-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PamOvlnxuG6RK1q1lJwRmt/8hWjUKT0cwnH9o2N/sdMRbqdnwdd8ZciJ6xpiknQQ KZvQZ/DGKGcciXqfE78t+Q== 0000912057-00-023671.txt : 20000515 0000912057-00-023671.hdr.sgml : 20000515 ACCESSION NUMBER: 0000912057-00-023671 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL PAPER CO /NEW/ CENTRAL INDEX KEY: 0000051434 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 130872805 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03157 FILM NUMBER: 627446 BUSINESS ADDRESS: STREET 1: TWO MANHATTANVILLE RD CITY: PURCHASE STATE: NY ZIP: 10577 BUSINESS PHONE: 9143971500 MAIL ADDRESS: STREET 1: TWO MANHATTANVILLE ROAD CITY: PURCHASE STATE: NY ZIP: 10577 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL PAPER & POWER CORP DATE OF NAME CHANGE: 19710527 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 |_| 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.) TWO MANHATTANVILLE ROAD, PURCHASE, NY 10577 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 397-1500 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 THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AS OF APRIL 30, 2000 WAS 414,743,586. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INTERNATIONAL PAPER COMPANY INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Earnings - 1 Three Months Ended March 31, 2000 and 1999 Consolidated Balance Sheet - 2 March 31, 2000 and December 31, 1999 Consolidated Statement of Cash Flows - 3 Three Months Ended March 31, 2000 and 1999 Consolidated Statement of Common Shareholders' Equity - 4 Three Months Ended March 31, 2000 and 1999 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and 13 Results of Operations Financial Information by Industry Segment 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk * PART II. OTHER INFORMATION Item 1. Legal Proceedings 22 Item 2. Changes in Securities and Use of Proceeds * Item 3. Defaults upon Senior Securities * Item 4. Submission of Matters to a Vote of Security Holders * Item 5. Other Information * Item 6. Exhibits and Reports on Form 8-K 24 Signatures 24
* Omitted since no answer is called for, answer is in the negative or inapplicable. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERNATIONAL PAPER COMPANY CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, -------------------- 2000 1999 ------- ------- NET SALES $ 6,371 $ 6,032 ------- ------- COSTS AND EXPENSES Cost of products sold 4,564 4,576 Selling and administrative expenses 521 504 Depreciation and amortization 383 383 Distribution expenses 266 276 Taxes other than payroll and income taxes 63 57 Merger integration costs 8 Equity earnings from investment in Scitex (1) ------- ------- TOTAL COSTS AND EXPENSES 5,805 5,795 ------- ------- EARNINGS BEFORE INTEREST, INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEMS 566 237 Interest expense, net 131 143 ------- ------- EARNINGS BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEMS 435 94 Income tax provision 136 28 Minority interest expense, net of taxes 55 34 ------- ------- EARNINGS BEFORE EXTRAORDINARY ITEMS 244 32 Gains on sales of investments, net of taxes and minority interest 134 ------- ------- NET EARNINGS $ 378 $ 32 ======= ======= EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY ITEMS $ 0.59 $ 0.08 EARNINGS PER COMMON SHARE - EXTRAORDINARY ITEMS 0.32 ------- ------- EARNINGS PER COMMON SHARE $ 0.91 $ 0.08 ======= ======= EARNINGS PER COMMON SHARE - ASSUMING DILUTION $ 0.91 $ 0.08 ======= ======= AVERAGE SHARES OF COMMON STOCK OUTSTANDING 413.5 412.1 ======= ======= CASH DIVIDENDS PER COMMON SHARE $ 0.25 $ 0.26 ======= =======
The accompanying notes are an integral part of these financial statements. 1 INTERNATIONAL PAPER COMPANY CONSOLIDATED BALANCE SHEET (UNAUDITED) (IN MILLIONS)
MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ASSETS Current Assets Cash and temporary investments $ 1,574 $ 453 Accounts and notes receivable, net 3,409 3,227 Inventories 3,306 3,203 Other current assets 384 358 -------- -------- Total Current Assets 8,673 7,241 -------- -------- Plants, Properties and Equipment, Net 14,389 14,381 Forestlands 2,895 2,921 Investments 169 1,044 Goodwill 3,207 2,596 Deferred Charges and Other Assets 2,216 2,085 -------- -------- TOTAL ASSETS $ 31,549 $ 30,268 ======== ======== LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current Liabilities Notes payable and current maturities of long-term debt $ 1,699 $ 920 Accounts payable 1,874 1,870 Accrued payroll and benefits 371 423 Other accrued liabilities 1,531 1,169 -------- -------- Total Current Liabilities 5,475 4,382 -------- -------- Long-Term Debt 7,250 7,520 Deferred Income Taxes 3,442 3,344 Other Liabilities 1,349 1,332 Minority Interest 1,699 1,581 International Paper - Obligated Mandatorily Redeemable Preferred Securities of Subsidiaries Holding International Paper Debentures 1,805 1,805 Common Shareholders' Equity Common stock, $1 par value, 2000 - 414.7 shares, 1999 - 414.6 shares 415 415 Paid-in capital 4,076 4,078 Retained earnings 6,887 6,613 Accumulated other comprehensive income (loss) (799) (739) -------- -------- 10,579 10,367 Less: Common stock held in treasury, at cost, 2000 - 1.1 shares, 50 63 1999 - 1.2 shares -------- -------- Total Common Shareholders' Equity 10,529 10,304 -------- -------- TOTAL LIABILITIES AND COMMON SHAREHOLDERS' EQUITY $ 31,549 $ 30,268 ======== ========
The accompanying notes are an integral part of these financial statements. 2 INTERNATIONAL PAPER COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
THREE MONTHS ENDED MARCH 31, ------------------- 2000 1999 -------- ------- OPERATING ACTIVITIES Net earnings $ 378 $ 32 Depreciation and amortization 383 383 Deferred income tax provision (benefit) 71 (13) Payments related to restructuring and legal reserves (62) (27) Merger integration costs 8 Gains on sales of investments (385) Other, net 197 33 Changes in current assets and liabilities Accounts and notes receivable (163) (184) Inventories (78) 11 Accounts payable and accrued liabilities 193 46 Other (7) 8 ------- ------- CASH PROVIDED BY OPERATIONS 535 289 ------- ------- INVESTMENT ACTIVITIES Invested in capital projects (214) (211) Mergers and acquisitions, net of cash acquired (590) (23) Proceeds from divestitures 1,359 16 Other (121) (32) ------- ------- CASH PROVIDED BY (USED FOR) INVESTMENT ACTIVITIES 434 (250) ------- ------- FINANCING ACTIVITIES Issuance of common stock 35 30 Issuance of debt 979 438 Reduction of debt (715) (406) Change in bank overdrafts (61) (41) Dividends paid (104) (108) Other 22 (36) ------- ------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 156 (123) ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (4) (9) ------- ------- CHANGE IN CASH AND TEMPORARY INVESTMENTS 1,121 (93) CASH AND TEMPORARY INVESTMENTS Beginning of the period 453 533 ------- ------- End of the period $ 1,574 $ 440 ======= =======
The accompanying notes are an integral part of these financial statements. 3 INTERNATIONAL PAPER COMPANY CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY (UNAUDITED) (IN MILLIONS, EXCEPT SHARE AMOUNTS IN THOUSANDS) THREE MONTHS ENDED MARCH 31, 2000
Accumulated Total Other Common Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders' Shares Amount Capital Earnings Income (Loss) Shares Amount Equity ------ ------ ------- -------- ------------- ------ ------ ------------- BALANCE, DECEMBER 31, 1999 414,584 $ 415 $ 4,078 $ 6,613 ($739) 1,216 $63 $10,304 Issuance of stock for various plans 151 (2) (791) (41) 39 Repurchase of stock 630 28 (28) Cash dividends - Common stock ($0.25 per share) (104) (104) Comprehensive income (loss) Net earnings 378 378 Change in cumulative foreign currency translation adjustment (60) (60) ------------- Total comprehensive income (loss) 318 ------- ------ ------- -------- ------------- ------ ------ ------------- BALANCE, MARCH 31, 2000 414,735 $ 415 $ 4,076 $ 6,887 ($799) 1,055 $50 $10,529 ======= ====== ======= ======== ============= ====== ====== =============
THREE MONTHS ENDED MARCH 31, 1999
