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, 2001
Commission File Number 1-3439
STONE CONTAINER CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-2041256
- ------------------------------- ---------------------------------
(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 _____
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APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 30, 2001, the registrant had outstanding 135,335,381 shares
of common stock, $.01 par value per share, all of which are owned by
Smurfit-Stone Container Corporation.
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
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STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
(In millions) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net sales ................................................... $ 1,440 $ 1,576 $ 4,391 $ 4,241
Cost of goods sold .......................................... 1,216 1,249 3,702 3,419
Selling and administrative expenses ......................... 128 128 382 339
Restructuring charges ....................................... 1 5 1 51
Gain on sale of assets ...................................... (1) (9)
---------------------------------------------------
Income from operations ................................... 96 194 315 432
Other income (expense)
Interest expense, net ...................................... (79) (102) (259) (272)
Equity income of affiliates ................................ 4 4 10 10
Other, net ................................................. 11 (1) 7
---------------------------------------------------
Income before income taxes
and extraordinary item ................................. 21 107 65 177
Provision for income taxes .................................. (14) (51) (47) (95)
---------------------------------------------------
Income before extraordinary item ........................... 7 56 18 82
Extraordinary item
Gain (loss) from early extinguishment of debt, net of income
tax (provision) benefit of $0 and $1 for the three
months and $2 and $0 for the nine months ended
September 30, 2001 and 2000, respectively ............... (1) (4) 1
---------------------------------------------------
Net income .............................................. 7 55 14 83
Preferred stock dividends ................................... (2) (6)
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Net income applicable to common shares .................. $ 7 $ 53 $ 14 $ 77
==================================================================================================================
See notes to consolidated financial statements.
1
STONE CONTAINER CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(In millions, except share data) 2001 2000
- ------------------------------------------------------------------------------------------------------------
Assets (Unaudited)
Current assets
Cash and cash equivalents ................................................ $ 14 $ 24
Receivables, less allowances of $43 in 2001 and $44 in 2000 ............. 375 369
Inventories
Work-in-process and finished goods ..................................... 147 154
Materials and supplies ................................................. 344 385
------------------------------
491 539
Deferred income taxes .................................................... 161 159
Prepaid expenses and other current assets ................................ 53 42
------------------------------
Total current assets .................................................. 1,094 1,133
Net property, plant and equipment ......................................... 4,189 4,348
Timberland, less timber depletion ......................................... 47 58
Goodwill, less accumulated amortization of $224 in 2001 and $161 in 2000... 3,128 3,170
Investment in equity of non-consolidated affiliates ....................... 134 132
Other assets .............................................................. 213 210
------------------------------
$ 8,805 $ 9,051
==========================================================================================================
Liabilities and Stockholder's Equity
Current liabilities
Current maturities of long-term debt ..................................... $ 32 $ 34
Accounts payable ......................................................... 376 405
Accrued compensation and payroll taxes ................................... 127 118
Interest payable ......................................................... 37 71
Other current liabilities ................................................ 142 136
------------------------------
Total current liabilities ............................................. 714 764
Long-term debt, less current maturities ................................... 3,643 3,779
Other long-term liabilities ............................................... 676 708
Deferred income taxes ..................................................... 768 797
Stockholder's equity
Common stock, par value $.01 per share; 200,000,000 shares authorized,
135,335,381 shares issued and outstanding in 2001 and 2000 ............ 1 1
Additional paid in capital ............................................... 3,015 3,015
Retained earnings ........................................................ 16 2
Accumulated other comprehensive income (loss) ............................ (28) (15)
----------- -----------
Total stockholder's equity ............................................ 3,004 3,003
----------- -----------
$ 8,805 $ 9,051
==========================================================================================================
See notes to consolidated financial statements.
2
STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30, (In millions) 2001 2000
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income ....................................................... $ 14 $ 83
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary (gain) loss from early extinguishment of debt... 6 (1)
Depreciation and amortization ................................ 263 228
Amortization of deferred debt issuance costs ................. 4 3
Deferred income taxes ........................................ 21 76
Non-cash employee benefits ................................... 5 2
Non-cash restructuring charge 32
Foreign currency transaction gains ........................... (2)
Equity income of affiliates .................................. (10) (10)
Gain on sale of assets ....................................... (9)
Change in current assets and liabilities, net of
effects from acquisitions and dispositions
Receivables ............................................... (5) 71
Inventories ............................................... 47 38
Prepaid expenses and other current assets ................. (11) 21
Accounts payable and other current liabilities ............ (30) (37)
Interest payable .......................................... (33) 6
Income taxes .............................................. (6) 1
Other, net ................................................... (22) (135)
--------------------------
Net cash provided by operating activities .......................... 232 378
--------------------------
Cash flows from investing activities
Property additions ................................................. (79) (148)
Proceeds from sales of assets and investments ...................... 23 62
Payments on acquisitions, net of cash received ..................... (16) (631)
---------------------------
Net cash used for investing activities ............................. (72) (717)
--------------------------
Cash flows from financing activities
Proceeds from long-term debt ....................................... 1,050 1,525
Payments of long-term debt ......................................... (1,183) (1,142)
Debt repurchase premiums ........................................... (14)
Deferred debt issuance costs ....................................... (23) (17)
--------------------------
Net cash provided by (used for) financing activities ............... (170) 366
--------------------------
Effect of exchange rate changes on cash ............................ (2)
--------------------------
Increase (decrease) in cash and cash equivalents .................... (10) 25
Cash and cash equivalents
Beginning of period ................................................ 24 13
--------------------------
End of period ...................................................... $ 14 $ 38
=================================================================================================
See notes to consolidated financial statements.
