**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549**

**FORM 10-Q**

**x****                             ****QuarterlyReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.**

**o****                                ****TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.**

**ForQuarter Ended March 31, 2007Commission File Number 1-3439**

**SMURFIT-STONECONTAINER ENTERPRISES, INC.**(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**  |
|--------------------------------------------------|--------|------------|
| (Address of  principal executive offices)        |   | (Zip Code) |

 

**(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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   Yes  x    No  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of theExchange Act):

| Large accelerated filer  o |   | Accelerated filer  o |   | Non-accelerated filer  x |
|--------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicateby check mark if the registrant is a shell company (as defined in Rule 12b-2 ofthe Act).  Yes  o    Nox

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of May 4, 2007, the registrant had outstanding 770 shares of commonstock, $.01 par value per share, all of which are owned by Smurfit-StoneContainer Corporation.

**The registrant meets the conditions set forth inGeneral Instruction (H) (1) (a) and (b) of Form 10-Q and is therefore filingthis form with the reduced disclosure format permitted thereby.**

 

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**PARTI—FINANCIAL INFORMATION**

**Item 1.    FinancialStatements**

**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**
| **Three Months Ended March 31, (In millions)** | ** ** | **2007**   | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Net sales                                                                    | ** ** | **$**      | **1,824**  |     | $          | 1,729 |   |
| Costs and expenses                                                           | ** ** | ** ** |       |     |       |
| Cost of goods  sold                                                          | ** ** | **1,610**  |       | 1,590    |       |
| Selling and  administrative expenses                                         | ** ** | **167**    |       | 173      |       |
| Restructuring  charges                                                       | ** ** | **24**     |       | 9        |       |
| Gain on sale of  assets                                                      |       |       |       | (23      | )          |
| Income (loss)  from operations                                               | ** ** | **23**     |       | (20      | )          |
| Other income (expense)                                                       |       |       |       |     |       |
| Interest  expense, net                                                       | ** ** | **(74**    | **)**      | (92      | )          |
| Loss on early  extinguishment of debt                                        | ** ** | **(23**    | **)**      |     |       |
| Other, net                                                                   | ** ** | **(12**    | **)**      | (3       | )          |
| Loss from  continuing operations before income taxes                         | ** ** | **(86**    | **)**      | (115     | )          |
| Benefit from income  taxes                                                   | ** ** | **34**     |       | 43       |       |
| Loss from  continuing operations                                             | ** ** | **(52**    | **)**      | (72      | )          |
| Discontinued operations                                                      |       |       |       |     |       |
| Income from  discontinued operations, net of income tax provision of $6      |       |       |       | 10       |       |
| Net loss                                                                     | ** ** | **$**      | **(52**    | **)**    | $          | (62 | ) |

 

See notes to consolidatedfinancial statements.

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(In millions, except share data)**                                                                     | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                   | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                   |       |               |       |                  |       |
| ** **                                                                                                                   |       |               |       |                  |       |
| Current assets                                                                                                               |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                   | ** ** | **$**              | **11**     |                  | $          | 9 |   |
| Receivables, less  allowances of $7 in 2007 and 2006                                                                         | ** ** | **178**            |       | 166                   |       |
| Retained  interest in receivables sold                                                                                       | ** ** | **189**            |       | 179                   |       |
| Inventories,  including amounts valued under LIFO method                                                                     |       |               |       |                  |       |
| Work-in-process  and finished goods                                                                                          | ** ** | **157**            |       | 155                   |       |
| Materials and  supplies                                                                                                      | ** ** | **397**            |       | 383                   |       |
|                                                                                                                         | ** ** | **554**            |       | 538                   |       |
| Prepaid expenses  and other current assets                                                                                   | ** ** | **31**             |       | 34                    |       |
| Total current  assets                                                                                                        | ** ** | **963**            |       | 926                   |       |
| Net property, plant and  equipment                                                                                           | ** ** | **3,725**          |       | 3,731                 |       |
| Timberland, less timber  depletion                                                                                           | ** ** | **43**             |       | 43                    |       |
| Goodwill                                                                                                                     | ** ** | **2,873**          |       | 2,873                 |       |
| Other assets                                                                                                                 | ** ** | **190**            |       | 203                   |       |
|                                                                                                                         | ** ** | **$**              | **7,794**  |                  | $          | 7,776 |   |
| **Liabilities and Stockholder’s  Equity**                                                                               |       |               |       |                  |       |
|                                                                                                                              |       |               |       |                  |       |
| Current liabilities                                                                                                          |       |               |       |                  |       |
| Current  maturities of long-term debt                                                                                        | ** ** | **$**              | **16**     |                  | $          | 84 |   |
| Accounts payable                                                                                                             | ** ** | **603**            |       | 542                   |       |
| Accrued  compensation and payroll taxes                                                                                      | ** ** | **171**            |       | 211                   |       |
| Interest payable                                                                                                             | ** ** | **63**             |       | 79                    |       |
| Income taxes  payable                                                                                                        | ** ** | **3**              |       | 2                     |       |
| Current deferred  income taxes                                                                                               | ** ** | **2**              |       | 2                     |       |
| Other current  liabilities                                                                                                   | ** ** | **132**            |       | 145                   |       |
| Total current  liabilities                                                                                                   | ** ** | **990**            |       | 1,065                 |       |
| Long-term debt, less  current maturities                                                                                     | ** ** | **3,723**          |       | 3,550                 |       |
| Other long-term  liabilities                                                                                                 | ** ** | **1,097**          |       | 1,010                 |       |
| Deferred income taxes                                                                                                        | ** ** | **354**            |       | 487                   |       |
| Stockholder’s equity                                                                                                    |       |               |       |                  |       |
| Common stock,  par value $.01 per share; 1,000 shares authorized, 770 issued and outstanding  in 2007 and 2006, respectively |       |               |       |                  |       |
| Additional  paid-in capital                                                                                                  | ** ** | **3,645**          |       | 3,635                 |       |
| Retained  earnings (deficit)                                                                                                 | ** ** | **(1,611**         | **)**      | (1,559                | )          |
| Accumulated  other comprehensive income (loss)                                                                               | ** ** | **(404**           | **)**      | (412                  | )          |
| Total  stockholder’s equity                                                                                             | ** ** | **1,630**          |       | 1,664                 |       |
|                                                                                                                         | ** ** | **$**              | **7,794**  |                  | $          | 7,776 |   |

 

See notes toconsolidated financial statements.