Accumulated Total Other Common Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders' Shares Amount Capital Earnings Income (Loss) Shares Amount Equity ------ ------ ------- -------- ------------- ------ ------ ------------- BALANCE, DECEMBER 31, 1998 413,185 $ 413 $ 3,896 $ 6,848 ($395) 552 $24 $10,738 Issuance of stock for various plans (461) 27 (245) (11) 38 Repurchase of stock 620 27 (27) Cash dividends - Common stock ($0.26 per share) (108) (108) Comprehensive income (loss) Net earnings 32 32 Change in cumulative foreign currency translation adjustment (186) (186) ------- Total comprehensive income (loss) (154) -------- ----- ------- ------- ----- --- --- ------- BALANCE, MARCH 31, 1999 412,724 $ 413 $ 3,923 $ 6,772 ($581) 927 $40 $10,487 ======== ===== ======= ======= ===== === === =======
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) which are necessary for the fair presentation of results for the interim periods. It is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto incorporated by reference in International Paper's Form 10-K for the year ended December 31, 1999, which has previously been filed with the Commission. On April 30, 1999, International Paper completed its previously announced merger with Union Camp Corporation in a transaction accounted for as a pooling-of-interests. The accompanying 1999 financial statements have been restated to include the financial position and results of operations for both International Paper and Union Camp. Certain reclassifications have been made to prior year amounts to conform with the current year presentation. NOTE 2 - EARNINGS PER COMMON SHARE Earnings per common share were computed by dividing net earnings by the weighted average number of common shares outstanding. Earnings per common share before extraordinary items - assuming dilution were computed assuming that all potentially dilutive securities 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 extraordinary items and earnings per common share before extraordinary items - assuming dilution is as follows:
THREE MONTHS ENDED MARCH 31, ------------------ IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2000 1999 ------------------------------------- -------- ------- EARNINGS BEFORE EXTRAORDINARY ITEMS $ 244 $ 32 Effect of dilutive securities Preferred securities of subsidiary trust 4 ------- ------- EARNINGS BEFORE EXTRAORDINARY ITEMS - ASSUMING DILUTION $ 248 $ 32 ======= ======= AVERAGE COMMON SHARES OUTSTANDING 413.5 412.1 Effect of dilutive securities Long-term incentive plan deferred compensation Stock options 1.2 2.3 Preferred securities of subsidiary trust 8.3 ------- ------- AVERAGE COMMON SHARES OUTSTANDING - ASSUMING DILUTION 423.0 414.4 ======= ======= EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY ITEMS $ 0.59 $ 0.08 ======= ======= EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY ITEMS - ASSUMING DILUTION $ 0.59 $ 0.08 ======= =======
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 On February 21, 2000, Carter Holt Harvey, a subsidiary of International Paper, announced the purchase of CSR Limited's medium density fiberboard and particleboard businesses and its Oberon sawmill for approximately $200 million in cash. This acquisition was completed on April 28, 2000. On February 17, 2000, International Paper announced that we had reached an agreement to acquire Shorewood Packaging Corporation, a leader in the premium retail packaging market, for approximately $640 million in cash and the assumption of approximately $280 million of debt. This merger was completed on March 31, 2000. On November 24, 1998, International Paper announced that it had reached an agreement to merge with Union Camp Corporation (Union Camp), a diversified paper and forest products company. The transaction was approved by Union Camp and International Paper shareholders on April 30, 1999. Union Camp shareholders received 1.4852 International Paper common shares for each Union Camp share held. The total value of the transaction, including the assumption of debt, was approximately $7.9 billion. International Paper issued 110 million shares for 74 million Union Camp shares, including options. The merger was accounted for as a pooling-of-interests. The accompanying 1999 financial statements have been restated to combine the historical financial position and results of operations for both International Paper and Union Camp. The results of operations for the separate companies for the periods prior to the merger and the combined amounts included in International Paper's consolidated financial statements are as follows:
THREE MONTHS ENDED IN MILLIONS MARCH 31, 1999 ----------- ---------------- Net sales: International Paper $ 4,962 Union Camp 1,137 Intercompany eliminations (67) ------- $ 6,032 ======= Net earnings (loss): International Paper $ 44 Union Camp (10) Other (2) ------- $ 32 =======
Note: Other includes the elimination of intercompany transactions and adjustments to conform the accounting practices of the two companies. In April 1999, Carter Holt Harvey acquired the corrugated packaging business of Stone Australia, a subsidiary of Smurfit-Stone Container Corporation. The business consists of two sites in Melbourne and Sydney which serve industrial and primary produce customers. All of the acquisitions completed in the first quarter of 2000 and for the year 1999 were accounted for using the purchase method, with the exception of the Union Camp acquisition, which was accounted for as a pooling-of-interests. The operating results of those mergers and acquisitions accounted for under the purchase method have been included in the consolidated statement of earnings from the dates of acquisition. The accompanying consolidated balance sheet as of March 31, 2000 reflects a preliminary allocation of the purchase price of Shorewood Packaging to the fair value of the assets and liabilities acquired. 6 NOTE 4 - PREFERRED SECURITIES OF SUBSIDIARIES In September 1998, International Paper Capital Trust III issued $805 million of International Paper-obligated mandatorily redeemable preferred securities. International Paper Capital Trust III is a wholly-owned consolidated subsidiary of International Paper and its sole assets are International Paper 7 7/8% debentures. The obligations of International Paper Capital Trust III related to its preferred securities are fully and unconditionally guaranteed by International Paper. These preferred securities are mandatorily redeemable on December 1, 2038. In June 1998, IP Finance (Barbados) Limited, a non-U.S. wholly-owned consolidated subsidiary of International Paper, issued $550 million of preferred securities with a dividend payment based on LIBOR. These preferred securities are mandatorily redeemable on June 30, 2008. In March 1998, Timberlands Capital Corp. II, Inc., a wholly-owned consolidated subsidiary of International Paper, issued $170 million of 7.005% preferred securities as part of the financing to repurchase the outstanding units of IP Timberlands, Ltd. These securities are not mandatorily redeemable and are classified in the consolidated balance sheet as a minority interest liability. In the third quarter of 1995, International Paper Capital Trust (the Trust) issued $450 million of International Paper-obligated mandatorily redeemable preferred securities. The Trust is a wholly-owned consolidated subsidiary of International Paper, and its sole assets are International Paper 5 1/4% convertible subordinated debentures. The obligations of the Trust related to its preferred securities are fully and unconditionally guaranteed by International Paper. These preferred securities are convertible into International Paper common stock. Distributions paid under all of International Paper's subsidiary preferred securities were $44 million and $42 million for the first quarter of 2000 and 1999, respectively. NOTE 5 - SPECIAL AND EXTRAORDINARY ITEMS INCLUDING RESTRUCTURING AND BUSINESS IMPROVEMENT ACTIONS During the first quarter of 2000, International Paper