3
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 Stone
Container Corporation ("Stone" 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 which
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 Company's Annual Report on
Form 10-K for the year ended December 31, 2000, filed March 13, 2001, with the
Securities Exchange Commission.
The Company is a wholly-owned subsidiary of Smurfit-Stone Container
Corporation ("SSCC"). On May 31, 2000, the Company acquired St.
Laurent Paperboard, Inc. (the "St. Laurent Acquisition").
2. Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. St. Laurent Acquisition
The purchase price allocation was completed during the second quarter of 2001.
The final allocation resulted in acquired goodwill of approximately $222
million, which is being amortized on a straight-line basis over 40 years. The
preliminary allocation was adjusted for the final fixed asset valuations.
4. Exit Liabilities
The Company recorded a restructuring charge of $1 million during the third
quarter of 2001 related to the closure of a sawmill. This charge related
primarily to the non-cash write-down of assets to their estimated fair value
less cost to sell.
At December 31, 2000, the Company had $49 million of exit liabilities related
primarily to the restructuring of operations in connection with the merger with
SSCC and the St. Laurent Acquisition. The Company had $1 million and $12 million
of cash disbursements related to these exit liabilities for the three and nine
months ended September 30, 2001, respectively.
5. Long-Term Debt
In January 2001, the Company closed on a bond offering to issue $750 million of
9.75% Senior Notes due 2011 and $300 million of 9.25% Senior Notes due 2008. The
proceeds of this issuance along with additional borrowings on the Revolving
Credit Facility of $32 million were used to redeem (i) $300 million in aggregate
principal of senior subordinated debentures due April 1, 2002, (ii) $45 million
in aggregate principal of convertible subordinated debentures due February 15,
2007, (iii) $500 million in aggregate principal of first mortgage notes due
October 1, 2002, and (iv) $200 million in aggregate principal of senior notes
due October 1, 2004. In addition, the proceeds were used to pay $37 million in
fees, call premiums and other expenses related to these transactions. An
extraordinary loss of $4 million (net of tax of $2 million) was recorded due to
the early extinguishment of debt.
4
6. Derivatives Instruments and Hedging Activities
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and
SFAS No. 138 requires that all derivatives be recorded on the consolidated
balance sheets at fair value. Changes in the fair value of derivatives not
qualifying as hedges are recorded each period in earnings. Changes in the fair
value of derivatives qualifying as hedges are either offset against the change
in fair value of the hedged item through earnings or recognized in Other
Comprehensive Income ("OCI") until the hedged item is recognized in earnings,
depending on the nature of the hedge. The ineffective portion of the change in
fair value of all derivatives is recognized in earnings. Hedges related to
anticipated transactions are designated and documented at hedge inception as
cash flow hedges and evaluated for hedge effectiveness quarterly.
The Company's derivative instruments and hedging activities relate to minimizing
exposures to fluctuations in the price of commodities used in its operations and
the movement in foreign currency exchange rates.
Commodity Future Contracts
The Company uses exchange traded futures contracts to manage fluctuations in
cash flows resulting from commodity price risk in the procurement of natural
gas. The objective is to fix the price of a portion of the Company's forecasted
purchases of natural gas used in the manufacturing process. The changes in the
market value of such contracts have historically been, and are expected to
continue to be, highly effective at offsetting changes in price movements of the
hedged item. As of September 30,2001, the maximum length of time over which the
Company is hedging its exposure to the variability in future cash flows
associated with natural gas forecasted transactions is approximately one year.
For the three and nine month periods ended September 30, 2001, the Company
reclassified a $6 million loss and a $4 million loss, respectively, from OCI to
cost of goods sold when the hedged items were recognized. The fair value of the
Company's futures contracts at September 30, 2001 is a $16 million liability.
For the three and nine month periods ended September 30, 2001, the Company
recorded a $1 million loss and a $4 million loss, respectively, in cost of goods
sold on commodity future contracts outstanding as of September 30, 2001, related
to the ineffective portion of the change in fair value of certain contracts and
contracts not qualifying as hedges.