 

 

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**
| **Three Months Ended March 31, (In millions)**                  | ** ** | **2007**   | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| **Cash flows from operating  activities**                                                     | ** ** | ** ** |       |     |       |
|  Net loss                                                                                | ** ** | **$**      | **(52**    | **)**    | $          | (62 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used for) operating activities    |       |       |       |     |       |
| Loss on early  extinguishment of debt                                                         | ** ** | **23**     |       |     |       |
| Depreciation,  depletion and amortization                                                     | ** ** | **88**     |       | 100      |       |
| Amortization of  deferred debt issuance costs                                                 | ** ** | **2**      |       | 2        |       |
| Deferred income  taxes                                                                        | ** ** | **(38**    | **)**      | (55      | )          |
| Pension and  postretirement benefits                                                          | ** ** | **(4**     | **)**      | 23       |       |
| Gain on sale of  assets                                                                       |       |       |       | (23      | )          |
| Non-cash  restructuring charges                                                               | ** ** | **12**     |       | 5        |       |
| Non-cash stock  based compensation                                                            | ** ** | **6**      |       | 5        |       |
| Non-cash foreign  currency (gains) losses                                                     | ** ** | **5**      |       | (2       | )          |
| Change in  current assets and liabilities, net of effects from acquisitions and  dispositions |       |       |       |     |       |
| Receivables and  retained interest in receivables sold                                        | ** ** | **(21**    | **)**      | (39      | )          |
| Inventories                                                                                   | ** ** | **(16**    | **)**      | 8        |       |
| Prepaid expenses  and other current assets                                                    | ** ** | **4**      |       | (3       | )          |
| Accounts payable  and accrued liabilities                                                     | ** ** | **25**     |       | (70      | )          |
| Interest payable                                                                              | ** ** | **(16**    | **)**      | (18      | )          |
| Other, net                                                                                    | ** ** | **2**      |       | 10       |       |
| Net cash  provided by (used for) operating activities                                         | ** ** | **20**     |       | (119     | )          |
| **Cash flows from investing  activities**                                                     |       |       |       |     |       |
| Expenditures for  property, plant and equipment                                               | ** ** | **(96**    | **)**      | (56      | )          |
| Proceeds from  property disposals                                                             | ** ** | **2**      |       | 28       |       |
| Net cash used  for investing activities                                                       | ** ** | **(94**    | **)**      | (28      | )          |
| **Cash flows from financing  activities**                                                     |       |       |       |     |       |
| Proceeds from  long-term debt                                                                 | ** ** | **675**    |       |     |       |
| Net borrowings  (repayments) of long-term debt                                                | ** ** | **(571**   | **)**      | 147      |       |
| Debt repurchase  premiums                                                                     | ** ** | **(19**    | **)**      |     |       |
| Dividends paid                                                                                | ** ** | **(2**     | **)**      | (2       | )          |
| Capital  contribution from SSCC                                                               |       |       |       | 1        |       |
| Deferred debt  issuance costs                                                                 | ** ** | **(7**     | **)**      |     |       |
| Net cash  provided by financing activities                                                    | ** ** | **76**     |       | 146      |       |
|                                                                                          |       |       |       |     |       |
| **Increase (decrease) in cash and  cash equivalents**                                         | ** ** | **2**      |       | (1       | )          |
| Cash and cash  equivalents                                                                    |       |       |       |     |       |
| Beginning of  period                                                                          | ** ** | **9**      |       | 5        |       |
| End of period                                                                                 | ** ** | **$**      | **11**     |     | $          | 4 |   |

 

See notes toconsolidated financial statements.

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Tabularamounts in millions)

**1.****              SignificantAccounting Policies**

**Basisof Presentation: **Theaccompanying consolidated financial statements and notes thereto of Smurfit-StoneContainer Enterprises, Inc. (“SSCE” or the “Company”) have been prepared inaccordance with the instructions to Form 10-Q and reflect all adjustments whichmanagement believes necessary (which include only normal recurring accruals) topresent fairly the Company’s financial position, results of operations and cashflows.  These statements, however, do notinclude all information and footnotes necessary for a complete presentation offinancial position, results of operations and cash flows in conformity withU.S. generally accepted accounting principles. Interim results may not necessarily be indicative of results that may beexpected for any other interim period or for the year as a whole.  These financial statements should be read inconjunction with the audited consolidated financial statements and footnotesincluded in the SSCE Annual Report on Form 10-K for the year ended December 31,2006 (“2006 10-K”) filed February 28, 2007 with the Securities and ExchangeCommission.

SSCE is a wholly-owned subsidiary of Smurfit-StoneContainer Corporation (“SSCC”).  SSCE hasdomestic and international operations.

**Recently Adopted AccountingStandards: **EffectiveJanuary 1, 2007, the Company adopted the Financial Accounting Standards Board (“FASB”)Staff Position (“FSP”) No. AUG AIR-1 “Accounting for Planned Major MaintenanceActivities.”  This FSP prohibits the useof the accrue-in-advance method of accounting for planned major maintenanceactivities in annual and interim financial reporting periods.  The FSP requires retrospective application toall financial statements presented.  Thenew standard does not impact the Company’s annual 2006 financial statements;however, the impact on the Company’s previously reported 2006 first quarterloss from continuing operations and net loss is expense of $1 million, which isreflected in cost of goods sold in the Containerboard and Corrugated Containerssegment.

EffectiveJanuary 1, 2007, the Company adopted the provisions of FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”), aninterpretation of Statement of Financial Accounting Standards No. 109, “Accountingfor Income Taxes.”  FIN No. 48 creates asingle model to address accounting for uncertainty in tax positions andclarifies the accounting for income taxes by prescribing a minimum recognitionthreshold a tax position is required to meet before being recognized in thefinancial statements.  FIN No. 48 alsoprovides guidance on derecognition, measurement, classification, interest andpenalties, accounting in interim periods, disclosure and transition.  Upon adoption, the Company reduced itsexisting reserves for uncertain tax positions by $2 million.  This reduction was recorded as a cumulativeeffect adjustment to the retained deficit. As of January 1, 2007, the Company had $134 million of unrecognized taxbenefits, of which $38 million was classified as a reduction to the amount ofthe Company’s net operating loss carryforwards and $96 million was classifiedas a liability for unrecognized tax benefits and included in other long-termliabilities.  All unrecognized taxbenefits, if recognized, would affect the Company’s effective tax rate.

Uponadoption of FIN No. 48, the Company elected to classify interest and penaltiesrelated to unrecognized tax benefits in the Company’s income tax provision,consistent with the Company’s previous accounting policy.  Unrecognized tax benefits of $14 million forinterest and penalties are included as a component of the $134 million ofunrecognized tax benefits noted above. The interest was computed on the difference between the tax positionrecognized in accordance with FIN No. 48 and the amount previously taken orexpected to be taken in the Company’s tax returns, adjusted to reflect theimpact of net operating loss and other tax carryforward items  (See Note 12).

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EffectiveApril 1, 2006, the Company adopted Emerging Issues Task Force (“EITF”) IssueNo. 04-13, “Accounting for Purchases and Sales of Inventory With the SameCounterparty,” for new arrangements and modifications or renewals of existingarrangements.  EITF No. 04-13 requirescertain inventory buy/sell transactions between counterparties within the sameline of business to be viewed as a single exchange transaction.   EITF No. 04-13 required the Company toprospectively report, beginning in the second quarter of 2006, certaininventory buy/sell transactions of similar containerboard types in theContainerboard and Corrugated Containers segment on a net basis in theconsolidated statements of operations. Had the EITF been in effect, net sales and cost of goods sold would havebeen reduced by an additional $58 million for the first quarter of 2006.

