<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For Quarter Ended September 30, 2000
Commission File Number 0-23876
SMURFIT-STONE CONTAINER CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1531401
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
150 North Michigan Avenue, Chicago, Illinois 60601
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(Address of principal executive offices) (Zip Code)
(312) 346-6600
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(Registrant's telephone number, including area code)
Not Applicable
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(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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 30, 2000, the registrant had outstanding 243,541,323 shares of
common stock, $.01 par value per share.
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------
(In millions, except per share data) 2000 1999 2000 1999
==============================================================================================================
<S> <C> <C> <C> <C>
Net sales................................................... $2,233 $1,792 $6,290 $5,227
Costs and expenses
Cost of goods sold......................................... 1,754 1,488 5,009 4,459
Selling and administrative expenses........................ 196 165 555 536
Restructuring charge....................................... 6 2 52 11
----------------------------------------------
Income from operations.................................... 277 137 674 221
Other income (expense)
Interest expense, net...................................... (142) (140) (392) (436)
Other, net................................................. 16 3 23 60
----------------------------------------------
Income (loss) from continuing operations
before income taxes, minority interest and
extraordinary item....................................... 151 0 305 (155)
Benefit from (provision for) income taxes................... (69) (9) (148) 35
Minority interest expense................................... (3) (2) (7) (6)
----------------------------------------------
Income (loss) from continuing operations
before extraordiny item................................... 79 (11) 150 (126)
Discontinued operations
Loss from discontinued operations, net of income
tax benefit of $4 for the three months and nine
months ended September 30, 1999.......................... (4) (1)
Gain on disposition of discontinued operations,
net of income taxes of $4................................ 6
----------------------------------------------
Income (loss) before extraordinary item.................. 79 (15) 156 (127)
Extraordinary item
Gain (loss) from early extinguishment of debt, net of
income tax benefit of $0 for the nine months ended
September 30, 2000, and $1 for the three months and
nine months ended September 30, 1999..................... (1) 1 (2)
----------------------------------------------
Net income (loss)........................................... $ 79 $ (16) $ 157 $ (129)
===============================================
Basic earnings per common share
Income (loss) from continuing operations before
extraordinary item........................................ $ .32 $ (.05) $ .66 $ (.58)
Discontinued operations.................................... (.02) (.01)
Gain on disposition of discontinued operations............. .03
Extraordinary item......................................... (.01)
----------------------------------------------
Net income (loss)......................................... $ .32 $ (.07) $ .69 $ (.60)
===============================================
Weighted average shares outstanding......................... 244 217 229 216
===============================================
Diluted earnings per common share
Income (loss) from continuing operations before
extraordinary item........................................ $ .32 $ (.05) $ .65 $ (.58)
Discontinued operations.................................... (.02) (.01)
Gain on disposition of discontinued operations............. .03
Extraordinary item......................................... (.01)
----------------------------------------------
Net income (loss)......................................... $ .32 $ (.07) $ .68 $ (.60)
===============================================
Weighted average shares outstanding......................... 244 217 231 216
===============================================================================================================
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In millions, except share data) 2000 1999
=======================================================================================================
<S> <C> <C>
Assets (Unaudited)
Current assets
Cash and cash equivalents.................................................$ 55 $ 24
Receivables, less allowances of $52 in 2000 and $50 in 1999............... 731 647
Inventories
Work-in-process and finished goods...................................... 260 238
Materials and supplies.................................................. 515 496
---------------------------
775 734
Refundable income taxes................................................... 35 7
Deferred income taxes..................................................... 117 130
Prepaid expenses and other current assets................................. 66 69
---------------------------
Total current assets.................................................... 1,779 1,611
Net property, plant and equipment........................................... 5,589 4,395
Timberland, less timber depletion........................................... 41 24
Goodwill, less accumulated amortization of $219 in 2000 and $151 in 1999.... 3,367 3,328
Investment in equity of non-consolidated affiliates......................... 175 176
Other assets................................................................ 334 325
---------------------------
$ 11,285 $ 9,859
=======================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt......................................$ 42 $ 174
Accounts payable.......................................................... 642 662
Accrued compensation and payroll taxes.................................... 230 238
Interest payable.......................................................... 143 111
Other current liabilities................................................. 234 384
---------------------------
Total current liabilities............................................... 1,291 1,569
Long-term debt, less current maturities..................................... 5,450 4,619
Other long-term liabilities................................................. 908 894
Deferred income taxes....................................................... 1,148 839
Minority interest........................................................... 99 91
Stockholders' equity
Preferred stock, par value $.01 per share; 25,000,000
shares authorized; none issued and outstanding
Common stock, par value $.01 per share; 400,000,000 shares
authorized, 243,541,323 and 217,820,762 issued
and outstanding in 2000 and 1999, respectively.......................... 2 2
Additional paid-in capital................................................ 3,836 3,436
Retained earnings (deficit)............................................... (1,429) (1,586)
Accumulated other comprehensive income (loss)............................. (20) (5)
---------------------------
Total stockholders' equity.............................................. 2,389 1,847
---------------------------
$ 11,285 $ 9,859
=======================================================================================================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30, (In millions) 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss).............................................. $ 157 $(129)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Gain on disposition of discontinued operations............... (10)
Extraordinary (gain) loss from early extinguishment of debt.. (1) 3
Depreciation, depletion and amortization..................... 318 328
Amortization of deferred debt issuance costs................. 8 11
Deferred income taxes........................................ 148 (75)
Gain on sale of assets....................................... (3) (39)
Non-cash employee benefit expense (income)................... (11) 29
Foreign currency transaction gains........................... (5)
Non-cash restructuring charge................................ 32 6
Change in current assets and liabilities,
net of effects from acquisitions and dispositions
Receivables.............................................. 34 (165)
Inventories.............................................. 43 16
Prepaid expenses and other current assets................ 20 29
Accounts payable and accrued liabilities................. (72) 144
Interest payable......................................... 29 9
Income taxes............................................. (42) 11
Other, net................................................... (139) (51)
----------------
Net cash provided by operating activities...................... 511 122
----------------
Cash flows from investing activities
Property additions............................................. (228) (101)
Proceeds from property and investment
disposals and sale of businesses............................. 69 546
Payments on acquisition, net of cash received.................. (631)
----------------
Net cash provided by (used for) investing activities........... (790) 445
----------------
Cash flows from financing activities
Borrowings under bank credit facilities........................ 1,525
Payments on debt............................................... (1,205) (670)
Net borrowings under the accounts
receivable securitization program............................ 3 17
Proceeds from exercise of stock options........................ 6 16
Deferred debt issuance costs................................... (17)
----------------
Net cash provided by (used for) financing activities........... 312 (637)
----------------
Effect of exchange rate changes on cash.......................... (2) 1
Increase (decrease) in cash and cash equivalents................. 31 (69)
Cash and cash equivalents
Beginning of period............................................ 24 155
----------------
End of period.................................................. $ 55 $ 86
-------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions)
1. Significant Accounting Policies
The accompanying consolidated financial statements and notes thereto of Smurfit-
Stone Container Corporation ("SSCC" or 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 financial position, results of operations and cash flows.