Foreign Currency Forward Contracts
The Company enters into foreign currency forward contracts with financial
institutions to purchase Canadian dollars, primarily to protect against currency
exchange risk associated with expected future cash flows. Contracts typically
have maturities of approximately one year or less. The fair value of the
Company's foreign currency forward contracts at September 30, 2001 is a $4
million liability. The change in fair value of these contacts is recorded in OCI
until the underlying transaction is recorded in earnings.
The cumulative deferred hedge loss on all commodity and foreign currency
contracts is $10 million (net of tax of $6 million) at September 30, 2001. The
Company expects to reclassify $9 million into earnings during the next twelve
months.
7. Other Items
The Company completed the sale of its Bathurst, New Brunswick, Canada, sawmill
during the first quarter of 2001, resulting in a gain on sale of assets of $6
million. An additional $1 million gain was recognized during the second quarter
of 2001, related to additional cash proceeds received from the final working
capital adjustments.
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.
5
8. 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 significant non-consolidated affiliate at September 30, 2001 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 $112 million and $118 million
for the three months ended September 30, 2001 and 2000, respectively, and $337
million and $349 million for the nine months ended September 30, 2001 and 2000,
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:
Three months ended Nine months ended
September 30, September 30,
------------------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
Results of operations
Net sales ............................................................ $ 156 $ 159 $ 485 $ 484
Cost of sales ........................................................ 143 138 424 423
Income before income taxes, minority interest
and extraordinary charges ......................................... 10 9 26 27
Net income ........................................................... 10 9 26 26
9. Comprehensive Income (Loss)
Comprehensive income (loss) is as follows:
Three months ended Nine months ended
September 30, September 30,
-------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net income ........................................................... $ 7 $ 55 $ 14 $ 83
Other comprehensive income (loss), net of tax:
Deferred hedge loss, net ........................................... (5) (10)
Foreign currency translation ....................................... 8 (18) ( 3) (15)
----- ------ ------ -----
Comprehensive income ................................................. $ 10 $ 37 $ 1 $ 68
===== ====== ====== =====
10. Business Segment Information
The Company has three reportable segments: (1) Containerboard and Corrugated
Containers, (2) Specialty Packaging and (3) International. 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 Specialty Packaging segment
converts kraft and specialty paper into multiwall bags, consumer bags and
intermediate bulk containers. These bags and containers are designed to ship and
protect a wide range of industrial and consumer products including fertilizers,
chemicals, concrete and pet and food products. The International segment is
primarily composed of the Company's containerboard mills and corrugated
container facilities located in Europe.
6
The Company's North American reportable segments are strategic business units
that offer different products, and each is managed separately because they
manufacture distinct products. The International segment is managed separately
because it has different customers, and its operations are based in markets
outside of the North American market. Other includes one nonreportable segment
and corporate related items which include the elimination of intercompany profit
and income and expense not allocated to reportable segments including corporate
expenses, restructuring charges, goodwill amortization, interest expense and the
adjustment to record inventory at LIFO.
Container-
board &
Corrugated Specialty Inter-
Containers Packaging national Other Total
--------------- ---------------- --------------- ---------------- -----------
Three months ended September 30,
- --------------------------------
2001
----
Revenues from external
customers ..................................... $ 1,143 $ 137 $ 143 $ 17 $ 1,440
Intersegment revenues .......................... 36 36
Segment profit (loss) .......................... 123 8 9 (119) 21
2000
----
Revenues from external
customers ..................................... $ 1,278 $ 126 $ 152 $ 20 $ 1,576
Intersegment revenues .......................... 35 35
Segment profit (loss) .......................... 224 8 11 (136) 107
Nine months ended September 30,
- -------------------------------
2001
----
Revenues from external
customers ..................................... $ 3,500 $ 401 $ 437 $ 53 $ 4,391
Intersegment revenues .......................... 94 94
Segment profit (loss) .......................... 366 23 33 (357) 65
2000
----
Revenues from external
customers ..................................... $ 3,381 $ 387 $ 447 $ 26 $ 4,241
Intersegment revenues .......................... 101 101
Segment profit (loss) .......................... 556 23 26 (428) 177
11. 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, the uncertainty
due to the joint and several nature of the Company's liabilities 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.
7
12. Prospective Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets," effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill (and intangible assets deemed to have indefinite lives) will
no longer be amortized, but will be subject to an annual impairment test. Other
intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provision of the Statement is expected to result in an increase
in net income of approximately $84 million per year. During 2002, the Company
will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002. The Company has not
yet determined what the effect of these tests will be on its earnings and
financial position.
8
Item 2. Management's 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 21 E 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 us or our 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 include the
following:
. the impact of general economic conditions in North America and Europe and in
other countries in which we and our subsidiaries currently do business;
. industry conditions, including competition and product and raw material
prices;
. fluctuations in exchange rates and currency values;
. capital expenditure requirements;
. legislative or regulatory requirements, particularly concerning environmental
matters;
. interest rates;
. access to capital markets;
. fluctuations in energy prices; and
. obtaining required approval, if any, of debt holders.