**2.****              Reclassifications**

Certainprior year amounts have been reclassified to conform to the current yearpresentation.

**3.****              StrategicInitiatives and Restructuring Activities**

During 2005, the Companyannounced a strategic initiatives plan to improve performance and betterposition the Company for long-term growth. The plan focused on cost reduction and productivity initiatives fromwhich the Company expects to achieve $525 million in annual savings by the endof 2008.

In the first quarter of2007, in conjunction with the strategic initiatives plan, the Company closedthree converting facilities and announced the closure of three additionalconverting facilities.  The Companyreduced its headcount by approximately 730 employees due to plant closures andother strategic initiatives actions and recorded restructuring charges of $24million.  The restructuring chargesinclude non-cash charges of $12 million related to the acceleration ofdepreciation over the revised useful life of equipment expected to be abandonedor taken out of service.  The remainingcharges were primarily for severance and benefits.  The net sales of these facilities in 2007prior to closure and for the year ended December 31, 2006 were $12 million and$97 million, respectively.  The majorityof these net sales are expected to be transferred to other operatingfacilities.  Additional charges of up to$2 million will be recorded in future periods for severance and benefitsrelated to the closure of these converting facilities.

Subsequent to March 31,2007, the Company announced the closure of two containerboard mills (See Note17) and three additional converting facilities. Restructuring charges of approximately $3 million are expected relatedto the converting facilities.

Duringthe first quarter of 2006, the Company recorded restructuring charges of $9million, including non-cash charges of $5 million related to thewrite-down of assets, primarily property, plant and equipment, to estimated netrealizable value related to the announced closure of three convertingfacilities.  The remaining charges wereprimarily for severance and benefits.

At December 31, 2006, theCompany had $47 million of accrued exit liabilities related to therestructuring of operations.  During thefirst quarter of 2007, the Company incurred $11 million of cash disbursementsrelated to these exit liabilities.  In addition,for the three months ended March 31, 2007, the Company incurred $4 million ofcash disbursements related to exit liabilities established during 2007.

**4.****              DiscontinuedOperations**

On June 30, 2006, theCompany completed the sale of substantially all of the assets of its ConsumerPackaging division for $1.04 billion. The Consumer Packaging division was a reportable segment of the Companycomprised of four coated recycled boxboard mills, 39 consumer packaging operationsin the 

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United States, includingfolding carton, multiwall and specialty bag, flexible packaging, label,contract packaging and lamination businesses and one consumer packaging plantin Brampton, Ontario.   Net sales forthese operations were $396 million for the three months ended March 31,2006.  These facilities employedapproximately 6,600 hourly and salaried employees.  The results of operations for the ConsumerPackaging segment have been reclassified as discontinued operations for thefirst quarter of 2006.

**5.****              Gainon Sale of Assets**

The Company recorded again of $23 million in the first quarter of 2006 related to the divestiture ofits Port St. Joe, Florida joint venture interest and related real estate.

**6.****              Other,Net**

For the three monthsended March 31, 2007 and 2006, the Company recorded non-cash foreign currencylosses of $5 million and gains of $2 million, respectively, related to itsoperations in Canada.

**7.  Accounts Receivable Securitization Programs**

AtMarch 31, 2007 and December 31, 2006, $633 million and $590 million, respectively,of receivables had been sold under two accounts receivable securitizationprograms, of which the Company retained a subordinated interest.  The off-balance sheet debt related to the twoaccounts receivable programs totaled $449 million and $448 million,respectively, as of those dates.

**8.  Guarantees and Commitments**

The Company has certain wood chipprocessing contracts extending from 2012 through 2018 with minimum purchasecommitments.  As part of the agreements,the Company guarantees the third party contractors’ debt outstanding and has asecurity interest in the chipping equipment. At March 31, 2007, the maximum potential amount of future paymentsrelated to these guarantees was approximately $33 million and decreases ratablyover the life of the contracts.  In theevent the guarantees on these contracts were called, proceeds from theliquidation of the chipping equipment would be based on current marketconditions and the Company may not recover in full the guarantee payments made.

In 2006, the Companyentered into an agreement to guarantee a portion of a third party’s debt indecreasing amounts through January 2010. The guarantee was entered into in connection with the third party’sprogress payment financing for the purchase and installation of machinery andequipment for the conversion of corrugated containerboard.  The Company and the third party are partiesto a supply agreement through 2021, whereby the Company sells containerboard tothe third party, and a purchase agreement through 2014, whereby the third partysells corrugated sheets to the Company. At March 31, 2007, the maximum potential amount of the future paymentsrelated to this guarantee was approximately $12 million, and decreases as the thirdparty’s contractual financial targets are met. The Company has no recourse to the assets of the third party, other thanthat of a general unsecured creditor. The fair value of this guarantee at March 31, 2007 was an immaterialamount and is included in other assets, with an offset in other long-termliabilities in the accompanying consolidated balance sheets.

The Company iscontingently liable for $18 million under a one year letter of credit issued inApril 2007 to support borrowings of one of the Company’s non-consolidatedaffiliates.  The letter of credit iscollateralized by a pledge of affiliate stock owned by the other shareholder inthe event the letter of credit 

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is drawn upon and theother shareholder is unable to reimburse the Company for their 50% share of theletter of credit obligation.

**9.  Long-Term Debt**

On March 12, 2007,the Company commenced a cash tender offer to purchase all of the $648 millionof 9.75% senior notes due 2011 (the “9.75% Senior Notes”) for totalconsideration equal to 103.5% of the principal amount plus accrued interest.

On March 26, 2007, theCompany completed an offering of $675 million of 8.00% unsecured senior notesdue March 15, 2017 (the “8.00% Senior Notes”). The Company used the proceeds of this issuance to repay $546 million of9.75% Senior Notes, which were purchased in connection with the cash tenderoffer, pay related tender premiums and accrued interest of $19 million and $8million, respectively, and repay $95 million of the Company’s revolving creditfacility.  In addition, the Company used theproceeds to pay fees and expenses of $7 million related to thistransaction.  A loss on earlyextinguishment of debt of $23 million was recorded, including $19 million fortender premiums and a $4 million write-off of unamortized deferred debtissuance costs.

The 8.00% Senior Notesare redeemable in whole or in part at the option of the Company beginning onMarch 15, 2012 at a price of 104.0% of their principal amount, plusaccrued interest. The redemption price will decline each year after 2012 and,beginning on March 15, 2015, will be 100% of their principal amount plusaccrued interest.

On May 9th, 2007, theCompany redeemed the remaining $102 million of the 9.75% Senior Notes at aredemption price of 103.25% plus accrued interest.  Borrowings under the Company’s revolvingcredit facility were used to redeem the notes and pay related call premiums andaccrued interest.

On March 30, 2007,the Company used approximately $66 million in borrowings against the revolvingcredit facility, together with an escrow balance of $3 million, to prepay the$69 million outstanding aggregate principal balance of the Company’s 8.45%mortgage notes, which were payable on September 1, 2007.

