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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 September 30, 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
October 31, 2003 was 480,467,169.
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INTERNATIONAL PAPER COMPANY
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Earnings -
Three Months and Nine Months Ended September 30, 2003 and 2002 1
Consolidated Balance Sheet -
September 30, 2003 and December 31, 2002 2
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2003 and 2002 3
Consolidated Statement of Common Shareholders' Equity -
Nine Months Ended September 30, 2003 and 2002 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Financial Information by Industry Segment 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
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 33
Item 6. Exhibits and Reports on Form 8-K 34
Signatures 35
* 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 Nine Months Ended
September 30, September 30,
------------------- ---------------------
2003 2002 2003 2002
------ ------ ------- -------
Net Sales $6,373 $6,343 $18,712 $18,686
------ ------ ------- -------
Costs and Expenses
Cost of products sold 4,754 4,611 13,924 13,664
Selling and administrative expenses 497 509 1,472 1,516
Depreciation, amortization and cost of timber harvested 416 407 1,226 1,194
Distribution expenses 272 281 821 821
Taxes other than payroll and income taxes 62 65 192 201
Restructuring and other charges 93 19 197 98
Net losses (gains) on sales and impairments of businesses
held for sale 1 (3) 11 (31)
------ ------ ------- -------
Total Costs and Expenses 6,095 5,889 17,843 17,463
Reversal of reserves no longer required, net 8 - 17 10
------ ------ ------- -------
Earnings Before Interest, Income Taxes, Minority
Interest and Cumulative Effect of Accounting Changes 286 454 886 1,233
Interest expense, net 203 186 581 590
------ ------ ------- -------
Earnings Before Income Taxes, Minority
Interest and Cumulative Effect of Accounting Changes 83 268 305 643
Income tax (benefit) provision (59) 85 (58) 118
Minority interest expense, net of taxes 20 38 99 100
------ ------ ------- -------
Earnings Before Cumulative Effect of
Accounting Changes 122 145 264 425
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) $ 122 $ 145 $ 254 $ (750)
====== ====== ======= =======
Basic and Diluted Earnings Per Common Share
Earnings before cumulative effect of accounting changes $ 0.25 $ 0.30 $ 0.55 $ 0.88
Cumulative effect of accounting changes:
Asset retirement obligations - - (0.02) -
Transitional goodwill impairment charge - - - (2.44)
------ ------ ------- -------
Net earnings (loss) $ 0.25 $ 0.30 $ 0.53 $ (1.56)
====== ====== ======= =======
Average Shares of Common Stock Outstanding 479.8 481.1 479.3 482.0
====== ====== ======= =======
Cash Dividends Per Common Share $ 0.25 $ 0.25 $ 0.75 $ 0.75
====== ====== ======= =======
The accompanying notes are an integral part of these financial statements.
1
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
September 30, December 31,
2003 2002
------- -------
Assets
Current Assets
Cash and temporary investments $ 1,564 $ 1,074
Accounts and notes receivable, net 2,948 2,780
Inventories 2,942 2,879
Assets of businesses held for sale 148 128
Other current assets 911 877
------- -------
Total Current Assets 8,513 7,738
------- -------
Plants, Properties and Equipment, net 14,029 14,167
Forestlands 3,932 3,846
Investments 287 227
Goodwill 5,332 5,307
Deferred Charges and Other Assets 2,545 2,507
------- -------
Total Assets $34,638 $33,792
======= =======
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 637 $ -
Accounts payable 2,185 2,014
Accrued payroll and benefits 459 523
Liabilities of businesses held for sale 41 44
Other accrued liabilities 1,831 1,998
------- -------
Total Current Liabilities 5,153 4,579
------- -------
Long-Term Debt 14,508 13,042
Deferred Income Taxes 1,663 1,765
Other Liabilities 3,783 3,778
Minority Interest 1,736 1,449
International Paper - Obligated Mandatorily Redeemable Preferred
Securities of Subsidiaries Holding International Paper Debentures - 1,805
Common Shareholders' Equity
Common stock, $1 par value, 485.0 in 2003 and 484.8 in 2002 485 485
Paid-in capital 6,493 6,493
Retained earnings 3,156 3,260
Accumulated other comprehensive loss (2,165) (2,645)
------- -------
7,969 7,593
Less: Common stock held in treasury, at cost, 2003 - 4.6 shares
2002 - 5.7 shares 174 219
------- -------
Total Common Shareholders' Equity 7,795 7,374
------- -------
Total Liabilities and Common Shareholders' Equity $34,638 $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)
Nine Months Ended
September 30,
---------------------------
2003 2002
------- --------
Operating Activities
Net earnings (loss) $ 254 $ (750)
Cumulative effect of accounting changes 10 1,175
Depreciation and amortization 1,226 1,194
Deferred income tax benefit (169) (114)
Payments related to restructuring and legal reserves (198) (257)
Restructuring and other charges 197 98
Reversal of reserves no longer required, net (17) (10)
Net losses (gains) on sales and impairments of businesses held for sale 11 (31)
Other, net 186 5
Changes in current assets and liabilities
Accounts and notes receivable (90) (62)
Inventories (8) 74
Accounts payable and accrued liabilities (83) 128
Other (17) (22)
------- -------
Cash Provided by Operations 1,302 1,428
------- -------
Investment Activities
Invested in capital projects
Ongoing businesses (703) (613)
Businesses sold and held for sale - (4)
Proceeds from divestitures 53 535
Other (134) (80)
------- -------
Cash Used for Investment Activities (784) (162)
------- -------
Financing Activities
Issuance of common stock 50 43
Issuance of debt 1,377 837
Reduction of debt (686) (1,763)
Redemption of preferred securities of a subsidiary (550) -
Change in bank overdrafts 31 (51)
Purchases of treasury stock (26) (124)
Dividends paid (358) (362)
Sale of preferred securities of a subsidiary 150 50
Other (102) (57)
------- -------
Cash Used for Financing Activities (114) (1,427)
------- -------
Effect of Exchange Rate Changes on Cash 86 (69)
------- -------
Change in Cash and Temporary Investments 490 (230)
Cash and Temporary Investments
Beginning of the period 1,074 1,224
------- -------
End of the period $ 1,564 $ 994
======= =======
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)
Nine Months Ended September 30, 2003
Accumulated
Other
Common Stock Issued Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss)
---------- ---------- ----------- ----------- --------------
Balance, December 31, 2002 484,760 $ 485 $ 6,493 $ 3,260 $ (2,645)
Issuance of stock for various
plans 228 - - - -
Repurchases of stock - - - - -
Cash dividends - Common
stock ($0.75 per share) - - - (358) -
Comprehensive income (loss):
Net earnings - - - 254 -
Foreign currency translation
adjustments - - - - 489
Cash flow hedging derivatives:
Net gain arising during the period
(less tax expense of $27) - - - - 49
Reclassification of gains
included in net income
(less tax expense of $29) - - - - (58)
Total comprehensive income
------- ----- ------- ------- --------
Balance, September 30, 2003 484,988 $ 485 $ 6,493 $ 3,156 $ (2,165)
======= ===== ======= ======= ========
Total
Common
Treasury Stock Shareholders'
Shares Amount Equity
---------- ----------- --------------
Balance, December 31, 2002 5,680 $ 219 $ 7,374
Issuance of stock for various
plans (1,831) (71) 71
Repurchases of stock 713 26 (26)
Cash dividends - Common
stock ($0.75 per share) - - (358)
Comprehensive income (loss):
Net earnings - - 254
Foreign currency translation
adjustments - - 489
Cash flow hedging derivatives:
Net gain arising during the period
(less tax expense of $27) - - 49
Reclassification of gains
included in net income
(less tax expense of $29) - - (58)
--------
Total comprehensive income 734
----- ----- -------
Balance, September 30, 2003 4,562 $ 174 $ 7,795
===== ===== =======
Nine Months Ended September 30, 2002
Accumulated
Other
Common Stock Issued Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss)
---------- ---------- ----------- ----------- --------------
Balance, December 31, 2001 484,281 $ 484 $ 6,465 $ 4,622 $ (1,175)
Issuance of stock for various
plans 404 1 13 - -
Repurchases of stock - - - - -
Cash dividends - Common
stock ($0.75 per share) - - - (362) -