Our actual results, performance or achievements could differ materially from
those expressed in, or implied by, these forward-looking statements.
Accordingly, no assurances can be given that any of the events anticipated by
the forward-looking statements will transpire or occur, or if any of them do so,
what impact they will have on our results of operations or financial condition.
We expressly decline any obligation to publicly revise any forward-looking
statements that have been made after the occurrence of events after the date
hereto.
9
Results of Operations - Third Quarter 2001 Compared to Third Quarter 2000
(In millions) Three months ended
September 30,
-----------------------
2001 2000
--------- ---------
Net sales
Containerboard and corrugated containers .................................... $ 1,143 $ 1,278
Specialty packaging ......................................................... 137 126
International ............................................................... 143 152
Other operations ............................................................ 17 20
--------- --------
Total ..................................................................... $ 1,440 $ 1,576
========= ========
Profit (loss)
Containerboard and corrugated containers .................................... $ 123 $ 224
Specialty packaging ......................................................... 8 8
International ............................................................... 9 11
Other operations ............................................................ 1 (2)
Corporate related items ..................................................... (41) (38)
Gain on sale of assets ...................................................... 1
Restructuring ............................................................... (1) (5)
Interest expense, net ....................................................... (79) (102)
Other, net .................................................................. 11
--------- --------
Income before income taxes and extraordinary item .......................... $ 21 $ 107
========= ========
Net sales decreased 9% due primarily to lower average sales prices and sales
volumes for containerboard, corrugated containers and market pulp.
Cost of goods sold decreased due primarily to the lower sales volume and lower
cost of reclaimed fiber. Cost of goods sold as a percent of net sales increased
to 84% from 79% last year due primarily to the lower average sales prices.
Selling and administrative expenses were comparable to last year. Selling and
administrative expense as a percent of net sales increased to 9% from 8% last
year due primarily to the lower average sales prices.
Interest expense, net was lower due to the favorable impact of $16 million from
lower overall average interest rates and $7 million on lower average borrowings.
Other, net for the 2000 period included a $12.5 million pretax gain related to
the proceeds received from the redemption of convertible preferred stock of Four
M Corporation that we received in connection with the consummation of the
Florida Coast Paper Company reorganization plan.
Provision for income taxes 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.
10
Increases (Decreases) in Net Sales
- ----------------------------------
Container-
board &
Corrugated Specialty Inter- Other
(In millions) Containers Packaging national Operations Total
---------- --------- -------- ---------- -----
Sales price and product mix ............... $ (115) $ 1 $ (10) $ $ (124)
Sales volume .............................. (7) (3) 2 (3) (11)
Acquisition ............................... 15 15
Closed or sold facilities ................. (13) (2) (1) (16)
------- ----- ------ ------ -------
Total .................................. $ (135) $ 11 $ (9) $ (3) $ (136)
======= ===== ====== ====== =======
Containerboard and Corrugated Containers Segment
- ------------------------------------------------
Net sales decreased 11% due primarily to lower average sales prices for
containerboard, market pulp, and corrugated containers. On average, corrugated
container prices decreased by 5% and linerboard prices were lower by 7%. The
average price of market pulp was 40% lower. The average sales price of kraft
paper decreased 6%.
Containerboard market related downtime in the third quarter of 2001 was 162,000
tons compared to 189,000 tons last year, however production of containerboard
decreased by 3% due to higher levels of maintenance downtime and lower
productivity. Shipments of corrugated containers decreased 4% because of impacts
from the slowing U.S. economy and our container plant closures. Production of
market pulp declined 1% and kraft paper production increased 12%.
Profits decreased by $101 million due primarily to the lower average sales
prices. Profits were favorably impacted by lower reclaimed fiber costs. Cost of
goods sold as a percent of net sales increased to 83% compared to 76% last year
due primarily to the lower average sales prices.
Specialty Packaging Segment
- ---------------------------
Net sales increased 9% due primarily to the acquisition of a multiwall bag
packaging facility. The increase in net sales was partially offset by a 6%
decrease in sales volume and the closure of an operating facility. Profits were
comparable to last year. Cost of goods sold as a percent of net sales increased
to 86% compared to 83% last year due primarily to higher material and conversion
cost.
International Segment
- ---------------------
Net sales decreased 6% due to lower average sales prices for corrugated
containers, containerboard and reclaimed fiber and the sale of a converting
facility. Profits decreased $2 million due primarily to the lower average sales
prices. Profits were favorably impacted by lower reclaimed fiber cost. Cost of
goods sold as a percent of net sales was 87%, which was comparable to last year.
Other Operations
- ----------------
Other operations consist of consumer packaging operations acquired as part of
the St. Laurent acquisition. Net sales decreased by 15% due primarily to lower
sales volume. Profits improved by $3 million as a result of lower operating
costs.
