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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For Quarter Ended June 30, 2004

Commission File Number 0-23876

SMURFIT-STONE CONTAINER CORPORATION
(Exact name of registrant as specified in its charter)

(312) 346-6600
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

        Indicate by check mark if the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

        As of June 30, 2004, the registrant had outstanding 253,672,631 shares of common stock, $.01 par value per share.

PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

SMURFIT-STONE CONTAINER CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See notes to consolidated financial statements.

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SMURFIT-STONE CONTAINER CORPORATION

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

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SMURFIT-STONE CONTAINER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to consolidated financial statements.

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SMURFIT-STONE CONTAINER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions, except share data)

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, 2003, filed March 3, 2004 ("10-K") with the Securities and Exchange Commission.

        SSCC 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 operations other than its investment in JSC(U.S.). JSC(U.S.) has operations throughout the United States. Stone has domestic and international operations.

2.    Reclassifications

        Certain prior year amounts have been reclassified to conform to the current year presentation.

3.    Stock-Based Compensation

        In the second quarter of 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," effective as of January 1, 2003. The Company selected the prospective transition method as allowed in SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which requires expensing options prospectively, beginning in the year of adoption. Because the prospective method was used and awards vest over three to eight years, the 2003 and 2004 expense is less than what would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123.

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        The following table illustrates the effect on net loss if the fair value based method had been applied to all outstanding and unvested awards under the SSCC 1998 Long-Term Incentive Plan in each period.

4.    Discontinued Operations

        In December 2002, the Company reached agreements with an affiliate of Jefferson Smurfit Group ("JS Group"), formerly SSCC's largest stockholder, to exchange, in two separate transactions, its European packaging operations for JS Group's 50% ownership in Smurfit-MBI, a Canadian packaging business, and approximately $189 million. The Company recorded a loss on disposition of discontinued European operations of $40 million arising from a provision for taxes on the disposition during the fourth quarter of 2002. Net sales for the European operations were $192 million for the three months ended March 31, 2003. The results of operations from the European operations were reclassified to discontinued operations.

        On March 31, 2003, the Company completed these exchange transactions resulting in no additional adjustments to the Company's results of operations. Previously, the Company owned 50% of Smurfit-MBI, and as a result of the completed transactions now owns 100% of Smurfit-MBI. Smurfit-MBI operates 16 converting facilities in Canada and employs approximately 2,500 hourly and salaried employees. The results of operations have been included in the consolidated statement of operations after March 31, 2003. The cost to acquire the remaining 50% of Smurfit-MBI of $137 million, including $26 million of debt assumed, has been allocated to the assets acquired and liabilities assumed according to fair values. The purchase price allocation resulted in acquired goodwill of $94 million, including a reclassification of $52 million associated with the Company's original 50% investment, and intangible assets of $45 million which were allocated to the Containerboard and Corrugated Containers segment.

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5.    Transfers of Financial Assets

        On March 30, 2004, the Company, through Smurfit-MBI, entered into an accounts receivable securitization program whereby the Company sells, without recourse, on an ongoing basis, certain of its Canadian accounts receivable to a trust in which the Company holds a variable interest, but is not the primary beneficiary. Accordingly, under Financial Accounting Standards Board ("FASB") Interpretation No. 46, "Consolidation of Variable Interest Entities," accounts receivable sold to the trust, for which the Company is not the primary beneficiary, are not included in the accompanying consolidated balance sheet. The Company has retained servicing responsibilities and a subordinated interest in future cash flows from the receivables. The Company receives rights to future cash flows arising after the investors in the securitization trust have received the return for which they have contracted. The investors and securitization trust have no recourse to the Company's other assets, except the Company's subordinated interest, for failure of debtors to pay when due.

        At June 30, 2004, $63 million of accounts receivable had been sold under the program, of which $25 million were retained by the Company as a subordinated interest and recorded in accounts receivable in the accompanying consolidated balance sheet.

