 30, 2010, we obtained proceeds of $1,188 million (net
of $12 million original issue discount) under the Term Loan Facility, which
together with available cash, were 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 Plan of Reorganization, including $32 million for debt issuance costs
related to our Exit Credit Facilities.
The net cash used for financing activities also included an additional
$15 million for debt issuance costs which were paid prior to emergence.
52
Net
cash used for financing activities for the nine months ended September 30,
2009 was $247 million, including proceeds from the DIP Credit Agreement of $440
million which were used to terminate our receivables securitization programs
and repay all indebtedness outstanding under the programs of $385 million. During the nine months ended September 30,
2009, we made $310 million of voluntary prepayments on the DIP credit agreement
with available cash provided by operating activities. Debt issuance costs of $63 million were
incurred and paid with the DIP proceeds and available cash. 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.
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 the 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.
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 June 30, 2010, the
Term Loan Facility was funded and borrowings became available under the ABL
Revolving Facility. The proceeds of the
borrowings under the Term Loan Facility of $1,200 million, together with
available cash, were 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 Plan of
Reorganization. On September 30,
2010 we had no borrowings under the ABL Revolving Facility. Borrowings under the ABL Revolving Facility
are available for working capital purposes, capital expenditures, permitted
acquisitions and general corporate purposes.
As of September 30, 2010, our borrowing base under the ABL
Revolving Facility was $625 million and the amount available for borrowings
after considering outstanding letters of credit was $528 million.
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 Plan of Reorganization and Exit Credit
Facilities Exit Credit Facilities.
53
Future Cash Flows
We recorded restructuring
charges of $22 million
during the first nine months of 2010, including a $12 million gain related to
the sale of previously closed facilities, of which $8 million resulted from the
legal release of environmental liability obligations. Restructuring charges included non-cash
charges of $11 million related to the acceleration of depreciation for
converting equipment abandoned or taken out of service. The remaining charges of $23 million were
principally for severance and benefits.
During the nine months ended September 30, 2010, we incurred cash
expenditures of $17 million for these exit liabilities. The remaining exit liabilities are expected
to be paid principally in the fourth quarter of 2010. At December 31, 2009, we had $54 million
of exit liabilities related principally to restructuring activities. During the nine months ended September 30,
2010, we incurred cash expenditures of $27 million for 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 and $3
million due to the reclassification of multi-employer pension liabilities to
liabilities subject to compromise. The
cash expenditures in connection with our remaining exit liabilities 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.
Upon
emergence from bankruptcy, we had $94 million accrued for professional fees and
other emergence fees and expenses related to our reorganization. During the
third quarter 2010, we incurred an additional $7 million of expense and paid
$75 million related to these fees and expenses.
As of September 30, 2010, our remaining accrual was $26 million,
which we expect to pay in the fourth quarter of 2010 and first quarter of 2011.
Pension Plan Contributions
At June 30, 2010, the qualified defined benefit
plans, which were assumed under the Plan of Reorganization, were underfunded by
approximately $1,450 million based on actual asset values and the discount
rates effective on June 30, 2010.
The weighted average discount rates used at June 30, 2010 for the
U.S. and Canadian qualified defined benefit plans were 5.31% and 5.23%,
respectively.
We currently
estimate that our minimum required cash contributions under the U.S. and
Canadian qualified pension plans will be approximately $100 million in 2010, of
which $31 million and $12 million were paid during the three months ended September 30,
2010 and six months ended June 30, 2010, respectively; and an additional
$57 million, which is expected to paid in the fourth quarter of 2010. Contributions are expected to be in the range
of $235 million to $305 million annually in 2011 through 2015. Projected pension contributions assume we
elect funding relief under the Preservation of Access to Care for Medicare
Beneficiaries and Pension Relief Act of 2010, enacted in June 2010. 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.
INCOME TAXES
Successor Company
We
recorded an income tax provision of $49 million for the three months ended September 30,
2010. The provision for income taxes
differed from the amount computed by applying the statutory U.S. federal income
tax rate to income before income taxes due primarily to adjustments resulting
from reconciling filed tax returns to recorded tax provision, state income
taxes and the effects of foreign tax rates.
Predecessor Company
We
recorded a net tax benefit of $199 million for the six months ended June 30,
2010. This included $200 million of net
benefit related to the effects of the Plan of Reorganization, which included
adjustments for valuation allowance ($427 million benefit), unrecognized tax
benefits ($39 million benefit) and cancellation of indebtedness and other plan
effects ($266 million provision).