These statements, however, do not include all information and footnotes
necessary for a complete presentation of financial position, results of
operations and cash flows in conformity with 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 footnotes included in the SSCC Annual Report on Form
10-K for the year ended December 31, 1999, (the "SSCC 1999 10-K"), filed March
14, 2000 with the Securities and Exchange Commission.
SSCC, formerly Jefferson Smurfit Corporation, owns 100% of the common equity
interest in JSCE, Inc. and Stone Container Corporation ("Stone"). The Company
has no operations other than its investments in JSCE, Inc. and Stone. JSCE, Inc.
owns 100% of the equity interest in Jefferson Smurfit Corporation (U.S.)
("JSC(U.S.)") and is the guarantor of the senior indebtedness of JSC(U.S.).
JSCE, Inc. has no other material operations other than its investment in
JSC(U.S.). JSC(U.S.) has extensive operations throughout the United States.
Stone has extensive domestic and international operations.
2. Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. St. Laurent Acquisition
On May 31, 2000, the Company, through a subsidiary of Stone, completed its
acquisition ("St. Laurent Acquisition") of St. Laurent Paperboard Inc. ("St.
Laurent") pursuant to an amended and restated pre-merger agreement dated as of
April 13, 2000 among SSCC, Stone and St. Laurent. Pursuant to the agreement,
each common share and restricted share unit of St. Laurent was exchanged for 0.5
shares of SSCC common stock and $12.50 in cash. A total of approximately 25.3
million shares of SSCC common stock were issued. The total purchase price,
including cash paid of $631 million and debt assumed of $376 million, was
approximately $1.4 billion.
The St. Laurent Acquisition was accounted for as a purchase business combination
and, accordingly, the results of operations of St. Laurent have been included in
the consolidated statements of operations of the Company after May 31, 2000. The
cost to acquire St. Laurent has been preliminarily allocated to the assets
acquired and liabilities assumed according to estimated fair values and are
subject to adjustment when additional information concerning asset and liability
valuations are finalized. The preliminary allocation has resulted in acquired
goodwill of approximately $175 million, which is being amortized on a straight-
line basis over 40 years.
4
<PAGE>
The following unaudited pro forma combined information presents the results of
operations of the Company as if the St. Laurent Acquisition had taken place on
January 1, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Nine months ended
Pro Forma Information September 30,
--------------------------
2000 1999
------- -------
<S> <C> <C>
Net sales...................................................................... $ 6,745 $ 5,850
Income (loss) before extraordinary item........................................ 147 (141)
Net income (loss).............................................................. 148 (144)
Net income (loss) per common share
Basic........................................................................ $ .61 $ (.60)
Diluted...................................................................... $ .60 $ (.60)
</TABLE>
The unaudited pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the St. Laurent Acquisition occurred as
of January 1, 2000 and 1999, respectively.
4. Merger and Restructuring
On November 18, 1998, Stone merged with a wholly-owned subsidiary of the Company
(the "Stone Merger"). The Stone Merger was accounted for as a purchase business
combination. The cost to acquire Stone was allocated to the assets acquired and
liabilities assumed according to their fair values. The allocation resulted in
acquired goodwill of $3,136 million, which is being amortized on a straight-line
basis over 40 years.
In May 2000, the Company sold the market pulp mill at its closed Port Wentworth
facility to a third party for approximately $63 million. Net cash proceeds of
$58 million from the sale were used for debt reduction. No gain or loss was
recognized.
The Company recorded a pretax restructuring charge of $6 million during the
third quarter of 2000 primarily related to the permanent shutdown of a multi-
wall bag facility.
Restructuring charges for the nine months ended September 30, 2000, included a
pretax restructuring charge of $40 million recorded during the second quarter of
2000 in conjunction with the permanent shutdown of a containerboard mill and a
corrugated container facility. Included in the restructuring charge is the
adjustment to fair value of property and equipment and spare parts ($31 million)
of closed facilities, liabilities for the termination of certain employees ($5
million), and liabilities for long-term commitments ($4 million). The assets at
these facilities were adjusted to their estimated fair value less cost to sell.