6.    Asset Retirement Obligation

        Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. The Company's asset retirement obligations relate primarily to environmental requirements upon closure of an operating facility. Certain of the Company's facilities have indeterminate lives because they are expected to remain in operation for the foreseeable future. Consequently, the asset retirement obligations related to these facilities cannot be reasonably estimated.

        Upon adoption of SFAS No. 143, the Company recorded an increase in net property, plant and equipment of $2 million, an asset retirement obligation liability of $10 million and a charge for the cumulative effect of an accounting change of $5 million, net of income taxes of $3 million. The net cumulative effect charge reflected the offset of a $5 million accrual recorded under the Company's previous accounting for landfills.

7.    Restructuring and Exit Liabilities

        As part of the Company's continued overall strategy to rationalize operations and cut costs in response to market conditions, the Company closed seven converting facilities and planned to exit its Indonesian operations resulting in restructuring charges of $2 million and $17 million for the three and six months ended June 30, 2004, respectively. The assets of these facilities were adjusted to the estimated net realizable value resulting in a $7 million non-cash write-down. The remaining charges are primarily severance and benefits resulting from approximately 850 employees being terminated. The net sales and operating losses of these facilities in 2004 prior to closure were $38 million and $5 million, respectively. The net sales and operating losses of these facilities for the year ended December 31, 2003 were $134 million and $10 million, respectively. The Company had $5 million of cash disbursements related to these charges for the three and six months ended June 30, 2004.

        At December 31, 2003, the Company had $51 million of exit liabilities related to the restructuring of operations. The Company had $3 million and $13 million of cash disbursements related to these exit liabilities for the three and six months ended June 30, 2004, respectively.

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        The Company recorded restructuring charges of $1 million and $6 million in the three and six months ended June 30, 2003, respectively, related to the closure of three converting facilities.

8.    Other, Net

        For the three and six months ended June 30, 2004, the Company recorded foreign currency exchange gains of approximately $7 million and $10 million, respectively, related to its operations in Canada. For the three and six months ended June 30, 2003, the Company recorded foreign currency exchange losses of approximately $20 million and $36 million, respectively.

9.    Long-Term Debt

        In April 2004, Stone and JSC(U.S.) obtained amendments from their lender groups easing certain financial covenant requirements under their bank credit agreements as of March 31, 2004, and for future periods through December 31, 2004. Stone and JSC(U.S.) expect to remain in compliance with all of the covenants in their credit agreements.

        In March 2004, Stone used $38 million of proceeds received from the Smurfit-MBI securitization program (See Note 5) primarily to prepay a portion of its outstanding Tranche C term loan due June 30, 2009.

        In May 2003, JSC(U.S.) completed an offering of $300 million of 7.50% unsecured senior notes due 2013. The Company used the proceeds of this issuance to repay the $175 million Tranche A term loan borrowings and $122 million of the outstanding Tranche B term loan borrowings under the JSC(U.S.) credit agreement. A loss of $2 million was recorded due to early extinguishment of debt.

        In March 2003, Stone repaid $190 million of the Tranche C term loan due October 1, 2003 and $7 million of the Tranche B term loan due June 30, 2009 from proceeds received from the sale of the European operations (See Note 4) and other asset sales. A loss of $1 million was recorded due to the early extinguishments of debt.

10.   Guarantees

        Effective January 1, 2003, the Company adopted FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which clarifies and expands on existing disclosure requirements for guarantees and requires the Company to recognize a liability for the fair value of its obligations under that guarantee.

        The Company has certain wood chip processing contracts, entered into prior to January 1, 2003, extending from 2010 through 2018 with minimum purchase commitments. As part of the agreements, the Company guarantees the third party contractor's debt outstanding and has a security interest in the chipping equipment. At June 30, 2004, the maximum potential amount of future payments related to these guarantees is approximately $46 million and decreases ratably over the life of the contracts. Proceeds from the liquidation of the chipping equipment would be based on current market conditions and may not recover in full the guarantee payments made.