11
Results of Operations - Nine Months 2001 Compared to Nine Months 2000
(In millions) Nine months ended
September 30,
--------------------
2001 2000
------- -------
Net sales
Containerboard and corrugated containers ..................................... $ 3,500 $ 3,381
Specialty packaging .......................................................... 401 387
International ................................................................ 437 447
Other operations ............................................................. 53 26
------- -------
Total ....................................................................... $ 4,391 $ 4,241
======= =======
Profit (loss)
Containerboard and corrugated containers ..................................... $ 366 $ 556
Specialty packaging .......................................................... 23 23
International ................................................................ 33 26
Other operations ............................................................. 3 (3)
Corporate related items ...................................................... (108) (109)
Gain on sale of assets ....................................................... 9
Restructuring ................................................................ (1) (51)
Interest expense, net ........................................................ (259) (272)
Other, net ................................................................... (1) 7
------- -------
Income before income taxes and extraordinary item ........................... $ 65 $ 177
======= =======
Net sales increased 4% due primarily to the St. Laurent Paperboard, Inc.
acquisition. Sales were negatively impacted by lower average sales prices and
lower sales volume for containerboard, corrugated containers and market pulp and
the closure of operating facilities.
Cost of goods sold increased due to the St. Laurent acquisition and higher
energy cost of $46 million. Cost of goods sold was favorably impacted by lower
reclaimed fiber. Cost of goods sold as a percent of net sales increased to 84%
from 81% last year due primarily to the lower average sales prices for
containerboard, market pulp and corrugated containers. Selling and
administrative expenses were higher due to the St. Laurent acquisition. Selling
and administrative expense as a percent of net sales increased to 9% from 8%
last year due primarily to lower average sales prices.
Interest expense, net was lower due to the favorable impact of $28 million from
lower overall average interest rates, which was partially offset by the
unfavorable impact of $15 million on higher average borrowings.
Gain on sale of assets included a gain of $7 million in 2001 related to the sale
of a sawmill operation.
Other, net for the 2000 period included a $12.5 million pretax gain related to
the proceeds received from the redemption of convertible preferred stock of Four
M Corporation that we received in connection with the consummation of the
Florida Coast Paper Company reorganization plan.
Provision for income taxes 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.
12
Increases (Decreases) in Net Sales
- ----------------------------------
Container-
board &
Corrugated Specialty Inter- Other
(In millions) Containers Packaging national Operations Total
---------- --------- -------- ---------- -----
Sales price and product mix ............... $ (150) $ 10 $ (21) $ 1 $ (160)
Sales volume .............................. (53) (1) 17 (4) (41)
Acquisitions .............................. 387 15 30 432
Closed or sold facilities ................. (65) (10) (6) (81)
------- ----- ------ ------ ------
Total .................................. $ 119 $ 14 $ (10) $ 27 $ 150
======= ===== ======== ====== ======
Containerboard and Corrugated Containers Segment
- ------------------------------------------------
Net sales increased by 4% due primarily to the St. Laurent acquisition. Net
sales were negatively impacted by lower average sales prices and sales volume
for market pulp and, excluding the St. Laurent acquisition, lower sales volume
for containerboard and corrugated containers. On average, corrugated container
prices were 2% lower compared to last year and linerboard prices were lower by
3%. The average price of market pulp prices were 31% lower. The average sales
price of kraft paper decreased 1%.
Production of containerboard increased 8% due primarily to the St. Laurent
acquisition. Exclusive of St. Laurent, production of containerboard declined 8%
due to the extensive market related downtime taken in 2001 to balance supply
with demand. Containerboard market related downtime was 577,000 tons in 2001
compared to 362,000 tons last year. Shipments of corrugated containers increased
2%, but excluding the impact of St. Laurent, shipments declined 5% because of
impacts from the slowing U.S. economy and our container plant closures.
Production of market pulp declined 11% due primarily to market related downtime
of 27,000 tons taken in the first quarter of 2001. Kraft paper production
increased 2%.
Profits decreased by $190 million due to lower average sales prices, the higher
levels of market related downtime taken at our containerboard and market pulp
mills and higher energy costs. Profits were favorably impacted by the St.
Laurent acquisition and lower reclaimed fiber costs. Cost of goods sold as a
percent of net sales increased to 83% compared to 77% last year due primarily to
the lower average sales prices, higher levels of market related downtime and
higher energy costs.
Specialty Packaging Segment
- ---------------------------
Net sales increased by 4% due to the acquisition of a multiwall bag packaging
facility and a 3% increase in average sales prices. The improvement in net sales
was partially offset by the closure of an operating facility. Profits of $23
million were comparable to last year. Cost of goods sold as a percent of net
sales increased to 86% compared to 84% last year due primarily to higher
material and conversion cost.