**10.  Employee Benefit Plans**

The Company sponsorsnoncontributory defined benefit pension plans for its U.S. employees and alsosponsors noncontributory and contributory defined benefit pension plans for itsCanadian employees.  The Company’sdefined benefit pension plans cover substantially all hourly employees, as wellas salaried employees hired prior to January 1, 2006.

The Company’spostretirement plans provide certain health care and life insurance benefitsfor all retired salaried and certain retired hourly employees, and for salariedand certain hourly employees who have reached the age of 60 with 10 years ofservice as of January 1, 2007.

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The components ofnet periodic benefit costs for the defined benefit plans and the components ofthe postretirement benefit costs, including the discontinued operations of theConsumer Packaging division during 2006 (See Note 4) are as follows:
|                                               | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **Defined  Benefit Plans**                      | ** ** | **Postretirement  Plans** | ** ** |
| ** **                                    | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                                  |       | $                                                    | 14         |   | $ | 20 |   | $ | 1 |   | $ | 1 |   |
| Interest cost                                 |       | 49                                                   |       | 48 |   | 3 |   | 4 |   |
| Expected return  on plan assets               |       | (58                                                  | )          | (55 | ) |   |   |   |   |
| Amortization of  prior service cost (benefit) |       | 2                                                    |       | 2 |   | (1 | ) | (1 | ) |
| Amortization of  net loss                     |       | 15                                                   |       | 21 |   | 1 |   | 1 |   |
| Settlements                                   |       | 1                                                    |       | 2 |   |   |   |   |   |
| Multi-employer  plans                         |       | 1                                                    |       | 2 |   |   |   |   |   |
| Net periodic benefit  cost                    |       | $                                                    | 24         |   | $ | 40 |   | $ | 4 |   | $ | 5 |   |

 

The Company’s 2007expected contributions to its qualified defined benefit plans and benefitpayments to its non-qualified defined benefit plans and postretirement plansare not expected to be materially different from the amounts disclosed atDecember 31, 2006.

The 2007 and 2006settlement charges are related to closed facilities and are included as part ofrestructuring charges (See Note 3).

**11.  Derivative Instruments and HedgingActivities**

The Company’s derivativeinstruments used for its hedging activities are designed as cash flow hedgesand relate to minimizing exposures to fluctuations in the price of commoditiesused in its operations, the movement in foreign currency exchange rates and thefluctuations in the interest rate on variable rate debt.

**Commodity Derivative Instruments**

The Company uses derivative instruments, including fixed price swaps andoptions, to manage fluctuations in cash flows resulting from commodity pricerisk in the procurement of natural gas and other commodities, including fueland heating oil.  The objective is to fixthe price of a portion of the Company’s purchases of these commodities used inthe manufacturing process.  The changesin the market value of such derivative instruments have historically offset,and are expected to continue to offset, the changes in the price of the hedgeditem.  As of March 31, 2007, the maximumlength of time over which the Company is hedging its exposure to the variabilityin future cash flows associated with the commodities’ forecasted transactionswas 21 months.

For the three months ended March 31, 2007 and 2006, the Companyreclassified a $5 million loss (net of tax) and a $1 million gain (net of tax),respectively, from other comprehensive income (“OCI”) to cost of goods soldwhen the hedged items were recognized. The fair value of the Company’s commodity derivative instruments atMarch 31, 2007 was an $8 million liability, of which $6 million was included inother current liabilities and $2 million was included in other long-termliabilities.

For the three months ended March 31, 2007 and 2006, the Company recordeda $3 million gain (net of tax) and a $5 million loss (net of tax),respectively, in cost of goods sold related to the change in fair value ofcertain commodity derivative instruments not qualifying for hedge accounting.

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For the three months ended March 31, 2007 and 2006, the Company recordeda $4 million loss (net of tax) and a $1 million loss (net of tax),respectively, in cost of goods sold on settled commodity derivative instrumentsrelated to commodity derivative instruments not qualifying for hedgeaccounting.

**Foreign Currency Derivative Instruments**

The Company’s principal foreign exchange exposure isthe Canadian dollar.  The Company usesforeign currency derivative instruments, including forward contracts and options,primarily to protect against Canadian currency exchange risk associated withexpected future cash flows.  As of March31, 2007, the maximum length of time over which the Company was hedging itsexposure to the variability in future cash flows associated with foreigncurrency exchange risk is 16 months.  Forthe three months ended March 31, 2007 and 2006, the Company reclassified a $1million loss (net of tax) and a $1 million gain (net of tax), respectively,from OCI to cost of goods sold related to the recognition of the foreigncurrency derivative instruments.  Thechange in fair value of these derivative instruments is recorded in OCI untilthe underlying transaction is recorded. The fair value of the Company’s foreign currency derivative instruments atMarch 31, 2007 was a $2 million asset, included in prepaid expenses and othercurrent assets.

**Interest Rate Swap Contracts**

The Company uses interest rate swap contracts to manageinterest rate exposure on $300 million of the current Tranche B and Tranche Cfloating rate bank term debt, effectively fixing the interest rate at4.3%.  These contracts extend until 2011,consistent with the maturity of the Company’s Tranche B and Tranche C termloans.  Changes in the fair value of theinterest rate swap contracts are expected to be highly effective in offsettingthe fluctuations in the floating interest rate and are recorded in OCI untilthe underlying transaction is recorded. The accounting for the cash flow impact of the swap contracts isrecorded as an adjustment to interest expense each period.  For the three months ended March 31, 2007 and2006, the Company reclassified a $1 million gain (net of tax) and an immaterialamount, respectively, from OCI to interest expense when the hedged items wererecognized.  The fair value of theCompany’s interest rate swap contracts at March 31, 2007 was an $8 millionasset included in other assets.

**Deferred Hedge Gain (Loss)**

The cumulative deferred hedge loss on all derivativeinstruments was an immaterial amount at March 31, 2007, including a $4 millionloss (net of tax) on commodity derivative instruments, an immaterial amount onforeign currency derivative instruments and a $4 million gain (net of tax) oninterest rate swap contracts.  TheCompany expects to reclassify a $4 million loss (net of tax) into cost of goodssold within the next 12 months, related to the commodity and foreign currencyderivative instruments.

**12.  Income Taxes**

Duringthe first quarter of 2007, an additional $2 million of unrecognized tax benefitswas recorded related to a tax position taken during the current year andinterest on unrecognized tax benefits previously recorded.

TheCanada Revenue Agency (“CRA”) is currently examining the tax years 1999 through2005.  In connection with the examinationof the Company’s 1999 and 2000 Canadian income tax returns, the CRA hasproposed certain significant adjustments to taxable income related to theacquisition of a Canadian company and to transfer prices of inventory sold bythe Company’s Canadian subsidiaries to its U.S. subsidiaries.  These matters may be resolved at theexamination level or subsequently upon appeal within the next twelvemonths.  While the final outcome of theexamination or subsequent appeal, including an estimate of the range of thereasonably possible changes to unrecognized tax benefits, is not yetdeterminable, the Company believes that the examination will not have amaterial adverse effect on its consolidated financial condition or results ofoperations.

