-----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, FIu1gWuN7h/8DRgaD+ZH8pwrp4/pfx44Gi4Zx3DbtaT5TFTCSobLFpPBDnFVqSFu MrpKygNjsobO9LWahIcMxw== /in/edgar/work/0001005477-00-007774/0001005477-00-007774.txt : 20001114 0001005477-00-007774.hdr.sgml : 20001114 ACCESSION NUMBER: 0001005477-00-007774 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL PAPER CO /NEW/ CENTRAL INDEX KEY: 0000051434 STANDARD INDUSTRIAL CLASSIFICATION: [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: 762283 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 0001.txt 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 September 30, 2000 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECUTITIES 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 October 31, 2000 was 481,370,059 ================================================================================ INTERNATIONAL PAPER COMPANY INDEX
PART I. Financial Information Page No. -------- Item 1. Financial Statements Consolidated Statement of Earnings - Three Months and Nine Months Ended September 30, 2000 and 1999 1 Consolidated Balance Sheet - September 30, 2000 and December 31, 1999 2 Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2000 and 1999 3 Consolidated Statement of Common Shareholders' Equity - Three Months and Nine Months Ended September 30, 2000 and 1999 4 - 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Financial Information by Industry Segment 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk 30 PART II. Other Information Item 1. Legal Proceedings 31 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 33 Signatures 33
* 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 Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Net Sales $ 7,801 $ 6,251 $ 20,952 $ 18,279 -------- -------- -------- -------- Costs and Expenses Cost of products sold 5,611 4,593 14,945 13,589 Selling and administrative expenses 553 495 1,637 1,548 Depreciation and amortization 516 383 1,303 1,140 Distribution expenses 335 268 872 821 Taxes other than payroll and income taxes 63 58 187 172 Restructuring and other charges 125 10 196 123 Merger integration costs 15 68 27 225 Equity earnings from investment in Scitex (3) -------- -------- -------- -------- Total Costs and Expenses 7,218 5,875 19,167 17,615 -------- -------- -------- -------- Reversal of reserves no longer required 6 6 36 -------- -------- -------- -------- Earnings Before Interest, Income Taxes, Minority Interest and Extraordinary Items 589 376 1,791 700 Interest expense, net 278 134 565 400 -------- -------- -------- -------- Earnings Before Income Taxes, Minority Interest and Extraordinary Items 311 242 1,226 300 Income tax provision 71 54 349 64 Minority interest expense, net of taxes 65 43 188 117 -------- -------- -------- -------- Earnings Before Extraordinary Items 175 145 689 119 Loss on extinguishment of debt, net of taxes (3) (16) Impairment losses on businesses to be sold, net of taxes (310) (310) Gains on sales of investments, net of taxes and minority interest 134 -------- -------- -------- -------- Net Earnings (Loss) $ (135) $ 142 $ 513 $ 103 ======== ======== ======== ======== Earnings Per Common Share Before Extraordinary Items $ 0.36 $ 0.35 $ 1.57 $ 0.29 Loss Per Common Share - Extraordinary Items (0.64) (0.01) (0.40) (0.04) -------- -------- -------- -------- Earnings (Loss) Per Common Share $ (0.28) $ 0.34 $ 1.17 $ 0.25 ======== ======== ======== ======== Earnings (Loss) Per Common Share - Assuming Dilution $ (0.28) $ 0.34 $ 1.17 $ 0.25 ======== ======== ======== ======== Average Shares of Common Stock Outstanding 481.6 413.5 438.9 412.9 ======== ======== ======== ======== Cash Dividends Per Common Share $ 0.25 $ 0.25 $ 0.75 $ 0.76 ======== ======== ======== ========
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, 2000 1999 ------------- ------------ Assets Current Assets Cash and temporary investments $ 1,171 $ 453 Accounts and notes receivable, net 3,729 3,227 Inventories 3,398 3,203 Other current assets 1,866 358 -------- -------- Total Current Assets 10,164 7,241 -------- -------- Plants, Properties and Equipment, net 17,372 14,381 Forestlands 6,056 2,921 Investments 316 1,044 Goodwill 6,438 2,596 Deferred Charges and Other Assets 2,619 2,085 -------- -------- Total Assets $ 42,965 $ 30,268 ======== ======== Liabilities and Common Shareholders' Equity Current Liabilities Notes payable and current maturities of long-term debt $ 2,912 $ 920 Accounts payable 1,829 1,870 Accrued payroll and benefits 592 423 Other accrued liabilities 2,253 1,169 -------- -------- Total Current Liabilities 7,586 4,382 -------- -------- Long-Term Debt 12,690 7,520 Deferred Income Taxes 4,647 3,344 Other Liabilities 2,239 1,332 Minority Interest 1,426 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 - 484.1 shares, 1999 - 414.6 shares 484 415 Paid-in capital 6,473 4,078 Retained earnings 6,799 6,613 Accumulated other comprehensive income (loss) (1,064) (739) -------- -------- 12,692 10,367 Less: Common stock held in treasury, at cost, 2000 - 2.7 shares 1999 - 1.2 shares 120 63 -------- -------- Total Common Shareholders' Equity 12,572 10,304 -------- -------- Total Liabilities and Common Shareholders' Equity $ 42,965 $ 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)