Comprehensive income (loss):
Net loss - - - (750) -
Foreign currency translation
adjustments - - - - (178)
Cash flow hedging derivatives:
Net gain arising during the period
(less tax expense of $17) - - - - 41
Reclassification of losses
included in net income
(less tax benefit of $2) - - - - 5
Total comprehensive loss
------- ----- ------- ------- --------
Balance, September 30, 2002 484,685 $ 485 $ 6,478 $ 3,510 $ (1,307)
======= ===== ======= ======= ========
Total
Common
Treasury Stock Shareholders'
Shares Amount Equity
---------- ----------- --------------
Balance, December 31, 2001 2,693 $ 105 $ 10,291
Issuance of stock for various
plans (1,181) (47) 61
Repurchases of stock 3,110 124 (124)
Cash dividends - Common
stock ($0.75 per share) - - (362)
Comprehensive income (loss):
Net loss - - (750)
Foreign currency translation
adjustments - - (178)
Cash flow hedging derivatives:
Net gain arising during the period
(less tax expense of $17) - - 41
Reclassification of losses
included in net income
(less tax benefit of $2) - - 5
-------
Total comprehensive loss (882)
----- ----- -------
Balance, September 30, 2002 4,622 $ 182 $ 8,984
===== ===== =======
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 nine 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 Nine Months Ended
September 30, September 30,
---------------------- -----------------------
In millions, except per share amounts 2003 2002 2003 2002
------ ------ ------ ------
Earnings before cumulative effect of
accounting changes $ 122 $ 145 $ 264 $ 425
Effect of dilutive securities - - - -
------ ------ ------ ------
Earnings before cumulative effect of
accounting changes - assuming dilution $ 122 $ 145 $ 264 $ 425
====== ====== ====== ======
Average common shares outstanding 479.8 481.1 479.3 482.0
Effect of dilutive securities
Stock options 2.0 1.2 1.4 1.8
------ ------ ------ ------
Average common shares outstanding - assuming dilution 481.8 482.3 480.7 483.8
====== ====== ====== ======
Earnings per common share before cumulative
effect of accounting changes $ 0.25 $ 0.30 $ 0.55 $ 0.88
====== ====== ====== ======
Earnings per common share before cumulative
effect of accounting changes - assuming dilution $ 0.25 $ 0.30 $ 0.55 $ 0.88
====== ====== ====== ======
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
5
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.
NOTE 4 - RESTRUCTURING, BUSINESS IMPROVEMENT AND OTHER CHARGES
During the third quarter of 2003, restructuring and other charges totaling $93
million before taxes ($59 million after taxes) were recorded, including $33
million before taxes ($20 million after taxes) for facility closure costs, $38
million before taxes ($23 million after taxes) for severance costs associated
with organizational restructuring programs, $14 million before taxes ($9 million
after taxes) for legal reserves, and $8 million before taxes ($7 million after
taxes) for early debt retirement costs. In addition, a $1 million pre-tax charge
($1 million after taxes) to adjust costs of businesses previously sold and an $8
million pre-tax credit ($5 million after taxes) for the net reversal of
restructuring and realignment reserves no longer required were recorded in the
quarter. In addition, a decrease in the income tax provision of $60 million was
recorded reflecting a favorable revision of estimated tax accruals upon filing
the 2002 Federal income tax return and increased research and development
credits.
Facility closure and severance costs included a $9 million charge for asset
write-downs and a $62 million charge for severance and other costs. The
following table presents additional detail related to these charges:
Asset Severance
In millions Write-downs and Other Total
- ----------- ----------- --------- -----
Administrative Support Groups (a) $ - $ 38 $ 38
Specialty Businesses and Other (b) 9 24 33
---- ---- ----
$ 9 $ 62 $ 71
==== ==== ====
(a) During the third quarter of 2003, International Paper implemented the
initial phase of an Overhead Reduction Program to improve competitive
performance. Charges associated with this initiative included $37 million
of severance costs covering the termination of 744 employees, and other
cash costs of $1 million. The $38 million charge included: Printing Papers
- $12 million, Industrial and Consumer Packaging - $11 million,
Distribution - $2 million, Forest Products - $6 million, Specialty
Businesses - $2 million, and Corporate - $5 million.
(b) Specialty Businesses recorded an additional charge of $33 million in
connection with the July 15th shutdown of the Natchez, Mississippi mill.
The charge included $9 million of asset write-downs to salvage value, $1
million of severance costs covering the termination of 20 employees, $20
million of environmental closure costs and other cash costs of $3 million.
During the second quarter of 2003, restructuring and other charges totaling $81
million before taxes ($50 million after taxes) were recorded, including $51
million before taxes ($32 million after taxes) for facility shutdown costs and
severance costs associated with organizational restructuring programs, $20
million pre-tax ($12 million after taxes) for legal reserves, and $10 million
before taxes ($6 million after taxes) for early debt retirement costs. In
addition, a $10 million pre-tax adjustment ($6 million after taxes) to reduce
previous divestiture costs and a $9 million credit before taxes and minority
interest ($5 million after taxes and minority interest) for the net reversal of
restructuring reserves no longer required were recorded in the quarter. Also, a
$50 million tax provision reduction was recorded reflecting a favorable tax
audit settlement and benefits from an overseas tax program.
6
The $51 million charge includes a $16 million charge for asset write-downs and a
$35 million charge for severance and other costs. The following table presents
additional detail related to this charge:
Asset Severance
In millions Write-downs and Other Total
- ----------- ----------- --------- -----
Printing Papers (a) $ 3 $ 2 $ 5
Consumer Packaging (b) - 6 6
Forest Products (c) 13 7 20
Distribution (d) - 4 4
Specialty Businesses and Other (e) - 16 16
--- --- ---
$16 $35 $51
=== === ===
(a) The Printing Papers business recorded a charge of $2 million for severance
costs relating to 19 employees associated with an organizational
restructuring initiative. The business also recorded an additional charge
of $3 million to write off obsolete equipment.
(b) The Consumer Packaging business implemented a rationalization plan at the
Clifton and Englewood, New Jersey plants as a result of increased
competition and slowing growth rates in key market segments. Management
also approved a plan to exit leased space at the Montvale, New Jersey
office in connection with the realignment of the Beverage Packaging and
Foodservice businesses. Additionally, the Consumer Packaging business
initiated an organizational restructuring program at several of its
Bleached Board facilities. Charges associated with these programs included
$2 million to cover the termination of 79 employees, lease termination
costs of $3 million, and other cash costs of $1 million.
(c) The Forest Products business approved plans to shut down the Springhill,
Louisiana lumber facility and the Slaughter Industries Distribution Center
in Portland, Oregon, and to temporarily cease operations at the Tuskalusa
lumber mill in Moundville, Alabama. Charges associated with these shutdowns
included $12 million of asset write-downs to salvage value at Springhill
and Slaughter, $5 million of severance costs covering the termination of
198 employees at all three facilities, and $1 million of other exit costs.
Management also approved the closure of the Madison, New Hampshire lumber
mill. Charges associated with this plan included $1 million to write down
assets to their net realizable value and other cash costs of $1 million.
(d) The Distribution business (xpedx) recorded a severance charge of $4 million
covering the termination of 176 employees in a continuing effort to
consolidate duplicative facilities and reduce ongoing operational expenses.
(e) Specialty Businesses recorded a severance charge of $16 million associated
with the termination of 447 employees in connection with the July 15th
shutdown of the Natchez, Mississippi mill. Additional shutdown charges were
recorded in the third quarter of 2003.