International Segment
- ---------------------
Net sales decreased by 2% due to lower average sales prices for reclaimed fiber,
corrugated containers and the sale of a converting facility. Profits increased
$7 million due primarily to lower reclaimed fiber cost and increased sales
volume of corrugated containers. Cost of goods sold as a percent of net sales
decreased to 86% compared to 87% last year due primarily to the lower reclaimed
fiber cost.
Other Operations
- ----------------
Net sales and profits of other operations improved as a result of the St.
Laurent consumer packaging operations, which were acquired May 31, 2000.
13
Statistical Data
(In thousands of tons, except as noted) Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
Mill production
Containerboard .................................. 1,460 1,509 4,287 3,991
Kraft paper ..................................... 82 73 222 218
Market pulp ..................................... 143 145 402 452
Solid bleached sulfate .......................... 30 28 92 39
Coated boxboard ................................ 20 22 60 64
Corrugated containers sold (billion sq. ft.) ........ 16.2 16.7 48.7 47.8
Multiwall bags sold ................................. 67 61 191 185
Acquisition and Restructuring
In connection with the St. Laurent acquisition on May 31, 2000, we recorded exit
liabilities of $12 million. Cash payments for exit liabilities for the nine
months ended September 30, 2001 were $5 million. Since the acquisition date,
through September 30, 2001, we have incurred $8 million (67%) of the planned
cash expenditures, including the termination of certain St. Laurent employees,
liabilities for long-term commitments and the permanent shutdown of a container
plant. Targeted synergy savings from the St. Laurent acquisition totaling $50
million per year were expected to be achieved through a combination of
purchasing savings, supply chain management, manufacturing efficiencies and
administrative reductions. Through September 2001, annualized merger synergy
savings of approximately $60 million have been achieved.
As explained in our Annual Report on Form 10-K for the year ended December 31,
2000, the restructuring of our operations in connection with the merger with
Smurfit-Stone was completed in 2000. The remaining cash expenditures in
connection with the restructuring will be funded through operations as
originally planned. For the nine months ended September 30, 2001, $6 million of
the $14 million anticipated cash expenditures for 2001 were incurred.
Liquidity and Capital Resources
For the nine months ended September 30, 2001, $1,050 million of borrowings, $232
million of net cash provided by operating activities, $23 million of proceeds
from the sale of assets and available cash of $10 million were used to fund
$1,183 million of net debt repayments, $79 million of property additions, $16
million for the acquisition of a multiwall bag packaging facility and $37
million of financing fees, call premiums and other refinancing costs.
In January 2001, we issued $750 million of 9.75% senior notes due 2011 and $300
million of 9.25% senior notes due 2008 (the New Senior Notes). The proceeds of
this issuance, along with additional borrowings on the Stone Container revolving
credit facility of $32 million, were used to redeem (i) $200 million aggregate
principal amount of 10.75% senior subordinated debentures due April 1, 2002,
(ii) $100 million aggregate principal amount of 10.75% senior subordinated
debentures and 1.5% supplemental interest certificates due April 1, 2002, (iii)
$45 million aggregate principal of 6.75% convertible subordinated debentures due
February 15, 2007, (iv) $500 million aggregate principal of 10.75% first
mortgage notes due October 1, 2002 and (v) $200 million aggregate principal of
11.50% senior notes due October 1, 2004. In addition, the proceeds were used to
pay $37 million in fees, call premiums and other expenses related to these
transactions. We commenced a registered exchange offer for the New Senior Notes
on June 13, 2001. On July 13, 2001, we completed the exchange of substantially
all of the New Senior Notes for a like amount of senior notes which have been
registered under the Securities Act of 1933. We did not receive any proceeds
from the exchange offer.
14
The obligations under the Stone Container credit agreement, which provide for
the Stone Container revolving credit facility and the Stone Container tranche C,
D, E and F term loans, are unconditionally guaranteed by certain subsidiaries of
Stone Container, other than subsidiaries acquired or created in connection with
the St. Laurent acquisition. The obligations under the Stone Container credit
agreement are secured by a security interest in substantially all of the assets
of Stone Container and its U.S. subsidiaries, other than the assets acquired in
the St. Laurent transaction, and 65% of the stock of Smurfit-Stone Container
Canada, Inc. The security interest under the Stone Container credit agreement
excludes cash, cash equivalents, certain trade receivables, four paper mills and
the land and buildings of the corrugated container facilities. The tranche G
term loan provided to Stone Container under the Stone Container/Smurfit-Stone
Container Canada, Inc. credit agreement is unconditionally guaranteed by the
U.S. subsidiaries acquired or created in connection with the St. Laurent
acquisition and is secured by a security interest in substantially all of the
U.S. assets acquired in the St. Laurent acquisition. The tranche H term loan and
revolving credit facility provided to Smurfit-Stone Container Canada under the
Stone Container/Smurfit-Stone Container Canada, Inc. credit agreement are
unconditionally guaranteed by Stone Container and the U.S. and Canadian
subsidiaries acquired or created in connection with the St. Laurent acquisition
and are secured by a security interest in substantially all of the U.S. and
Canadian assets acquired in the St. Laurent acquisition.