TheCompany has settled the Internal Revenue Service examinations of tax yearsthrough 2003.  However, the statute oflimitations has not yet expired for the tax years 1999 through 2003.  There are currently no 

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federalexaminations in progress.  In addition,the Company files tax returns in numerous states.  The states’ statutes of limitations aregenerally open for the same years as the federal statute of limitations.

**13.  Comprehensive Income (Loss)**

Comprehensiveincome (loss) is as follows:
|                                                    | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Net loss                                           |       | $                                                    | (52        | ) | $ | (62 | ) |
| Other  comprehensive income (loss), net of tax:    |       |                                                 |       |   |   |
| Net changes in fair value of hedging instruments   |       | 3                                                    |       | (9 | ) |
| Net hedging (gain) loss reclassified into earnings |       | 5                                                    |       | (2 | ) |
| Foreign currency translation adjustment            |       |                                                 |       | (1 | ) |
| Comprehensive income  (loss)                       |       | $                                                    | (44        | ) | $ | (74 | ) |

 

**14.  Stock-Based Compensation**

Certainofficers and key managers of the Company participate in various stock-basedcompensation plans sponsored by SSCC, which issues stock options and restrictedstock units (“RSUs”).  During the firstquarter of 2007, the Company granted 820,000 SSCC stock options to certainemployees with a weighted-average exercise price and grant date fair value of$12.64 and $4.67, respectively.  Theseoptions vest and become exercisable on the third anniversary of the awarddate.  Compensation expense is beingrecorded over the three-year period on a straight-line basis.  The Company also granted 110,000 SSCCperformance-based stock options to certain management level employeesresponsible for implementing the strategic initiatives plan with aweighted-average exercise price and grant date fair value of $11.70 and $3.99,respectively.  Vesting of theperformance-based options is dependent upon the financial performance of theCompany and the attainment of the strategic initiatives savings through2008.  Compensation expense is beingrecorded over the remaining strategic initiatives period based on theachievement of the performance criteria.

TheCompany also issued approximately 295,000 non-vested SSCC RSUs to certainemployees with a weighted average grant date fair value of $12.58 per RSU.  In addition, the Company issued approximately334,000 vested SSCC RSUs and approximately 67,000 related premium non-vested SSCCRSUs at $10.83 per RSU to settle its 2006 management incentive plan liability,which had been accrued for in the prior year. The non-vested SSCC RSUs vest in three years, in accordance with theCompany’s applicable management incentive plan and long-term incentive plan.

**15.  Business Segment Information**

The Company’s ConsumerPackaging segment, which was sold as of June 30, 2006 (See Note 4), has beenclassified as discontinued operations and is excluded from the segmentresults.  As a result, the Company hasone reportable segment, Containerboard and Corrugated Containers.  Two operating facilities of the ConsumerPackaging segment, which were not included as part of the sale transaction,were reclassified to the Containerboard and Corrugated Containers segment forall periods presented.  TheContainerboard and Corrugated Containers segment is highly integrated.  It includes a system of mills and plants thatproduces a full line of containerboard that is converted into corrugatedcontainers.  It also provides singlesource full merchandising solutions to retailers and consumer packagingcompanies.  Corrugated containers areused to transport such diverse products as home appliances, electric motors,small machinery, grocery products, produce, books, tobacco and furniture.

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The Company evaluatesperformance and allocates resources based on profit or loss from operationsbefore income taxes, interest expense and other non-operating gains andlosses.  The accounting policies of thereportable segment are the same as those described in the summary ofsignificant accounting policies in the 2006 10-K.  Intersegment sales and transfers are recordedat market prices.

Other includes corporaterelated items and one non-reportable segment, Reclamation.  Corporate related items include expenses notallocated to the reportable segment including corporate expenses, restructuringcharges, unrealized gains or losses on derivative instruments not qualifyingfor hedge accounting, non-cash foreign currency gains or losses, gains orlosses from the sale of business or real estate and interest expense.  Effective January 1, 2007, the Companyrevised its internal reporting to discontinue charging working capital interestto its operating segments.  As a result,the 2006 first quarter segment profit (loss) has been restated by $16 millionto conform to the current year presentation.

A summary by businesssegment follows:
| ** **                       | ** ** | **Containerboard  & Corrugated  Containers** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Three months  ended March 31,    |       |                                                  |       |      |       |      |       |
| 2007                             |       |                                                  |       |      |       |      |       |
| Revenues from external customers |       | $                                                     | 1,690      |      | $          | 134       |       | $ | 1,824 |   |
| Intersegment revenues            |       |                                                  |       | 81        |       | 81        |       |
| Segment profit (loss)            |       | 92                                                    |       | (178      | )          | (86       | )          |
|                             |       |                                                  |       |      |       |      |       |
| 2006                             |       |                                                  |       |      |       |      |       |
| Revenues from external customers |       | $                                                     | 1,646      |      | $          | 83        |       | $ | 1,729 |   |
| Intersegment revenues            |       |                                                  |       | 45        |       | 45        |       |
| Segment profit  (loss)           |       | 25                                                    |       | (140      | )          | (115      | )          |

 

**16. Contingencies**

The Company’s past andpresent operations include activities which are subject to federal, state andlocal environmental requirements, particularly relating to air and waterquality.  The Company faces potentialenvironmental liability as a result of violations of permit terms and similarauthorizations that have occurred from time to time at its facilities.  In addition, the Company faces potentialliability for response costs at various sites for which it has received noticeas being a potentially responsible party (“PRP”) concerning hazardous substancecontamination.  In estimating itsreserves for environmental remediation and future costs, the Company’sestimated liability of $5 million reflects the Company’s expected share ofcosts after consideration for the relative percentage of waste deposited ateach site, the number of other PRPs, the identity and financial condition ofsuch parties and experience regarding similar matters.  As of March 31, 2007, the Company hadapproximately $17 million reserved for environmental liabilities includedprimarily in other long-term liabilities in the consolidated balancesheet.  The Company believes theliability for these matters was adequately reserved at March 31, 2007.

If all or most of theother PRPs are unable to satisfy their portion of the clean-up costs at one ormore of the significant sites in which the Company is involved or the Company’sexpected share increases, the resulting liability could have a material adverseeffect on the Company’s consolidated financial condition or results ofoperations.

The Company is adefendant in a number of lawsuits and claims arising out of the conduct of itsbusiness.  While the ultimate results ofsuch suits or other proceedings against the Company cannot be predicted withcertainty, management of the Company believes that the resolution of thesematters will not have a material adverse effect on its consolidated financialcondition, results of operations or cash flows.

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**17.  Subsequent Events**

On April 26, 2007, theCompany announced plans to further realign its containerboard mill system overthe next six months as part of the strategic initiatives plan.  The Company will permanently close theCarthage, Indiana and Los Angeles, California medium mills, which have combinedannual capacity of approximately 200,000 tons. The previously idled machine at the Jacksonville, Florida mill withcapacity to produce 170,000 tons of medium will be restarted.  These actions will result in a net workforcereduction of approximately 100 employees. As a result of these closures, the Company expects to incur pretaxrestructuring charges of approximately $18 million, including $11 million ofnon-cash charges.