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:
7
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.
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.
The following table presents a roll forward of the cumulative severance and
other costs included in the 2003 restructuring plans:
Severance
In millions and Other
- ----------- ---------
Opening balance - first quarter 2003 $ 21
Additions - second quarter 2003 35
Additions - third quarter 2003 62
Cash charges - second quarter 2003 (5)
Cash charges - third quarter 2003 (39)
----
Balance, September 30, 2003 $ 74
====
The severance charges recorded in the first, second and third quarters of 2003
related to 2,069 employees. As of September 30, 2003, 1,191 employees had been
terminated.
During the third quarter of 2002, special charges totaling $19 million before
taxes and minority interest ($9 million after taxes and minority interest),
including $9 million for asset impairment charges and $10 million for severance
and other charges, were recorded.
During the second quarter of 2002, special charges before taxes of $79 million
($50 million after taxes) were recorded for asset shutdowns of excess internal
capacity and cost reduction actions, including a $42 million charge for asset
write-downs and a $37 million charge for severance and other charges.
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 fourth quarter of 2002, restructuring and other charges totaling $597
million before taxes and minority interest ($376 million after taxes and
minority interest) were recorded. These charges included a
8
$101 million charge before taxes and minority interest ($71 million after taxes
and minority interest), including $29 million for asset shutdowns of excess
internal capacity and $72 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 fourth quarter 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.
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)
Cash charges - second quarter 2003 (16)
Cash charges - third quarter 2003 (8)
Reclassifications:
Environmental remediation and other exit costs (4)
Reversal of reserves no longer required (9)
----
Balance, September 30, 2003 $ 24
====
The severance charges recorded in the second, third and fourth quarters of 2002
related to 1,989 employees. As of September 30, 2003, 1,775 employees had been
terminated. An additional 74 employees were retained, and the associated
severance reserves were reversed in the 2003 second quarter.
International Paper continually evaluates its operations for improvement. In
July 2003, the Company announced a program targeting an additional reduction in
annual overhead costs by late 2004. An initial charge of $38 million for
severance and other costs was recorded in the 2003 third quarter relating to
this program. Additional charges will be recorded when additional employees are
notified that their positions will be eliminated and severance charges can be
estimated.
NOTE 5 - BUSINESSES HELD FOR SALE AND DIVESTITURES
Sales and operating earnings for each of the nine month periods ended September
30, 2003 and 2002 for certain small businesses currently held for sale, as well
as results for businesses sold through their respective divestiture dates, were:
- ---------------------------------------------------------------------------
In millions 2003 2002
- ---------------------------------------------------------------------------
Sales $104 $294
Operating Profit 1 8
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 $148 million at September 30, 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 September 30, 2003 are included in Liabilities of
businesses held for sale in Current Liabilities in the accompanying consolidated
balance sheet.
9
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 ended efforts to sell 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.
The mill was closed in mid-July of 2003.
In the third quarter of 2002, International Paper completed the sale of its
Decorative Products division to an affiliate of Kohlberg & Co. for approximately
$100 million in cash and a note receivable with a fair market value of $13
million. This transaction resulted in no gain or loss as these assets had
previously been written down to fair market value in the second quarter of 2002
(see below). Also during the third quarter of 2002, a net pre-tax gain of $3
million before taxes ($1 million after taxes) was recorded related to
adjustments of previously recorded costs of businesses held for sale.
During the second quarter of 2002, a net pre-tax gain on sales of businesses
held for sale of $28 million before taxes and minority interest ($96 million
after taxes and minority interest) was recorded, including a pre-tax gain of $63
million ($40 million after taxes) from the sale of International Paper's
Oriented Strand Board facilities (see below), and a net charge of $35 million
before taxes and minority interest (a gain of $56 million after taxes and
minority interest) relating to other sales and adjustments of previously
recorded estimated costs of businesses held for sale. This net pre-tax charge
included:
(1) a $2 million net loss associated with the sales of the Wilmington
carton plant and Carter Holt Harvey's distribution business;
(2) an additional loss of $12 million to write down the net assets of
Decorative Products to the amount realized on the subsequent sale of
this business in July 2002;
(3) $11 million of additional expenses relating to the decision to
continue to operate Arizona Chemical, including a $3 million
adjustment of previously estimated costs incurred in connection with
the prior sale effort and an $8 million charge to permanently close a
production facility; and
(4) a $10 million charge for additional expenses relating to prior
divestitures.
The impairment charge recorded for Arizona Chemical in 2001 included a tax
expense based on the form of sale being negotiated at that time. As a result of
the decision in the second quarter of 2002 to discontinue sale efforts and to
hold and operate Arizona Chemical in the future, this provision was no longer
required. Consequently, special items for the second quarter include a larger
tax benefit, resulting in a net after-tax gain.
In April 2002, International Paper sold its Oriented Strand Board facilities to
Nexfor Inc. for $250 million, resulting in a pre-tax gain of $63 million ($40
million after taxes).
NOTE 6 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Inventories by major category were:
September 30, December 31,
In millions 2003 2002
- ----------- ------------- ------------
Raw materials $ 430 $ 469
Finished pulp, paper and packaging products 1,768 1,694
Finished lumber and panel products 167 158
Operating supplies 537 517
Other 40 41
------ ------
Total $2,942 $2,879
====== ======
10
Temporary investments with a maturity of three months or less are treated as
cash equivalents and are stated at cost. Temporary investments totaled $973
million and $689 million at September 30, 2003 and December 31, 2002,
respectively.
Interest payments made during the nine-month periods ended September 30, 2003
and 2002 were $605 million and $712 million, respectively. Capitalized net
interest costs were $5 million and $6 million for the nine months ended
September 30, 2003 and 2002, respectively. Total interest expense was $660
million for the first nine months of 2003 and $671 million for the first nine
months of 2002. Distributions paid under all of International Paper's preferred
securities of subsidiaries were $62 million and $89 million during the first
nine months of 2003 and 2002, respectively. Interest payments and expense for
the 2003 nine-month period included an additional $15 million and $22 million,
respectively, of interest on borrowings from de-consolidated trusts as of July
1, 2003 (see Note 7). Income tax payments of $172 million and $204 million were
made during the first nine months of 2003 and 2002, respectively.
Accumulated depreciation was $18.6 billion at September 30, 2003 and $18.1
billion at December 31, 2002. The allowance for doubtful accounts was $147
million at September 30, 2003 and $169 million at December 31, 2002.
In accordance with the provisions of SFAS No. 143, "Accounting for Asset
Retirement Obligations," adopted effective January 1, 2003, International Paper
records a liability and an asset 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 liability is accreted over time and the asset
is depreciated over the life of the related equipment or facility. 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. 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. The
following table presents an analysis of activity related to the asset retirement
obligation since January 1, 2003:
In millions
- -----------
Asset retirement obligation at January 1, 2003 $20
Net transition adjustment 22
Liabilities settled (2)
Net adjustments to existing liabilties 6
Accretion expense 1
---
Asset retirement obligation at September 30, 2003 $47
===
This liability is included in Other liabilities in the accompanying consolidated
balance sheet.
NOTE 7 - RECENT ACCOUNTING DEVELOPMENTS
Financial Instruments With Characteristics of Both Liabilities and Equity:
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." It establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. This standard
was effective for financial instruments entered into or modified after May 31,
2003, and otherwise was effective at the beginning of the first interim period
beginning after June 15, 2003. International Paper adopted this standard for the
quarter ending September 30, 2003, with no material effect on the Company's
financial position or results of operations.
11
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.
Consolidation of Variable Interest Entities:
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51," addressing
consolidation of certain entities in which equity investors do not have the
characteristics of a controlling financial interest, or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The interpretation applied
immediately to variable interest entities (VIE's) created after January 31,
2003, and to VIE's in which an enterprise obtains an interest after that date.