The credit agreements contain various covenants and restrictions including,
among other things, (i) limitations on dividends, redemptions and repurchases of
capital stock, (ii) limitations on the incurrence of indebtedness, liens, leases
and sale-leaseback transactions, (iii) limitations on capital expenditures, and
(iv) maintenance of certain financial covenants. The credit agreements also
require prepayments of the term loans from excess cash flow, as defined, and
proceeds from certain asset sales, insurance, and incurrence of certain
indebtedness. Such restrictions, together with our highly leveraged position,
could restrict corporate activities, including our ability to respond to market
conditions, to provide for unanticipated capital expenditures or to take
advantage of business opportunities.
We expect internally generated cash flows and existing financing resources will
be sufficient for the next several years to meet our obligations, including debt
service, expenditures relating to environmental compliance and other capital
expenditures. Scheduled debt payments for the last three months of 2001 and for
the year 2002 total $13 million and $32 million, respectively, with increasing
amounts thereafter. We intend to hold capital expenditures for 2001
significantly below our anticipated annual depreciation level of $280 million.
As of September 30, 2001, we had authorized commitments for capital expenditures
of $94 million, including $24 million for environmental projects, $23 million to
maintain competitiveness and $47 million for upgrades, modernization and
expansion. We expect to use any excess cash flows provided by operations to make
further debt reductions. As of September 30, 2001, we had $549 million of unused
borrowing capacity under our credit agreements.
Environmental Compliance
The United States Environmental Protection Agency (EPA) has finalized
significant portions of its comprehensive rule governing the pulp, paper and
paperboard industry, known as the "Cluster Rule". Phase I of the Cluster Rule
required us to convert our bleached market pulp mill at Panama City, Florida to
an elemental chlorine free bleaching process, to install systems at several of
our mills for the collection and destruction of low volume, high concentration
gases and to implement best management practices, such as spill controls. These
projects have been substantially completed at a cost of approximately $154
million as of September 30, 2001 (of which approximately $20 million has been
spent in 2001). Phase II of the Cluster Rule will require the implementation of
systems to collect high volume, low concentration gases at various mills and has
a compliance date of 2006. Phase III of the Cluster Rule will require control of
particulate from recovery boilers, smelt tanks and lime kilns and has a
compliance date of 2005. We continue to study possible means of compliance with
Phases II and III of the Cluster Rule. Based on currently available information,
we estimate that the compliance cost of Phases II and III of the Cluster Rule is
likely to be in the range of $70 to $90 million and that such cost will be
incurred over the next five years.
15
In recent years, the EPA has undertaken significant air quality initiatives
associated with nitrogen oxide emissions, regional haze and national ambient air
quality standards. Several of our mills are located in states affected by these
EPA initiatives. When regulatory requirements for new and changing standards are
finalized, we will add any resulting future cost projections to our expenditure
forecast.
In addition to Cluster Rule compliance, we anticipate additional capital
expenditures related to environmental compliance. Excluding the spending on
Cluster Rule projects described above, for the past three years, we have spent
an average of approximately $8 million annually on capital expenditures for
environmental purposes. Since our principal competitors are subject to
comparable environmental standards, including the Cluster Rule, management is of
the opinion, based on current information, that compliance with environmental
standards should not adversely affect our competitive position. However, we
could incur significant expenditures due to changes in law or the discovery of
new information, which expenditures could have a material adverse effect on our
operation results.
Prospective Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) will no longer be amortized, but will be
subject to annual impairment test. Other intangible assets will continue to be
amortized over their useful lives.
We will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. Application of the
non-amortization provision of the Statement is expected to result in an increase
in net income of $84 million per year. During 2002, we will perform the first of
the required impairment tests of goodwill and indefinite lived intangible assets
as of January 1, 2002. We have not yet determined what the effect of these tests
will be on our earnings and financial position.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
We are exposed to various market risks, including interest rate risk, commodity
price risk and foreign currency risk. To manage the volatility related to these
risks, we enter into various derivative contracts. We do not use derivatives for
speculative or trading purposes.
Earnings and cash flows are significantly affected by the amount of interest on
our indebtedness. Management's objective is to protect Stone Container from
interest rate volatility and reduce or cap interest expense within acceptable
levels of market risk. We may periodically enter into interest rate swaps, caps
or options to hedge interest rate exposure and manage risk within company
policy. Any derivative would be specific to the debt instrument, contract or
transaction, which would determine the specifics of the hedge. There were no
interest rate derivatives outstanding at September 30, 2001. Issuance of the New
Senior Notes and the related debt redemptions did not materially change the
composition of our fixed and variable rate debt or our interest rate risk.