Nine Months Ended September 30, -------------------- 2000 1999 ------- ------- Operating Activities Net earnings $ 513 $ 103 Depreciation and amortization 1,303 1,140 Deferred income tax benefit (34) (209) Payments related to restructuring and legal reserves (161) (117) Payments related to mergers (31) (124) Merger integration costs 27 225 Restructuring and other charges 196 123 Reversal of reserves no longer required (6) (36) Loss on extinguishment of debt 26 Impairment losses on businesses to be sold 460 Gains on sales of investments (385) Other, net 292 22 Changes in current assets and liabilities Accounts and notes receivable (313) (331) Inventories (63) (57) Accounts payable and accrued liabilities 92 381 Other (10) 11 ------- ------- Cash Provided by Operations 1,880 1,157 ------- ------- Investment Activities Invested in capital projects (908) (706) Mergers and acquisitions, net of cash acquired (5,618) (54) Proceeds from divestitures 1,393 119 Other 44 (84) ------- ------- Cash Used for Investment Activities (5,089) (725) ------- ------- Financing Activities Issuance of common stock 43 192 Issuance of debt 6,328 787 Reduction of debt (1,896) (1,159) Penalties paid on early retirement of debt (23) Change in bank overdrafts (202) (68) Dividends paid (327) (314) Other 105 (12) ------- ------- Cash Provided by (Used for) Financing Activities 4,051 (597) ------- ------- Effect of Exchange Rate Changes on Cash (124) (15) ------- ------- Change in Cash and Temporary Investments 718 (180) Cash and Temporary Investments Beginning of the period 453 533 ------- ------- End of the period $ 1,171 $ 353 ======= =======
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 September 30, 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, June 30, 2000 483,450 $ 484 $ 6,437 $ 7,054 $ (862) 1,582 $ 72 $ 13,041 Issuance of stock for various plans 658 36 700 33 3 Repurchase of stock 460 15 (15) Cash dividends - Common stock ($0.25 per share) (120) (120) Comprehensive income (loss) Net earnings (loss) (135) (135) Change in cumulative foreign currency translation adjustment (202) (202) -------- Total comprehensive income (loss) (337) ------- -------- -------- -------- -------- ----- -------- -------- Balance, September 30, 2000 484,108 $ 484 $ 6,473 $ 6,799 $ (1,064) 2,742 $ 120 $ 12,572 ======= ======== ======== ======== ======== ===== ======== ========
Three Months Ended September 30, 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, June 30, 1999 413,228 $ 413 $ 3,997 $ 6,597 $ (620) 139 $ 9 $ 10,378 Issuance of stock for various plans 799 1 (10) (207) (12) 3 Repurchase of stock 640 33 (33) Cash dividends - Common stock ($0.25 per share) (102) (102) Comprehensive income (loss) Net earnings 142 142 Change in cumulative foreign currency translation adjustment 6 6 -------- Total comprehensive income (loss) 148 ------- -------- -------- -------- -------- ----- -------- -------- Balance, September 30, 1999 414,027 $ 414 $ 3,987 $ 6,637 $ (614) 572 $ 30 $ 10,394 ======= ======== ======== ======== ======== ===== ======== ========
The accompanying notes are an integral part of these financial statements. 4 INTERNATIONAL PAPER COMPANY Consolidated Statement of Common Shareholders' Equity (Unaudited) (In millions, except share amounts in thousands) Nine Months Ended September 30, 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 merger 68,706 69 2,360 2,429 Issuance of stock for various plans 818 35 (184) (9) 44 Repurchase of stock 1,710 66 (66) Cash dividends - Common stock ($0.75 per share) (327) (327) Comprehensive income (loss) Net earnings 513 513 Change in cumulative foreign currency translation adjustment (325) (325) -------- Total comprehensive income (loss) 188 ------- -------- -------- -------- -------- ----- -------- -------- Balance, September 30, 2000 484,108 $ 484 $ 6,473 $ 6,799 $ (1,064) 2,742 $ 120 $ 12,572 ======= ======== ======== ======== ======== ===== ======== ========
Nine Months Ended September 30, 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 842 1 91 (1,870) (87) 179 Repurchase of stock 1,890 93 (93) Cash dividends - Common stock ($0.76 per share) (314) (314) Comprehensive income (loss) Net earnings 103 103 Change in cumulative foreign currency translation adjustment (219) (219) -------- Total comprehensive income (loss) (116) ------- -------- -------- -------- -------- -------- -------- -------- Balance, September 30, 1999 414,027 $ 414 $ 3,987 $ 6,637 $ (614) 572 $ 30 $ 10,394 ======= ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. 5 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 June 20, 2000, International Paper acquired Champion International Corporation (Champion). The transaction was accounted for as a purchase. The accompanying statement of earnings includes Champion's earnings from June 20, 2000. On April 30, 1999, International Paper completed its merger with Union Camp Corporation (Union Camp) 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 before extraordinary items were computed by dividing earnings before extraordinary items 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: 6
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- In millions, except per share amounts 2000 1999 2000 1999 ------------------------------------- -------- -------- -------- -------- Earnings before extraordinary items $ 175 $ 145 $ 689 $ 119 Effect of dilutive securities Preferred securities of subsidiary trust 12 -------- -------- -------- -------- Earnings before extraordinary items - assuming dilution $ 175 $ 145 $ 701 $ 119 ======== ======== ======== ======== Average common shares outstanding 481.6 413.5 438.9 412.9 Effect of dilutive securities Preferred securities of subsidiary trust 8.3 Long-term incentive plan deferred compensation Stock options 0.1 3.3 0.3 3.3 -------- -------- -------- -------- Average common shares outstanding - assuming dilution 481.7 416.8 447.5 416.2 ======== ======== ======== ======== Earnings per common share before extraordinary items $ 0.36 $ 0.35 $ 1.57 $ 0.29 ======== ======== ======== ======== Earnings per common share before extraordinary items - assuming dilution $ 0.36 $ 0.35 $ 1.57 $ 0.29 ======== ======== ======== ========