For VIE's created before February 1, 2003, the consolidation provisions were
originally effective in the first reporting period beginning after June 15,
2003. On October 9, 2003, the FASB deferred the required effective date of this
interpretation until the end of the first reporting period ending after December
15, 2003, although early application of the provisions of this interpretation
was allowed.
International Paper neither entered into nor obtained an interest in any VIE's
after January 31, 2003. In the third quarter of 2003, the Company completed its
analysis of the application of this interpretation to certain existing trusts,
International Paper Capital Trust and International Paper Capital Trust III (the
Trusts), that had issued Mandatorily Redeemable Preferred Securities that had
been classified as a separate line item in the Company's consolidated balance
sheet. Under the provisions of FIN 46, it was determined that the Company is not
the "primary beneficiary" of the variable interests of these entities.
Accordingly, these previously consolidated entities were de-consolidated as of
July 1, 2003. As a result, approximately $1.3 billion of Mandatorily Redeemable
Preferred Securities were de-consolidated and approximately $1.3 billion of
borrowings from the Trusts were classified as Long-term debt. These borrowings
represent the sole assets of the Trusts. In addition, interest on the borrowings
totaling approximately $22 million was recorded as Interest expense in the third
quarter, replacing approximately $22 million of preferred dividends that, prior
to the de-consolidation, would have been recorded as Minority interest expense.
Preferred dividends for periods prior to the 2003 third quarter de-consolidation
continue to be reported as Minority interest expense.
The Company is currently analyzing certain other of its financial arrangements
entered into before February 1, 2003, under the provisions of FIN 46, and will
record required adjustments, if any, in the 2003 fourth quarter.
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 (the "Indemnification Lawsuit"). This lawsuit sought to recover amounts
paid by International Paper and Masonite to property owners and others in
connection with the settlement of a lawsuit referred to as Judy Naef v. Masonite
and International Paper (the "Hardboard Lawsuit"), as well as damages for the
refusal of one insurer, Employer's Insurance of Wausau (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 (the "Breach of Duty Lawsuit") was
conducted in a state court in California. The jury
12
found in favor of Masonite, and awarded Masonite $13 million for its expenses to
defend the Hardboard Lawsuit. The jury also awarded $12 million in attorneys'
fees and interest for Masonite's expense to prosecute the Breach of Duty Lawsuit
against Wausau, 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, also based on the finding that
Wausau had acted in bad faith. All post-trial motions brought by Wausau seeking
to upset the jury verdict have been denied but, as of September 30, 2003, the
court has not yet entered a judgment. 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 the Indemnification Lawsuit against 22 insurers (the "Defendants")
began in April 2003 and concerned $470 million paid to claimants pursuant to the
settlement of the Hardboard Lawsuit through May 2003. In July 2003, the jury
determined that $383 million of International Paper's payments to settle these
claims are covered by its insurance policies (the "Phase 1 verdict"). The next
phase of the case will determine how much of the $383 million will be allocated
to the policies of the Defendants. The Company is presently engaged in
court-ordered mediation with several of the Defendants, and no judgment has yet
been entered on the verdict. The Company anticipates that the California court
will also make a determination about indemnification for future claims based on
the Phase 1 verdict. The court will also determine whether amounts paid to the
plaintiff class counsel pursuant to the settlement of the Hardboard Lawsuit, and
administrative expenses incurred in connection with that settlement, are covered
by insurance. In addition to the foregoing proceedings, the Company intends to
seek indemnification from other insurance carriers in arbitration proceedings as
required by the policies.
Because of the uncertainties inherent in the litigation and arbitration,
International Paper is unable to estimate the amount that it will recover
against its insurance carriers. However, as of September 30, 2003, International
Paper had received an aggregate of $94 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 as determined
by the court in the Indemnification Lawsuit. Accordingly, International Paper
believes that the obligation of the third party with respect to the financial
collar arrangement 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. 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.
The following table presents an analysis of the net reserve activity related to
these lawsuits for the nine months ended September 30, 2003.
13
RESERVE ANALYSIS
- ------------------------------------------------------------------------------------------
Hard- Omni-
In millions board wood Woodruf Total
- ------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 357 $138 $12 $ 507
Payments (101) (15) (3) (119)
Insurance collections 33 - - 33
----- ---- -- -----
Balance, September 30, 2003 $ 289 $123 $9 $ 421
===== ==== == =====
The following table shows an analysis of claims statistics related to these
lawsuits for the nine months ended September 30, 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 35.1 7.7 3.7 0.2 0.8 -- 39.6 7.9 47.5
No. of Claims Paid (22.6) (5.5) (2.8) (0.2) (0.7) -- (26.1) (5.7) (31.8)
No. of Claims Dismissed (12.7) (2.8) (0.7) -- (0.3) -- (13.7) (2.8) (16.5)
September 30, 2003 28.4 3.4 2.1 0.4 0.9 0.3 31.4 4.1 35.5
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
During the third quarter of 2003, in conjunction with the Company's application
of the provisions of FIN 46 (see Note 7), approximately $1.3 billion of
Mandatorily Redeemable Preferred Securities, previously classified as a separate
line item on the Company's consolidated balance sheet, was de-consolidated and
approximately $1.3 billion of borrowings from the Trusts were recorded as
Long-term debt. In addition, interest on the borrowings totaling approximately
$22 million was recorded as Interest expense in the third quarter, replacing
approximately $22 million of preferred dividends that, prior to the
de-consolidation, would have been recorded as Minority interest expense.
Preferred dividends for periods prior to the 2003 third quarter continue to be
reported as Minority interest expense. The implementation of this interpretation
had no adverse effect on existing debt covenants.
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
14
were used to repay approximately $450 million of commercial paper and long-term
debt and to redeem $550 million of preferred securities of IP Finance (Barbados)
Limited, a non-U.S. consolidated subsidiary of International Paper.
In September 2003, in connection with a Forest Products industry review,
Standard & Poor's announced that it had changed the outlook on International
Paper's long-term credit rating from BBB/stable to BBB/negative. Standard &
Poor's also downgraded the short-term credit rating of International Paper from
A-2 to A-3. At September 30, 2003, International Paper had no short-term
commercial paper outstanding. While this downgrade does limit the Company's
access to commercial paper markets, alternative sources of committed short-term
liquidity in the form of revolving credit facilities and an accounts receivables
securitization facility are expected to be adequate to meet the Company's
expected future short-term requirements. International Paper continues to
maintain a long-term credit rating of Baa2/Stable and a short-term credit rating
of P-2 from Moody's Investor Services. The Standard & Poor's rating actions had
no effect on any of the covenants contained in any of International Paper's debt
obligations.
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 initially held
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 $150 million
third-party interest is included in Minority interest in the accompanying
consolidated balance sheet.
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.
In March 2001, Ponderosa LLC, a consolidated subsidiary of the Company, pledged
installment notes with a fair market value of approximately $480 million,
received in connection with the sale of Washington State timberlands as
collateral, on a $500 million four-year term loan with an outside lender. These
installment notes are subject to a first priority lien under the lending
agreement. Accordingly, creditors of International Paper cannot look to
these assets for repayment of other obligations of the Company.
In a similar transaction completed in June 2002 involving Ponderosa II LLC, a
consolidated subsidiary of the Company, approximately $400 million of
installment notes received in connection with the sale of timberlands in various
states were pledged as collateral on a $350 million ten-year term loan with an
outside lender. These installment notes are subject to a first priority lien
under the lending agreement. Accordingly, creditors of International Paper
cannot look to these assets for the repayment of other obligations of the
Company.
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
15
committee of independent 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 option-based employee compensation cost is reflected in net
earnings, 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 earnings 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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
In millions, except per share amounts 2003 2002 2003 2002
- ------------------------------------- ---------- --------- ---------- ---------
Net earnings (loss), as reported $ 122 $ 145 $ 254 $ (750)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (11) (11) (32) (34)
----- ----- ----- ------
Pro forma net income (loss) $ 111 $ 134 $ 222 $ (784)
===== ===== ===== ======
Earnings (loss) per common share
Basic and diluted - as reported $0.25 $0.30 $0.53 $(1.56)
===== ===== ===== ======
Basic and diluted - pro forma $0.23 $0.28 $0.47 $(1.62)
===== ===== ===== ======
The effect for the nine months ended September 30, 2003 and 2002, on 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.