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11.    Employee Benefit Plans

        The Company sponsors noncontributory defined benefit pension plans covering substantially all U.S. employees. The Company also sponsors noncontributory and contributory defined benefit pension plans for its Canadian operations.

        The Company's postretirement plans provide certain health care and life insurance benefits for all salaried as well as certain hourly employees.

        The components of net periodic benefit costs for the defined benefit plans and the components of the postretirement benefit costs are as follows:

        The Company's 2004 expected contributions to its qualified defined benefit plans, non-qualified defined benefit plans and postretirement plans are not expected to be materially different from the amounts disclosed at December 31, 2003.

        In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003, (the "Act") was enacted. The Act introduced a prescription drug benefit under Medicare Part D as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Under FASB Financial Staff Position ("FSP") 106-1, issued in January 2004, related to the Act, the Company elected to defer recognizing the effects of the Act on its accumulated postretirement benefit obligation ("APBO") and net periodic postretirement benefit costs until pending authoritative guidance on the accounting for the federal subsidy is issued.

        In February 2004, the FASB proposed FSP No. FAS 106-b, which provides guidance on the accounting for the effects of the Act and also requires employers to provide certain disclosures provided by the Act. Under FSP No. FAS 106-b, the Company would be required to determine by the end of the first interim period beginning after June 15, 2004, whether its retiree drug coverage is actuarially equivalent to the Medicare Part D coverage. If its plans are actuarially equivalent to Medicare Part D, the Company must reflect the value of the subsidy in the APBO, service cost and amortization of gains and losses, retroactive to January 1, 2004. The Company has determined that certain of its plans are actuarially equivalent to Medicare Part D and estimates the impact of the Act would reduce its APBO as of December 31, 2003 by approximately $13 million. The Company's postretirement benefit costs would be reduced by approximately $2 million in 2004. The Company will recognize the effects of adopting the Act during the third quarter of 2004.

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12.   Non-Consolidated Affiliates

        The Company has several non-consolidated affiliates that are engaged in paper and packaging operations that are accounted for under the equity method.

        Prior to the Company's acquisition of the remaining 50% interest from JS Group on March 31, 2003 (See Note 4), Smurfit-MBI was accounted for as an equity affiliate and, as such, its results are included in the 2003 summarized financial information below through March 31, 2003. Smurfit-MBI had net sales of $110 million for the three months ended March 31, 2003.

        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:

13.    Derivative Instruments and Hedging Activities

        SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, SFAS No. 138 and SFAS No. 149, 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 exposure to fluctuations in the price of commodities used and sold in its operations and the movement in foreign currency exchange rates and are designated as cash flow hedges.

Commodity Futures 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 or cap 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 of the hedged item. As of June 30, 2004, 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 30 months. For the three and six months ended June 30, 2004, the Company reclassified an immaterial amount from OCI to cost of goods sold when the hedged items were recognized.

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        The fair value of the Company's futures contracts at June 30, 2004 is a $7 million gain included in other current assets. At June 30, 2004, the Company recorded a $1 million loss in cost of goods sold on natural gas futures contracts, related to the ineffective portion of the change in fair value of certain contracts and contracts not qualifying for hedge accounting.

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 one year or less. The fair value of the Company's foreign currency forward contracts at June 30, 2004 is a $1 million gain included in other current assets. The change in fair value of these contracts is recorded in OCI until the underlying transaction is recorded.

        The cumulative deferred hedge gain on all commodity and foreign currency contracts is $1 million (net of tax) at June 30, 2004. The Company expects to reclassify $1 million into cost of goods sold during the remainder of 2004.

14.    Income Taxes

        In the second quarter of 2003, the Company recorded an income tax benefit of $12 million related to the resolution of certain prior year tax matters.