Note: If an amount does not appear in the above table, the security was antidilutive for the period presented. NOTE 3 - MERGERS AND ACQUISITIONS On June 20, 2000, International Paper completed the previously announced merger with Champion, a leading manufacturer of paper for business communications, commercial printing and publications with significant market pulp, plywood, lumber and wood chip manufacturing operations. Under the terms of the merger agreement, Champion shareholders received $50 in cash per share and $25 worth of International Paper common stock per share. Champion shares were acquired for approximately $5 billion in cash and 68.7 million shares of International Paper common stock totaling $2.4 billion. Approximately $2.3 billion of debt was assumed. The results of Champion are included in the consolidated statement of earnings from June 20, 2000. In connection with the merger announcement, International Paper also announced its intention to sell more than $3 billion of assets by the end of 2001 as part of its increased focus on its core businesses. When the decision has been made to sell a specific business, costs and charges may be incurred in future periods. See Note 13 - Businesses Held for Sale regarding the announced plans to sell Masonite, Zanders and Bush Boake Allen and related charges under this program. Also, as a result of the merger announcement, Moody's lowered our long-term debt rating to Baa1. At September 30, 2000, outstanding debt included approximately $3 billion of commercial paper and bank notes with interest rates that fluctuate based on market conditions and our credit rating. Carter Holt Harvey purchased CSR Limited's medium density fiberboard and particleboard businesses and its Oberon sawmill for approximately $200 million in cash on April 28, 2000. International Paper acquired Shorewood Packaging Corporation, a leader in the premium retail packaging market, for approximately $640 million in cash and the assumption of $280 million of debt on March 31, 2000. 7 On November 24, 1998, International Paper announced that we had reached an agreement to merge with Union Camp, a diversified paper and forest products company. The transaction was approved by Union Camp and International Paper shareholders, and the merger was completed, 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 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 nine months 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 September 30, 2000, reflects preliminary allocations of the purchase prices of Shorewood Packaging, CSR Limited and Champion to the fair value of the assets and liabilities acquired. 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 the International Paper's subsidiary preferred securities were $32 million and $31 million for the third quarter of 2000 and 1999, respectively, and $108 million and $103 million for the nine months ended September 30, 2000 and 1999, respectively. These distributions are included in minority interest expense in the consolidated statement of earnings. 8 NOTE 5 - SPECIAL AND EXTRAORDINARY ITEMS INCLUDING RESTRUCTURING AND BUSINESS IMPROVEMENT ACTIONS During the third quarter of 2000, International Paper recorded special items amounting to a net charge before taxes of $134 million ($85 million after taxes). The special items included a $15 million pre-tax charge ($9 million after taxes) for merger-related expenses, a $6 million pre-tax credit ($4 million after taxes) for the reversal of merger-related termination benefits reserves no longer required and a $125 million pre-tax charge ($80 million after taxes) for additional Masonite legal reserves. The merger-related expenses of $15 million consist primarily of travel expenses, system integration costs and stay bonuses. International Paper also recorded an extraordinary loss of $460 million before taxes ($310 million after taxes) to reflect the estimated losses on the planned sales of Masonite and Zanders. See Note 13 - Businesses Held for Sale for additional information. During the second quarter of 2000, International Paper recorded special items amounting to a net charge before taxes and minority interest of $75 million ($45 million after taxes and minority interest). The special items included a $4 million pre-tax charge ($3 million after taxes) for merger-related expenses and a $71 million pre-tax charge ($42 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions. The merger-related expenses of $4 million consist primarily of travel expenses and system integration costs related to the Union Camp and Champion mergers. The $71 million charge for asset shutdowns of excess internal capacity and cost reduction actions includes $40 million of asset write-downs and $31 million of severance and other charges. The following table presents additional detail related to the $71 million charge:
Second Quarter 2000 --------------------------- Asset Severance Write- and In millions downs Other Total ----------- ------- --------- ----- Printing and Communications Papers (a) $ 22 $ 7 $ 29 Consumer Packaging (b) 7 9 16 Industrial Papers (c) 9 4 13 Other (d) 2 11 13 ----- ----- ----- $ 40 $ 31 $ 71 ===== ===== =====