16
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 $122 million, or $.25 per share, in the 2003 third quarter. This
compared with net earnings of $145 million, or $.30 per share, in the third
quarter of 2002 and net earnings of $88 million, or $.19 per share, in the
second quarter of 2003. Amounts include the effects of special items in all
periods.
Third-quarter 2003 net sales totaled $6.4 billion, compared with $6.4 billion in
the third quarter of 2002 and $6.2 billion in the second quarter of 2003.
Third-quarter 2003 earnings benefited from a $15 million reduction ($.03 per
share) in the provision for income taxes due to a reduction in the projected
2003 full year effective tax rate before special items from 28% to 25%. The
full-year effective tax rate projection was decreased due to a higher proportion
of projected 2003 earnings in lower tax rate jurisdictions.
Ongoing overhead cost reduction efforts and continued improvement in mill
operating performance had a favorable impact on earnings for the 2003 third
quarter compared with the second quarter. In addition, a seasonal increase in
sales volumes and foreign exchange gains were positive factors. However, average
prices were lower as price declines for uncoated paper, pulp, linerboard, and
corrugated boxes more than offset higher prices for bleached board, lumber and
plywood products. Higher wood costs and increased pension and other benefit
related costs also adversely affected operating results.
Compared with the third quarter of 2002, higher energy and raw material costs,
higher pension and other benefit related costs, and lower average sales prices
and volumes contributed to lower earnings in the current quarter. Overhead cost
reduction efforts, improved manufacturing operations and a lower effective tax
rate helped mitigate the earnings decline from the third quarter of 2002.
During the quarter, International Paper took approximately 370,000 tons of
downtime, including 240,000 tons for lack-of-orders, compared with approximately
380,000 tons of downtime in the second quarter of 2003, which included 90,000
tons for lack-of-orders. The labor strike at Carter Holt Harvey's Kinleith mill
settled in May resulted in an additional 130,000 tons of downtime in New Zealand
in the second quarter. The increased lack-of-order downtime in the third quarter
was taken to bring inventory levels back to normal levels by the end of the
quarter. 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 majority of 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.
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 facility shutdowns,
severance costs associated with organizational restructuring, early debt
extinguishment costs, legal reserves and the reversal of reserves no longer
required. The following table presents a reconciliation of International Paper's
net earnings to its operating profits:
17
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ---------------------
In millions 2003 2002 2003 2002
- ----------- ---- ---- ------ ------
Net Earnings (Loss) $122 $145 $ 254 $ (750)
Add back: Cumulative effect of accounting changes - - 10 1,175
---- ---- ------ ------
Earnings Before Cumulative Effect of Accounting Changes 122 145 264 425
Add back: Income tax (benefit) provision (59) 85 (58) 118
Minority interest expense, net of taxes 20 38 99 100
---- ---- ------ ------
Earnings Before Income Taxes, Minority Interest and
Cumulative Effect of Accounting Changes 83 268 305 643
Interest expense, net 203 186 581 590
Minority interest included in operations (21) (18) (52) (43)
Corporate items 138 71 322 202
Special items:
Restructuring and other charges 93 19 197 98
Reversal of reserves no longer required, net (8) - (17) (10)
Net losses (gains) on sales and impairments of businesses
held for sale 1 (3) 11 (31)
---- ---- ------ ------
$489 $523 $1,347 $1,449
==== ==== ====== ======
Segment Operating Profit
Printing Papers $120 $180 $ 385 $ 362
Industrial and Consumer Packaging 107 128 317 401
Distribution 24 23 61 64
Forest Products 201 164 505 544
Carter Holt Harvey 19 16 44 40
Specialty Businesses and Other 18 12 35 38
---- ---- ------ ------
Total Segment Operating Profit $489 $523 $1,347 $1,449
==== ==== ====== ======
The provision for income taxes for the 2003 third quarter included a $60 million
adjustment reflecting a favorable revision of estimated tax reserves upon the
third quarter filing of the 2002 Federal income tax return and increased
research and development credits. The 2003 nine-month income tax provision also
reflects a $50 million benefit in the second quarter from the settlements of
prior period tax issues.
Net interest expense for the 2003 third quarter of $203 million was higher than
$194 million in the second quarter of 2003 due to the inclusion of $22 million
of interest expense relating to recently de-consolidated trusts (see Note 7). In
connection with the Company's application of the provisions of FIN 46, interest
on borrowings from the Trusts totaling approximately $22 million was recorded as
Interest expense in the third quarter, replacing approximately $22 million of
preferred dividends that, prior to the de-consolidation, would have been
recorded as Minority interest expense. Preferred dividends for periods prior to
the 2003 third quarter de-consolidation continue to be reported as Minority
interest expense. Excluding the effect of this early adoption, interest expense
declined slightly during the quarter.
Corporate items, net totaled $138 million in the 2003 third quarter, up from $71
million in the third quarter of 2002, principally due to higher pension and
other benefit related costs ($58 million), supply chain initiative costs ($14
million) and lower foreign exchange gains ($9 million), partially offset by
higher natural gas hedging gains and other smaller items. The increase from $96
million in the 2003 second quarter was mainly due to higher pension and other
benefit related costs.
Special items in the 2003 third quarter included a pre-tax charge of $93 million
($59 million after taxes), including $33 million for facility closure costs, $38
million for severance and other costs associated with organizational
restructuring programs, $8 million for early debt retirement costs, and $14
million for additional legal reserves; a pre-tax charge of $1 million ($1
million after taxes) to adjust costs of businesses previously sold; and a
pre-tax credit of $8 million ($5 million after taxes) for the reversal of
restructuring and realignment reserves no longer required.
18
Special items in the third quarter of 2002 consisted of a $19 million charge
before taxes and minority interest ($9 million after taxes and minority
interest) for facility closure, administrative realignment and related severance
costs as well as a pre-tax credit of $3 million ($1 million after taxes) to
adjust accrued costs of businesses sold.
Special items in the second quarter of 2003 included pre-tax charges of $81
million ($50 million after taxes) consisting of $43 million for facility
shutdown costs, and $38 million for severance costs associated with
organizational restructuring programs, early debt extinguishment costs and legal
reserves. Special items also included a pre-tax charge of $10 million ($6
million after taxes) to adjust accrued costs of businesses previously sold, and
a credit of $9 million before taxes and minority interest ($5 million after
taxes and minority interest) for the reversal of restructuring and realignment
reserves no longer required.
BUSINESS SEGMENT OPERATING RESULTS
The following presents segment discussions for the third quarter of 2003.
Printing Papers
2003 2002
--------------------------------------------- -------------------------------------------
In millions 3rd Quarter 2nd Quarter Nine Months 3rd Quarter 2nd Quarter Nine Months
--------------------------------------------- -------------------------------------------
Sales $1,915 $1,870 $5,670 $1,965 $1,815 $5,600
Operating Profit 120 143 385 180 106 362
Printing Papers net sales for the third quarter of 2003 were 3% lower than in
the third quarter of 2002, but were 2% higher than in the second quarter of
2003. Operating profits in the third quarter of 2003 were 33% lower than in the
third quarter of 2002 and were 16% lower than in the second quarter of 2003. The
2003 third-quarter earnings decrease versus 2002 was a result of continued high
energy and fiber costs, lower average uncoated paper and pulp prices, and
reduced sales volumes. Compared with the second quarter of 2003, Printing
Papers' third-quarter earnings declined as lower average prices more than offset
the impact of improved mill operations, cost improvement initiatives and higher
sales volumes. During the third quarter of 2003, the segment took 220,000 tons
of downtime, including 135,000 tons of lack-of-order downtime and 85,000 tons
that was maintenance-related. In the previous quarter, downtime totaled 245,000
tons, including 55,000 tons due to lack-of-orders.
Operating profits for Printing Papers continued to be negatively impacted in the
2003 third quarter by high wood costs in the United States due to the impact of
wet weather conditions throughout much of 2003 on harvest activity, particularly
in the Southeast. Earnings in our uncoated free sheet business declined during
the 2003 third quarter as lower average prices offset slightly higher sales
volumes as well as improvements in mill operating efficiencies. Operating
results in our market pulp business declined during the quarter as a result of
lower average prices and increased fiber costs, which were offset somewhat by
higher sales volumes, lower overhead costs and better mill operations. The
coated paper business's operating results improved during the third quarter as
seasonal demand led to higher sales volumes and mill operating improvements more
than offset lower average prices. European papers' third-quarter earnings
decreased from the previous quarter as a result of lower average prices, more
than offsetting improved sales mix and slightly higher sales volumes. In Brazil,
operating earnings remained at high levels, although slightly lower than in the
previous quarter due to softer demand and lower average prices.
While market conditions remain generally soft entering the fourth quarter,
Printing Papers will continue to emphasize manufacturing and overhead cost
reduction initiatives as well as further improvements in mill operations while
balancing production and inventory levels.
19
Industrial and Consumer Packaging
2003 2002
-------------------------------------------- ------------------------------------------
In millions 3rd Quarter 2nd Quarter Nine Months 3rd Quarter 2nd Quarter Nine Months
-------------------------------------------- ------------------------------------------
Sales $1,535 $1,565 $4,600 $1,565 $1,530 $4,555
Operating Profit 107 121 317 128 145 401
Industrial and Consumer Packaging net sales for the third quarter of 2003 were
2% lower than in both the third quarter of 2002 and the second quarter of 2003.
Operating profits in the third quarter of 2003 were 16% lower than in the third
quarter of 2002 and were 12% lower than in the second quarter of 2003. Higher
energy and raw material costs continued to negatively affect earnings during the
2003 third quarter. Earnings in the 2003 third quarter were down compared with
the previous quarter due to lower average linerboard and box prices, partially
offset by higher domestic box volumes and the effects of cost reduction efforts
across the segment. The segment took 140,000 tons of downtime in the third
quarter, including 100,000 tons of lack-of-order downtime to balance internal
supply with customer demand. Lack-of-order downtime was 35,000 tons of the total
81,000 tons of downtime in the previous quarter.
Industrial Packaging's sales and operating profit decreased from the 2003 second
quarter due principally to lower average prices for both containerboard and
boxes. Lower prices and unfavorable mill operations early in the quarter were
partially offset by improved domestic box volumes, improved grade mix and
significant overhead cost reductions.
Consumer Packaging's earnings increased over the previous quarter due to higher
bleached board average prices, improved manufacturing operations and benefits
from cost control efforts, although volumes were slightly lower. Operating
results for converting businesses improved due largely to the effects of
facility and production realignments and continued overhead reduction efforts.
Looking forward to the fourth quarter, this segment expects continued soft
demand and prices for the balance of the year. The segment will focus on further
cost reductions, efficiency improvement initiatives and overhead expense control
in order to improve operating results.
Distribution
2003 2002
------------------------------------------- ------------------------------------------
In millions 3rd Quarter 2nd Quarter Nine Months 3rd Quarter 2nd Quarter Nine Months
------------------------------------------- ------------------------------------------
Sales $1,565 $1,570 $4,665 $1,605 $1,575 $4,715
Operating Profit 24 22 61 23 23 64
Distribution's 2003 third-quarter sales were down 2% from the third quarter of
2002 and were about flat compared with the previous quarter. Operating profits
in the third quarter of 2003 were up 4% and 9% from the third quarter of 2002
and the previous quarter, respectively. Compared with the 2002 third quarter,
earnings improved in the third quarter of 2003 due to the effects of cost
control initiatives and lower bad debt expense, partially offset by lower
average sales volumes and prices. Compared with the 2003 second quarter, higher
sales volumes and reduced overhead costs resulted in increased earnings.
Packaging sales continued to show market strength during the quarter while
commercial printing sales remained weak. Demand improved somewhat during the
quarter, but generally remains weak across most product lines and geographic
markets.
Distribution will continue to emphasize cost control initiatives during the
fourth quarter, with earnings expected to benefit from these initiatives as well
as a seasonal improvement in demand.
20
Forest Products
2003 2002
------------------------------------------- ------------------------------------------
In millions 3rd Quarter 2nd Quarter Nine Months 3rd Quarter 2nd Quarter Nine Months
------------------------------------------- ------------------------------------------
Sales $800 $740 $2,215 $745 $815 $2,325
Operating Profit 201 143 505 164 204 544
Forest Products net sales for the third quarter of 2003 were 7% higher than in
the third quarter of 2002 and were 8% higher than in the second quarter of 2003.
Operating profits in the third quarter of 2003 were 23% higher than in the third
quarter of 2002 and were 41% higher than in the second quarter of 2003.
The increase in earnings in the third quarter of 2003 versus both the previous
quarter and the 2002 third quarter was driven by strong Wood Products earnings,
reflecting higher average plywood and lumber prices and volumes as a result of
strong housing starts and low customer inventory levels. Plywood prices during
the quarter were at historic highs. Harvest volumes from Company forestlands for
the quarter were higher than in both the prior quarter and the 2002 third
quarter. Average stumpage prices were lower than in the second quarter of 2003.
Compared with the third quarter of 2002, average prices for sawtimber were down
while pulpwood prices were higher. Earnings from sales of timberland and other
non-harvest income were about the same as in the previous quarter and were
approximately $10 million higher than in the third quarter of 2002. At Weldwood
of Canada, operating results in the third quarter benefited from higher average
sales prices and volumes and favorable foreign exchange gains versus the
previous quarter.
Looking forward to the fourth quarter, strong demand for both lumber and plywood
is expected to continue; however, some seasonal slowing is likely to occur as
winter weather conditions arrive. Forest Resources' harvest volumes are expected
to be seasonally somewhat lower in the fourth quarter.
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 volume of such sales.
Carter Holt Harvey
2003 2002
------------------------------------------- ------------------------------------------
In millions 3rd Quarter 2nd Quarter Nine Months 3rd Quarter 2nd Quarter Nine Months
------------------------------------------- ------------------------------------------
Sales $590 $525 $1,615 $500 $480 $1,390
Operating Profit 19 9 44 16 14 40
Carter Holt Harvey's 2003 third-quarter sales were 18% and 12% higher than in
the third quarter of 2002 and the second quarter of 2003, respectively.
Operating profits in the third quarter of 2003 were up 19% from the third
quarter of 2002 and were up 111% from the second quarter of 2003.
Earnings in the Forest business were lower than the 2002 third quarter and about
even with the previous quarter reflecting increasingly competitive market
conditions for both domestic and export logs. Wood Products recorded
significantly higher earnings compared to the previous quarter as a result of
the continued strength of the Australian and New Zealand housing markets,
although operating results continued to suffer from weaker export markets. Pulp
and Paper earnings were up significantly from the previous quarter following the
conclusion in May of the strike at the Kinleith mill.
21
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; and (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 in
standards relate to cost of timber harvested (COTH), goodwill amortization,
depreciation and financial instruments.
Specialty Businesses and Other
2003 2002
--------------------------------------- ---------------------------------------
In millions 3rd Quarter 2nd Quarter Nine Months 3rd Quarter 2nd Quarter Nine Months
--------------------------------------- ---------------------------------------
Sales $315 $340 $1,005 $340 $445 $1,205
Operating Profit 18 10 35 12 16 38
The Specialty Businesses and Other segment includes the operating results of
Arizona Chemical, Industrial Papers and, prior to its closure, our Chemical
Cellulose Pulp mill. Also included are divested businesses whose results are
included in this segment for periods prior to their sale. Third-quarter 2003 net
sales were 7% less than both the third quarter of 2002 and the second quarter of
2003. Operating profits in the third quarter of 2003 were 50% higher than in the
third quarter of 2002 and were 80% higher than in the second quarter of 2003.