The terminated employees included approximately 105 employees at the mill
facility and 150 employees at the container facility. The long-term commitments
consist of environmental clean-up and one-time closure costs.
The Company recorded a $2 million restructuring charge during the third quarter
of 1999, and $11 million for the nine months ended September 30, 1999 related to
the permanent shutdown of various facilities.
5. Long-Term Debt
On March 31, 2000, Stone amended and restated its existing credit agreement (the
"Stone Credit Agreement") pursuant to which a group of financial institutions
provided an additional $575 million to Stone in the form of a Tranche F term
loan maturing on December 31, 2005 and extended the maturity dates of the
revolving credit facilities under the Stone Credit Agreement to December 31,
2005. On April
5
<PAGE>
28, 2000, Stone used $559 million of the proceeds of the Tranche F term loan to
redeem the 9.875% senior notes due February 1, 2001.
On May 31, 2000, Stone and certain of its wholly-owned subsidiaries closed on
new credit facilities (the "Stone Additional Credit Agreement") with a group of
financial institutions consisting of (i) $950 million in the form of Tranche G
and Tranche H term loans maturing on December 31, 2006, and (ii) a $100 million
revolving credit facility maturing on December 31, 2005. The proceeds of the
Stone Additional Credit Agreement were used to fund the cash component of the
St. Laurent Acquisition, refinance certain existing indebtedness of St. Laurent,
and pay fees and expenses related to the St. Laurent Acquisition. The new
revolving credit will be used for general corporate purposes. The Stone
Additional Credit Agreement is secured by a security interest in substantially
all of the assets acquired in the St. Laurent Acquisition.
6. Other Significant Events
During the third quarter of 2000, the Company recorded a $12.5 million pretax
gain related to the proceeds received from the redemption of the convertible
preferred stock of Four M Corporation that Stone had received in connection with
the consummation of the Florida Coast Paper Company reorganization plan. The
pretax gain is included in other, net in the consolidated statements of
operations.
During 1999, the Company sold its interest in Abitibi-Consolidated, Inc., a
Canadian-based manufacturer and marketer of publication paper, resulting in a
gain of $39 million, which was reflected in other, net in the consolidated
statements of operations.
7. Non-Consolidated Affiliates
The Company has several non-consolidated affiliates that are engaged in paper
and packaging operations in North America, South America and Europe. Investments
in majority-owned affiliates where control does not exist and non majority-owned
affiliates are accounted for under the equity method.
The Company's only significant non-consolidated affiliate at September 30, 2000
is Smurfit-MBI, a Canadian corrugated container company, in which the Company
owns a 50% interest. The remaining 50% interest is indirectly owned by Jefferson
Smurfit Group plc. Smurfit-MBI had net sales of $115 million and $100 million
for the three months ended September 30, 2000 and 1999, respectively, and $337
million and $282 million for the nine months ended September 30, 2000 and 1999,
respectively.
Combined summarized financial information for all of the Company's non-
consolidated affiliates that are accounted for under the equity method of
accounting is presented below:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Results of operations (a)
Net sales.................................... $165 $154 $502 $486
Cost of sales................................ 143 134 439 423
Income before income taxes, minority interest
and extraordinary charges.................. 9 7 28 23
Net income................................... 9 7 26 22
</TABLE>
(a) Includes results of operations for each of the Company's affiliates for the
period it was accounted for under the equity method.
6
<PAGE>
8. Discontinued Operations
During February 1999 the Company adopted a formal plan to sell the newsprint
mills of its subsidiary, Smurfit Newsprint Corporation ("SNC"). Accordingly, the
newsprint operations of SNC are accounted for as discontinued operations in the
accompanying consolidated financial statements. The Company transferred
ownership of the Oregon City, Oregon newsprint mill to a third party in May
2000, thereby completing its exit from the newsprint business. No proceeds from
the transfer were received. During the second quarter of 2000, the Company
recorded a $6 million after tax gain to reflect adjustments to previous
estimates on disposition of discontinued operations.
9. Comprehensive Income (Loss)
Comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- -----
<S> <C> <C> <C> <C>
Net income (loss) .............................. $ 79 $(16) $157 $(129)
Other comprehensive income (loss), net of tax:
Foreign currency translation ................. (18) 4 (15) (5)
---- ---- ---- -----
Comprehensive income (loss) .................... $ 61 $(12) $142 $(134)
---- ---- ---- -----
</TABLE>
10. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ----- ---- -----
<S> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing operations before
extraordinary item .............................. $ 79 $ (11) $150 $(126)
Denominator:
Denominator for basic earnings per share--
Weighted average shares ....................... 244 217 229 216
Effect of dilutive securities:
Employee stock options ........................ 2
---- ----- ---- -----
Denominator for diluted earnings per share--
Adjusted weighted average shares .............. 244 217 231 216
---- ----- ---- -----
Basic earnings (loss) per share from continuing
operations before extraordinary item ............ $.32 $(.05) $.66 $(.58)
---- ----- ---- -----
Diluted earnings (loss) per share from continuing
operations before extraordinary item ............ $.32 $(.05) $.65 $(.58)
---- ----- ---- -----
</TABLE>
For the three and nine month periods ended September 30, 2000 and 1999,
convertible debt to acquire one million shares of common stock with an earnings
effect of $.5 million and $1.5 million, respectively, and three million
additional minority interest shares with an earnings effect of $2 million and
$6 million, respectively, are excluded from the diluted earnings per share
computation because they are
7
<PAGE>
antidilutive. For the three and nine month periods ended September 30, 1999,
options to purchase four million shares of common stock under the treasury stock
method were also excluded from the diluted earnings per share computation
because they are antidilutive.