(a) The Printing and Communications Papers business shutdown the Millers Falls, Massachusetts mill due to excess capacity. Charges associated with the shutdown include $22 million of asset write-downs, $2 million of severance costs covering the termination of 119 employees and other exit costs of $3 million. At September 30, 2000, 107 employees had been terminated. Also, the Franklin, Virginia mill reduced its salaried workforce in a continuing effort to improve the cost effectiveness and long-term competitive position of the pulp and paper operation. A severance charge of $2 million covers the elimination of 108 salaried positions. At September 30, 2000, 26 employees had been terminated. (b) The Consumer Packaging business has implemented a plan to reduce excess capacity and streamline administrative functions at several of its locations as a result of the Shorewood acquisition. The Richmond, Virginia facility is scheduled to be shut down. Charges associated with the shutdown include $6 million of asset write-downs, $2 million of severance costs covering the termination of 126 employees and other exit costs of $1 million. At September 30, 2000, 123 employees had been terminated. 9 Management also decided to permanently idle the lithographic department of the Clinton, Iowa facility. This action will allow the Retail Packaging business to better focus its resources for further profit improvement. The charge includes $1 million of asset write-downs, $3 million of severance covering the termination of 187 employees and $2 million of other exit costs. At September 30, 2000, 103 employees had been terminated. A severance reserve of $1 million has also been established related to the streamlining effort of the Consumer Packaging business. This reserve covers the termination of 17 employees. At September 30, 2000, 13 employees had been terminated. (c) Industrial Papers announced the shutdown of the Knoxville, Tennessee converting facility in an effort to reduce excess capacity. The charge includes $9 million of asset write-downs, $1 million of severance costs related to the termination of 120 employees and other exit costs of $3 million. At September 30, 2000, 11 employees had been terminated. (d) Other includes $8 million related to Industrial Packaging, primarily for the shutdown of the Tupelo, Mississippi sheet plant. The Industrial Packaging charge includes $5 million of severance costs covering the termination of 221 employees, $2 million of asset write-offs and $1 million of other cash costs. At September 30, 2000, 158 employees had been terminated. Other also includes $5 million related to the indefinite shutdown of Carter Holt Harvey's Mataura paper mill. The Carter Holt Harvey charge includes $3 million of severance costs covering the termination of 158 employees and $2 million of other cash costs. At September 30, 2000, 138 employees had been terminated. The following table is a roll forward of the severance and other costs included in the second quarter 2000 reserves for excess internal capacity and cost reduction:
Severance and Dollars in millions Other ------------------- ---------- Opening balance - second quarter 2000 (1,056 employees) $ 31 Cash charges - third quarter 2000 (679 employees) (10) ---------- Balance, September 30, 2000 (377 employees) $ 21 ==========
During the first quarter of 2000, International Paper 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. Also 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-related expenses. 10 The following table shows the impact of special items on 2000 pre-tax earnings by quarter:
Quarter --------------------------------- In millions First Second Third Year-to-Date - ----------- ----- ------ ----- ------------ Earnings before special items, income taxes, minority interest and extraordinary items $ 443 $ 555 $ 445 $ 1,443 Merger-related expenses (8) (4) (15) (27) Restructuring and other charges (71) (71) Reversal of reserves no longer required 6 6 Provision for legal reserves (125) (125) ------- ------- ------- ------- Earnings before income taxes, minority interest and extraordinary items $ 435 $ 480 $ 311 $ 1,226 ======= ======= ======= =======
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 merger-related 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) Merger-related 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 completed in the third quarter of 2000. Under this program, 1,218 employees of the combined company were originally identified for termination. Benefits payable under this program for certain senior executives and managers have been paid from the general assets of International Paper. Benefits for remaining employees have been primarily paid from plan assets of our qualified pension plan. In total, 1,062 employees were terminated. Related cash payments approximated $71 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. Upon termination of the program in the third quarter of 2000, $6 million of the original reserve of $148 million was not used and reversed to income. 11 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 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 (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) Incurred costs - second quarter 2000 (164 employees) (18) Reversal of reserves no longer required (156 employees) (6) --------- Balance, September 30, 2000 $ -- ========= Note: Benefit costs are treated as incurred on the termination date of the employee.