15.   Comprehensive Income (Loss)

        Comprehensive income (loss) is as follows:

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16.   Earnings Per Share

        The following table sets forth the computation of basic and diluted earnings per share:

        For the three and six months ended June 30, 2004 and 2003, SSCC preferred stock that is convertible into three million shares of common stock with an earnings effect of $3 million and $6 million, respectively, is excluded from the diluted earnings per share computation because it is antidilutive.

        For the three and six months ended June 30, 2004 and 2003, employee stock options are excluded from the diluted earnings per share calculation because they are antidilutive.

17.   Restricted Stock

        In February 2004, the Company issued approximately 152,000 vested restricted stock units and approximately 33,000 related premium restricted stock units in accordance with its 2003 management incentive plan to settle its 2003 incentive plan liability.

        The premium restricted stock units vest in three years, in accordance with the 2003 management incentive plan. When these non-vested premium restricted stock units are issued, unamortized restricted stock compensation is recorded as a reduction of stockholders' equity, and charged to expense over the vesting period.

18.   Business Segment Information

        The Company has two reportable segments: (1) Containerboard and Corrugated Containers and (2) Consumer Packaging. 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 Consumer Packaging segment is also highly integrated. It includes a system of mills and plants that

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produce a broad range of coated recycled boxboard that is converted into folding cartons and packaging labels. In addition, the Consumer Packaging segment converts kraft and specialty paper into multiwall bags, consumer bags and intermediate bulk containers. 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. The Consumer Packaging segment also produces flexible packaging, paper and metalized paper labels and heat transfer labels used in a wide range of consumer applications. The bags and intermediate 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 Company evaluates performance and allocates resources based on profit or loss from operations before income taxes, interest expense and other non-operating gains and losses. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Company's 10-K. Intersegment sales and transfers are recorded at market prices.

        The Company's reportable segments are strategic business units that offer different products. The reportable segments are each managed separately because they manufacture distinct products. Other includes corporate related items and two nonreportable segments, including Reclamation and International. Corporate related items include expenses not allocated to reportable segments including corporate expenses, restructuring charges, non-cash foreign currency gains or losses and interest expense.

        A summary by business segment follows:

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19.    Contingencies

        In November 2003, the Company reached an agreement to settle the antitrust class action cases pending against the Company, Stone and JSC(U.S.), which were based on allegations of a conspiracy among containerboard manufacturers in 1993-95. The Companies agreed to make aggregate settlement payments of $92.5 million, one-half of which were paid in December 2003 and the remainder of which will be paid in January 2005. All of the other defendants have also entered into agreements to settle these class actions; however, most of the defendants in the class actions continue to be defendants in twelve lawsuits brought on behalf of numerous parties that have opted out of the class actions to seek their own recovery. The Company recorded pretax charges of $121 million in 2003 to accrue for the class action settlement and estimated liability of the opt-out cases. The Company believes the liability for these matters was adequately reserved at June 30, 2004.

        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. As of June 30, 2004, the Company had approximately $28 million reserved for environmental liabilities included primarily in other long-term liabilities in the consolidated balance sheet. The Company believes the liability recorded for these matters was adequately reserved at June 30, 2004.

        If all or most of the other PRPs are unable to satisfy their portion of the cleanup costs at one or more of the significant sites in which the Company is involved or the Company's expected share increases, the resulting liability could have a material adverse effect on the Company's consolidated financial condition or results of operations.

        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.

20.    Subsequent Event

        In July 2004, Stone, through a wholly-owned subsidiary, completed an offering of $200 million of 7.375% unsecured senior notes due 2014. In the third quarter of 2004, Stone will use the proceeds of this issuance to redeem at par the $185 million aggregate principal 11.5% senior notes due August 15, 2006 and prepay approximately $12 million of secured Tranche B term loan due June 30, 2009 outstanding under its credit agreement. In addition, Stone expects to use the proceeds to pay fees and other expenses of approximately $3 million related to this transaction.