recorded special items amounting to a net pre-tax charge of $8 million ($5 million after taxes) for additional Union Camp merger integration costs. International Paper also recorded an extraordinary gain of $385 million before taxes and minority interest expense ($134 million after taxes and minority interest expense) on the sale of our investment in Scitex and Carter Holt Harvey's sale of its share of Compania de Petroleos de Chile (COPEC), Chile's largest industrial conglomerate. The sale for just over $1.2 billion of Carter Holt Harvey's equity interest in COPEC closed on January 3, 2000. The sale for $79 million of our equity interest in Scitex was completed on January 6, 2000. The gains on these sales are recorded as extraordinary items pursuant to the pooling-of-interests rules. During 1999 special items amounting to a net charge before taxes and minority interest expense of $557 million ($352 million after taxes and minority interest expense) were recorded. The special items included a $148 million pre-tax charge ($97 million after taxes) for Union Camp merger-related termination benefits, a $107 million pre-tax charge ($78 million after taxes) for one-time merger expenses, a $298 million pre-tax charge ($180 million after taxes and minority interest expense) for asset shutdowns of excess internal capacity and cost reduction actions, a $10 million pre-tax charge ($6 million after taxes) to increase existing environmental remediation reserves related to certain former Union Camp facilities, a $30 million pre-tax charge ($18 million after taxes) to increase existing legal reserves and a $36 million pre-tax credit ($27 million after taxes) for the reversal of reserves that were no longer required. The 1999 extraordinary item was 7 a $26 million pre-tax charge ($16 million after taxes) related to the refinancing of high interest Union Camp debt, which we assumed under the merger agreement. The following table shows the impact of special items on 1999 pre-tax earnings by quarter:
QUARTER ------------------------------------------------------ YEAR-TO- IN MILLIONS FIRST SECOND THIRD FOURTH DATE - --------------- ------------- ------------- ------------ ------------- ------------- EARNINGS BEFORE SPECIAL ITEMS, INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEMS $ 94 $ 198 $ 320 $ 393 $1,005 Merger-related termination benefits (98) (50) (148) One-time merger expenses (59) (18) (30) (107) Restructuring and other charges (113) (185) (298) Reversal of reserves no longer required 36 36 Environmental reserve (10) (10) Provision for legal reserves (30) (30) ------------- ------------- ------------ ------------- -------------- EARNINGS (LOSS) BEFORE INCOME TAXES, MINORITY $ 94 $ (36) $ 242 $ 148 $ 448 INTEREST AND EXTRAORDINARY ITEMS ============= ============= ============ ============= ==============
The Union Camp merger-related termination benefits charge relates to employees terminating after the effective date of the merger under an integration benefits program. Under this program, 1,218 employees of the combined company were identified for termination. Benefits payable under this program for certain senior executives and managers are or have been paid from the general assets of International Paper. Benefits for remaining employees have been or will be primarily paid from plan assets of our qualified pension plan. Through March 31, 2000, 898 employees had been terminated. Related cash payments approximated $65 million (including payments related to our nonqualified pension plans). The remainder of the incurred costs primarily represents an increase in the projected benefit obligation of our qualified pension plan. Substantially all of the positions are expected to be eliminated by May 31, 2000. The following table is a roll forward of the Union Camp merger-related termination benefits charge and costs incurred by quarter. The amounts identified below as incurred include all payments made or to be made to employees that have been terminated. The payments are made from the general assets of International Paper or from the assets of our qualified pension plan.
TERMINATION DOLLARS IN MILLIONS BENEFITS ------------------- -------------- Special charge - second quarter 1999 (572 employees) $ 98 Incurred costs - second quarter 1999 (83 employees) (30) Special charge - third quarter 1999 (646 employees) 50 Incurred costs - third quarter 1999 (484 employees) (53) Incurred costs - fourth quarter 1999 (220 employees) (33) --------------- Balance, December 31, 1999 (431 employees) 32 Incurred costs - first quarter 2000 (111 employees) (8) --------------- Balance, March 31, 2000 (320 employees) $ 24 ===============
Note: Benefit costs are treated as incurred on termination date of the employee. 8 The one-time merger expenses of $107 million consisted of $49 million of merger costs and $58 million of post-merger expenses. The merger costs were primarily investment banker, consulting, legal and accounting fees. Post-merger integration expenses included costs related to employee retention such as stay bonuses and other one-time cash costs related to the integration of Union Camp. The $298 million charge for the asset shutdowns of excess internal capacity consisted of a $113 million charge in the 1999 second quarter and a $185 million charge in the 1999 fourth quarter. The charges included $149 million of asset write-downs and $149 million of severance and other charges. A full discussion of these charges is included in International Paper's 1999 Annual Report filed on Form 10-K. The following table is a roll forward of the severance and other costs included in the 1999 restructuring plan:
SEVERANCE DOLLARS IN MILLIONS AND OTHER ------------------- --------------- Opening balance - second quarter 1999 (1,118 employees) $ 56 Cash charges - third quarter 1999 (710 employees) (13) Additions - fourth quarter 1999 (2,045 employees) 93 Cash charges - fourth quarter 1999 (50 employees) (21) --------------- Balance, December 31, 1999 (2,403 employees) 115 Cash charges - first quarter 2000 (1,031 employees) (25) Other charges - first quarter 2000 (8) --------------- Balance, March 31, 2000 (1,372 employees) $ 82 ===============
The $36 million pre-tax credit for the reversal of reserves that were no longer required consists of $30 million related to a retained exposure at the Lancey mill in France and $6 million of excess reserves previously established by Union Camp. The Lancey mill was sold to an employee group in October of 1997. In April 1999, International Paper's remaining exposure to potential obligations under this sale were resolved, and the reserve was returned to income in the second quarter. The $30 million pre-tax charge to increase existing legal reserves included $25 million which we added to our reserve for hardboard siding claims. The remaining $5 million is related to other potential exposures. NOTE 6 - INVENTORIES Inventories by major category include:
MARCH 31, DECEMBER 31, IN MILLIONS 2000 1999 ----------- ------------- ------------- Raw materials $ 489 $ 484 Finished pulp, paper and packaging products 1,970 1,869 Finished lumber and panel products 182 178 Operating supplies 480 486 Other 185 186 ------------- ------------- TOTAL $3,306 $3,203 ============= =============