54
Certain
debt obligations of ours were discharged upon emergence from bankruptcy. Discharge of a debt obligation for an amount
less than the adjusted issue price generally creates cancellation of
indebtedness income (CODI), which must be included in taxable income. However, CODI is excluded from taxable income
for a taxpayer that is a debtor in a reorganization case if the discharge is
granted by the court or pursuant to a plan of reorganization approved by the
court. The Plan of Reorganization filed
by us enabled us and our debtor subsidiaries to qualify for this bankruptcy
exclusion rule. Based upon current
projections, the CODI triggered by discharge of debt under the Plan of
Reorganization will not create current taxable income, but will reduce our net
operating losses (NOLs) for the year of discharge and net operating loss
carryforwards. None of our other U.S.
income tax attributes are expected to be reduced.
Pursuant
to the Plan of Reorganization, the assets of all Canadian subsidiaries were
sold to a new wholly-owned Canadian subsidiary for fair value. All pre-emergence Canadian subsidiaries will
be liquidated in accordance with the Plan of Reorganization and all
pre-emergence Canadian income tax attributes will be eliminated following their
dissolution.
Due
to the effects of the Plan of Reorganization, we concluded it is more likely
than not that the majority of deferred income tax assets will be realized. Management considered the reversal of
deferred tax liabilities in making this assessment. As a result, we recognized an income tax
benefit for release of pre-emergence valuation allowance on its net deferred
tax assets in the U.S. and Canada. At September 30,
2010, a valuation allowance remains in place related to certain state NOLs.
As
previously reported, we entered into an agreement with the Canada Revenue
Agency and other provincial tax authorities that took effect upon our emergence
from bankruptcy. This agreement settled
the open Canadian income tax matters through January 26, 2009. As a result of this agreement, we reported a
$39 million net income tax benefit for the six months ended June 30, 2010
related to the final settlement of the Canadian tax claims and the release of
the previously accrued unrecognized tax benefits related to the Canadian audit.
Based
on our current tax position that the alternative fuel mixture credits are not
taxable, we increased the tax value of its federal NOL carryforwards by $254
million during the six months ended June 30, 2010. A reserve of $254 million was recorded
related to this unrecognized tax benefit.
Deferred
Income Tax Assets and Liabilities
At
June 30, 2010, we had federal NOL carryforwards net of unrecognized tax
benefits of $722 million, with a tax value of $253 million. We had NOL carryforwards for state purposes
with a tax value of $61 million.
Additionally, we had $68 million of alternative minimum tax credit
carryforwards and $6 million of other federal and state tax credit
carryforwards available.
As
a result of the issuance of new common shares upon emergence from bankruptcy,
we realized a change of ownership for purposes of Section 382 of the U.S.
Internal Revenue Code, which can impose annual limitations on utilization of
NOLs and tax credits. We do not expect
the provisions of Section 382 to significantly limit its ability to
utilize NOLs or tax credits in the carryforward periods.
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 $59
million. These derivative liabilities
were stayed due to the filing of the Chapter 11 Petition and the Canadian
Petition at which time these liabilities were adjusted through OCI for
derivative instruments qualifying for hedge
55
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 June 30, 2010, all amounts in OCI
were recognized through earnings. On June 30,
2010, the derivative contract termination liabilities of $59 million were paid
in connection with our emergence from our Chapter 11 and CCAA bankruptcy
proceedings. See Note 10 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.
Our investments in foreign subsidiaries with a functional currency other
than the U.S. dollar are not hedged.
Prior to emerging from bankruptcy, the functional
currency for our Canadian operations was the U.S. dollar. Fluctuations in Canadian dollar monetary
assets and liabilities resulted in gains or losses which were credited or
charged to income. Upon emergence, we
reviewed the primary economic indicators for our Canadian operations under the
Reorganized Smurfit-Stone, including cash flow indicators, sales price indicators,
sales market indicators, expense indicators, financing indicators and
intercompany transactions as required by ASC 830, Foreign Currency Matters. Based on our analysis, including current
operations and financing availability within Canada, we determined the
functional currency for our Canadian operations to be the local currency. As a result, effective July 1, 2010, the
assets and liabilities for the Canadian operations are translated at the
exchange rate in effect at the balance sheet date and income and expenses are
translated at average exchange rates prevailing during the year. Translation gains or losses are included
within stockholders equity as part of OCI.
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 June 30, 2010, compared to December 31, 2009, weakened
1.3% against the U.S. dollar. Under the
Predecessor periods, we recognized non-cash foreign currency exchange gains of
$3 million for the six month period ended June 30, 2010, and a loss of $11
million and $10 million for the three and nine months ended September 30,
2009, respectively. The Canadian dollar
as of September 30, 2010 compared to June 30, 2010 strengthened 2.9%
against the U.S. dollar, and as a result, we recorded a $4 million gain in OCI
related to the translation of our Canadian operations for the three months
ended September 30, 2010.