The decrease in sales during the 2003 third quarter is principally due to the
closure of the Natchez, Mississippi Chemical Cellulose dissolving pulp mill that
ceased operations on July 15, 2003. The increase in earnings during the 2003
third quarter is primarily attributable to reduced operating and raw material
costs at Arizona Chemical and Industrial Papers, while average sale prices and
volumes remained about flat.
Other
In July 2003, the Company announced a program targeting additional reductions in
overhead costs by late 2004. This program will include the elimination of
approximately 3,000 salaried positions in the United States by late 2004,
including some achieved through normal attrition. In connection with this
program, the Company recorded an initial $37 million special charge for
severance costs of 744 employees in the third quarter of 2003. Additional
severance charges will be recorded in future quarters when additional employees
are notified that their positions will be eliminated and severance charge costs
can be estimated.
The Company is currently implementing a supply chain initiative that includes
targeting a reduction in maintenance and repair parts inventories of
approximately $175 million over a four-year period from enhanced management
techniques that will reduce purchases and improve usage. Some of these
reductions may be from dispositions of inventory that, based on the new
approach, will be considered excess.
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 significant additional charges will be
incurred in future periods in our businesses should such triggering events
occur.
Liquidity and Capital Resources
Cash provided by operations totaled $1.3 billion for the first nine months of
2003, compared to $1.4 billion for the comparable 2002 period. Working capital
requirements, reflecting slightly higher accounts and notes receivable and
inventory balances along with slightly lower accrued liability balances,
decreased operating cash flow for the first nine months of 2003 by $198 million.
In the first nine months of 2002, working capital increased operating cash flow
by $118 million.
22
Investments in capital projects totaled $703 million and $617 million for the
first nine months of 2003 and 2002, respectively. Full year capital spending for
2003 is now expected to be approximately $1.1 billion, which is below projected
depreciation and amortization charges.
Financing activities for the first nine months of 2003 included a $691 million
net increase in debt versus a $926 million net reduction in the comparable 2002
nine-month period. In March 2003, International Paper completed 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 were used to repay
approximately $450 million of commercial paper and long-term debt and to redeem
$550 million of preferred securities of IP Finance (Barbados) Limited, a
non-U.S. consolidated subsidiary of International Paper. These preferred
securities had been classified in the consolidated balance sheet as Obligated
Mandatorily Redeemable Preferred Securities of a Subsidiary.
Also during the first nine months of 2003, approximately 713,000 shares were
added to treasury stock through repurchases at a cost of $26 million, while
1,831,000 treasury shares were issued for various incentive plans, including
stock option exercises that generated $50 million of cash. In the first nine
months of 2002, approximately 3,110,000 shares were added to treasury stock at a
cost of $124 million with approximately 1,181,000 treasury shares issued for
various incentive plans, including stock option exercises that generated $43
million of cash. Common stock dividend payments totaling $358 million and $362
million for the first nine months of 2003 and 2002, respectively, were $.75 per
share for both periods.
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 initially held
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 $150 million
third-party interest is included in Minority interest in the accompanying
consolidated balance sheet.
At September 30, 2003, cash and temporary investments totaled $1.6 billion
compared with $1.1 billion at December 31, 2002.
In March 2003, International Paper renegotiated its $1.5 billion bank credit
facility. The facility has a maturity of March 2006. This facility was unused at
September 30, 2003.
In September 2003, in connection with a Forest Products industry review,
Standard & Poor's announced that it had changed the outlook on International
Paper's long-term credit rating from BBB/stable to BBB/negative.
Standard & Poor's also downgraded the short-term credit rating of International
Paper from A-2 to A-3. At September 30, 2003, International Paper had no
short-term commercial paper outstanding. While this downgrade does limit the
Company's access to commercial paper markets, alternative sources of committed
short-term liquidity in the form of revolving credit facilities and an accounts
receivables securitization facility are expected to be adequate to meet the
Company's expected future short-term requirements. International Paper
continues to maintain a long-term credit rating of Baa2/Stable and a short-term
credit rating of P-2 from Moody's Investor Services. The Standard & Poor's
rating actions had no effect on any of the covenants contained in any of
International Paper's debt obligations.
In connection with the application of the provisions of FIN 46 in the third
quarter of 2003 (see Note 7), approximately $1.3 billion of Mandatorily
Redeemable Preferred Securities, previously classified as a separate line item
in the Company's consolidated balance sheet, were de-consolidated, and
approximately $1.3 billion of borrowings from the Trusts were classified as
Long-term debt. In addition, interest on the
23
borrowings totaling approximately $22 million was recorded as Interest expense
in the third quarter, replacing approximately $22 million of preferred dividends
that, prior to the de-consolidation, would have been recorded as Minority
interest expense. Preferred dividends for periods prior to the 2003 third
quarter de-consolidation continue to be reported as Minority interest expense.
The implementation of this interpretation had no adverse effect on existing debt
covenants.
International Paper believes its capital resources remain adequate to fund
expected working capital requirements.
Income Taxes
The effective income tax rate before the cumulative effect of accounting changes
was 19% and 18% for the 2003 and 2002 nine-month periods, respectively, which
included 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 rates for the nine-month periods ended September 30, 2003 and 2002
excluding these special and unusual items were 25% and 31%, respectively.
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 Company has included in its Annual Report on Form 10-K for the year ended
December 31, 2002, a discussion of these critical accounting policies, which are
important to the portrayal of the Company's financial condition and results of
operations and require management's judgments. The Company has not made any
changes in any of these critical accounting policies during the third quarter of
2003.
Significant Accounting Estimates
Pension Accounting. Net pension expense totaled approximately $32.5 million for
International Paper's U.S. plans for the nine months ended September 30, 2003,
or about $93.5 million lower than the pension income amount recorded for the
first nine months of 2002. Net pension expense for non-U.S. plans was about
$34.7 million and $26 million for the nine-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, reductions in the discount rate (6.50% for 2003 from
7.25% for 2002), an adjustment in the third quarter to reflect union benefit
increases negotiated in mid-2003, and a truing-up of certain demographic
assumptions used at the beginning of the year to determine 2003 pension expense.
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
24
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, 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. As of
September 30, 2003, interest rates have declined further since the December 31,
2002 measurement date while the market value of plan assets has increased
slightly. If a remeasurement had occurred as of September 30, 2003, an increase
in the recorded minimum liability of approximately $238 million after-tax would
have been required, with a $161.5 million after-tax reduction in Shareholders'
equity.
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.
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 after-tax
expenses of $32 million and $34 million would have been recorded in the first
nine months of 2003 and 2002, respectively, decreasing the reported earnings per
share to $.47 in the first nine months of 2003 and increasing the reported loss
per share to $1.62 in the first nine months 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,"
25
"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.