        In connection with this new offering, the Company announced its plans to merge the operations of Stone and JSC(U.S.) in the near future, principally to simplify and consolidate debt financing activities. The Company expects that JSCE, Inc. will merge with and into JSC(U.S.), with JSC(U.S.) as the surviving company, prior to the planned merger of Stone and JSC(U.S.). Stone and JSC(U.S.) are direct or indirect wholly-owned subsidiaries of SSCC and, therefore, this planned merger would not impact the SSCC consolidated financial statements. The planned merger will not occur unless Stone and JSC(U.S.) are able to obtain a new combined bank credit agreement that would replace their current bank credit agreements.

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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 Smurfit-Stone Container Corporation or its management, are intended to identify such forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties. There are important factors that could cause actual results to differ materially from those in forward-looking statements, certain of which are beyond our control. These factors, risks and uncertainties include the following:

•

the impact of general economic conditions in North America and in other locations in which we currently do business;



•

general industry conditions, including competition and product and raw material prices;



•

fluctuations in interest rates, exchange rates and currency values;



•

unanticipated capital expenditure requirements;



•

legislative or regulatory requirements, particularly concerning environmental matters;



•

access to capital markets;



•

assumptions relating to pension and postretirement costs;



•

assumptions relating to cost savings expected from rationalization;



•

fluctuations in energy cost;



•

fluctuations in wood fiber and reclaimed fiber costs;



•

our substantial leverage; and



•

obtaining required consents or waivers of creditors in the event we are unable to satisfy covenants in our debt instruments.

        Our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what impact they will have on our results of operations or financial condition. We expressly decline any obligation to publicly revise any forward-looking statements that have been made to reflect the occurrence of events after the date hereof.

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RESULTS OF OPERATIONS

Overview

        For the second quarter of 2004, we had a net loss available to common stockholders of $10 million, or $.04 per diluted share. Our results were comparable to the net loss available to common stockholders of $8 million, or $.03 per diluted share, for the second quarter of 2003.

        The second quarter results improved compared to the net loss available to common stockholders of $66 million in the first quarter of 2004, reflecting several favorable trends. The economic recovery in the United States is having a positive effect on the packaging industry. Although markets remain highly competitive, containerboard and corrugated container prices have improved. In addition, the fundamentals for our business are improving: shipments have increased, mill operating rates were high, inventories remained lean and key costs have stabilized. Cost reduction initiatives also contributed to our improved results.

        For the six months ended June 30, 2004, we had a net loss available to common stockholders of $76 million, or $.30 per diluted share as compared to a net loss available to common stockholders of $41 million, or $.17 per diluted share for the same period last year. The decline compared to last year was due primarily to lower pricing for corrugated containers and higher fiber cost.

Second Quarter 2004 Compared to Second Quarter 2003

(1)

Amounts include corporate expenses, corporate charges to segments for working capital interest and other expenses not allocated to segments.

        Net sales of $2,038 million in 2004 increased by 2.5% compared to last year due primarily to higher sales volume and higher sales prices for reclaimed fiber. The change in net sales for each of our segments is summarized in the chart below:

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        Cost of goods sold increased due primarily to higher product shipments and higher costs, including reclaimed fiber ($28 million) and wood fiber ($5 million). Cost of goods sold as a percent of net sales increased from 86% in 2003 to 87% in 2004 due primarily to the higher costs of reclaimed fiber and wood fiber.

        Selling and administrative expense as a percent of net sales in 2004 was comparable to 2003. Selling and administrative expenses in 2003 were favorably impacted by an $11 million litigation settlement with respect to Chesapeake Corporation's environmental indemnification obligation regarding our West Point, Virginia containerboard mill. Exclusive of the legal settlement, selling and administrative expenses declined compared to 2003, primarily as a result of lower personnel costs.