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**ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**FORWARD-LOOKING STATEMENTS**

Some information includedin this report may contain forward-looking statements within the meaning ofSection 21E of the Securities Exchange Act of 1934, as amended.  Although we believe that, in making any suchstatements, our expectations are based on reasonable assumptions, any suchstatement may be influenced by factors that could cause actual outcomes andresults to be materially different from those projected.  When used in this document, the words “anticipates,”“believes,” “expects,” “intends” and similar expressions as they relate toSmurfit-Stone Container Enterprises, Inc or its management, are intended toidentify such forward-looking statements. These forward-looking statements are subject to numerous risks anduncertainties.  There are importantfactors that could cause actual results to differ materially from those inforward-looking statements, certain of which are beyond our control.  These factors, risks and uncertainties arediscussed in our 2006 Annual Report on Form 10-K (2006 Form 10-K).

Our actual results, performance or achievements coulddiffer materially from those expressed in, or implied by, these forward-lookingstatements.  Accordingly, we can give noassurances that any of the events anticipated by the forward-looking statementswill occur, or if any of them do, what impact they will have on our results ofoperations or financial condition.  Weexpressly decline any obligation to publicly revise any forward-lookingstatements that have been made to reflect the occurrence of events after thedate hereof.

# **GENERAL**

# We are a wholly-owned subsidiaryof Smurfit-Stone Container Corporation (Smurfit-Stone), a holding company withno business operations of its own. Smurfit-Stone conducts its business operations through us.

# We meet the conditions set forthin General Instruction (H) (1) (a) and (b) of Form 10-Q and are thereforefiling this form with the reduced disclosure format permitted thereby.  The omitted information is substantiallysimilar to the disclosures contained in Smurfit-Stone Container Corporation’sQuarterly Report on Form 10-Q for the quarter ended March 31, 2007 filed withthe Securities and Exchange Commission on the date hereof.  In accordance with General Instruction (H)(2) (a), the discussion of our results of operations below includes only anarrative analysis of the most recent fiscal year-to-date period presented andthe corresponding year-to-date period in the preceding fiscal year.

Our Consumer Packagingsegment, which was sold as of June 30, 2006 (see “Discontinued Operations”),has been classified as discontinued operations and is excluded from the segmentresults for the first quarter of 2006. As a result, we have one reportable segment, Containerboard andCorrugated Containers.

**DISCONTINUED OPERATIONS**

On June 30, 2006, wecompleted the sale of substantially all of the assets of our Consumer Packagingdivision for $1.04 billion.  The ConsumerPackaging division was a reportable segment comprised of four coated recycledboxboard mills, 39 consumer packaging operations in the United States,including folding carton, multiwall and specialty bag, flexible packaging,label, contract packaging and lamination businesses and one consumer packagingplant in Brampton, Ontario.   Net salesfor these operations were $396 million for the three months ended March 31,2006.  These facilities employedapproximately 6,600 hourly and salaried employees.

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# **RESULTS OF OPERATIONS**

# **Strategic Initiatives**

During the fourth quarterof 2005, we announced a strategic initiatives plan to improve performance andbetter position us for long-term growth. Our plan focuses on cost reduction and productivity initiatives fromwhich we expect to achieve $525 million in annual savings by the end of 2008.

In the first quarter of2007, in conjunction with the strategic initiatives plan, we closed threeconverting facilities and announced the closure of three additionalfacilities.  We reduced our headcount byapproximately 730 employees, due to plant closures and other strategicinitiatives actions and recorded restructuring charges of $24 million.  The restructuring charges include non-cashcharges of $12 million related to the acceleration of depreciation over therevised useful life of equipment expected to be abandoned or taken out ofservice.  The remaining charges wereprimarily for severance and benefits. The net sales of these facilities in 2007 prior to closure and for theyear ended December 31, 2006, were $12 million and $97 million,respectively.  The majority of these netsales are expected to be transferred to other operating facilities.  Additional charges of up to $2 million willbe recorded in future periods for severance and benefits related to the closureof these converting facilities.

For 2007, we aretargeting $420 million in savings and productivity improvements from ourstrategic initiatives, compared to levels prior to the start of our plan asadjusted for the impact of inflation. During the three months ended March 31, 2007, we realized estimatedsavings of $86 million from these initiatives.

Subsequent to March 31,2007, we announced the closure of three additional converting facilities.  Restructuring charges of approximately $3million are expected related to these converting facilities.

On April 26, 2007, weannounced plans to further realign our containerboard mill system over the nextsix months as part of the strategic initiatives plan.  We will permanently close the Carthage,Indiana and Los Angeles, California medium mills, which have combined annualcapacity of approximately 200,000 tons. The previously idled machine at the Jacksonville, Florida mill withcapacity to produce 170,000 tons of medium will be restarted.  These actions will result in a net workforcereduction of approximately 100 employees. As a result of these closures, we expect to incur a pretax restructuringcharge of approximately $18 million, including $11 million of non-cash charges.

**RecentlyAdopted Accounting Standards**

EffectiveJanuary 1, 2007, we adopted the Financial Accounting Standards Board (FASB)Staff Position (FSP) No. AUG AIR-1 “Accounting for Planned Major MaintenanceActivities.” This FSP prohibits the use of the accrue-in-advance method ofaccounting for planned major maintenance activities in annual and interimfinancial reporting periods.  The FSPrequires retrospective application to all financial statements presented.  The new standard does not impact our annual2006 financial statements; however, the impact on the previously reported 2006first quarter loss from continuing operations and net loss available to commonstockholders is expense of $1 million, which is reflected in cost of goods soldin the Containerboard and Corrugated Containers segment.  The related impact on earnings per share isan immaterial amount for the first quarter of 2006.

EffectiveJanuary 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (FIN No. 48), an interpretation of Statementof Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.”  FIN No. 48 creates a single model to addressaccounting for uncertainty in tax positions and clarifies the accounting forincome taxes by prescribing a minimum recognition threshold a tax position isrequired to meet before being recognized in the financial statements.  FIN No. 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. Upon adoption, we reduced our existing reserves for uncertain taxpositions by $2 million.  This reductionwas recorded as a cumulative effect adjustment to the retained deficit.  As of January 1, 2007, we had $134 million ofunrecognized tax benefits, of which $38 million was classified as a reductionto 

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theamount of our net operating loss carryforwards and $96 million was classifiedas a liability for unrecognized tax benefits and included in other long-termliabilities.  All unrecognized taxbenefits, if recognized, would affect our effective tax rate.

Uponadoption of FIN No. 48, we elected to classify interest and penalties relatedto unrecognized tax benefits in our income tax provision, consistent with ourprevious accounting policy.  Unrecognizedtax benefits of $14 million for interest and penalties are included as acomponent of the $134 million of unrecognized tax benefits noted above.  The interest was computed on the differencebetween the tax position recognized in accordance with FIN No. 48 and theamount previously taken or expected to be taken in our tax returns, adjusted toreflect the impact of net operating loss and other tax carryforward items  (See Note 12).