9 NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION Interest payments made during the three month period ended March 31, 2000 and 1999 were $137 million and $130 million, respectively. Capitalized net interest costs were $7 million for the quarter ended March 31, 2000. International Paper capitalized net interest costs of $2 million for the 1999 first quarter. Total interest expense was $156 million for the 2000 first quarter and $163 million for the 1999 first quarter. We made a net income tax payment of $22 million during the 2000 first quarter and received a net refund of $6 million during the first quarter of 1999. NOTE 8 - TEMPORARY INVESTMENTS Temporary investments with a maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments totaled $1.3 billion and $153 million at March 31, 2000 and December 31, 1999, respectively. NOTE 9 - SUPPLEMENTAL BALANCE SHEET INFORMATION Accumulated depreciation was $15.3 billion at March 31, 2000 and $15.1 billion at December 31, 1999. The allowance for doubtful accounts was $111 million at March 31, 2000 and $106 million at December 31, 1999. NOTE 10 - FINANCIAL INSTRUMENTS International Paper uses financial instruments primarily to hedge its exposure to currency and interest rate risk. To qualify as hedges, financial instruments must reduce the currency or interest rate risk associated with the related underlying items and be designated as hedges by management. Gains or losses from the revaluation of financial instruments which do not qualify for hedge accounting treatment are recognized in earnings. International Paper has a policy of financing a portion of its investments in overseas operations with borrowings denominated in the same currency as the investment or by entering into foreign exchange contracts in tandem with U.S. dollar borrowings. These contracts are effective in providing a hedge against fluctuations in currency exchange rates. Gains or losses from the revaluation of these contracts, which are fully offset by gains or losses from the revaluation of the net assets being hedged, are determined monthly based on published currency exchange rates and are recorded as translation adjustments in common shareholders' equity. Upon liquidation of the net assets being hedged or early termination of the foreign exchange contracts, the gains or losses from the revaluation of foreign exchange contracts are included in earnings. Amounts payable to or due from the counterparties to the foreign exchange contracts are included in accrued liabilities or accounts receivable as applicable. International Paper also utilizes foreign exchange contracts to hedge certain transactions that are denominated in foreign currencies, primarily export sales and equipment purchases from nonresident vendors. These contracts serve to protect us from currency fluctuations between the transaction and settlement dates. Gains or losses from the revaluation of these contracts, based on published currency exchange rates, along with offsetting gains or losses resulting from the revaluation of the underlying transactions, are recognized in earnings or deferred and recognized in the basis of the underlying transaction when completed. Any gains or losses arising from the cancellation of the underlying transactions or early termination of the foreign currency contracts are included in earnings. 10 International Paper uses cross-currency and interest rate swap agreements to manage the composition of its fixed and floating rate debt portfolio. Amounts to be paid or received as interest under these agreements are recognized over the life of the swap agreements as adjustments to interest expense. Gains or losses from the revaluation of cross-currency swap agreements that qualify as hedges of investments are recorded as translation adjustments in common shareholders' equity. Gains or losses from the revaluation of cross-currency swap agreements that do not qualify as hedges of investments are included in earnings. The related amounts payable to or receivable from the counterparties to the agreements are included in accrued liabilities or accounts receivable. If swap agreements are terminated early, the resulting gain or loss is deferred and amortized over the remaining life of the related debt. International Paper does not hold or issue financial instruments for trading purposes. The counterparties to our interest rate swap agreements and foreign exchange contracts consist of a number of major international financial institutions. International Paper continually monitors its positions with and the credit quality of these financial institutions and does not expect nonperformance by the counterparties. NOTE 11 - RECENT ACCOUNTING DEVELOPMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured by its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The Statement is effective for fiscal years beginning after June 15, 2000. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance. The Statement cannot be applied retroactively. The Statement must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the company's election, before January 1, 1998). International Paper has not yet quantified the impact of adopting the Statement on its consolidated financial statements and has not determined the timing or method of the adoption. However, adoption of the provisions of the Statement could increase volatility in earnings and other comprehensive income. NOTE 12 - SUBSEQUENT EVENTS On April 25, 2000, International Paper announced that it had offered to purchase all outstanding shares of Champion International Corporation in a cash and stock transaction worth $64 per share or an estimated $6.2 billion. In addition, International Paper would assume approximately $2.3 billion of Champion's debt. Champion is a leading manufacturer of paper for business communications, commercial printing and publications with significant market pulp, plywood, lumber and wood chip manufacturing operations. In connection with such announcement, International Paper also announced its intention to sell more than $3 billion of assets by the end of 2001 as part of our increased focus on our core businesses. When such disposition plans are finalized, we may incur costs and charges in future periods. Also as a result of the above announcement, Moody's has lowered our long-term debt rating to Baa1. At March 31, 2000, 11 outstanding debt included approximately $2.5 billion of commercial paper and bank notes with interest rates that fluctuate based on market conditions and our credit rating. On May 10, 2000, International Paper announced that it had submitted a revised bid of $75 per share in cash and stock for Champion or an estimated $7.3 billion. In addition, International Paper would assume approximately $2.3 billion of Champion's debt. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS International Paper's first-quarter 2000 net sales were $6.4 billion, up from $6.3 billion in the 1999 fourth-quarter and $6.0 billion in the 1999 first-quarter. 1999 amounts have been restated to reflect International Paper's merger with Union Camp Corporation which was accounted for as a pooling-of-interests. First-quarter 2000 net earnings were $249 million, or $.60 per share, before special and extraordinary items, an increase of $22 million, or $.05 per share, over fourth-quarter 1999 net earnings of $227 million, or $.55 per share, before special and extraordinary items. First-quarter 1999 net earnings were $32 million, or $.08 per share. First-quarter 2000 net earnings were $378 million, or $.91 per share, after special and extraordinary items, compared with net earnings after special items of $80 million, or $.19 per share, in the 1999 fourth-quarter and net earnings of $32 million, or $.08 per share, in the 1999 first-quarter. Extraordinary items in the 2000 first-quarter represented a gain of $134 million, or $.32 per share, after taxes and minority interest resulting from the sale of International Paper's investment in Scitex and Carter Holt Harvey's sale of its share of COPEC. 2000 first-quarter special items consisted of additional Union Camp integration costs which negatively impacted earnings by $5 million, or $.01 per share, after taxes. Special items in the fourth quarter of 1999 amounted to $147 million or $.36 per share after taxes and minority interest, representing restructuring costs primarily in packaging, chemicals, and xpedx, and integration costs associated with the Union Camp merger. No special or extraordinary items were recorded in the first quarter of 1999. First-quarter 2000 operating profit of $603 million more than doubled the $281 million in the 1999 first-quarter. Operating profit was positively impacted by higher prices for most of our paper and board products, as well as favorable volume and mix. Increased operating profit also reflects the effects of internal profit improvement programs and benefits achieved from last year's merger with Union Camp. PRINTING AND COMMUNICATIONS PAPERS 2000 first-quarter net sales increased 14% to $1,650 million from $1,450 million recorded in the 1999 first-quarter and 8% from $1,525 million in the 1999 fourth quarter. First-quarter 2000 operating profit increased significantly to $178 million from $8 million in the 1999 first-quarter and $141 million in the 1999 fourth quarter. Earnings in the U.S. Papers business were considerably better than those achieved in the first quarter of 1999 and 35% better than those achieved in the 1999 fourth-quarter. Earnings improvement reflects strong volume, price improvement, and the effects of internal profit improvement programs and merger benefits. European Papers' results were also significantly better than in the first quarter of 1999 and slightly better than in the 1999 fourth-quarter. European Papers' earnings improvement from the 1999 first-quarter reflects increased shipments for both coated and uncoated products. Eastern European operations remain strong. PRINTING AND COMMUNICATIONS PAPERS - ----------------------------------
2000 1999 -------------- ----------------------------- IN MILLIONS 1ST QUARTER 1ST QUARTER 4TH QUARTER - -------------- -------------- -------------- ------------- Sales $1,650 $1,450 $1,525 Operating Profit 178 8 141
13 INDUSTRIAL AND CONSUMER PACKAGING 2000 first-quarter net sales of $1,805 million were 8% better than 1999 first-quarter net sales of $1,675 million and slightly lower than the $1,835 million reported in the 1999 fourth-quarter. First-quarter 2000 operating profit of $196 million was significantly higher than the $56 million recorded in the 1999 first-quarter, and slightly ahead of 1999 fourth-quarter earnings of $193 million. Industrial Packaging's first-quarter performance continued the positive trend established during the last half of 1999, up significantly from the 1999 first-quarter. The favorable results reflect continued realization of synergies from the Union Camp merger, as well as ongoing profit improvement programs and increased prices. Earnings for Consumer Packaging were up almost one-third from the same period last year. The improvement resulted primarily from better bleached board pricing. Consumer Packaging earnings were 5% below those achieved in the 1999 fourth quarter. INDUSTRIAL AND CONSUMER PACKAGING - ---------------------------------
2000 1999 -------------- --------------------------------- IN MILLIONS 1ST QUARTER 1ST QUARTER 4TH QUARTER - -------------- -------------- -------------- ----------- Sales $1,805 $1,675 $1,835 Operating Profit 196 56 193
DISTRIBUTION 2000 first-quarter net sales of $1,750 million were up slightly from $1,700 million in the 1999 first-quarter and about even with $1,735 million in the previous quarter. First-quarter 2000 operating profit of $30 million was up 25% from 1999 first-quarter earnings of $24 million and slightly ahead of 1999 fourth-quarter earnings of $29 million. The favorable results reflect the elimination of Zellerbach integration costs and Union Camp merger benefits. DISTRIBUTION - ------------
2000 1999 -------------- ---------------------------------- IN MILLIONS 1ST QUARTER 1ST QUARTER 4TH QUARTER - -------------- -------------- -------------- -------------- Sales $1,750 $1,700 $1,735 Operating Profit 30 24 29
CHEMICALS AND PETROLEUM, which includes results from our approximately 68% owned subsidiary, Bush Boake Allen, reported first-quarter 2000 net sales of $345 million as compared with $350 million in the 1999 first-quarter and $375 million in the 1999 fourth-quarter. First-quarter 2000 operating profit of $33 million was substantially higher than the $19 million recorded in the 1999 first-quarter. The improvement was due largely to increased Arizona Chemical earnings which were 75% better than the same period last year, as well as Petroleum and Minerals' earnings which were also up compared with the same period last year, due in part to higher prices for oil and gas. First-quarter 2000 operating profit for the segment was 13% lower than the $38 million recorded in the 1999 fourth quarter due to lower earnings for Bush Boake Allen and chemical cellulose pulp. CHEMICALS AND PETROLEUM - -----------------------
2000 1999 -------------- ------------------------------- IN MILLIONS 1ST QUARTER 1ST QUARTER 4TH QUARTER - -------------- -------------- -------------- -------------- Sales $345 $350 $375 Operating Profit 33 19 38
14 FOREST PRODUCTS 2000 first-quarter net sales of $780 million were about flat compared with sales during the same period last year and in the fourth quarter of 1999. First-quarter 2000 operating profit of $149 million was down about 15% compared with 1999 first quarter operating profit of $174 million and fourth quarter 1999 earnings of $176 million, due largely to lower bulk timber sales in the current quarter. Excluding the effects of these sales, operating earnings were about the same as the comparable period last year, despite stumpage prices for both pine pulpwood and sawtimber which averaged well below 1999 first-quarter prices. First-quarter 2000 operating profit, excluding bulk timber sales, was better than the fourth quarter of 1999, even though first-quarter 2000 pulpwood prices were slightly lower than in the 1999 fourth-quarter. Building Materials first quarter earnings were down compared to first-quarter 1999. The decline was driven by weaker pricing for wood products and molded door facings as well as lower volumes. Operating results were 30% better than the fourth quarter of 1999, due mainly to higher Decorative Products sales volumes, improved Wood Products prices and better Masonite operations. FOREST PRODUCTS - ---------------
2000 1999 -------------- --------------------------------------- IN MILLIONS 1st Quarter 1st Quarter 4th Quarter - ----------- -------------- -------------- --------------- Sales $780 $785 $780 Operating Profit 149 174 176
CARTER HOLT HARVEY reported first-quarter net sales of $410 million compared with $365 million recorded during the same period last year and $430 million in the fourth quarter of 1999. First-quarter 2000 operating profit of $17 million was significantly higher than breakeven in the same period a year ago and 11% lower than $19 million recorded in the fourth quarter of 1999. Compared to the 1999 first-quarter, current quarter results reflect improvements in volumes across all business groups and higher prices for pulp, linerboard and Wood Products. When compared with the preceding quarter of 1999, the first quarter of 2000 displayed the usual seasonal reduction in sales volumes from the Tissue group, while pricing and volumes improved for logs, pulp and linerboard. CARTER HOLT HARVEY - ------------------
2000 1999 -------------- --------------------------------------- IN MILLIONS 1st Quarter 1st Quarter 4th Quarter - ----------- -------------- -------------- --------------- Sales $410 $365 $430 Operating Profit 17 -- 19
International Paper's results for this segment differ from those reported by Carter Holt Harvey in New Zealand due to (1) Carter Holt Harvey's fiscal year ends March 31 versus our calendar year, (2) our segment earnings include only our share of Carter Holt Harvey's operating earnings while 100% of sales are included, (3) our results are in U.S. dollars while Carter Holt Harvey reports in New Zealand dollars, and (4) Carter Holt Harvey reports under New Zealand accounting standards while our segment results comply with U.S. generally accepted accounting principles. The major accounting differences relate to cost of timber harvested and start-up costs. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations totaled $535 million for the 2000 first-quarter compared with $289 million for the 1999 first-quarter. Higher earnings and decreased working capital requirements contributed to the first-quarter 2000 increase. Working capital changes decreased first-quarter 2000 operating cash flow by $55 million as compared to a decrease of $119 million in operating cash flow for first-quarter 1999. 15 Investments in capital projects totaled $214 million and $211 million for the 2000 and 1999 first-quarters, respectively. Cash flow generated by operations, supplemented as necessary by short- or long-term borrowings, is anticipated to be adequate to fund capital expenditures. As part of our program to improve return on investment, we plan to continue to hold annual capital spending below annual depreciation and amortization expense. Discretionary capital spending will be primarily for reducing costs, stabilizing processes and improving services. Financing activities for the 2000 and 1999 first-quarters include a $264 million and $32 million net increase in debt. The 2000 net increase reflects increased short-term borrowings used to finance the Shorewood acquisition partially offset by other decreases to long-term debt. Common stock dividend payments were $104 million or $.25 per common share for the 2000 first-quarter and $108 million or $.26 per share for the 1999 first-quarter. Actual cash dividends paid for the 1999 first-quarter were $.25 per common share. However, cash dividends declared per common share have been restated to include dividends declared by Union Camp. At March 31, 2000, cash and temporary investments totaled $1.6 billion compared to $453 million at December 31, 1999. This increase is due to the approximately $1.2 billion received by Carter Holt Harvey for the sale of its interest in COPEC. These proceeds were used for the CSR acquisition which closed April 28, 2000 and to pay down approximately $650 million of short-term debt. MERGERS AND ACQUISITIONS On February 21, 2000, Carter Holt Harvey announced the purchase of CSR Limited's medium density fiberboard and particleboard businesses and its Oberon sawmill for approximately $200 million in cash. This acquisition was completed on April 28, 2000. On February 17, 2000, International Paper announced that we had reached an agreement to acquire Shorewood Packaging Corporation, a leader in the premium retail packaging market, for approximately $640 million in cash and the assumption of approximately $280 million of debt. This merger was completed on March 31, 2000. On November 24, 1998, International Paper announced that it had reached an agreement to merge with Union Camp Corporation (Union Camp), a diversified paper and forest products company. The transaction was approved by Union Camp and International Paper shareholders on April 30, 1999. Union Camp shareholders received 1.4852 International Paper common shares for each Union Camp share held. The total value of the transaction, including the assumption of debt, was approximately $7.9 billion. International Paper issued 110 million shares for 74 million Union Camp shares, including options. The merger was accounted for as a pooling-of-interests. In April 1999, Carter Holt Harvey, a subsidiary of International Paper, acquired the corrugated packaging business of Stone Australia, a subsidiary of Smurfit-Stone Container Corporation. The business consists of two sites in Melbourne and Sydney which serve industrial and primary produce customers. All of the acquisitions completed in the first quarter of 2000 and for the year 1999 were accounted for using the purchase method, with the exception of the Union Camp acquisition, which was accounted for as a pooling-of-interests. The operating results of those mergers and acquisitions accounted for under the purchase method have been included in the consolidated statement of earnings from the dates of acquisition. The accompanying consolidated balance sheet as of March 31, 2000 reflects a preliminary allocation of the purchase price of Shorewood Packaging to the fair value of the assets and liabilities acquired. 16 RESTRUCTURING, SPECIAL AND EXTRAORDINARY ITEMS During the first quarter of 2000, International Paper recorded special items amounting to a net pre-tax charge of $8 million ($5 million after taxes) for additional Union Camp merger integration costs. International Paper also recorded an extraordinary gain of $385 million before taxes and minority interest expense ($134 million after taxes and minority interest expense) on the sale of our investment in Scitex and Carter Holt Harvey's sale of its share of COPEC. The sale for just over $1.2 billion of Carter Holt Harvey's equity interest in COPEC closed on January 3, 2000. The sale for $79 million of our equity interest in Scitex was completed on January 6, 2000. The gains on these sales are recorded as extraordinary items pursuant to the pooling-of-interests rules. During 1999 special items amounting to a net charge before taxes and minority interest expense of $557 million ($352 million after taxes and minority interest expense) were recorded. The special items included a $148 million pre-tax charge ($97 million after taxes) for Union Camp merger-related termination benefits, a $107 million pre-tax charge ($78 million after taxes) for one-time merger expenses, a $298 million pre-tax charge ($180 million after taxes and minority interest expense) for asset shutdowns of excess internal capacity and cost reduction actions, a $10 million pre-tax charge ($6 million after taxes) to increase existing environmental remediation reserves related to certain former Union Camp facilities, a $30 million pre-tax charge ($18 million after taxes) to increase existing legal reserves and a $36 million pre-tax credit ($27 million after taxes) for the reversal of reserves that were no longer required. The 1999 extraordinary item was a $26 million pre-tax charge ($16 million after taxes) related to the refinancing of high interest Union Camp debt, which we assumed under the merger agreement. The following table shows the impact of special items on 1999 pre-tax earnings by quarter:
QUARTER ------------------------------------------------------ YEAR-TO- IN MILLIONS FIRST SECOND THIRD FOURTH DATE - -------------- ------------- ------------- ------------ ------------- ------------- EARNINGS BEFORE SPECIAL ITEMS, INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEMS $ 94 $ 198 $ 320 $ 393 $ 1,005 Merger-related termination benefits (98) (50) (148) One-time merger expenses (59) (18) (30) (107) Restructuring and other charges (113) (185) (298) Reversal of reserves no longer required 36 36 Environmental reserve (10) (10) Provision for legal reserves (30) (30) ============= ============= ============ ============= ============= EARNINGS (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEMS $ 94 $ (36) $ 242 $ 148 $ 448 ============= ============= ============ ============= =============
The Union Camp merger-related termination benefits charge relates to employees terminating after the effective date of the merger under an integration benefits program. Under this program, 1,218 employees of the combined company were identified for termination. Benefits payable under this program for certain senior executives and managers are or have been paid from the general assets of International Paper. Benefits for remaining employees have been or will be primarily paid from plan assets of our qualified pension plan. Through March 31, 2000, 898 employees had been terminated. Related cash payments approximated $65 million (including payments related to our nonqualified pension plans). The remainder of the incurred costs primarily represents an increase in the projected benefit obligation of our qualified pension plan. Substantially all of the positions are expected to be eliminated by May 31, 2000. 17 The following table is a roll forward of the Union Camp merger-related termination benefit charges and costs incurred by quarter. The amounts identified below as incurred include all payments made or to be made to employees that have been terminated. The payments are made from the general assets of International Paper or from the assets of our qualified pension plan.