        We recorded restructuring charges of $2 million during the second quarter of 2004 related to the closure of three converting facilities. The charges were primarily for severance and benefits resulting from approximately 260 employees being terminated.

        Interest expense, net for 2004 was comparable to 2003.

        Other, net for 2004 included non-cash foreign currency exchange gains of $7 million compared to losses of $21 million in 2003. During the second quarter of 2004, the Canadian dollar weakened compared to the U.S. dollar, whereas in the second quarter of 2003, it had strengthened compared to the U.S. dollar.

        Benefit from income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to loss from continuing operations before income taxes and cumulative effect of accounting change due primarily to state income taxes and the effect of other permanent differences.

Containerboard and Corrugated Containers Segment

        Net sales increased by 2% due primarily to the increased demand for corrugated packaging. The price increases we announced in March and June of 2004 are taking hold, and containerboard and corrugated container prices have increased compared to the first quarter of 2004. Our prices were lower than the second quarter of 2003, however. The average domestic linerboard price decreased 2.0% compared to 2003. The average corrugated container price per thousand square feet (MSF) decreased by 1.5%. On a per ton basis, average corrugated container prices were flat compared to last year due to a reduction in basis weight. Price increases were also implemented on solid bleached sulfate (SBS) and market pulp, which increased those average prices by 2.8% and 4.8%, respectively, compared to 2003. Shipments of corrugated containers increased 2% compared to 2003 despite the shutdown of eight converting facilities since June 2003.

        Containerboard production increased by 1.4%. Our containerboard mills operated at an average rate of 95.0% of capacity in 2004, as compared to 90.4% in 2003. Production of SBS increased by 1% and market pulp increased by 15% due primarily to the timing of maintenance shutdowns.

        Profits decreased by $13 million due primarily to the lower average sales prices and higher cost of wood fiber, reclaimed fiber and employee benefits. Improvements in our mill operating rates and savings from our restructuring activities announced in the fourth quarter of 2003 partially offset the increases in cost.

Consumer Packaging Segment

        Net sales declined slightly in 2004 primarily as a result of lower folding carton shipments. The decline in folding carton shipments was partially offset by the addition of Arko Paper Products, Inc., which was acquired May 31, 2003. Shipments of laminated products were also lower as a result of a plant sale. The coated recycled boxboard mills operated at near 100% capacity in 2004 as compared to 94.8% in 2003, but production was lower by 4% due to the permanent closure of a paper machine. Folding carton shipments declined 3% overall and multiwall bag shipments were flat. Average selling prices for folding cartons and multiwall bags were generally flat. Profits increased by $3 million as a result of the improvements in the boxboard mill operating rates and benefits from cost control efforts.

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Other Operations

        Net sales increased by 28% due primarily to higher sales prices for reclamation products. The average price of old corrugated containers (OCC), our predominant grade of recycled fiber, was higher by approximately $20 per ton. Total tons of fiber reclaimed and brokered decreased by 3% as a result of the shutdown of three of our paper machines in the fourth quarter of 2003.

Six Months 2004 Compared to Six Months 2003

        The decline in our results was due to lower profit from our Containerboard and Corrugated Containers segment, primarily as a result of lower average sales prices and higher cost for fiber. Net sales of $3,980 million in 2004 increased by 3% compared to last year due primarily to Stone Container Corporation's acquisition of the remaining 50% of Smurfit-MBI on March 31, 2003. The change in net sales for each of our segments is summarized in the chart below:

        Cost of goods sold increased due primarily to the acquisition of Smurfit-MBI and higher costs including, reclaimed fiber ($54 million) and wood fiber ($16 million). Cost of goods sold as a percent of net sales increased from 86% in 2003 to 89% in 2004 due primarily to the lower average selling prices and the higher costs of reclaimed fiber and wood fiber.

        Selling and administrative expense as a percent of net sales was comparable to 2003. Selling and administrative expenses for 2004 include the additional cost resulting from the acquisition of Smurfit-MBI. Exclusive of Smurfit-MBI, selling and administrative expenses declined compared to 2003, primarily as a result of lower personnel costs.