11. Business Segment Information
The Company has two reportable segments: (1) Containerboard and Corrugated
Containers and (2) Folding Cartons and Boxboard. The Containerboard and
Corrugated Containers segment is highly integrated. It includes a system of
mills and plants that produces a full line of containerboard that is converted
into corrugated containers. Corrugated containers are used to transport such
diverse products as home appliances, electric motors, small machinery, grocery
products, produce, books, tobacco and furniture. The Folding Cartons and
Boxboard segment is also highly integrated. It includes a system of mills and
plants that produces a broad range of coated recycled boxboard that is converted
into folding cartons. Folding cartons are used primarily to protect products,
such as food, fast food, detergents, paper products, beverages, health and
beauty aids and other consumer products, while providing point of purchase
advertising.
Other includes five non-reportable segments (specialty packaging, industrial
bags, reclamation, St. Laurent converting plants acquired May 31, 2000 and
international) and corporate related items. Corporate related items include
income and expense not allocated to reportable segments, goodwill amortization,
net interest expense, the adjustment to record inventory at LIFO and the
elimination of intercompany profit.
The information for 1999 has been restated from the prior year's presentation in
order to conform to the 2000 presentation.
<TABLE>
<CAPTION>
Container-
board & Folding
Corrugated Cartons &
Containers Boxboard Other Total
---------- --------- ------ ------
<S> <C> <C> <C> <C>
Three months ended September 30,
--------------------------------
2000
----
Revenues from external customers .... $1,402 $239 $ 592 $2,233
Intersegment revenues ............... 48 72 120
Segment profit (loss) ............... 262 24 (135) 151
1999
----
Revenues from external customers .... $1,164 $212 $ 416 $1,792
Intersegment revenues ............... 49 75 124
Segment profit (loss) ............... 171 15 (186) 0
Nine months ended September 30,
-------------------------------
2000
----
Revenues from external customers .... $4,026 $678 $1,586 $6,290
Intersegment revenues ............... 136 262 398
Segment profit (loss) ............... 702 61 (458) 305
1999
----
Revenues from external customers .... $3,394 $617 $1,216 $5,227
Intersegment revenues ............... 145 213 358
Segment profit (loss) ............... 323 48 (526) (155)
</TABLE>
The Company announced its plan to reorganize part of its packaging operations to
reduce costs and enhance its marketing efforts. The Company will begin reporting
its new segments in its internal reporting during the fourth quarter.
8
<PAGE>
12. Contingencies
The Company's past and present operations include activities which are subject
to federal, state and local environmental requirements, particularly relating to
air and water quality. The Company faces potential environmental liability as a
result of violations of permit terms and similar authorizations that have
occurred from time to time at its facilities. In addition, the Company faces
potential liability for response costs at various sites for which it has
received notice as being a potentially responsible party ("PRP") concerning
hazardous substance contamination. In estimating its reserves for environmental
remediation and future costs, the Company's estimated liability reflects only
the Company's expected share after consideration for the number of other PRPs at
each site, the identity and financial condition of such parties and experience
regarding similar matters.
The Company is a defendant in a number of lawsuits and claims arising out of the
conduct of its business, including those related to environmental matters. While
the ultimate results of such suits or other proceedings against the Company
cannot be predicted with certainty, the management of the Company believes that
the resolution of these matters will not have a material adverse effect on its
consolidated financial condition or results of operations.
13. Subsequent Event
On October 26, 2000 the stockholders of Stone approved an Agreement and Plan of
Merger among SSCC, SCC Merger Co. and Stone pursuant to which each share of
issued and outstanding $1.75 Series E Cumulative Convertible Exchangeable
Preferred Stock of Stone (the "Stone Preferred Stock") will be converted into
the right to receive one share of $1.75 Series A Cumulative Convertible
Exchangeable Preferred Stock of SSCC (the "SSCC Preferred Stock") plus a cash
payment from SSCC equal to the accrued and unpaid dividends on each outstanding
share of Stone Preferred Stock, less $0.12 to cover certain transaction related
expenses.
It is anticipated that the merger transaction will be completed on November 15,
2000, and that the cash payment per share of Stone Preferred Stock will be
$6.4425, resulting in total cash payments by SSCC of approximately $30 million.
Following the completion of the merger transaction, the holders of the SSCC
Preferred Stock will be entitled to dividends of $0.4375 per quarter, payable in
cash except in certain circumstances, with the first dividend to be paid on
February 15, 2001.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
<TABLE>
<CAPTION>
(In millions) Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales
Containerboard and corrugated containers...................... $1,402 $1,164 $4,026 $3,394
Folding cartons and boxboard.................................. 239 212 678 617
Other operations.............................................. 592 416 1,586 1,216
------ ------ ------ ------
Total......................................................... $2,233 $1,792 $6,290 $5,227
====== ====== ====== ======
Profit (loss)
Containerboard and corrugated containers...................... $ 262 $ 171 $ 702 $ 323
Folding cartons and boxboard.................................. 24 15 61 48
Other operations.............................................. 29 27 93 82
------ ------ ------ ------
Total operations.............................................. $ 315 $ 213 $ 856 $ 453
Restructuring charge.......................................... (6) (2) (52) (11)
Interest expense, net......................................... (142) (140) (392) (436)
Other, net.................................................... (16) (71) (107) (161)
------ ------ ------ ------
Income (loss) before income taxes............................ $ 151 $ $ 305 $ (155)
====== ====== ====== ======
</TABLE>
Net sales for the Company for the three and nine month periods ended September
30, 2000, increased 25% and 20%, respectively, compared to the same periods last
year due to higher average sales prices for containerboard, corrugated
containers and market pulp and the St. Laurent Acquisition. St. Laurent's
results of operations are included in the consolidated results of the Company
after May 31, 2000, the date of the acquisition. Net sales included for St.