We periodically enter into exchange traded futures contracts to manage
fluctuations in cash flows resulting from commodity price risk in the
procurement of natural gas. As of September 30, 2001, we have futures contracts
to hedge approximately 85% to 100% of our expected natural gas requirements for
the months of October 2001 through December 2001. We have futures contracts to
hedge approximately 20% to 50% of our expected natural gas requirements for the
months of January 2002 through October 2002. Management's objective is to fix
the price of a portion of our forecasted purchases of natural gas used in the
manufacturing process. The increase in energy cost discussed in Part 1, Item 2
above includes the impact of the natural gas futures contracts.
Our principal foreign exchange exposures are the Canadian dollar and the euro.
The functional currency for the majority of our foreign operations is the
applicable local currency except for the operations in
16
Canada, which is the U.S. dollar. Our investments in foreign subsidiaries with a
functional currency other than the U.S. dollar are not hedged.
We periodically enter into foreign exchange forward contracts with financial
institutions to purchase Canadian dollars in order to protect against currency
exchange risk associated with expected future cash flows. Contracts typically
have maturities of approximately one year or less. As of September 30, 2001, we
have Canadian dollar forward purchase contracts to hedge approximately 20% to
60% our Canadian dollar requirements for the months of October 2001 through
December 2002.
The exchange rate for the Canadian dollar and the euro as of September 30, 2001
compared to December 31, 2000 strengthened/(weakened) against the U.S. dollar by
(5.3)% and 3.3%, respectively. We recognized foreign currency transaction gains
of $2 million for the nine months ended September 30, 2001 and none for the same
period last year.
17
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
In 1998, seven putative class action complaints were filed in the United States
District Court for the Northern District of Illinois and the United States
District Court for the Eastern District of Pennsylvania. These complaints
alleged that we reached agreements in restraint of trade that affected the
manufacture, sale and pricing of corrugated products in violation of antitrust
laws. The complaints have been amended to name several other defendants,
including Jefferson Smurfit (U.S.) and Smurfit-Stone. The suits seek an
unspecified amount of damages arising out of the sale of corrugated products for
the period from October 1, 1993 through March 31, 1995. Under the provisions of
the applicable statutes, any award of actual damages could be trebled. The
complaints have been consolidated in the United States District Court for the
Eastern District of Pennsylvania, which has certified two plaintiff classes
comprised of purchasers of corrugated sheets and corrugated boxes, respectively.
We are vigorously defending these cases.
In September 1997, we received a Notice of Violation and a Compliance Order from
the EPA alleging non-compliance with air emissions limitations for the smelt
dissolving tank at our Hopewell, Virginia mill and for failure to comply with
New Source Performance Standards applicable to certain other equipment at the
mill. In cooperation with the EPA, we responded to information requests,
conducted tests and took measures to ensure continued compliance with applicable
emission limits. In December 1997 and November 1998, we received additional
requests from the EPA for information about past capital projects at the mill.
In April 1999, the EPA issued a Notice of Violation alleging that we "modified"
the recovery boiler and increased nitrogen oxide emissions without obtaining a
required construction permit. We responded to this notice and indicated the
EPA's allegations were without merit. We have entered into a tolling agreement
with the EPA that defers any further prosecution of this matter until at least
January 4, 2002. Upon expiration of the tolling agreement, the EPA may bring
suit against us.
In April 1999, the EPA and the Virginia Department of Environmental Quality
(Virginia DEQ) each issued a notice of violation under the Clean Air Act to St.
Laurent's mill located in West Point, Virginia, which was acquired from
Chesapeake Corporation in May 1997. In general, the notices of violation allege
that, from 1984 to the present, the West Point mill installed certain equipment
and modified certain production processes without obtaining the required
permits. St. Laurent made a claim for indemnification from Chesapeake for its
costs relating to these notices of violation pursuant to the purchase agreement
between St. Laurent and Chesapeake and the parties appointed a third-party
arbitrator to resolve the issues relating to the indemnification claim. The
arbitrator has established a binding cost-sharing formula between the parties as
to the cost of any required capital expenditures that might be required to
resolve the notices of violation, as well as any fines and penalties imposed in
connection therewith. St. Laurent and Chesapeake are attempting to reach
agreement with the EPA and Virginia DEQ on a capital expenditure plan to remedy
the notices of violation, and based on the information developed to date and
discussions with the EPA and Virginia DEQ, we believe our share of the costs to
resolve this matter will not be material and will not exceed established
reserves. We have entered into a tolling agreement with the EPA that defers any
further prosecution of this matter until at least December 31, 2001. Upon
expiration of the tolling agreement, the EPA may bring suit against St. Laurent.
18
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
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:
None
b) Reports on Form 8-K:
There were no Form 8-K filings during the three months ended September 30,
2001.
19
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.
STONE CONTAINER CORPORATION
-----------------------------------
(Registrant)
Date: November 13, 2001 /s/ Paul K. Kaufmann
------------------ -----------------------------------
Paul K. Kaufmann
Vice President and
Corporate Controller
(Principal Accounting Officer)
20