Effective April 1, 2006,we adopted Emerging Issues Task Force (EITF) Issue No. 04-13, “Accounting forPurchases and Sales of Inventory With the Same Counterparty” (EITF 04-13), fornew arrangements and modifications or renewals of existing arrangements.  EITF No. 04-13 requires certain inventorybuy/sell transactions between counterparties within the same line of businessto be viewed as a single exchange transaction.  EITF No. 04-13 required us to prospectively report, beginning in thesecond quarter of 2006, certain inventory buy/sell transactions of similarcontainerboard types in the Containerboard and Corrugated Containers segment ona net basis in the consolidated statements of operations.  Had EITF 04-13 been in effect, net sales andcost of goods sold would have been reduced by an additional $58 million for thefirst quarter of 2006.

# **Overview**

We had a net loss of $52million for the first quarter of 2007 compared to a net loss of $62 million forthe same period in 2006.  The 2007results were adversely impacted by higher restructuring charges of $24 millioncompared to $9 million last year and loss on early extinguishment of debt of$23 million. The 2006 results also benefited from a gain on sale of assets of$23 million.  Net sales increased by 5.5%compared to the first quarter of 2006. The improvement in operating income compared to the first quarter of2006 was due primarily to higher Containerboard and Corrugated Containerssegment profit.  In the first quarter of2007, the Containerboard and Corrugated Containers segment profits of $92million were $67 million higher compared to the same period last year dueprimarily to higher average selling prices for containerboard and corrugatedcontainers.

We expect improvedoperating results in the second quarter of 2007.  Additional benefits from our strategicinitiatives and seasonally stronger packaging demand should contribute to theearnings improvement.  Production ofcontainerboard is expected to increase due to less maintenance downtime and oneadditional day of mill production. We expect lower costs for energy andemployee benefits.  Average reclaimedfiber costs are expected to increase in the second quarter of 2007; however,lower cost for virgin fiber should offset the reclaimed fiber cost increase.

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**First Quarter 2007 Compared toFirst Quarter 2006**
| ** **                                           | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **(In millions)**                               | ** ** | **Net  Sales**                                       | ** ** | **Profit/  (Loss)** | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** |
|                                                 |       |                                                 |       |   |   |   |   |   |   |
| Containerboard  and corrugated containers (Note 1)   |       | $                                                    | 1,690      |   | $ | 92 |   | $ | 1,646 |   | $ | 25 |   |
| Reclamation  operations (Note 1)                     |       | 134                                                  |       | 10 |   | 83 |   | 4 |   |
| Total segment operations                             |       | $                                                    | 1,824      |   | 102 |   | $ | 1,729 |   | 29 |   |
|                                                 |       |                                                 |       |   |   |   |   |   |   |
| Restructuring  charges                               |       |                                                 |       | (24 | ) |   |   | (9 | ) |
| Gain on sale of  assets                              |       |                                                 |       |   |   |   |   | 23 |   |
| Interest  expense, net                               |       |                                                 |       | (74 | ) |   |   | (92 | ) |
| Loss on early  extinguishment of debt                |       |                                                 |       | (23 | ) |   |   |   |   |
| Non-cash foreign  currency (losses) gains            |       |                                                 |       | (5 | ) |   |   | 2 |   |
| Corporate  expenses and other (Note 1, 2)            |       |                                                 |       | (62 | ) |   |   | (68 | ) |
| Loss from  continuing operations before income taxes |       |                                                 |       | $ | (86 | ) |   |   | $ | (115 | ) |

 

Note 1:  Effective January 1,2007, working capital interest is no longer charged to the operating segments.The 2006 segment profit has been restated to conform to the current yearpresentation.

Note 2:  Amounts include corporate expenses and otherexpenses not allocated to segments.

The increase innet sales in the first quarter of 2007 was due primarily to higher averageselling prices for containerboard, corrugated containers and reclaimedfiber.  The change in net sales for eachof our segments, including the impact of adopting EITF No. 04-13, as describedin “Recently Adopted Accounting Standards,” is summarized in the chart below:
| **(In millions)**       | ** ** | **Container-  board &  Corrugated  Containers** | ** ** | **Other  Operations** | ** ** | **Total** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|-----------------------|------------|-----------|------------|
|                         |       |                                                     |       |                  |       |      |       |
| Sales price and  product mix |       | $                                                        | 153        |                  | $          | 41        |       | $ | 194 |   |
| Sales volume                 |       | (57                                                      | )          | 10                    |       | (47       | )          |
| EITF No. 04-13               |       | (52                                                      | )          |                  |       | (52       | )          |
| Total                        |       | $                                                        | 44         |                  | $          | 51        |       | $ | 95 |   |

 

Cost of goods soldincreased from $1,590 million in 2006 to $1,610 million in 2007 due primarilyto higher costs of reclaimed material ($72 million) and wood fiber ($10million).  Cost of goods sold in 2007 wasfavorably impacted by the adoption of EITF No. 04-13 ($52 million), lower salesvolume ($43 million) and lower cost for energy ($16 million).  Cost of goods sold as a percent of net salesdecreased from 92.0% in 2006 to 88.3% in 2007 due primarily to the impact ofthe higher average sales prices and adopting EITF No. 04-13.

Selling andadministrative expense decreased $6 million in 2007 compared to 2006 dueprimarily to cost savings achieved from our strategic initiatives plan.  Selling and administrative expense as apercent of net sales decreased from 10.0% in 2006 to 9.2% in 2007 due primarilyto the higher average sales prices.

In the first quarter of2007, we recorded restructuring charges of $24 million including non-cashcharges of $12 million related to the acceleration of depreciation over therevised useful life of equipment expected to be abandoned or taken out ofservice.  The remaining charges wereprimarily for severance and benefits.

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Interest expense, net was$74 million in 2007.  The $18 milliondecrease compared to 2006 was the result of lower average borrowings ($20million) and higher interest income ($1 million), which were partially offset byhigher average interest rates ($3 million). The lower average borrowings were primarily due to the sale of theConsumer Packaging division and the resulting debt reduction.  Our overall average effective interest ratein 2007 was higher than 2006 by approximately 0.30%.

In the first quarter of2007, we recorded a loss on early extinguishment of debt of $23 million,including $19 million for tender premiums and a $4 million non-cash write-offof deferred debt issuance cost.

Other, net for 2007included non-cash foreign currency losses of $5 million compared to gains of $2million in 2006.

The benefit forincome taxes differed from the amount computed by applying the statutory U.S.federal income tax rate to loss before income taxes due primarily to stateincome taxes and the effect of other permanent differences.

**Containerboard and Corrugated Containers Segment**

Net sales increased 2.7%in 2007 compared to last year primarily as a result of higher average sellingprices for containerboard and corrugated containers offset by lower salesvolume for corrugated containers.  Netsales were unfavorably impacted by the adoption of EITF 04-13.  Average domestic linerboard prices in thefirst quarter of 2007 were comparable to the fourth quarter of 2006, but were12.8% higher compared to the first quarter of 2006.  Our average North American selling price forcorrugated containers was comparable to the fourth quarter of 2006, butincreased 6.9% compared to the first quarter of 2006. Third party shipments ofcontainerboard increased 14.8% compared to the same period last year.  Shipments of corrugated containers on a totaland per day basis were 5.8% lower compared to last year due primarily tocontainer plant closure efforts, actions to improve the profitability ofmarginal accounts and markets conditions. First quarter average sales prices for market pulp, solid bleachedsulfate (SBS) and kraft paper increased 18.4%, 2.5% and 11.0%, respectively,compared to the same period last year.