Laurent for the three and nine months ended September 30, 2000 were $279 million
and $375 million, respectively. The increases (decreases) in net sales for each
of the Company's segments are shown in the chart below.
Operating profits for the Company for the three and nine month periods ended
September 30, 2000 increased 48% and 89%, respectively, compared to last year
due to the higher average sales prices, Stone Merger synergy savings, including
improved efficiency in the Company's mill system, and the St. Laurent
Acquisition. Operating profits in the 2000 periods were negatively impacted by
higher energy cost and downtime taken at the Company's containerboard mills for
internal inventory management and maintenance. Operating profits included for
St. Laurent for the three and nine months ended September 30, 2000 were $47
million and $64 million, respectively.
Other, net for the three months and nine months ended September 30, 2000
improved compared to last year due to the effects of lower intercompany profit
elimination and LIFO expense, and a non-recurring gain of $12.5 million related
to the proceeds received from the redemption of convertible preferred stock in
connection with the consummation of the Florida Coast Paper Company
reorganization plan. For the nine months ended September 30, 1999, other, net
included a $39 million gain on asset sales and an expense of $26 million related
to the cashless exercise of SSCC stock options under the Jefferson Smurfit
Corporation stock option plan.
10
<PAGE>
<TABLE>
<CAPTION>
(In millions)
Container-
board & Folding
Increase (decrease) Corrugated Cartons & Other
in net sales due to: Containers Boxboard Operations Total
-------------------- ---------- --------- ---------- ------
<S> <C> <C> <C> <C>
Three months ended September 30,
2000 compared to 1999
--------------------------------
Sales price and product mix .... $ 146 $18 $ 4 $ 168
Sales volume ................... (45) 9 45 9
Acquisition and other .......... 188 132 320
Closed or sold facilities ...... (51) (5) (56)
----- --- ---- ------
Total increase ............. $ 238 $27 $176 $ 441
===== === ==== ======
Nine months ended September 30,
2000 compared to 1999
--------------------------------
Sales price and product mix .... $ 551 $42 $147 $ 740
Sales volume ................... (73) 19 66 12
Acquisition and other .......... 296 179 475
Closed or sold facilities ...... (142) (22) (164)
----- --- ---- ------
Total increase ............. $ 632 $61 $370 $1,063
===== === ==== ======
</TABLE>
Containerboard and Corrugated Containers Segment
------------------------------------------------
Net sales of $1,402 million for the three months ended September 30, 2000
increased 20% compared to last year and profits increased by $91 million to $262
million. The increase in net sales was due to higher average sales prices for
containerboard, corrugated containers and market pulp and the St. Laurent
Acquisition. The increase in operating profits compared to last year were due to
the higher average sales prices, Stone Merger synergy savings, including
improved efficiency in the Company's mill system, and the St. Laurent
Acquisition. Profits were negatively impacted by higher energy cost and mill
downtime taken for internal inventory management and maintenance. Net sales and
operating profit included for the St. Laurent operations in this segment for the
three months ended September 30, 2000 were $147 million and $46 million,
respectively. Cost of goods sold as a percent of net sales decreased to 72% for
the three months ended September 30, 2000 compared to 75% for the same period
last year due to the St. Laurent Acquisition and the higher average sales
prices.
On average, linerboard prices for the third quarter of 2000 were higher than
last year by 12% and the average price of corrugated containers was higher by
15%. Strong demand for market pulp drove prices higher in the first half of 2000
and the Company implemented a price increase of $30 per metric ton on July 1,
2000. The average price of market pulp for the third quarter of 2000 was 13%
higher compared to last year.
Production of containerboard and kraft paper for the third quarter of 2000,
exclusive of St. Laurent's production of 335,000 tons, declined 10% compared to
last year due to the higher levels of downtime. Shipments of corrugated
containers increased 3% compared to last year due to the St. Laurent
Acquisition. Corrugated shipments were negatively impacted by plant closures and
customer rationalization. The Company had higher third party sales of
containerboard, but lower third party sales of kraft paper in the three and nine
month periods ended September 30, 2000. Sales volume for market pulp for the
third quarter was comparable to last year.
For the nine months ended September 30, 2000, net sales of $4,026 million
increased 19% compared to last year and profits increased by $379 million to
$702 million. The improved results were due to the higher sales prices, Stone
Merger synergy savings and the St. Laurent Acquisition, although profits were
11
<PAGE>
negatively impacted by the mill downtime and higher cost of energy and reclaimed
fiber. Net sales and operating profit included for St. Laurent for the nine
months ended September 30, 2000 were $196 million and $61 million, respectively.
On average, linerboard prices were higher than last year by 18% and the average
price of corrugated containers was higher by 18%. Production of containerboard
and kraft paper for the nine months ended September 30, 2000, exclusive of St.
Laurent's production of 445,000 tons, decreased 5% due primarily to the
downtime. Shipments of corrugated containers increased 1% compared to last year.
The average sales price of market pulp increased 25% compared to last year while
sales volume declined 8% due to higher maintenance downtime in 2000. Cost of
goods sold as a percent of net sales decreased to 74% for the nine months ended
September 30, 2000 compared to 81% for the same period last year due to the St.
Laurent Acquisition and the higher average sales prices.