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        We recorded restructuring charges of $17 million during the first quarter of 2004 related to the closure of seven converting facilities and the planned exit from of our Indonesian operation. The assets of these facilities were adjusted to the estimated net realizable value resulting in a $7 million non-cash write-down. The remaining charges were primarily for severance and benefits resulting from approximately 850 employees being terminated.

        The 2004 restructuring activities are a continuation of our restructuring strategy announced in the fourth quarter of 2003 to rationalize operations and cut costs in response to expected future market conditions. This rationalization process, when completed, is expected to result in annual savings of approximately $140 million. We have achieved the planned reduction of 1,400 positions in our workforce and, for the six months ended June 30, 2004, have realized approximately $80 million in savings from the headcount reductions, reduced fixed costs and process improvements.

        Interest expense, net for 2004 was comparable to 2003. The impact of lower average borrowings ($2 million) was offset by higher average interest rates ($2 million). Our overall average effective interest rate in 2004 was higher than 2003 by approximately 10 basis points.

        Other, net for 2004 included non-cash foreign currency exchange gains of $10 million compared to losses of $37 million in 2003. The Canadian dollar has weakened compared to the U.S. dollar in 2004, whereas it had strengthened compared to the U.S. dollar throughout most of 2003.

        Benefit from income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to loss from continuing operations before income taxes and cumulative effect of accounting change due primarily to state income taxes and the effect of other permanent differences.

Containerboard and Corrugated Containers Segment

        Net sales increased by 3% due primarily to higher shipments of corrugated containers resulting from the acquisition of Smurfit-MBI. Lower average sales prices partially offset the increase. The average domestic linerboard price decreased 5.5%. The average price per MSF for corrugated containers declined 3.3%. Average SBS and market pulp prices increased by 3.5% and 6.4%, respectively, compared to 2003. Our external sales of containerboard declined due to the higher integration level resulting from the acquisition of Smurfit-MBI. Shipments of corrugated containers increased 2.7% compared to 2003, exclusive of the Smurfit-MBI acquisition. The increase in shipments of corrugated containers was negatively impacted by the shutdown of ten operating facilities since January 2003.

        Containerboard production was flat compared to 2003. Our containerboard mills operated at an average rate of 93.2% of capacity in 2004, as compared to 90.3% in 2003. Production of kraft paper and market pulp increased by 7% and 6%, respectively. Production of SBS decreased by 11% due primarily to the timing of maintenance shutdowns.

        Profits decreased by $76 million due primarily to the lower average sales prices and higher costs of wood, reclaimed fiber and employee benefits. Improvements in our mill operating rates and savings from our restructuring activities partially offset the lower average sales prices and the increases in cost.

Consumer Packaging Segment

        Net sales were comparable to 2003, as higher shipments of multiwall bags and the addition of Arko Paper Products, Inc., were offset by the effects of lower average sales prices. The coated recycled boxboard mills operated at near 100% capacity in 2004 as compared to 95.4% in 2003, but production was lower by 4% due to the permanent closure of a paper machine. Folding carton shipments declined 2%, while multiwall bag shipments increased 1%. Shipments of laminated products declined as a result of a plant sale. Average folding carton and multiwall bag prices were lower by approximately 1% and 2%, respectively. Profits increased by $4 million as a result of the improvements in the boxboard mill operating rates and benefits from cost control efforts.

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Other Operations

        Net sales increased by 27% due primarily to higher sales prices for reclamation products. The average price of OCC was higher by approximately $25 per ton. Total tons of fiber reclaimed and brokered decreased by 3% as a result of the shutdown of three of our paper machines in the fourth quarter of 2003.

Statistical Data

LIQUIDITY AND CAPITAL RESOURCES

        The following table summarizes our cash flows for the six months ended June 30,: