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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2003
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _______________ to _______________
----------
Commission File Number 1-3157
INTERNATIONAL PAPER COMPANY
(Exact name of registrant as specified in its charter)
New York 13-0872805
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
400 Atlantic Street, Stamford, CT 06921
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 541-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2) of the Exchange Act.
Yes [X] No [_]
The number of shares outstanding of the registrant's common stock as of April
30, 2003 was 478,935,506.
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INTERNATIONAL PAPER COMPANY
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Earnings -
Three Months Ended March 31, 2003 and 2002 1
Consolidated Balance Sheet -
March 31, 2003 and December 31, 2002 2
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2003 and 2002 3
Consolidated Statement of Common Shareholders' Equity -
Three Months Ended March 31, 2003 and 2002 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Financial Information by Industry Segment 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
PART II. Other Information
Item 1. Legal Proceedings 25
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
* Omitted since no answer is called for, answer is in the negative or
inapplicable.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Earnings
(Unaudited)
(In millions, except per share amounts)
Three Months Ended
March 31,
------------------
2003 2002
------ -------
Net Sales $6,075 $ 6,038
------ -------
Costs and Expenses
Cost of products sold 4,506 4,465
Selling and administrative expenses 497 515
Depreciation, amortization and cost of timber harvested 398 382
Distribution expenses 270 271
Taxes other than payroll and income taxes 64 71
Restructuring and other charges 23 --
------ -------
Total Costs and Expenses 5,758 5,704
Reversal of reserves no longer required -- 10
------ -------
Earnings Before Interest, Income Taxes, Minority
Interest and Cumulative Effect of Accounting Changes 317 344
Interest expense, net 184 205
------ -------
Earnings Before Income Taxes, Minority
Interest and Cumulative Effect of Accounting Changes 133 139
Income tax provision 39 43
Minority interest expense, net of taxes 40 31
------ -------
Earnings Before the Cumulative Effect of
Accounting Changes 54 65
Cumulative effect of accounting changes:
Asset retirement obligations, net of taxes (10) --
Transitional goodwill impairment charge, net of minority interest -- (1,175)
------ -------
Net Earnings (Loss) $ 44 $(1,110)
====== =======
Basic and Diluted Earnings (Loss) Per Common Share
Earnings before the cumulative effect of accounting changes $ 0.11 $ 0.13
Cumulative effect of accounting changes:
Asset retirement obligations (0.02) --
Transitional goodwill impairment charge -- (2.44)
------ -------
Net earnings (loss) $ 0.09 $ (2.31)
====== =======
Average Shares of Common Stock Outstanding 479.0 482.3
====== =======
Cash Dividends Per Common Share $ 0.25 $ 0.25
====== =======
The accompanying notes are an integral part of these financial statements.
1
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
March 31, December 31,
2003 2002
--------- ------------
Assets
Current Assets
Cash and temporary investments $ 2,218 $ 1,074
Accounts and notes receivable, net 2,959 2,780
Inventories 2,993 2,879
Assets of businesses held for sale 138 128
Other current assets 891 877
------- -------
Total Current Assets 9,199 7,738
------- -------
Plants, Properties and Equipment, net 14,109 14,167
Forestlands 3,925 3,846
Investments 234 227
Goodwill 5,328 5,307
Deferred Charges and Other Assets 2,547 2,507
------- -------
Total Assets $35,342 $33,792
======= =======
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 270 $ --
Accounts payable 2,061 2,014
Accrued payroll and benefits 408 523
Liabilities of businesses held for sale 41 44
Other accrued liabilities 1,879 1,998
------- -------
Total Current Liabilities 4,659 4,579
------- -------
Long-Term Debt 14,110 13,042
Deferred Income Taxes 1,812 1,765
Other Liabilities 3,812 3,778
Minority Interest 1,662 1,449
International Paper - Obligated Mandatorily Redeemable Preferred
Securities of Subsidiaries Holding International Paper Debentures 1,805 1,805
Common Shareholders' Equity
Common stock, $1 par value, 484.8 shares in both 2003 and 2002 485 485
Paid-in capital 6,479 6,493
Retained earnings 3,184 3,260
Accumulated other comprehensive loss (2,442) (2,645)
------- -------
7,706 7,593
Less: Common stock held in treasury, at cost, 2003 - 5.9 shares
2002 - 5.7 shares 224 219
------- -------
Total Common Shareholders' Equity 7,482 7,374
------- -------
Total Liabilities and Common Shareholders' Equity $35,342 $33,792
======= =======
The accompanying notes are an integral part of these financial statements.
2
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
Three Months Ended
March 31,
------------------
2003 2002
------- --------
Operating Activities
Net earnings (loss) $ 44 $(1,110)
Cumulative effect of accounting changes 10 1,175
Depreciation, amortization and cost of timber harvested 398 382
Deferred income tax benefit 11 3
Payments related to restructuring and legal reserves (90) (70)
Restructuring and other charges 23 --
Reversal of reserves no longer required -- (10)
Net losses on sales and impairments of businesses held for sale -- 4
Other, net 15 (53)
Changes in current assets and liabilities
Accounts and notes receivable (154) (106)
Inventories (94) 6
Accounts payable and accrued liabilities (4) 41
Other (32) (40)
------ -------
Cash Provided by Operations 127 222
------ -------
Investment Activities
Invested in capital projects
Ongoing businesses (173) (140)
Businesses sold and held for sale -- (13)
Proceeds from divestitures 44 28
Other (45) (42)
------ -------
Cash Used for Investment Activities (174) (167)
------ -------
Financing Activities
Issuance of common stock 6 30
Issuance of debt 1,350 1
Reduction of debt (50) (223)
Change in bank overdrafts (88) 3
Purchases of treasury stock (26) (6)
Dividends paid (120) (121)
Sale of minority interest 150 --
Other (48) 1
------ -------
Cash Provided by (Used for) Financing Activities 1,174 (315)
------ -------
Effect of Exchange Rate Changes on Cash 17 3
------ -------
Change in Cash and Temporary Investments 1,144 (257)
------ -------
Cash and Temporary Investments
Beginning of the period 1,074 1,224
------ -------
End of the period $2,218 $ 967
====== =======
The accompanying notes are an integral part of these financial statements.
3
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Common Shareholders' Equity
(Unaudited)
(In millions, except share amounts in thousands)
Three Months Ended March 31, 2003
Accumulated Total
Common Stock Issued Other Treasury Stock Common
------------------- Paid-in Retained Comprehensive -------------- Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------- ------ ------- -------- ------------- ------ ------ -------------
Balance, December 31, 2002 484,760 $485 $6,493 $3,260 $(2,645) 5,680 $219 $7,374
Issuance of stock for various
plans 2 -- (14) -- -- (512) (21) 7
Repurchases of stock -- -- -- -- -- 713 26 (26)
Cash dividends - Common
stock ($0.25 per share) -- -- -- (120) -- -- -- (120)
Comprehensive income (loss):
Net earnings -- -- -- 44 -- -- -- 44
Foreign currency translation
adjustments -- -- -- -- 200 -- -- 200
Cash flow hedging derivatives:
Net gain arising during the period
(less tax expense of $14) -- -- -- -- 30 -- -- 30
Reclassification adjustments
for gains included in net
income (less tax expense
of $12) -- -- -- -- (27) -- -- (27)
------
Total comprehensive income 247
------- ---- ------ ------ ------- ----- ---- ------
Balance, March 31, 2003 484,762 $485 $6,479 $3,184 $(2,442) 5,881 $224 $7,482
======= ==== ====== ====== ======= ===== ==== ======
Three Months Ended March 31, 2002
Accumulated Total
Common Stock Issued Other Treasury Stock Common
------------------- Paid-in Retained Comprehensive -------------- Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------- ------ ------- -------- ------------- ------ ------ -------------
Balance, December 31, 2001 484,281 $484 $6,465 $ 4,622 $(1,175) 2,693 $105 $10,291
Issuance of stock for various
plans 367 1 6 -- -- (975) (38) 45
Repurchases of stock -- -- -- -- -- 160 6 (6)
Cash dividends - Common
stock ($0.25 per share) -- -- -- (121) -- -- -- (121)
Comprehensive income (loss):
Net loss -- -- -- (1,110) -- -- -- (1,110)
Foreign currency translation
adjustments -- -- -- -- 45 -- -- 45
Cash flow hedging derivatives:
Net gain arising during the period
(less tax expense of $7) -- -- -- -- 20 -- -- 20
Reclassification adjustments
for losses included in net
income (less tax benefit of $8) -- -- -- -- 19 -- -- 19
-------
Total comprehensive loss (1,026)
------- ---- ------ ------- ------- ----- ---- -------
Balance, March 31, 2002 484,648 $485 $6,471 $ 3,391 $(1,091) 1,878 $ 73 $ 9,183
======= ==== ====== ======= ======= ===== ==== =======
The accompanying notes are an integral part of these financial statements.
4
INTERNATIONAL PAPER COMPANY
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, in the opinion of
Management, include all adjustments (consisting only of normal recurring
accruals) that are necessary for the fair presentation of results for the
interim periods. Results for the first three months of the year may not
necessarily be indicative of full year results. It is suggested that these
consolidated financial statements be read in conjunction with the audited
financial statements and the notes thereto included in International Paper's
(the Company) Annual Report on Form 10-K for the year ended December 31, 2002,
which has previously been filed with the Securities and Exchange Commission.
NOTE 2 - EARNINGS PER COMMON SHARE
Earnings per common share before the cumulative effect of accounting changes
were computed by dividing earnings before the cumulative effect of accounting
changes by the weighted average number of common shares outstanding. Earnings
per common share before the cumulative effect of accounting changes, assuming
dilution, were computed assuming that all potentially dilutive securities,
including "in-the-money" stock options, were converted into common shares at the
beginning of each period. A reconciliation of the amounts included in the
computation of earnings per common share before the cumulative effect of
accounting changes, and earnings per common share before the cumulative effect
of accounting changes, assuming dilution, is as follows:
Three Months Ended
March 31,
------------------
In millions, except per share amounts 2003 2002
- ------------------------------------- ------ ------
Earnings before the cumulative effect of
accounting changes $ 54 $ 65
Effect of dilutive securities -- --
------ ------
Earnings before the cumulative effect of
accounting changes - assuming dilution $ 54 $ 65
====== ======
Average common shares outstanding 479.0 482.3
Effect of dilutive securities
Stock options 1.1 2.0
------ ------
Average common shares outstanding - assuming dilution 480.1 484.3
====== ======
Earnings per common share before the cumulative
effect of accounting changes $ 0.11 $ 0.13
====== ======
Earnings per common share before the cumulative
effect of accounting changes - assuming dilution $ 0.11 $ 0.13
====== ======
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented. Antidilutive securities included
preferred securities of a subsidiary trust for the periods presented.
NOTE 3 - MERGERS AND ACQUISITIONS
In December 2002, Carter Holt Harvey acquired Starwood Australia's Bell Bay
medium density fiberboard plant in Tasmania for $28 million in cash.
5
NOTE 4 -RESTRUCTURING, BUSINESS IMPROVEMENT AND OTHER CHARGES
During the first quarter of 2003, special charges totaling $23 million before
taxes and minority interest ($14 million after taxes and minority interest) were
recorded for asset shutdowns of excess internal capacity and cost reduction
actions. This amount included a $2 million charge for asset write-downs and a
$21 million charge for severance and other charges. The following table presents
additional detail related to the $23 million charge:
Asset Severance
In millions Write-downs and Other Total
- ----------- ----------- --------- -----
Industrial Packaging (a) $-- $ 2 $ 2
Specialty Businesses and Other (b) 2 18 20
Carter Holt Harvey (c) -- 1 1
--- --- ---
$ 2 $21 $23
=== === ===
(a) The Industrial Packaging business implemented a plan to reorganize the
Creil and Mortagne locations in France into a single complex. Charges
associated with the reorganization include $1 million for severance costs
covering the termination of 31 employees and other cash costs of $1
million.
(b) Arizona Chemical recorded a charge of $1 million for severance costs for 51
employees associated with the Valkeakoski, Finland plant closure. Chemical
Cellulose implemented a plan to shut down the Natchez, Mississippi
dissolving pulp mill by mid-2003. Charges associated with this shutdown
included a $1 million charge to write down assets to their salvage value
and $12 million of severance costs covering the termination of 141
employees in April and other employees to be terminated upon closure.
Additional shutdown charges, estimated at approximately $40 million, for
additional severance and closure costs will be recorded in the second
quarter of 2003. Additionally, Industrial Papers approved a plan to
restructure converting operations at the Kaukauna, Wisconsin facility,
modify its release products organization and implement division-wide
productivity improvement actions. Charges associated with these plans
included $1 million to write down assets to their salvage value and $5
million of severance costs covering the termination of 130 employees.
(c) Carter Holt Harvey recorded a charge of $1 million for severance costs for
33 employees associated with a headcount reduction initiative.
During the first quarter of 2002, special items consisted of a $10 million
pre-tax credit ($7 million after taxes) for the reversal of fourth-quarter 2001
restructuring reserves no longer required.
During the last three quarters of 2002, restructuring and other charges totaling
$695 million before taxes and minority interest ($435 million after taxes and
minority interest) were recorded. These charges included a $199 million charge
before taxes and minority interest ($130 million after taxes and minority
interest) including $80 million for asset shutdowns of excess internal capacity
and $119 million for severance and other charges, a $450 million pre-tax charge
($278 million after taxes) for additional exterior siding legal reserves, and a
charge of $46 million before taxes and minority interest ($27 million after
taxes and minority interest) for early debt retirement costs. In addition, a $58
million pre-tax credit ($36 million after taxes) was recorded in the last three
quarters of 2002, including $35 million for the reversal of 2001 and 2000
reserves no longer required and $23 million for the reversal of excess Champion
purchase accounting reserves.
6
The following table presents a roll forward of the cumulative severance and
other costs included in the 2002 restructuring plans:
Severance
In millions and Other
- ----------- ---------
Opening balance - second quarter 2002 $ 37
Additions - third quarter 2002 10
Additions - fourth quarter 2002 72
Cash charges - 2002 (15)
Cash charges - first quarter 2003 (43)
----
Balance, March 31, 2003 $ 61
====
The severance charges recorded in the second, third and fourth quarters of 2002
related to 1,989 employees. As of March 31, 2003, 1,436 employees had been
terminated.
International Paper continually evaluates its operations for improvement. When
any such improvement plans are finalized, we may incur costs or charges in
future periods related to the implementation of such plans. As this review
process is ongoing, it is possible that additional charges will be incurred in
future periods in our businesses should such triggering events occur.
NOTE 5 - BUSINESSES HELD FOR SALE AND DIVESTITURES
Businesses Held for Sale:
Sales and operating earnings for each of the three month periods ended March 31,
2003 and 2002 for smaller businesses currently held for sale, as well as results
for businesses sold through their respective divestiture dates, were:
- --------------------------------------------------------------------------------
In millions 2003 2002
- --------------------------------------------------------------------------------
Sales $34 $129
Operating Profit -- 1
The sales and operating earnings for these businesses are included in Specialty
Businesses and Other in management's discussion and analysis. The assets of
businesses held for sale, totaling $138 million at March 31, 2003, are included
in Assets of businesses held for sale in Current Assets in the accompanying
consolidated balance sheet. The liabilities of businesses held for sale,
totaling $41 million at March 31, 2003, are included in Liabilities of
businesses held for sale in Current Liabilities in the accompanying consolidated
balance sheet.
In June 2002, International Paper announced that it would discontinue efforts to
divest its Arizona Chemical and Industrial Papers businesses after these efforts
did not generate acceptable offers. International Paper has made a decision to
operate these two businesses. International Paper discontinued efforts to divest
the Chemical Cellulose Pulp business in February 2002, and in January 2003,
announced it would close the Natchez mill comprising this business in mid-2003.
7
NOTE 6 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Inventories by major category were:
March 31, December 31,
In millions 2003 2002
- ----------- --------- ------------
Raw materials $ 420 $ 469
Finished pulp, paper and packaging products 1,789 1,694
Finished lumber and panel products 194 158
Operating supplies 534 517
Other 56 41
------ ------
Total $2,993 $2,879
====== ======
Temporary investments with maturities of three months or less are treated as
cash equivalents and are stated at cost. Temporary investments totaled $1.8
billion and $689 million at March 31, 2003 and December 31, 2002, respectively.
Interest payments during the three-month periods ended March 31, 2003 and 2002
were $184 million and $271 million, respectively. Capitalized net interest costs
were $2 million for both the three months ended March 31, 2003 and 2002. Total
interest expense was $210 million for the first three months of 2003 and $231
million for the first three months of 2002. Income tax payments of $33 million
and $19 million were made during the first three months of 2003 and 2002,
respectively. Distributions paid under all of International Paper's preferred
securities of subsidiaries were $37 million during the first three months of
both 2003 and 2002, and are included in minority interest expense.
Accumulated depreciation was $18.2 billion at both March 31, 2003 and December
31, 2002. The allowance for doubtful accounts was $158 million at March 31, 2003
and $169 million at December 31, 2002.
NOTE 7 - RECENT ACCOUNTING DEVELOPMENTS
Asset Retirement Obligations:
Effective January 1, 2003, International Paper adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations." It requires the recording of an asset and a
liability equal to the present value of the estimated costs associated with the
retirement of long-lived assets where a legal or contractual obligation exists.
The asset is required to be depreciated over the life of the related equipment
or facility, and the liability accreted each year using a credit-adjusted
risk-free rate.
International Paper's asset retirement obligations under this standard generally
relate to closure costs for landfills and other environmental liabilities
resulting from the normal operations of long-lived assets. The estimated future
liability was determined using historical experience in other similar landfill
closures and federal and state regulatory requirements. The liability was
discounted using a credit-adjusted risk-free rate of approximately 5%. Revisions
to the liability could occur due to changes in the estimated costs or timing of
environmental closures, or possible new federal or state regulations affecting
these closures.
Upon adoption of SFAS No. 143, International Paper recorded a discounted
liability of $22 million, increased Property, plant and equipment, net by $7
million and recognized a one-time cumulative effect charge of $10 million (net
of deferred tax benefit of $5 million). Pro forma effects on earnings from
continuing operations before the cumulative effect of the accounting change for
the three months ended March 31, 2002, assuming the adoption of SFAS No. 143 as
of January 1, 2002, were not material to net earnings or earnings per share. No
additional liabilities were incurred or settled during the three-month period
ended March 31, 2003.
8
Costs Associated with Exit or Disposal Activities:
International Paper adopted SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," effective January 1, 2003, with no material effect
on the Company's financial position or results of operations.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
International Paper has established reserves relating to certain liabilities
associated with exterior siding and roofing products manufactured by its former
Masonite subsidiary, which were the subject of settlements in three nationwide
class action lawsuits. These lawsuits, which were settled during 1998 and 1999,
are discussed in detail in Note 11 to the Financial Statements included in
International Paper's Annual Report on Form 10-K for the year ended December 31,
2002.
In November 1995, International Paper and Masonite commenced a lawsuit in the
Superior Court of the State of California against certain of their insurance
carriers because of their refusal to indemnify International Paper and Masonite
for claims paid as a result of the settlement of the lawsuit entitled Judy Naef
v. Masonite and International Paper (Hardboard Lawsuit) and the refusal of one
insurer, Employer's Insurance of Wausau, to provide a defense of that lawsuit.
During the fall of 2001, a trial of Masonite's claim that Wausau breached its
duty to defend was conducted in a state court in California. The jury found that
Wausau had breached its duty to defend Masonite and awarded Masonite $13 million
for its expense to defend the Hardboard Lawsuit; an additional $12 million in
attorneys' fees and interest for Masonite's expense to prosecute the duty to
defend its case against Wausau based on a finding that Wausau had acted in bad
faith; and an additional $68 million in punitive damages. In a post-trial
proceeding, the court awarded an additional $2 million in attorneys' fees based
on the finding that Wausau had acted in bad faith. As of March 31, 2003, all
post-trial motions brought by Wausau seeking to upset the jury verdict have been
denied, but no judgment has been entered by the court. Masonite has agreed to
pay amounts equal to the proceeds of its bad faith and punitive damage award to
International Paper and has assigned its breach of contract claim against Wausau
to International Paper. The trial of International Paper's and Masonite's claims
for indemnification began in April 2003. Because of the uncertainties inherent
in the litigation, International Paper is unable to estimate the amount that it
will recover against those insurance carriers. However, as of April 22, 2003,
International Paper had received an aggregate of $91 million from certain of its
insurance carriers, and had signed a settlement agreement with one of its
insurers that provides for the payment to International Paper of an additional
$10 million in January 2004.
Under a financial collar arrangement, International Paper contracted with a
third party for payment in an amount up to $100 million for certain costs
relating to the Hardboard Lawsuit if payments by International Paper with
respect thereto exceeded $165 million. The arrangement with the third party is
in excess of insurance otherwise available to International Paper, which is the
subject of the separate litigation referred to above. Accordingly, International
Paper believes that the obligation of the third party with respect to this
financial collar does not constitute "other valid and collectible insurance"
that would either eliminate or otherwise affect its right to collect insurance
coverage available to it and Masonite under the insurance policies, which are
the subject of this separate litigation. At December 31, 2001, International
Paper had received the $100 million. A dispute between International Paper and
the third party concerning a number of issues, including the timing of
International Paper's obligation to repay the third party is the subject of an
arbitration commenced in 2002 by the third party in London, England. The
arbitration hearing is expected to take place in February 2004.
9
The following table presents an analysis of the net reserve activity related to
these lawsuits for the three months ended March 31, 2003.
RESERVE ANALYSIS
- --------------------------------------------------------------------------------
Hard- Omni-
In millions board wood Woodruf Total
- --------------------------------------------------------------------------------
Balance, December 31, 2002 $357 $138 $12 $507
Payments (41) (6) (1) (48)
Insurance collections -- -- -- --
---- ---- --- ----
Balance, March 31, 2003 $316 $132 $11 $459
==== ==== === ====
The following table shows an analysis of claims statistics related to these
lawsuits for the three months ended March 31, 2003.
CLAIMS STATISTICS
- -------------------------------------------------------------------------------------------------------------
In thousands Hardboard Omniwood Woodruf Total
No. of Single Multi- Single Multi- Single Multi- Single Multi-
Claims Pending Family Family Family Family Family Family Family Family Total
- -------------------------------------------------------------------------------------------------------------
December 31, 2002 28.6 4.0 1.9 0.4 1.1 0.3 31.6 4.7 36.3
No. of Claims Filed 11.2 2.9 0.9 0.1 0.2 -- 12.3 3.0 15.3
No. of Claims Paid (8.1) (2.0) (0.9) (0.2) (0.3) -- (9.3) (2.2) (11.5)
No. of Claims Dismissed (5.1) (1.3) (0.3) -- (0.1) -- (5.5) (1.3) (6.8)
March 31, 2003 26.6 3.6 1.6 0.3 0.9 0.3 29.1 4.2 33.3
While International Paper believes that the reserve balances established for
these matters are adequate, and that additional amounts will be recovered from
its insurance carriers in the future relating to these claims, International
Paper is unable to estimate at this time the amount of additional charges, if
any, that may be required for these matters in the future.
International Paper is also involved in various other inquiries, administrative
proceedings and litigation relating to contracts, sales of property,
environmental protection, tax, antitrust, personal injury and other matters,
some of which allege substantial monetary damages. While any proceeding or
litigation has the element of uncertainty, International Paper believes that the
outcome of any of the other lawsuits or claims that are pending or threatened,
or all of them combined, will not have a material adverse effect on its
consolidated financial position or results of operations.
NOTE 9 - DEBT
In March 2003, International Paper completed a private placement with
registration rights of $300 million 3.80% notes due April 1, 2008 and $700
million 5.30% notes due April 1, 2015. Proceeds from the notes, which totaled
approximately $992 million, will be used to redeem certain preferred securities
of a wholly owned subsidiary, to refinance certain long-term debt and for
general corporate purposes.
NOTE 10 - PREFERRED SECURITIES OF SUBSIDIARIES
In March 2003, Southeast Timber, Inc. (Southeast Timber), a consolidated
subsidiary of International Paper, issued $150 million of preferred securities
to a private investor with future dividend payments based on LIBOR plus a
defined margin. Southeast Timber, which through a subsidiary holds approximately
1.5 million acres of forestlands in the southern United States, will be
International Paper's primary vehicle for future sales of southern forestlands.
The preferred securities may be put back to International Paper by the private
investor upon the occurrence of certain events, and have a liquidation
preference that approximates their face amount. The securities are included
in minority interest in International Paper's consolidated balance sheet.
10
The agreement with the private investor also places certain limitations on
International Paper's ability to sell forestlands in the southern United States
outside of Southeast Timber without either the investor's consent or upon a cash
contribution of up to a maximum of $80 million to Southeast Timber, its
consolidated subsidiary. In addition, because Southeast Timber is a separate
legal entity, the assets of Southeast Timber and its subsidiaries, consisting
principally of forestlands having a book value of approximately $430 million,
will not be available to satisfy future liabilities and obligations of
International Paper, although the value of International Paper's interests in
Southeast Timber and its subsidiaries will be available for these purposes.
NOTE 11 - STOCK OPTIONS
International Paper has a Long-Term Incentive Compensation Plan (LTICP) that
includes a Stock Option Program, a Restricted Performance Share Program and a
Continuity Award Program, administered by a committee of nonemployee members of
the Board of Directors who are not eligible for awards. The Company accounts for
stock options granted under the plan using the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations and the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." These plans are discussed in detail
in Note 18 to the Financial Statements included in International Paper's Annual
Report on Form 10-K for the year ended December 31, 2002. No stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
Three Months Ended
March 31,
------------------
In millions 2003 2002
- ----------- ----- -------
Net income (loss), as reported $ 44 $(1,110)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (10) (12)
----- -------
Pro forma net income (loss) $ 34 $(1,122)
===== =======
Earnings (loss) per share:
Basic - as reported $0.09 $ (2.31)
===== =======
Basic - pro forma $0.07 $ (2.33)
===== =======
Diluted - as reported $0.09 $ (2.31)
===== =======
Diluted - pro forma $0.07 $ (2.33)
===== =======
The effect on the three months ended March 31, 2003 and 2002 pro forma net
earnings, earnings per common share and earnings per common share-assuming
dilution of expensing the estimated fair market value of stock options is not
necessarily representative of the effect on reported earnings for future periods
due to the vesting period of stock options and the potential for issuance of
additional stock options in future periods.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
International Paper Company (the "Company" or "International Paper"), reported
net earnings of $44 million, or $.09 per share, in the 2003 first quarter. This
compared with a net loss of $1.1 billion, or $2.31 per share, in the first
quarter of 2002 and a net loss of $130 million, or $.27 per share, in the fourth
quarter of 2002. Amounts include the cumulative effect of accounting changes.
First-quarter 2003 net sales totaled $6.1 billion, compared with $6.0 billion in
the first quarter of 2002 and $6.3 billion in the fourth quarter of 2002.
Before the cumulative effect of accounting changes, earnings for the first
quarter of 2003 were $54 million compared with $65 million in the 2002 first
quarter and a loss of $130 million in the fourth quarter of 2002.
Compared with the fourth quarter of 2002, earnings for the first quarter of 2003
were negatively impacted by increased energy and wood fiber costs as poor
weather conditions hampered harvesting activity and delivery of raw materials.
Cost reduction efforts continued to benefit earnings but these effects were
offset by unfavorable mill operating results in January and February partially
due to the winter weather. Reduced forestland sales and higher pension and tax
costs also contributed to the earnings decline, although the quarter also
benefited from lower interest expense. Fourth quarter 2002 results also included
$290 million of net special items, principally for restructuring costs and
additional exterior siding legal reserves.
Compared with the first quarter of 2002, higher average prices, increased
average sales volumes, the impact of prior capacity rationalizations and lower
interest expense contributed to higher earnings in the current quarter, while
increased energy and raw material costs and higher pension expense were negative
factors.
During the quarter, International Paper took approximately 220,000 tons of
downtime, including 60,000 tons for lack-of-orders, compared with approximately
400,000 tons of downtime in the fourth quarter of 2002, which included 270,000
tons for lack-of-orders. Lack-of-order downtime is taken to balance internal
supply with our customer demand to help manage inventory levels, while
maintenance downtime, which makes up the difference between total downtime and
lack-of-order downtime, is taken periodically during the year. The costs for
annual planned maintenance downtime are charged to expense evenly in each
quarter. Downtime costs due to lack-of-orders are expensed in the periods that
they are taken.
Segment Operating Profits
To measure the performance of the Company's business segments from period to
period without variations caused by special or unusual items, International
Paper's management focuses on business segment operating profit. This is defined
as earnings before taxes and minority interest, excluding interest expense,
corporate charges and special items that include charges for asset shutdowns of
excess internal capacity and cost reduction actions and the reversal of reserves
no longer required. The following table presents a reconciliation of
International Paper's net earnings to its operating profit for each of the three
months ended:
12
March 31, March 31,
In millions 2003 2002
- ----------- --------- ---------
Net Earnings (Loss) $ 44 $(1,110)
Add back: Cumulative effect of accounting changes 10 1,175
---- -------
Earnings Before the Cumulative Effect of Accounting Changes 54 65
Add back: Income tax provision 39 43
Minority interest expense, net of taxes 40 31
---- -------
Earnings Before Taxes and Minority Interest 133 139
Interest expense, net 184 205
Minority interest included in operations (18) (10)
Corporate items 88 94
Special items:
Restructuring charges 23 --
Reversal of reserves no longer required -- (10)
---- -------
Segment Operating Profit $410 $ 418
==== =======
Results for the first quarter of 2003 included a charge of $10 million after
taxes for the cumulative effect of an accounting change to record the
transitional charge for the adoption of Statement of Financial Accounting
Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." Results
for the first quarter of 2002 included a charge of $1.2 billion after minority
interest for the cumulative effect of an accounting change to record the
transitional impairment charge for the adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets."
Net interest expense was $184 million in the first quarter of 2003 compared with
$205 million in the first quarter of 2002, reflecting the refinancing of higher
rate debt during 2002. The increase in Minority interest reflects higher
earnings in the 2003 first quarter for the Company's non wholly-owned
subsidiaries, principally Carter Holt Harvey Limited.
Special items in the first quarter of 2003 included a charge of $23 million
before taxes and minority interest ($14 million after taxes and minority
interest) for asset shutdowns of excess internal capacity and cost reduction
actions. This amount included $2 million for asset write-downs to estimated
realizable value and $21 million for severance and other charges. First-quarter
2002 special items included a $10 million pre-tax credit ($7 million after
taxes) for the reversal of reserves no longer required.
BUSINESS SEGMENT OPERATING RESULTS
The following presents segment discussions for the first quarter of 2003.
Printing Papers
2003 2002
----------- -------------------------
In millions 1st Quarter 1st Quarter 4th Quarter
- ----------- ----------- ----------- -----------
Sales $1,885 $1,820 $1,910
Operating Profit 122 76 157
Printing Papers net sales for the first quarter of 2003 were 4% higher than the
first quarter of 2002 and were slightly lower than the fourth quarter of 2002.
Operating profits in the first quarter of 2003 were 61% higher than the first
quarter of 2002 and were 22% lower than the fourth quarter of 2002. Compared
with the first quarter of 2002, Printing Papers' first quarter of 2003 earnings
benefited from higher average prices, increased volume and lower administrative
costs partially offset by higher raw material costs. Increased energy, fiber
costs and the impact of a severe winter in the United States resulted in lower
earnings in the first quarter of 2003 compared with the 2002 fourth quarter.
Printing Papers took approximately 70% less market related
13
downtime in the first quarter of 2003 compared with both the first and fourth
quarters of 2002. Uncoated freesheet sales volumes increased slightly during the
quarter while average prices remained about flat. Prices for pulp improved
during the quarter from very low levels in late 2002, contributing to a
reduction in operating losses for this business compared with the previous
quarter. Although coated paper shipments were down, reflecting lower levels of
advertising in the current uncertain economic environment, average prices were
higher as previously announced price increases began to be realized in the 2003
first quarter. European Papers' first quarter earnings benefited from solid mill
operations, higher volumes, and favorable foreign exchange rates, although
average prices in local currency were lower than in the previous quarter. In
Brazil, operating profits decreased slightly from the fourth quarter of 2002 as
lower volumes offset the benefit of higher average prices. The focus of this
segment for the second quarter will be on maintaining market place momentum,
managing manufacturing and overhead costs, and improving operating efficiencies.
Industrial and Consumer Packaging
2003 2002
----------- -------------------------
In millions 1st Quarter 1st Quarter 4th Quarter
- ----------- ----------- ----------- -----------
Sales $1,500 $1,460 $1,540
Operating Profit 89 128 116
Industrial and Consumer Packaging net sales for the first quarter of 2003 were
3% higher than in the first quarter of 2002, but were 3% lower than in the
fourth quarter of 2002. Operating profits for the first quarter of 2003 were
down 30% and 23%, respectively, from the first and fourth quarters of 2002
primarily as a result of increased energy and fiber costs. Lack-of-order
downtime in the first quarter of 2003 declined 70% and 82% from the first and
fourth quarters of 2002, respectively.
Sales volumes in 2003 for the Industrial Packaging business increased from the
first quarter of 2002, although overall average prices declined. Average
domestic box prices were down slightly versus the fourth quarter of 2002 while
volumes improved modestly. Average containerboard prices also were lower, while
sales volumes reflected a small improvement. Containerboard shipments to
domestic customers were stronger despite sluggish U.S. box demand. The weakening
U.S. dollar and accelerated sales activities overseas helped to mitigate the
soft domestic market conditions.
Consumer Packaging's 2003 first quarter sales volumes reflected a seasonal
slowdown from the fourth quarter of 2002. Bleached board prices were up slightly
due to improved mix, and volumes were flat. Higher energy, fiber and
polyethylene costs as well as poor weather conditions adversely impacted
operating results. Operating results for the converting businesses reflected a
seasonal weakness versus the previous quarter.
In the coming months, economic conditions are not expected to improve
significantly. However, a seasonal improvement in demand should favorably impact
our results for the second quarter. Improved operational performance and
continued focus on cost reduction and control efforts should also favorably
impact earnings.
14
Distribution
2003 2002
----------- -------------------------
In millions 1st Quarter 1st Quarter 4th Quarter
- ----------- ----------- ----------- -----------
Sales $1,530 $1,535 $1,630
Operating Profit 15 18 28
Distribution's 2003 first-quarter sales were flat compared with the first
quarter of 2002 and were 6% less than in the fourth quarter of 2002. Operating
profits in the 2003 first quarter were 17% lower than in the first quarter of
2002 and were 46% lower than in the fourth quarter of 2002, primarily due to
lower sales volumes and increased energy costs that affected both warehousing
and delivery costs. Sales were flat in the first quarter of 2003 versus the 2002
first quarter as lower sales in commercial printing were offset by an increase
in packaging sales. Compared with the 2002 fourth quarter, demand was seasonally
lower across all market segments. Although the general market conditions
remained depressed, an increased focus on key customers and a higher margin
product mix has helped bolster operating results. Distribution continues to
reduce controllable overhead costs through headcount reductions associated with
facility consolidations and efficiency initiatives in transaction processing.
Bad debt expense improved during the quarter to a more normal level. With the
expected modest seasonal strengthening during the second quarter and continued
momentum of our cost control initiatives, we expect improved earnings in the
second quarter of 2003.
Forest Products
2003 2002
----------- -------------------------
In millions 1st Quarter 1st Quarter 4th Quarter
- ----------- ----------- ----------- -----------
Sales $675 $765 $765
Operating Profit 161 176 156
Forest Products 2003 first-quarter net sales were 12% lower than in both the
first and fourth quarters of 2002. Operating profits were 3% higher than the
fourth quarter of 2002 but were 9% lower than the first quarter of 2002. The
decline in first-quarter earnings compared with the same period in 2002
reflected lower harvest volumes, average stumpage prices and forestland sales in
our forestlands operations, and lower volumes and average prices in the lumber
and plywood businesses. Compared with the fourth quarter of 2002, the increase
in operating profits in the first quarter of 2003 reflects higher average lumber
prices and reduced overhead and forest operations expenses, and lower raw
material costs in our wood products businesses offset in part by lower
forestland and timber sales. In addition, wet weather conditions had a negative
impact on earnings in this segment in the first quarter of 2003. Average prices
for pine pulpwood decreased 3% and pine sawtimber decreased 10% during the
quarter. Earnings from sales of timberlands were about $20 million less than in
the fourth quarter of 2002. Compared with the fourth quarter of 2002, sales
volumes in wood products were slightly lower overall due mainly to
weather-related conditions, although the effect on earnings was more than offset
by an increase in average lumber prices. International Paper monetizes its
forest assets in various ways, including sales of short- and long-term harvest
rights, on a pay-as-cut or lump-sum bulk sale basis, as well as sale of
timberlands. Accordingly, earnings from quarter to quarter may vary depending on
the number of sales, timber prices and underlying timber volumes of such sales.
Carter Holt Harvey
2003 2002
----------- -------------------------
In millions 1st Quarter 1st Quarter 4th Quarter
- ----------- ----------- ----------- -----------
Sales $500 $410 $520
Operating Profit 16 10 16
15
Carter Holt Harvey's 2003 first-quarter sales were 22% higher than the first
quarter of 2002 and were 4% lower than the fourth quarter of 2002. Operating
profits in the first quarter of 2003 were 60% higher than the first quarter of
2002 and were flat compared with the fourth quarter of 2002. The strong 2003
first quarter reflected a continuation of strong housing markets in Australia
and New Zealand, improved average pricing, and a continued focus on cost control
measures. A stronger New Zealand dollar versus the U.S. dollar also had a
positive effect on International Paper's translated operating results. Compared
with the previous quarter, Forests' 2003 first-quarter sales volumes declined
slightly. Earnings were also unfavorably impacted by weaker domestic prices and
increased distribution costs. The Wood Products business benefited from the
continued strength of housing construction markets. Sales volumes in the
Australian lumber and plywood business were up compared with the same quarter
last year and were slightly higher than the previous quarter. The Pulp and Paper
business was negatively impacted during the first quarter of 2003 by a strike at
the Kinleith mill. Prices, however, improved during the quarter. The Tissue
business reflected lower earnings compared with the seasonally strong fourth
quarter of 2002. The Packaging business performed well with a seasonal decline
in earnings compared with the 2002 fourth quarter but higher than the same
quarter last year, reflecting the contribution from cost savings programs and
improved sales volumes. Looking forward to the second quarter of 2003, overall
business conditions are expected to be comparable to those in the first quarter.
The resolution of the Kinleith mill strike, as well as higher hydroelectric
energy costs due to very dry weather conditions, are likely to affect second
quarter operating results.
International Paper's results for this segment differ from those reported by
Carter Holt Harvey in New Zealand in three major respects: (1) Carter Holt
Harvey's earnings include only our share of Carter Holt Harvey's operating
earnings. Segment sales, however, represent 100% of Carter Holt Harvey's sales.
(2) Carter Holt Harvey reports in New Zealand dollars but our segment results
are reported in U.S. dollars. (3) Carter Holt Harvey reports under New Zealand
accounting standards, but our segment results comply with generally accepted
accounting principles in the United States. The major differences relate to cost
of timber harvested (COTH), goodwill amortization, pensions, deferred taxes and
financial instruments.
Specialty Businesses and Other
2003 2002
----------- -------------------------
In millions 1st Quarter 1st Quarter 4th Quarter
- ----------- ----------- ----------- -----------
Sales $350 $420 $330
Operating Profit 7 10 13
The Specialty Businesses and Other segment includes the operating results of
Arizona Chemical, Industrial Papers and Chemical Cellulose Pulp. Also included
are businesses identified in our divestiture program whose results are included
in this segment for periods prior to their sale. First-quarter 2003 net sales
were 17% less than the first quarter of 2002 and were 6% higher than the fourth
quarter of 2002. Operating profits in the first quarter of 2003 were 30% and 46%
lower than the first and fourth quarters of 2002, respectively, as a result of
losses in the Chemical Cellulose Pulp business. The segment was negatively
impacted by higher raw material costs in the current quarter versus the prior
quarter. Operating profits in our Arizona Chemical and Industrial Papers
businesses were slightly lower than the 2002 fourth quarter due to lower average
prices while sales volumes were relatively flat. In January 2003, we announced
the planned closure of the Natchez, Mississippi Chemical Cellulose dissolving
pulp mill by mid-2003.
Corporate Items
Corporate items, net, were $88 million for the 2003 first quarter, slightly
lower than the $94 million in the first quarter of 2002, but higher than the $51
million in the fourth quarter of 2002 which was lower than normal due to a gain
from the sale of shares received from an insurance company demutualization.
Higher pension expenses and supply chain initiative costs, partially offset by
lower benefit costs, also contributed to the increase versus the fourth quarter
of 2002. These items were also factors versus the prior year first quarter, but
were offset by favorable natural gas hedging costs compared with the 2002 first
quarter.
16
Liquidity and Capital Resources
Cash provided by operations totaled $127 million for the first three months of
2003 compared with $222 million for the comparable 2002 period. Increased
working capital requirements of $284 million in the first quarter of 2003,
reflecting slightly higher accounts and notes receivable and inventory balances,
led to the operating cash flow decrease.
Investments in capital projects totaled $173 million and $153 million for the
first three months of 2003 and 2002, respectively. Full year capital spending
for 2003 is now expected to be approximately $1.1 billion, below projected
depreciation and amortization charges.
Financing activities for the first three months of 2003 included a $1.3 billion
net increase in debt versus a $222 million net reduction in the comparable 2002
three-month period. In March 2003, International Paper completed the private
placements of $300 million of 3.80% notes due April 1, 2008 and $700 million of
5.30% notes due April 1, 2015. The proceeds from these notes will be used to
redeem certain preferred securities and retire other maturing debt balances
later in 2003.
Also during the 2003 first quarter, approximately 713,000 shares were added to
treasury stock at a cost of $26 million, while 512,000 treasury shares were
issued for various incentive plans, including stock option exercises that
generated $6 million of cash. In the 2002 three-month period, approximately
160,000 shares were added to treasury stock at a cost of $6 million with
approximately 975,000 treasury shares issued for various incentive
plans, including stock option exercises that generated $30 million of cash.
Common stock dividend payments were $.25 per share for both the 2003 and 2002
three-month periods.
In March 2003, International Paper sold a minority interest in Southeast Timber,
Inc. (Southeast Timber), a consolidated subsidiary of International Paper, to a
private investor for $150 million. Southeast Timber, through a subsidiary, holds
approximately 1.5 million acres of forestlands in the southern United States,
and will be the primary vehicle for selling International Paper's southern
forestlands over the next five years. Southeast Timber and its subsidiaries will
continue to be consolidated by International Paper. The private investor is
entitled to an annual preferred dividend based on LIBOR plus a defined margin.
The $150 million third-party interest is included in minority interest in
International Paper's consolidated balance sheet.
At March 31, 2003, cash and temporary investments totaled $2.2 billion compared
with $1.1 billion at December 31, 2002.
In March 2003, International Paper renegotiated its $1.5 billion commercial
paper credit facility. The facility now has a maturity of March 2006. This
facility was unused at March 31, 2003.
International Paper believes its capital resources remain adequate to fund
expected working capital requirements.
17
Other
The effective income tax rate before the cumulative effect of accounting changes
was 29% and 31% for the 2003 and 2002 three-month periods, respectively, which
include the tax effects of certain special and unusual items that can affect the
effective income tax rate in a given quarter, but may not recur in subsequent
quarters. Management believes that the effective tax rate computed after
excluding these special or unusual items provides a better estimate of the rate
that could be expected in future quarters of the current calendar year if no
additional special or unusual items were to occur in those quarters. The
effective tax rate for the three-month periods ended March 31, 2003 and 2002
excluding these special and unusual items was 31% in both periods.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires International Paper to
establish accounting policies and to make estimates that affect both the amounts
and timing of the recording of assets, liabilities, revenues and expenses. Some
of these estimates require judgments about matters that are inherently
uncertain.
Accounting policies whose application may have a significant effect on the
reported results of operations and financial position of International Paper,
and that can require judgments by management that affect their application,
include SFAS No. 5, "Accounting for Contingencies," SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," SFAS No. 142, "Goodwill
and Other Intangible Assets," SFAS No. 87, "Employers' Accounting for Pensions,"
as amended by SFAS No. 132, "Employers' Disclosures About Pension and Other
Postretirement Benefits," and SFAS No. 109, "Accounting for Income Taxes." The
following is a discussion of the impact of these accounting policies on
International Paper:
Contingent Liabilities. Accruals for contingencies including legal and
environmental matters are recorded when it is probable that a liability has been
incurred or an asset impaired and the amount of the loss can be reasonably
estimated. Liabilities accrued for legal matters require judgments regarding
projected outcomes and range of loss based on historical experience and
recommendations of legal counsel. Additionally, as discussed in Note 11 of the
Notes to Consolidated Financial Statements included in International Paper's
Annual Report on Form 10-K for the year ended December 31, 2002, reserves for
projected future claims settlements relating to exterior siding products
previously manufactured by Masonite require judgments regarding projections of
future claims rates and amounts. When deemed appropriate, International Paper
utilizes independent third parties to assist in developing these estimates.
Liabilities for environmental matters require evaluations of relevant
environmental regulations and estimates of future remediation alternatives and
costs. International Paper determines these estimates after a detailed
evaluation of each site.
Impairment of Long-Lived Assets and Goodwill. An impairment of a long-lived
asset exists when the asset carrying amount exceeds its fair value, and is
recorded when the carrying amount is not recoverable through future operations.
A goodwill impairment exists when the carrying amount of goodwill exceeds its
fair value. Assessments of possible impairments of long-lived assets and
goodwill are made when events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable through future operations.
Additionally, testing for possible impairment of recorded goodwill and
intangible asset balances will be performed in the third quarter of each year.
The amount and timing of impairment charges for these assets require the
estimation of future cash flows and the fair market value of the related assets.
Pension and Postretirement Benefit Obligations. The charges recorded for pension
and other postretirement benefit obligations are determined annually in
conjunction with International Paper's consulting actuary, and are dependent
upon various assumptions. These assumptions include the expected long-term rate
of return on plan assets, discount rates, projected future compensation
increases, health care cost trend rates, and mortality rates.
18
Income Taxes. International Paper records provisions for U.S. federal, state and
foreign income taxes based on the respective tax rules and regulations for the
jurisdictions in which it operates, and judgments as to the allocation of income
and the amount of deductions relating to those jurisdictions. Domestic and
foreign tax authorities frequently challenge the timing and amounts of these
income allocations and deductions. International Paper records reserves for
estimated taxes payable and for projected settlements of these disputes.
However, the final resolution of these challenges can differ from estimated
amounts.
While the judgments and estimates made by International Paper are based on
historical experience and other assumptions that management believes are
appropriate and reasonable under current circumstances, actual resolution of
these matters may differ from recorded estimated amounts, resulting in charges
or credits that could materially affect future financial statements.
Significant Accounting Estimates
Pension Accounting. Net pension expense reported in operating income totaled
approximately $1.4 million for International Paper's U.S. plans for the three
months ended March 31, 2003, or about $19.5 million lower than the pension
income amount recorded for the first three months of 2002. Net pension expense
for non-U.S. plans was about $11 million and $6 million for the three-month
periods in 2003 and 2002, respectively. The decrease in U.S. plan pension income
was principally due to a reduction in the expected long-term rate of return on
plan assets to 8.75% for 2003 from 9.25% for 2002, and reductions in the
discount rate (6.50% for 2003 and 7.25% for 2002) and assumed rate of future
compensation increase (3.75% for 2003 and 4.5% for 2002).
After consultation with our actuaries, International Paper determines these
actuarial assumptions on December 31 of each year to calculate liability
information as of that date and pension expense for the following year. The
discount rate assumption is determined based on the internal rate of return for
a portfolio of high quality bonds (Moody's Aa Corporate bonds) with maturities
that are consistent with projected future plan cash flows. The expected
long-term rate of return on plan assets is based on historical and projected
average rates of return for current and planned asset classes in the plan
investment portfolio. The market value of plan assets for International Paper's
U.S. plans at December 31, 2002, totaled approximately $5.6 billion, consisting
of approximately 60% equity securities, 30% fixed income securities, and 10%
real estate and other assets. Plan assets included approximately $25 million of
International Paper common stock that was sold in the first quarter of 2003.
At December 31, 2002, the market value of assets was less than the accumulated
benefit obligation for International Paper's qualified pension plans and,
accordingly, a minimum liability of approximately $1.0 billion was established
with an after tax charge of approximately $1.5 billion to Shareholders' equity,
with no impact on earnings or cash flows. If the difference between the market
value of plan assets and the accumulated benefit obligation increases by the
next plan measurement date, normally December 31, 2003, a further increase to
the recorded minimum liability would be required, with an additional charge to
Shareholders' equity. Factors that could cause this difference to increase
include a further decline in the market value of plan assets or a decrease in
the discount rate used to compute the accumulated benefit obligation. During the
first quarter of 2003, the actual return on plan assets for these plans has been
below the expected long-term rate of return. While International Paper may elect
to make voluntary contributions to its plans in the coming years, it is unlikely
that there will be any required minimum contributions to the plans before 2005
unless interest rates decline below current levels or investment performance is
significantly below projections.
Accounting for Stock Options. International Paper accounts for stock options
using the intrinsic value method under APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Under this method, compensation expense is recorded over
the related service period when the market price exceeds the option price at the
measurement date, which is the grant date for International Paper's options. No
compensation expense is recorded as options are issued with an exercise price
equal to the market price of International Paper stock on the grant date.
19
During each reporting period, fully diluted earnings per share is calculated by
assuming that "in-the-money" options are exercised and the exercise proceeds are
used to repurchase shares in the marketplace. When options are actually
exercised, option proceeds are credited to equity and issued shares are included
in the computation of earnings per common share, with no effect on reported
earnings. Equity is also increased by the tax benefit that International Paper
will receive in its tax return for income reported by the optionees in their
individual tax returns.
Under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
expense for stock options is measured at the grant date based on a computed fair
value of options granted, and then charged to expense over the related vesting
period. Had this method of accounting been applied, additional expense of $10
million and $12 million would have been recorded in the first quarters of 2003
and 2002, respectively, decreasing the reported earnings per share by 22% to
$0.07 in the first quarter of 2003 and increasing the reported loss per share by
1% to ($2.33) in the first quarter of 2002.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, and in particular,
statements found in Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, that are not historical in nature may
constitute forward-looking statements. These statements are often identified by
the words, "will," "may," "should," "continue," "anticipate," "believe,"
"expect," "plan," "appear," "project," "estimate," "intend," and words of
similar import. Such statements reflect the current views of International Paper
with respect to future events and are subject to risks and uncertainties. Actual
results may differ materially from those expressed or implied in these
statements. Factors which could cause actual results to differ include, among
other things, the timing and strength of an economic recovery, changes in
interest rates and plan asset values which could have an impact on reported
earnings and shareholders' equity, the strength of demand for the Company's
products and changes in overall demand, the effects of competition from foreign
and domestic producers, the level of housing starts, changes in the cost or
availability of raw materials, the cost of compliance with environmental and
other governmental regulations, the ability of the Company to continue to
realize anticipated cost savings, performance of the Company's manufacturing
operations, results of legal proceedings, changes related to international
economic conditions, changes in currency exchange rates, particularly the
relative value of the U.S. dollar to the Euro, economic conditions in developing
countries, specifically Brazil and Russia, and the war on terrorism. In view of
such uncertainties, investors are cautioned not to place undue reliance on these
forward-looking statements. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
20
Financial Information by Industry Segment
(Unaudited)
(In millions)
Sales by Industry Segment
Three Months Ended
March 31,
------------------
2003 2002
------ ------
Printing Papers $1,885 $1,820
Industrial and Consumer Packaging 1,500 1,460
Distribution 1,530 1,535
Forest Products 675 765
Carter Holt Harvey 500 410
Specialty Businesses and Other (1) 350 420
Corporate and Inter-segment Sales (365) (372)
------ ------
Net Sales $6,075 $6,038
====== ======
Operating Profit by Industry Segment
Three Months Ended
March 31,
------------------
2003 2002
----- -----
Printing Papers $ 122 $ 76
Industrial and Consumer Packaging 89 128
Distribution 15 18
Forest Products 161 176
Carter Holt Harvey 16 10
Specialty Businesses and Other (1) 7 10
----- -----
Operating Profit 410 418
Interest expense, net (184) (205)
Minority interest (2) 18 10
Corporate items, net (88) (94)
Restructuring and other charges (23) --
Reversal of reserves no longer required -- 10
----- -----
Earnings before income taxes,
minority interest, and cumulative effect
of accounting changes $ 133 $ 139
===== =====
(1) Includes Arizona Chemical, Industrial Papers, Chemical Cellulose Pulp and
businesses identified in our divestiture program.