Folding Cartons and Boxboard Segment
------------------------------------
Net sales of $239 million for the three months ended September 30, 2000
increased by 13% compared to last year and profits increased by $9 million to
$24 million. The sales and profit increases were due primarily to higher average
sales prices for folding cartons and boxboard and higher shipments of folding
cartons. On average, boxboard sales prices were 14% higher and folding carton
sales prices were 7% higher than last year. Folding carton shipments increased
5% compared to last year. Reclaimed fiber cost was comparable to last year. Cost
of goods sold as a percent of net sales decreased to 83% for the three months
ended September 30, 2000 compared to 85% for the same period last year due
primarily to the higher sales prices.
For the nine months ended September 30, 2000 net sales of $678 million increased
by 10% compared to last year and profit improved $13 million to $61 million. On
average, boxboard sales prices were 11% higher and folding carton sales prices
were 6% higher than last year. Folding carton shipments increased 2% and
boxboard shipments increased 9% compared to last year. Increases in the cost of
materials and higher converting costs partially offset the improvements in sales
price and product mix. Cost of goods sold as a percent of net sales for the nine
months ended September 30, 2000 was 84%, comparable to the same period last
year.
Other Operations
----------------
Net sales of $592 million for the three months ended September 30, 2000,
increased by 42% compared to last year and profits increased by $2 million to
$29 million. Sales were higher than last year due primarily to the St. Laurent
Acquisition. Net sales and profit included for the St. Laurent converting
facilities for the three months ended September 30, 2000 were $132 million and
$1 million, respectively. On average, reclaimed fiber prices were lower than
last year due primarily to reduced demand for old corrugated containers ("OCC")
resulting from the high level of mill downtime taken by the containerboard
industry. Total tons of fiber reclaimed and brokered increased by 3% compared to
last year. International operations experienced a 20% increase in net sales due
to increased volume, primarily for container operations, and higher average
sales prices for containerboard and reclaimed fiber. Results for the Company's
industrial bag and specialty packaging operations were comparable to last year.
Net sales of $1,586 million for the nine months ended September 30, 2000,
increased by 30% compared to last year and profits increased by $11 million to
$93 million due primarily to the reclamation operations and St. Laurent's
converting operations. Reclaimed fiber prices for the nine months ended
September 30, 2000 were higher than last year for OCC and old newsprint by $20
per ton and $30 per ton, respectively. Total tons of fiber reclaimed and
brokered increased 3% compared to last year. Results for the Company's
industrial bag, international and specialty packaging operations were comparable
to last year. Net sales and profit included for the St. Laurent converting
facilities for the nine months ended September 30, 2000 were $179 million and $3
million, respectively.
Costs and Expenses
------------------
Costs and expenses for the three months and nine months ended September 30, 2000
include expenses for St. Laurent after May 31, 2000. The decreases in the
Company's overall cost of goods sold as a percent of net sales for the three
months ended September 30 from 83% in 1999 to 79% in 2000, and for the nine
12
<PAGE>
months ended September 30 from 85% in 1999 to 80% in 2000, were due to the St.
Laurent Acquisition and the higher average sales prices.
Selling and administrative expenses as a percent of net sales for the nine month
period ended September 30, decreased from 10% in 1999 to 9% in 2000 due
primarily to higher average sales prices. Selling and administrative expenses as
a percent of net sales for the three months ended September 30, 2000 was 9%,
unchanged from the same period in 1999.
Merger synergy savings of $50 million from the St. Laurent Acquisition are
targeted by the end of 2001. These synergies will be achieved through a
combination of purchasing savings, supply chain management, manufacturing
efficiencies and administrative reductions.
Other income and expense, net for the three months ended September 30, 2000
included a non-recurring pretax gain of $12.5 million related to proceeds
received from the redemption of the convertible preferred stock of Four M
Corporation that Stone had received in connection with the consummation of the
Florida Coast Paper Company reorganization plan. For the nine months ended
September 30, 1999, the Company recorded a $39 million gain on the sale of its
equity interest in Abitibi-Consolidated, Inc. In addition, foreign exchange
gains were more favorable in 1999 as compared to 2000.
Higher interest rates and new borrowings used to fund the St. Laurent
Acquisition resulted in higher interest expense, net for the three months ended
September 30, 2000 compared to last year. Interest expense, net for the nine
months ended September 30, 2000 was lower than last year by $44 million due to
lower average debt levels. The Company's overall average effective interest
rates in the 2000 periods were higher than last year for the three and nine
month periods ended September 30, 2000 by 0.7% and 0.6%, respectively.
Provision for income taxes for the three months and nine months ended September
30, 2000 differed from the federal statutory tax rate due to several factors,
the most significant of which were state income taxes and the effect of
permanent differences from applying purchase accounting.
Statistical Data
<TABLE>
<CAPTION>
(In thousands of tons, except as noted) Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------ ------ ------ ------
Mill production:
Containerboard ....................... 1,821 1,625 5,055 4,745
Kraft paper .......................... 73 99 218 324
Market pulp .......................... 145 142 452 434
Solid bleached sulfate ............... 79 50 185 141
Recycled boxboard .................... 210 207 635 622
Corrugated shipments (billion sq. ft.) ... 23.7 23.1 69.4 68.8
Folding carton shipments ................. 176 147 474 435
Industrial bag shipments ................. 74 79 228 236
Fiber reclaimed and brokered ............. 1,705 1,648 5,036 4,869
</TABLE>
Restructuring
As explained in the SSCC 1999 10-K, the Company restructured its operations in
connection with the Stone Merger. The Company recorded a pretax charge of $257
million in the fourth quarter of 1998 for restructuring costs related to the
permanent closure of certain JSC(U.S.) mill operations and related facilities on
December 1, 1998. In addition, the allocation of the cost to acquire Stone
included an adjustment to fair value of property, plant and equipment associated
with the permanent closure of certain containerboard and pulp mill facilities
owned by Stone on December 1, 1998 and five Stone converting
13
<PAGE>
facilities during the allocation period in 1999. As part of the Company's
continuing evaluation of all areas of its business in connection with its Stone
Merger integration, the Company recorded a $10 million restructuring charge in
the year ended December 31, 1999 related to the permanent shutdown of eight
additional JSC(U.S.) facilities and a $46 million restructuring charge in 2000
related to the permanent shutdown of a Stone containerboard mill and five Stone
converting facilities. The containerboard mill shutdown in 2000 had an annual
capacity of 130,000 tons of corrugating medium. In addition, the Company
recorded a pretax restructuring charge of $6 million during the third quarter of
2000 primarily related to the permanent shutdown of a multi-wall bag facility.
The restructuring charges and the allocation of costs to acquire Stone included
adjustments to liabilities for the termination of certain employees of the
Company, the liabilities for long-term commitments and resolution of litigation
related to Stone's investment in Florida Coast Paper Company, L.L.C. ("FCPC").
Since the Stone Merger, through September 30, 2000, approximately $226 million
(75%) of the cash expenditures were incurred, approximately 54% of which related
to the FCPC settlement. The remaining exit liabilities for JSC(U.S.) and Stone
as of September 30, 2000 of approximately $75 million will be funded through
operations as originally planned.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine months ended September
30, 2000 of $511 million, borrowings under bank credit facilities of $1,525
million, proceeds from the sale of assets of $69 million and proceeds from
exercise of stock options of $6 million were used to fund the $631 million cash
component of the St. Laurent Acquisition, $1,205 million of net debt repayments,
$17 million of financing fees and property additions of $228 million. Property
additions include approximately $103 million of expenditures, as planned, under
the Cluster Rule (as discussed in the SSCC 1999 10-K). Debt repayments for the
nine months ended September 30, 2000 included the $559 million redemption of the
Company's outstanding 9.875% senior notes due February 1, 2001, repayment of
approximately $376 million of existing indebtedness of St. Laurent, prepayments
on the Company's bank term loans and scheduled debt repayments.
On May 31, 2000, the Company, through a subsidiary of Stone, acquired St.
Laurent. Under the terms of the merger agreement, each common share and
restricted share unit of St. Laurent was exchanged for 0.5 shares of SSCC common
stock and $12.50 in cash. Approximately 25.3 million shares of SSCC common stock
were issued. The total purchase price, including cash paid of $631 million and
debt assumed of $376 million, was approximately $1.4 billion.
On May 31, 2000, Stone and certain of its wholly-owned subsidiaries closed on
the Stone Additional Credit Agreement with a group of financial institutions
consisting of (i) $950 million in the form of Tranche G and Tranche H term loans
maturing on December 31, 2006, and (ii) a $100 million revolving credit facility
maturing on December 31, 2005. The proceeds of the Stone Additional Credit
Agreement were used to fund the cash component of the St. Laurent Acquisition,
refinance certain existing indebtedness of St. Laurent and pay fees and expenses
related to the acquisition. The new revolving credit facility will be used for
general corporate purposes. The Stone Additional Credit Agreement is secured by
a security interest in substantially all of the assets acquired in the St.
Laurent Acquisition.
In May 2000, Stone sold the market pulp mill at its Port Wentworth, Georgia mill
site to a third party. Net proceeds of approximately $58 million from the sale
were used for debt reduction.
On March 31, 2000, Stone amended and restated its existing Stone Credit
Agreement pursuant to which a group of financial institutions provided an
additional $575 million to Stone in the form of a Tranche F term loan maturing
on December 31, 2005 and extended the maturity date of the revolving credit
agreement to December 31, 2005. On April 28, 2000, Stone used $559 million of
the proceeds of the Tranche F term loan to redeem the 9.875% senior notes due
February 1, 2001.
The bank credit facilities of JSC(U.S.) and Stone (collectively, the "Credit
Agreements") contain various business and financial covenants including, among
other things, (i) limitations on dividends, redemptions
14
<PAGE>
and repurchases of capital stock, (ii) limitations on the incurrence of
indebtedness, (iii) limitations on capital expenditures and (iv) maintenance of
certain financial covenants. The Credit Agreements also require prepayments if
JSC(U.S.) or Stone have excess cash flows, as defined, or receive proceeds from
certain asset sales, insurance, issuance of certain equity securities or
incurrence of certain indebtedness. The obligations under the JSC(U.S.) Credit
Agreement are unconditionally guaranteed by the Company and certain of its
subsidiaries. The obligations under the JSC(U.S.) Credit Agreement are secured
by a security interest in substantially all of the assets of JSC(U.S.). The
obligations under the Stone Credit Agreement are secured by a security interest
in substantially all of the assets of Stone and 65% of the stock of its Canadian
subsidiary. The security interest excludes cash, cash equivalents, certain trade
receivables, four paper mills and the land and buildings of the corrugated
container facilities. Such restrictions, together with the highly leveraged
position of the Company, could restrict corporate activities, including the
Company's ability to respond to market conditions, to provide for unanticipated
capital expenditures or to take advantage of business opportunities.