TERMINATION DOLLARS IN MILLIONS BENEFITS ------------------- --------------- Special charge - second quarter 1999 (572 employees) $ 98 Incurred costs - second quarter 1999 (83 employees) (30) Special charge - third quarter 1999 (646 employees) 50 Incurred costs - third quarter 1999 (484 employees) (53) Incurred costs - fourth quarter 1999 (220 employees) (33) --------------- Balance, December 31, 1999 (431 employees) 32 Incurred costs - first quarter 2000 (111 employees) (8) --------------- Balance, March 31, 2000 (320 employees) $ 24 ===============
Note: Benefit costs are treated as incurred on termination date of the employee. The one-time merger expenses of $107 million consisted of $49 million of merger costs and $58 million of post-merger expenses. The merger costs were primarily investment banker, consulting, legal and accounting fees. Post-merger integration expenses included costs related to employee retention such as stay bonuses and other one-time cash costs related to the integration of Union Camp. The $298 million charge for the asset shutdowns of excess internal capacity consisted of a $113 million charge in the 1999 second quarter and a $185 million charge in the 1999 fourth quarter. The charges included $149 million of asset write-downs and $149 million of severance and other charges. A full discussion of these charges is included in International Paper's 1999 Annual Report filed on Form 10-K. The following table is a roll forward of the severance and other costs included in the 1999 restructuring plan:
SEVERANCE DOLLARS IN MILLIONS AND OTHER ------------------- --------------- Opening balance - second quarter 1999 (1,118 employees) $ 56 Cash charges - third quarter 1999 (710 employees) (13) Additions - fourth quarter 1999 (2,045 employees) 93 Cash charges - fourth quarter 1999 (50 employees) (21) --------------- Balance, December 31, 1999 (2,403 employees) 115 Cash charges - first quarter 2000 (1,031 employees) (25) Other charges - first quarter 2000 (8) --------------- Balance, March 31, 2000 (1,372 employees) $ 82 ===============
The $36 million pre-tax credit for the reversal of reserves that were no longer required consists of $30 million related to a retained exposure at the Lancey mill in France and $6 million of excess reserves previously established by Union Camp. The Lancey mill was sold to an employee group in October of 1997. In April 1999, International Paper's remaining exposure to potential obligations under this sale were resolved, and the reserve was returned to income in the second quarter. 18 The $30 million pre-tax charge to increase existing legal reserves included $25 million which we added to our reserve for hardboard siding claims. The remaining $5 million is related to other potential exposures. International Paper continually evaluates its operations for improvement. When any such plans are finalized, we may incur costs or charges in future periods related to the implementation of such plans. OTHER The effective income tax rate before extraordinary items for the 2000 first-quarter increased to 31% from 30% in the first quarter of 1999. The increase was primarily due to changes in the mix of estimated annual earnings. The effective tax rate before special items was also 31% and 30% for the first-quarter ended March 31, 2000 and 1999, respectively. The following table presents the components of pre-tax earnings and losses and the related income tax expense or benefit for each of the three month periods ended March 31, 2000 and 1999.
2000 1999 -------------------------------------------- ------------------------------------------ Earnings Earnings (Loss) Before (Loss) Before Income Taxes Income Tax Income Taxes Income Tax and Minority Provision Effective and Minority Provision Effective IN MILLIONS Interest (Benefit) Tax Rate Interest (Benefit) Tax Rate - ----------- ------------- ------------ ----------- ------------ ------------ ------------- Before special and extraordinary items $ 443 $ 139 31% $ 94 $ 28 30% One-time merger expenses (8) (3) 38% ---------- --------- ------ ---------- After special items $ 435 $ 136 31% $ 94 $ 28 30% ========== ========= ====== ==========
19 FINANCIAL INFORMATION BY INDUSTRY SEGMENT (UNAUDITED) (IN MILLIONS) NET SALES BY INDUSTRY SEGMENT
THREE MONTHS ENDED MARCH 31, ------------------------------- 2000 1999 ------------- ------------- Printing and Communications Papers $ 1,650 $ 1,450 Industrial and Consumer Packaging 1,805 1,675 Distribution 1,750 1,700 Chemicals and Petroleum 345 350 Forest Products 780 785 Carter Holt Harvey 410 365 Corporate and Intersegment Sales (369) (293) ------------- ------------- NET SALES $ 6,371 $ 6,032 ============ ============= OPERATING PROFIT BY INDUSTRY SEGMENT THREE MONTHS ENDED MARCH 31, -------------------------------- 2000 1999 ------------- ------------- Printing and Communications Papers $ 178 $ 8 Industrial and Consumer Packaging 196 56 Distribution 30 24 Chemicals and Petroleum 33 19 Forest Products 149 174 Carter Holt Harvey (1) 17 ------------- ------------- OPERATING PROFIT 603 281 Interest expense, net (131) (143) Minority interest adjustment 24 6 Corporate items, net (53) (50) Merger integration costs (8) ------------- ------------- EARNINGS BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEMS $ 435 $ 94 ============= =============
(1) Includes equity earnings (in millions) of $6 in 2000 and $1 in 1999. Half of these equity earnings amounts are in the Carter Holt Harvey segment and half are in the minority interest adjustment. 20 PRODUCTION BY PRODUCT
THREE MONTHS ENDED MARCH 31, --------------------------- 2000 1999(a) ----------- ------------ Printing Papers (In thousands of tons) White Papers and Bristols 1,380 1,351 Coated Papers 325 316 Market Pulp (b) 522 532 Newsprint 27 23 Packaging (In thousands of tons) Containerboard 1,203 1,135 Bleached Packaging Board 532 567 Industrial Papers 241 227 Industrial and Consumer Packaging (c) 1,283 1,311 Specialty Products (In thousands of tons) Tissue 41 42 Forest Products (In millions) Panels (sq. ft. 3/8" - basis) (d) 493 487 Lumber (board feet) 715 783 MDF (sq. ft. 3/4" - basis) 60 56 Particleboard (sq. ft. 3/4" - basis) 49 46
(a) Certain reclassifications and adjustments have been made to current and prior year amounts. (b) This excludes market pulp purchases. (c) A significant portion of this tonnage was fabricated from paperboard and paper produced at International Paper's own mills and is included in the containerboard, bleached packaging board and industrial papers amounts in this table. (d) Panels include plywood and oriented strand board. 