Our containerboard millsoperated at 96.7% of capacity in the first quarter of 2007, whilecontainerboard production was 2.4% higher compared to last year.  Production of market pulp was comparable tolast year.  Production of SBS increased8.3%, while kraft paper decreased 14.8%.

Profitsincreased $67 million due primarily to the higher average sales prices,benefits from our strategic initiatives and lower energy costs ($16 million),which were partially offset by higher costs of reclaimed and wood fiber ($40million) and freight ($6 million).

**Other Operations**

Net sales increased 61.4%due primarily to higher average sales prices and higher sales volume forreclaimed fiber.  The average price forold corrugated containers (OCC) increased approximately $45 per ton compared tolast year.  Total tons of fiber reclaimedand brokered increased 3.3%.  Profits in2007 increased $6 million compared to last year due primarily to higher averagesales prices and higher sales volume.

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**Statistical Data**
| **(In thousands of tons, except as noted)** | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Mill production                                                           |       |                                             |       |   |   |
| Containerboard (1)                                                        |       | 1,813                                            |       | 1,771 |   |
| Kraft paper                                                               |       | 46                                               |       | 54 |   |
| Market pulp                                                               |       | 145                                              |       | 145 |   |
| SBS                                                                       |       | 78                                               |       | 72 |   |
| North American  corrugated containers sold (billion sq. ft.)              |       | 19.1                                             |       | 20.3 |   |
| Fiber reclaimed and  brokered                                             |       | 1,721                                            |       | 1,666 |   |

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(1)             Forthe three months ended March 31, 2007 and 2006, our corrugated container plantsconsumed 1,264,000 tons and 1,355,000 tons of containerboard, respectively.

**CRITICALACCOUNTING POLICIES AND USE OF ESTIMATES**

Effective January 1, 2007, we adopted the provisions ofFASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FINNo. 48), an interpretation of SFAS No. 109, “Accounting for Income Taxes.” FINNo. 48 addresses the determination of how tax benefits claimed or expected tobe claimed on a tax return should be recorded in the financial statements.  Under FIN No. 48, we must recognize the taxbenefit from an uncertain tax position only if it is more likely than not thatthe tax position will be sustained on examination by the taxing authorities,based on the technical merits of the position. The tax benefits recognized in the financial statements from such aposition are measured based on the largest benefit that has a greater thanfifty percent likelihood of being realized upon ultimate resolution.  Upon adoption, we reduced our existingreserves for uncertain tax positions by $2 million.  This reduction was recorded as a cumulativeeffect adjustment to the retained deficit. For additional information regarding the adoption of FIN No. 48, see “Resultsof Operations—Recently Adopted Accounting Standards.”

**ITEM 3.**          **QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Intentionally omitted inaccordance with General Instruction (H) of Form 10-Q.

**ITEM 4.          CONTROLS AND PROCEDURES**

**Evaluation of Disclosure Controlsand Procedures**

Our management, with theparticipation of our principal executive officer and our principal financialofficer, evaluated the effectiveness of our disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of theperiod covered by this report and concluded that, as of such date, ourdisclosure controls and procedures were adequate and effective.

**Changes in Internal Control**

There have not been anychanges in our internal control over financial reporting during the most recentquarter that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

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**PART II - OTHER INFORMATION**

**ITEM 1.          LEGALPROCEEDINGS**

None

**ITEM 1A.       RISK FACTORS**

There are no material changes to the risk factors as disclosed in our2006 Annual Report on Form 10-K.

**ITEM 2.          UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

Intentionally omitted in accordance with General Instruction (H) of Form10-Q.

**ITEM 3.          DEFAULTS UPONSENIOR SECURITIES**

Intentionally omitted in accordance with General Instruction (H) of Form10-Q.

**ITEM 4.          SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

Intentionally omitted in accordance with General Instruction (H) of Form10-Q.

**ITEM 5.          OTHERINFORMATION**

None

**ITEM 6.          EXHIBITS**

Thefollowing exhibits are included in this Form 10-Q:
| 4.1(a) |   | Form of 8.000% Senior Notes due 2017 of Smurfit-Stone  Container Enterprises, Inc. (incorporated by reference to Exhibit 4.1 to  Smurfit-Stone Container Enterprises, Inc.’s Registration Statement on Form  S-4, Registration Number 333-141630 (the “SSCE Form S-4”).                                                                                                                                                                                                                                                                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.1(b) |   | Indenture dated as of March 26, 2007, between  Smurfit-Stone Container Enterprises, Inc. and The Bank of New York Trust  Company, N.A., as Trustee, relating to Smurfit-Stone Container Enterprises,  Inc.’s 8.000% Senior Notes due 2017 (incorporated by reference to Exhibit 4.2  to the SSCE Form S-4).                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.2(c) |   | First Supplemental Indenture dated as of March 23,  2007, between Smurfit-Stone Container Enterprises, Inc. and The Bank of New  York, as Trustee, relating to Smurfit-Stone Container Enterprises, Inc.’s 93⁄4%  Senior Notes due 2011 (incorporated by reference to Exhibit 4.2(c) to the  SSCE Form S-4).                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.3    |   | Registration Rights Agreement dated as of March 26,  2007, by and among Smurfit-Stone Container Enterprises, Inc. and Deutsche  Bank Securities Inc., Banc of America Securities LLC, J.P. Morgan Securities  Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley  & Co., Incorporated, UBS Securities LLC, BNY Capital Markets, Inc.,  Goldman, Sachs & Co., Scotia Capital (USA) Inc., SG Americas Securities,  LLC and Wachovia Capital Markets, LLC (incorporated by reference to Exhibit  4.3 to the SSCE Form S-4). |

 

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| 31.1   |   | Certification pursuant to Rules 13a—14(a) and  15d—14(a) under the Securities Exchange Act of 1934, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                 |
| 31.2   |   | Certification pursuant to Rules 13a—14(a) and  15d—14(a) under the Securities Exchange Act of 1934, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                                                 |
| 32.1   |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                             |
|   |   |                                                                                                                                                                                 |
| 32.2   |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                             |

 

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Signature

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                    | SMURFIT-STONE  CONTAINER ENTERPRISES, INC. |
|--------------------|--------------------------------------------|
|               | (Registrant)                               |
|               |                                       |   |
|               |                                       |   |
|               |                                       |   |
| Date: May 10, 2007 |                                       | /s/ Paul K.  Kaufmann |
|               |                                       | Paul K. Kaufmann |
|               |                                       | Senior Vice  President and Corporate Controller |
|               |                                       | (Principal  Accounting Officer) |
|               |                                       |   |

 

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