26
INTERNATIONAL PAPER COMPANY
Financial Information by Industry Segment
(Unaudited)
(In millions)
Sales by Industry Segment
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
2003 2002 2003 2002
------ ------ ------- -------
Printing Papers $1,915 $1,965 $ 5,670 $ 5,600
Industrial and Consumer Packaging 1,535 1,565 4,600 4,555
Distribution 1,565 1,605 4,665 4,715
Forest Products 800 745 2,215 2,325
Carter Holt Harvey 590 500 1,615 1,390
Specialty Businesses and Other (1) 315 340 1,005 1,205
Corporate and Inter-segment Sales (347) (377) (1,058) (1,104)
------ ------ ------- -------
Net Sales $6,373 $6,343 $18,712 $18,686
====== ====== ======= =======
Operating Profit by Industry Segment
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
2003 2002 2003 2002
------ ------ ------- -------
Printing Papers $ 120 $ 180 $ 385 $ 362
Industrial and Consumer Packaging 107 128 317 401
Distribution 24 23 61 64
Forest Products 201 164 505 544
Carter Holt Harvey 19 16 44 40
Specialty Businesses and Other (1) 18 12 35 38
------ ------ ------- -------
Operating Profit 489 523 1,347 1,449
Interest expense, net (203) (186) (581) (590)
Minority interest (2) 21 18 52 43
Corporate items, net (138) (71) (322) (202)
Restructuring and other charges (3) (93) (19) (197) (98)
Net (losses) gains on sales and impairments of
businesses held for sale (1) 3 (11) 31
Reversal of reserves no longer required, net 8 - 17 10
------ ------ ------- -------
Earnings before income taxes,
minority interest and cumulative effect
of accounting changes $ 83 $ 268 $ 305 $ 643
====== ====== ======= =======
(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.
(3) See Footnote 4 for additional information concerning restructuring and
other charges.
27
INTERNATIONAL PAPER COMPANY
Sales Volumes By Product (1) (2)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2003 2002 2003 2002
------ ------ ------ ------
Printing Papers (In thousands of short tons)
Uncoated Papers and Bristols 1,605 1,664 4,774 4,899
Coated Papers 575 615 1,581 1,657
Market Pulp 630 654 1,810 1,853
Packaging (In thousands of short tons)
Containerboard 560 611 1,696 1,695
Bleached Packaging Board 361 343 1,062 994
Kraft 148 159 455 472
Industrial and Consumer Packaging 1,137 1,122 3,386 3,403
Forest Products (In millions)
Panels (sq. ft. 3/8" - basis) 600 585 1,699 1,905
Lumber (board feet) 1,047 1,099 3,066 3,222
MDF and Particleboard (sq. ft. 3/4" - basis) 155 130 441 500
(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.
28
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 26 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.
29
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended
(Exchange Act), Company management, including the Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) as
of September 30, 2003. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report. As
required by Exchange Act Rule 13a-15(d), Company management, including the Chief
Executive Officer and Chief Financial Officer, also conducted an evaluation of
the Company's internal control over financial reporting to determine whether any
changes occurred during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting. Based on that evaluation, there has been no
such change during the quarter covered by this report.
30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following matters discussed in previous filings under the Exchange 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
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 (acquired by International Paper in 1999), and other
manufacturers of linerboard. These suits allege that the defendants conspired to
fix prices for corrugated sheets and containers during the period October 1,
1993, through November 30, 1995. These lawsuits, which seek injunctive relief as
well as treble damages and other costs associated with the litigation, were
consolidated and, on September 4, 2001, certified as a class action. On
September 22, 2003, International Paper, along with Weyerhaeuser Co. and
Georgia-Pacific Corp., agreed with the class plaintiffs to settle the litigation
for an aggregate amount of $68 million. International Paper's share of the
settlement, which is subject to court approval, is $24.4 million. The
International Paper portion of the settlement also covers the claims brought
against Union Camp Corporation. A final fairness hearing on the proposed
settlement is scheduled for November 25, 2003.
Twelve opt-out complaints, most with multiple plaintiffs, have been filed in
various federal district courts around the country. One opt-out plaintiff
voluntarily dismissed its complaint on October 10, 2003. It is expected that all
of the federal opt-out cases will be consolidated for pre-trial purposes in the
federal court in the Eastern District of Pennsylvania, where the class action
litigation is also pending. Discovery in the federal opt-out cases is scheduled
to conclude September 30, 2004. Additionally, one opt-out case has been filed in
state court in Kansas. Defendants have removed the matter to federal court, but
the Kansas state plaintiffs have filed a motion to remand, which is currently
pending.
In 2000, purchasers of high-pressure laminates filed a number of purported class
actions under the federal antitrust laws alleging that International Paper's
Nevamar division (which was part of the Decorative Products division)
participated in a price-fixing conspiracy with competitors between January 1,
1994 and June 30, 2000. These lawsuits seek injunctive relief as well as treble
damages and other costs associated with the litigation. These cases have been
consolidated in federal district court in New York. In 2000 and 2001, indirect
purchasers of high-pressure laminates also filed similar purported class action
cases under various state antitrust and consumer protection statutes in Arizona,
California, Florida, Maine, Michigan, Minnesota, New Mexico, New York, North
Carolina, North Dakota, South Dakota, Tennessee, West Virginia, Wisconsin and
the District of Columbia. The case in New York state court and one of the two
Michigan cases have been dismissed, while all of the other state cases have been
stayed. On June 17, 2003, the federal district court certified the consolidated
federal cases as a class action. The deadline by which members of the class must
decide whether to opt out of the class action litigation has expired and
thirty-one plaintiffs have opted not to participate in the class litigation.
Discovery in the federal case is ongoing. In the third quarter of 2002,
International Paper completed the sale of the Decorative Products operations,
but retained any liability for these cases.
Environmental
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
31
facility in Joplin, Missouri. On October 10, 2003, the Company was served with a
civil administrative complaint seeking a civil penalty of $673,969. The Company
and the EPA are pursuing 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.
32
ITEM 5. OTHER INFORMATION
The Company announced the following changes in senior management and the Board
of Directors:
John T. Dillon, chairman and chief executive officer, retired on October 31,
2003.
John V. Faraci, formerly president, became the chairman and chief executive
officer on November 1, 2003.
Robert M. Amen, formerly executive vice president, became president and was
elected to the Board of Directors effective November 1, 2003.
James P. Melican, executive vice president, will retire on December 31,
2003.
Maura A. Smith, senior vice president and general counsel, was elected
corporate secretary by the Board of Directors on October 14, 2003.
Martha Finn Brooks was elected to the Board of Directors on October 14,
2003, effective December 9, 2003.
At the May, 2003 Annual Meeting of Shareholders, a stockholder resolution
asking that the Board impose certain limitations on any future termination
agreement or change in control agreement entered into with a senior executive
of the Company was approved by more than a majority vote of the stockholders
voting on that resolution. In consideration of that vote and, after due
consideration, the Board decided at its October, 2003 meeting to adopt the
two policies which are set forth in Exhibits 99.1 and 99.2.
33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement of Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of principal executive officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of principal financial officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Board Policy on Severance Agreements with Senior Executives
99.2 Board Policy on Change of Control Agreements
(b) Reports on Form 8-K
On July 15, 2003 the Company filed a Current Report on Form 8-K
under Item 9. Regulation FD Disclosure relating to a favorable
decision in a lawsuit brought by International Paper against 22
insurers.
On July 24, 2003, the Company filed a Current Report on Form 8-K,
furnishing under Item 9. Regulation FD Disclosure (Information
provided under Item 12 - Results of Operations and Financial
Condition) the results of its operations for the quarter ended
June 30, 2003.
On September 9, 2003, the Company filed a Current Report on Form
8-K under Items 5 and 7 announcing the retirement of Chairman and
Chief Executive Officer, John Dillon, on October 31, 2003, and
the election of John V. Faraci as Chairman and Chief Executive
Officer and the election of Robert M. Amen to President and his
election to the Board of Directors effective November 1, 2003.
On October 15, 2003, the Company filed a Current Report on Form
8-K under Items 5 and 7 announcing the election of Martha Finn
Brooks as a director of International Paper Company.
On October 27, 2003, the Company filed a Current Report on Form
8-K, furnishing under Item 12 the results of its operations for
the quarter ended September 30, 2003.
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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: November 13, 2003 By /s/CHRISTOPHER P. LIDDELL
--------------------------------
Christopher P. Liddell
Senior Vice President and Chief
Financial Officer
Date: November 13, 2003 By /s/ ROBERT J. GRILLET
---------------------------------
Robert J. Grillet
Vice President and Controller
35