(2) Operating profits for industry segments include each segment's percentage
share of the profits of subsidiaries included in that segment that are less
than wholly owned. The pre-tax minority interest for these subsidiaries is
added here to present consolidated earnings before income taxes, minority
interest, and cumulative effect of accounting changes.
21
INTERNATIONAL PAPER COMPANY
SALES VOLUMES BY PRODUCT (1)(2)
(Unaudited)
Three Months Ended
March 31,
------------------
2003 2002
----- -----
Printing Papers (In thousands of short tons)
Uncoated Papers and Bristols 1,604 1,621
Coated Papers 506 509
Market Pulp 631 611
Packaging (In thousands of short tons)
Containerboard 586 504
Bleached Packaging Board 340 314
Kraft 150 173
Industrial and Consumer Packaging 1,117 1,113
Forest Products (In millions)
Panels (sq. ft. 3/8" - basis) 506 779
Lumber (board feet) 964 1,005
MDF and Particleboard (sq. ft. 3/4"- basis) 147 179
(1) Sales volumes include third party and inter-segment sales and 100% of
volumes sold by Carter Holt Harvey.
(2) Volumes for divested businesses are included through the date of sale.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosures about market
risk are shown on pages 25 and 56 through 58 of International Paper's Annual
Report to Shareholders for the year ended December 31, 2002 as previously filed
on Form 10-K, which information is incorporated herein by reference.
23
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Within 90 days prior to the filing of this report, an evaluation was carried out
under the supervision and with the participation of the Company's management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures, as defined in Rule
13a-14 (c) under the Securities Exchange Act (Act). Based upon this evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports we file under the Act is
recorded, processed, summarized and reported by management of the Company on a
timely basis in order to comply with the Company's disclosure obligations under
the Act and the SEC rules thereunder.
Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following matters discussed in previous filings under the Act, are updated
as follows:
Exterior Siding and Roofing Litigation: A discussion of developments relating to
the financial impact of certain class action lawsuits that were settled in 1998
and 1999 is found in Note 8 in this Form 10-Q.
Other Litigation: In March and April 2000, Champion and 10 members of its board
of directors were served with six lawsuits that were filed in the Supreme Court
for the State of New York, New York County. Each of the suits purported to be a
class action filed on behalf of Champion shareholders and alleged that the
defendants breached their fiduciary duties in connection with the proposed
merger with UPM-Kymmene Corporation and the merger proposal from International
Paper. On September 26, 2002, the parties signed a stipulation of settlement
providing for the settlement and final disposition of this lawsuit. Pursuant to
the stipulation, International Paper will donate $100,000 to a law school
designated by the Court to fund educational programs in support of corporate
governance and shareholder rights. International Paper will also pay such
attorneys' fees and expenses of plaintiffs' counsel as may be awarded by the
Court, up to $300,000. The Court held a hearing on the fairness of the proposed
settlement on February 10, 2003. On April 23, 2003, the Court entered an order
approving the settlement.
On May 14, 1999, and May 18, 1999, two lawsuits were filed in federal court in
the Eastern District of Pennsylvania against International Paper, the former
Union Camp Corporation and other manufacturers of linerboard. These suits allege
that the defendants conspired to fix prices for linerboard and corrugated sheets
during the period October 1, 1993, through November 30, 1995. These lawsuits
seek injunctive relief as well as treble damages and other costs associated with
the litigation. The cases have been consolidated. The plaintiffs in these
consolidated cases sought certification on behalf of both corrugated sheet
purchasers and corrugated container purchasers. On September 4, 2001, the
district court certified both classes. Defendants filed a petition appealing the
certification order, which the Court of Appeals for the Third Circuit, in its
discretion, granted. On September 5, 2002, the Court of Appeals for the Third
Circuit affirmed the district court's certification decision. On January 14,
2003, the defendants filed a petition for certiorari with the U.S. Supreme Court
seeking a review of the Court of Appeals decision; the Supreme Court denied the
petition on April 21, 2003. Discovery in the case is ongoing.
Environmental
In February 2000, the Town of Lyman, South Carolina issued an administrative
order alleging past violations of a wastewater pretreatment permit at the former
Union Camp folding carton facility in Spartanburg, South Carolina. International
Paper has satisfied the terms of the order, and in March 2003 agreed to resolve
the matter for a payment of $400,000 for past wastewater treatment fees and
other expenses allegedly incurred by the Town of Lyman.
In March 2003, the United States Environmental Protection Agency (EPA) notified
the Company that it intends to initiate an enforcement action alleging hazardous
waste deficiencies at the Company's treated pole facility in Joplin, Missouri.
The Company and the EPA have entered into settlement discussions.
International Paper is also involved in various other inquiries, administrative
proceedings and litigation relating to contracts, sales of property,
environmental protection, tax, antitrust, personal injury and other matters,
some of which allege substantial monetary damages. While any proceeding or
litigation has the element of uncertainty, International Paper believes that the
outcome of any of the other lawsuits or claims that are pending or threatened,
or all of them combined, will not have a material adverse effect on its
consolidated financial position or results of operations.
25
ITEM 5. OTHER INFORMATION
The Company announced the following changes in senior management:
John V. Faraci, formerly executive vice president and chief financial officer
became president and a director of the Company in February 2003.
Christopher P. Liddell, formerly vice president-finance of the Company, and
before that chief executive officer of Carter Holt Harvey Limited, became senior
vice president and chief financial officer in March 2003.
Maura A. Smith, formerly senior vice president, chief restructuring officer,
general counsel and secretary of Owens Corning, became senior vice president
and general counsel of the Company on March 31, 2003.
Paul Herbert, senior vice president of the Company and president of IP Europe,
became senior vice president-printing and communications papers in March 2003.
Charles H. Greiner, formerly senior vice president - printing and communications
papers became senior vice president - commercial development in March 2003.
Richard B. Lowe, formerly vice president of the Company was elected senior vice
president - distribution in April 2003.
Robert J. Grillet was appointed vice president and controller in April 2003.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
In connection with Item 601(b)(4)(iii)(A) of Regulation S-K,
certain instruments respecting long-term debt of the Company have
been omitted but will be furnished to the Commission upon
request.
10.1 $1.5 Billion 3-Year Credit Agreement dated as of March 6,
2003 between International Paper Company, the Lenders Party
thereto, Citibank, N.A., as Syndication Agent, Bank of
America, N.A., BNP Paribas and Deutsche Bank Securities
Inc., as Documentation Agents and J.P. Morgan Securities
Inc. and Salomon Smith Barney Inc., as Joint Lead Arrangers
and Joint Bookrunners.
10.2 Management Incentive Plan, amended and restated as of
January 1, 2003.
11 Statement of Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges
99.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted by Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted by Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
International Paper Company furnished a report on Form 8-K under
Item 9. Regulation FD Disclosure (Information provided under Item
12-Results of Operations and Financial Condition) with respect to
its press release dated April 24, 2003 announcing first quarter
earnings.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL PAPER COMPANY
(Registrant)
Date: May 14, 2003 By /s/CHRISTOPHER P. LIDDELL
-------------------------------------
Christopher P. Liddell
Senior Vice President and
Chief Financial Officer
Date: May 14, 2003 By /s/ ROBERT J. GRILLET
-------------------------------------
Robert J. Grillet
Vice President and Controller
28
Certifications:
I, John T. Dillon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International Paper
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ John T. Dillon
- ------------------------------------
John T. Dillon
Chairman and Chief Executive Officer
29
I, Christopher P. Liddell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International Paper
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Christopher P. Liddell
- -------------------------------------------------
Christopher P. Liddell
Senior Vice President and Chief Financial Officer
30