During
the three months ended September 30, 2010, we entered into foreign
currency exchange derivative contracts to minimize the exposure to currency
exchange rate fluctuations on a $255 million Canadian dollar denominated
inter-company note established upon emergence between a U.S. subsidiary and a
Canadian subsidiary, whereby the U.S subsidiary is the lender. The inter-company note matures on June 29,
2015 and interest is payable quarterly.
The derivative contracts are monthly or quarterly instruments with a
notional amount equal to the inter-company note principal, plus accrued
interest. The derivative contracts are
marked-to-market through earnings on a quarterly basis.
For
the three months ended September 30, 2010, our U.S subsidiary recorded a
$4 million foreign currency gain (net of tax) in other, net in the consolidated
statements of operations related to the revaluation of the inter-company note.
For
the three months ended September 30, 2010, we recorded a $4 million loss
(net of tax) in other, net in the consolidated statements of operations on the
settlement of the derivative contracts.
56
For
the three months ended September 30, 2010, we recorded an immaterial
amount in other, net in the consolidated statements of operations related to
the change in fair value of the derivative contracts.
Interest Rate Risk
Our
earnings and cash flow are significantly affected by the amount of interest on
our indebtedness. Upon emergence, our
financing arrangements include variable rate debt. 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 may 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.
57
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 and certain
Non-Debtor subsidiaries were not included in the filings and continued to
operate outside of the Chapter 11 and CCAA processes. On June 21,
2010, the U.S. Court entered the Findings of Fact, Conclusions of Law and Order
Confirming the Joint Plan for Smurfit-Stone Container Corporation and its
Debtor Subsidiaries and Plan of Compromise and Arrangement for Smurfit-Stone
Container Canada Inc. and Affiliated Canadian Debtors (the Confirmation Order),
which approved and confirmed the Plan of Reorganization. On June 30,
2010 (the Effective Date), the Plan of Reorganization became effective and the
Debtors consummated their reorganization through a series of transactions
contemplated by the Plan of Reorganization and emerged from Chapter 11
bankruptcy proceedings. See Part I, Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations Bankruptcy
Proceedings.
In September 2010, four
putative class action complaints (the Complaints) were filed in the United
States District Court for the Northern District of Illinois against us and
several other paper and packaging companies (collectively referred to as the
Defendants). The Complaints allege that
we and the Defendants engaged in anti-competitive activities and violation of
antitrust laws by reaching agreements in restraint of trade that affected the
manufacture, sale and pricing of corrugated products. The Complaints seek an unspecified amount of
damages arising from the sale of corrugated products from 2005 to present. We have filed an adversary proceeding in the
U.S. Bankruptcy Court seeking a determination that the filing of these
Complaints violates the Confirmation Order, along with a motion for a
preliminary injunction to prevent prosecution of the Complaints.
ITEM 1A.
RISK FACTORS
The
Bankruptcy Related Risk Factors as disclosed in our 2009 Form 10-K are
no longer applicable upon our emergence from bankruptcy proceedings. There are no material changes to the Other
Risk Factors as disclosed in our 2009 Form 10-K.
ITEM 2.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Pursuant to the Plan of
Reorganization, the Company issued an aggregate of 91,014,189 shares of Common
Stock in its initial distribution. On or
about October 29, 2010, the Company issued an additional 648,363 shares
and cancelled 34,000 shares previously issued in the first distribution. Approximately 8.4 million shares of Common
Stock continue to be held in reserve for future distribution to holders of
unsecured non-priority claims that are unliquidated or subject to
dispute. These shares will be distributed as these claims are liquidated or
resolved, in accordance with the Plan of Reorganization and Confirmation
Order. To the extent that such unliquidated or disputed claims are
settled for less than the number of shares reserved, additional distributions
may also be made with respect to previously allowed claims under the terms and
conditions of the Plan of Reorganization and Confirmation Order.
ITEM 3.
DEFAULTS UPON
SENIOR SECURITIES
None
ITEM 4.
RESERVED
58
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 Quarterly Report on Form 10-Q for the quarter ended June 30,
2010.
ITEM 6.
EXHIBITS
The following exhibits are included in this Form 10-Q:
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.
99.1
Agreement and
General Release of Claims dated as of October 27, 2010 by and between
Steven J. Klinger and Smurfit-Stone Container Corporation and its subsidiaries
(incorporated by reference to Exhibit 10.1 to Smurfit-Stones Current
Report on Form 8-K filed November 1, 2010 (file No. 1-03439)).
59
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:
November 5, 2010
|
/s/ Paul K. Kaufmann
|
|
Paul K. Kaufmann
|
|
Senior Vice President and Corporate Controller
|
|
(Principal Accounting Officer)
|
60
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