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The following matters discussed in previous filings under the Securities Exchange Act, are updated as follows: MASONITE LITIGATION Three nationwide class action lawsuits filed against International Paper have been settled. The first suit alleged that hardboard siding manufactured by Masonite fails prematurely, allowing moisture intrusion that in turn causes damage to the structure underneath the siding. The class consisted of all U.S. property owners having Masonite hardboard siding installed on and incorporated into buildings between 1980 and January 15, 1998. Final approval of the settlement was granted by the Court on January 15, 1998. The settlement provides for monetary compensation to class members meeting the settlement requirements on a claims-made basis. It also provides for the payment of attorneys' fees equaling 15% of the settlement amounts paid to class members, with a nonrefundable advance of $47.5 million plus $2.5 million in costs. The second suit made similar allegations with regard to Omniwood siding manufactured by Masonite (Omniwood Lawsuit). The class consists of all U.S. property owners having Omniwood siding installed on and incorporated into buildings from January 1, 1992 to January 6, 1999. The third suit alleged that Woodruf roofing manufactured by Masonite is defective and causes damage to the structure underneath the roofing (Woodruf Lawsuit). The class consists of all U.S. property owners having Masonite Woodruf roofing incorporated into and installed on buildings from January 1, 1980 to January 6, 1999. Final approval of the settlements of the Omniwood and Woodruf lawsuits was granted by the Court on January 6, 1999. The settlements provide for monetary compensation to class members meeting the settlement requirements on a claims-made basis, and provide for payment of attorneys' fees equaling 13% of the settlement amounts paid to class members with a nonrefundable advance of $1.7 million plus $75,000 in costs for each of the two cases. Our reserves for these matters total $44 million at March 31, 2000. This amount includes $25 million which we added to our reserve for hardboard siding claims in the fourth quarter of 1999, to cover an expected shortfall in that reserve resulting primarily from a higher number of hardboard siding claims in the fourth quarter of 1999 than we had anticipated. It is reasonably possible that the higher number of hardboard siding claims might be indicative of the need for one or more future additions to this reserve. However, whether or not any future additions to this reserve become necessary, International Paper believes that these settlements will not have a material adverse effect on our consolidated financial position or results of operations. The reserve balance is net of $51 million of expected insurance recoveries (apart from the insurance recoveries to date). Through March 31, 2000, settlement payments of $219 million, including the $51 million of nonrefundable advances of attorneys' fees discussed above, have been made. Also, we have received $27 million from our insurance carriers through March 31, 2000. International Paper and Masonite have the right to terminate each of the settlements after seven years from the dates of final approval. 22 OTHER LITIGATION In August 1998, the former Union Camp Corporation informed the Virginia Department of Environmental Quality (DEQ) of certain New Source Performance Standards (NSPS) permitting discrepancies related to a power boiler at the paper mill in Franklin, Virginia. On April 11, 2000, International Paper and the DEQ entered into a consent order which resolved the matter for a civil penalty of $134,000. We are also involved in other contractual disputes, administrative and legal proceedings and investigations of various types. While any litigation, proceeding or investigation has an element of uncertainty, we believe that the outcome of any proceeding, lawsuit or claim that is pending or threatened, or all of them combined, will not have a material adverse effect on our consolidated financial position or results of operations. 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (2) Agreement and Plan of Merger by and among International Paper Company, International Paper - 37, Inc. and Shorewood Packaging Corporation dated as of February 16, 2000, incorporated by reference to the Schedule TO of International Paper and International Paper - 37, Inc. dated February 29, 2000. (11) Statement of Computation of Per Share Earnings (12) Computation of Ratio of Earnings to Fixed Charges (27) Financial Data Schedule (b) Reports on Form 8-K Reports on Form 8-K were filed on January 11, February 17, March 24, April 11, and April 26, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERNATIONAL PAPER COMPANY (REGISTRANT) Date: May 12, 2000 By /S/ JOHN V. FARACI ------------------ John V. Faraci Senior Vice President and Chief Financial Officer Date: May 12, 2000 By /S/ ANDREW R. LESSIN -------------------- Andrew R. Lessin Vice President, Finance and Chief Accounting Officer 24 EX-11 2 EXHIBIT 11 (EXHIBIT 11) INTERNATIONAL PAPER COMPANY STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, ------------------------- 2000 1999 ---------- ---------- EARNINGS BEFORE EXTRAORDINARY ITEMS $ 244 $ 32 Effect of dilutive securities Preferred securities of subsidiary trust 4 ------- ------- EARNINGS BEFORE EXTRAORDINARY ITEMS - ASSUMING $ 248 $ 32 DILUTION ======= ======= AVERAGE COMMON SHARES OUTSTANDING 413.5 412.1 Effect of dilutive securities Long-term incentive plan deferred compensation Stock options 1.2 2.3 Preferred securities of subsidiary trust 8.3 ------- ------- AVERAGE COMMON SHARES OUTSTANDING - ASSUMING 423.0 414.4 DILUTION ======= ======= EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY $ 0.59 $ 0.08 ITEMS ======= ======= EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY $ 0.59 $ 0.08 ITEMS - ASSUMING DILUTION ======= =======
Note: If an amount does not appear in the above table, the security was antidilutive for the period presented. EX-12 3 EXHIBIT 12 (EXHIBIT 12) INTERNATIONAL PAPER COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
THREE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------------- -------------------- TITLE 1995 1996 1997 1998 1999 1999 2000 - ------------------------------------- -------- -------- -------- -------- -------- -------- -------- A) Earnings before income taxes, minority interest, extraordinary items and accounting changes $ 2,742.0 $ 939.0 $ 143.0 $ 429.0 $ 448.0 $ 94.0 $ 435.0 B) Minority interest expense, net of taxes (166.0) (180.0) (140.0) (87.0) (163.0) (34.0) (55.0) C) Fixed charges excluding capitalized interest 740.3 802.1 826.6 866.7 820.9 212.0 207.1 D) Amortization of previously capitalized interest 29.6 34.2 37.0 38.8 17.0 5.4 5.5 E) Equity in undistributed earnings of affiliates (94.5) 6.2 (40.4) 23.7 (41.6) 11.0 0.4 ----------- ----------- --------- ----------- ----------- --------- -------- F) EARNINGS BEFORE INCOME TAXES, MINORITY INTEREST, EXTRAORDINARY ITEMS, ACCOUNTING CHANGES AND FIXED CHARGES $ 3,251.4 $ 1,601.5 $ 826.2 $ 1,271.2 $ 1,081.3 $ 288.4 $ 593.0 =========== =========== ========= =========== =========== ========= ======== FIXED CHARGES G) Interest and amortization of debt expense $ 664.9 $ 699.5 $ 720.0 $ 716.9 $ 611.5 $ 162.6 $ 155.5 H) Interest factor attributable to rentals 64.8 79.0 83.0 80.7 76.3 17.5 16.8 I) Preferred dividends of subsidiary 10.6 23.6 23.6 69.1 133.1 31.9 34.8 J) Capitalized interest 66.9 71.2 71.6 53.4 29.3 2.1 6.6 ----------- ----------- --------- ----------- ----------- --------- -------- K) TOTAL FIXED CHARGES $ 807.2 $ 873.3 $ 898.2 $ 920.1 $ 850.2 $ 214.1 $ 213.7 =========== =========== ========= =========== =========== ========= ======== L) RATIO OF EARNINGS TO FIXED CHARGES 4.03 1.83 1.38 1.27 1.35 2.77 =========== =========== ========= =========== =========== ========= ======== M) DEFICIENCY IN EARNINGS NECESSARY TO COVER FIXED CHARGES $ (72.0) =========
EX-27 4 EXHIBIT 27
5 1,000,000 3-MOS DEC-31-2000 MAR-31-2000 1,574 0 3,520 111 3,306 8,673 29,683 15,294 31,549 5,475 7,250 1,805 0 415 10,114 31,549 6,371 6,371 4,564 5,805 0 10 131 566 136 244 0 134 0 378 0.91 0.91
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