The declaration of dividends by the Board of Directors is subject to, among
other things, certain restrictive provisions contained in the Credit Agreement
and certain note indentures. At September 30, 2000, Stone had accumulated
dividend arrearages of approximately $28 million related to its $1.75 Series E
Cumulative Convertible Exchangeable Preferred Stock (the "Stone Preferred
Stock"). On October 26, 2000 the stockholders of Stone approved an Agreement and
Plan of Merger among SSCC, SCC Merger Co. and Stone pursuant to which each share
of issued and outstanding Stone Preferred Stock will be converted into the right
to receive one share of $1.75 Series A Cumulative Convertible Exchangeable
Preferred Stock of SSCC (the "SSCC Preferred Stock") plus a cash payment from
SSCC equal to the accrued and unpaid dividends on each outstanding share of
Stone Preferred Stock, less $0.12 to cover certain transaction related expenses.
It is anticipated that the merger transaction will be completed on November 15,
2000, and that the cash payment per share of Stone Preferred Stock will be
$6.4425, resulting in total cash payments by SSCC of approximately $30 million.
Following the completion of the merger transaction, the holders of the SSCC
Preferred Stock will be entitled to dividends of $0.4375 per quarter, payable in
cash except in certain circumstances, with the first dividend to be paid on
February 15, 2001. The Company will fund the $30 million cash portion of the
merger consideration and future dividend payments on the SSCC Preferred Stock by
cash from operations and borrowings under the JSC(U.S.) Credit Agreement.
The Company expects that internally generated cash flows, proceeds from asset
divestitures and existing financing resources will be sufficient for the next
several years to meet its obligations, including debt service, expenditures
under the Cluster Rule and other capital expenditures. The Company expects to
use any excess cash flows provided by operations to make further debt
reductions. As of September 30, 2000, JSC(U.S.) had $517 million of unused
borrowing capacity under the JSC(U.S.) Credit Agreement and Stone had $491
million of unused borrowing capacity under the Stone Credit Agreement and the
Stone Additional Credit Agreement.
Prospective Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. SFAS No. 133 is
required to be adopted effective January 1, 2001 for companies with fiscal years
ending December 31, 2000. The Company is currently assessing what the impact of
SFAS No. 133 will be on its earnings and financial position.
In 1999, the Securities and Exchange Commission staff issued Staff Accounting
Bulletin No. 101, ("SAB 101") "Revenue Recognition in Financial Statements." SAB
101 clarifies the basic principles of revenue recognition in existing generally
accepted accounting principles. SAB 101 is required to be implemented no later
than the fourth quarter of fiscal years beginning after December 15, 1999. The
Company anticipates no effect on income from operations or financial position
from the adoption of SAB 101.
15
<PAGE>
In September 2000, the Emerging Issues Task Force reached a consensus on Issue
No. 00-10 ("EITF 00-10"), "Accounting for Shipping and Handling Fees and Costs."
EITF 00-10 implementation is consistent with the requirements of SAB 101. The
Company intends to adopt EITF 00-10 in the fourth quarter of 2000 and reclassify
shipping and handling costs from net sales. The reclassification will have no
effect on income from operations or financial position.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
For a discussion of certain market risks related to the Company, See Part II,
Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", in the
SSCC 1999 10-K.
Foreign Currency Risk
During the nine months ended September 30, 2000, the exchange rates for the
Canadian dollar and the German mark strengthened/(weakened) against the U.S.
dollar as follows:
<TABLE>
<CAPTION>
<S> <C>
Rate at September 30, 2000 vs. December 31, 1999
Canadian dollar (4.4)%
German mark (14.2)%
Average rate for the nine months ended September 30, 2000 vs. 1999
Canadian dollar 1.2%
German mark (14.0)%
</TABLE>
The Company has experienced foreign currency transaction gains and losses on the
translation of U.S. dollar denominated obligations of certain of its Canadian
subsidiaries, non-consolidated affiliates and a German mark obligation. The
Company recognized foreign currency transaction gains of less than $1 million
for the nine months ended September 30, 2000 compared to a gain of $5 million
for the same period last year.
Interest Rate Risk
The Company's earnings and cash flows are significantly affected by the amount
of interest on its indebtedness. No significant change has occurred in the
Company's exposure to such risk for the nine months ended September 30, 2000.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
As of September 30, 2000, Stone had accumulated dividend arrearages of
approximately $28 million related to the Stone Preferred Stock (see Item 4,
Submission of Matters to a Vote of Security Holders). Declaration of dividends
in respect of such stock is currently prohibited by the terms of the Stone
Credit Agreement and certain note indentures.
16
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On October 26, 2000, a special meeting of shareholders was held. At the meeting,
the stockholders of Stone approved a proposed merger transaction pursuant to
which each share of Stone Preferred Stock will be canceled and converted into
the right to receive one share of the SSCC Preferred Stock, plus $6.4425 in
cash. The transaction is expected to occur on November 15, 2000.
<TABLE>
<CAPTION>
Shares
Votes For Votes Against Abstentions Not Voted
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Common Stock 135,335,381
Series E Preferred 3,093,165 61,223 5,122 1,439,790
</TABLE>
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) The following exhibits are included in this Form 10-Q.
10.1 Third Admendment of Amended and Restated Credit Agreement dated as of
March 22, 2000, among SSCC, JSCE, Inc., JSC(U.S.) and the banks party
thereto.
10.2 Fourth Admendment of Amended and Restated Credit Agreement dated as of
July 31, 2000, among SSCC, JSCE, Inc., JSC(U.S.) and the banks party
thereto.
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
17
<PAGE>
Signatures
----------
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 9, 2000 /s/ Paul K. Kaufmann
----------------- ---------------------------------------
Paul K. Kaufmann
Vice President and
Corporate Controller
(Principal Accounting Officer)
18