The 1999 merger-related 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 merger-related cash costs related to the integration of Union Camp. The $298 million charge in 1999 for the asset shutdowns of excess internal capacity consisted of a $113 million charge in the second quarter and a $185 million charge in the 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) Cash charges - second quarter 2000 (673 employees) (14) Cash charges - third quarter 2000 (200 employees) (15) Other charges - third quarter 2000 (5) ---------- Balance, September 30, 2000 (499 employees) $ 48 ==========
The 1999 $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. 12 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:
September 30, December 31, In millions 2000 1999 ----------- ------------- ------------ Raw Materials $ 462 $ 484 Finished pulp, paper and packaging products 2,038 1,869 Finished lumber and panel products 245 178 Operating supplies 506 486 Other 147 186 ---------- ---------- Total $ 3,398 $ 3,203 ========== ==========
The increase in inventories is primarily due to the Champion merger ($455 million at the date of acquisition) offset by the reclassification of $267 million of inventories to other current assets related to the businesses held for sale discussed in Note 13. NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION Interest payments made during the nine month periods ended September 30, 2000 and 1999 were $487 million and $450 million, respectively. Capitalized net interest costs were $19 million for the nine months ended September 30, 2000 and $27 million for the nine months ended September 30, 1999. Total interest expense was $628 million for the nine months ended September 30, 2000 and $457 million for the nine months ended September 30, 1999. Income tax payments made during the nine months ended September 30, 2000 and 1999 were $210 million and $31 million, respectively. 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 $630 million and $153 million at September 30, 2000 and December 31, 1999, respectively. The increase was primarily due to unused proceeds from Carter Holt Harvey's sale of its share of COPEC. NOTE 9 - SUPPLEMENTAL BALANCE SHEET INFORMATION Accumulated depreciation was $15.7 billion at September 30, 2000 and $15.1 billion at December 31, 1999. The allowance for doubtful accounts was $120 million at September 30, 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 13 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. 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 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", an amendment to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", issued in June 1998. Statement No. 133 established 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. Statement No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Statement No. 138 amends the accounting and reporting standards of Statement No. 133 for certain derivative instruments and certain hedging activities. We will adopt SFAS 133 (as amended by SFAS 138) beginning on January 1, 2001. We are in the process of completing our review to determine the impact of the new standard on income and equity. Since the impact is dependent on future market rates and future derivative actions prior to year-end, the impact of adopting SFAS 133 is not fully determinable at this time. 14 NOTE 12 - PRO FORMA FINANCIAL INFORMATION International Paper's consolidated results of operations include Champion's activity from June 20, 2000, the date of the merger. The following unaudited pro forma financial information for the nine months ended September 30, 2000 and 1999 presents the combined results of the continuing operations of International Paper and Champion as if the merger occurred as of the beginning of each period. The pro forma adjustments are based on available information, estimated purchase price allocations and certain assumptions that we believe are reasonable. There can be no assurance that the assumptions and estimates will be realized. The pro forma information does not purport to represent International Paper's actual results of operations if the transaction described above would have occurred at the beginning of the respective period. In addition, the information is not indicative of future results.
In millions, except per share amounts, for the nine months ended September 30, 2000 1999 --------------------------------------- -------- -------- Net Sales $ 23,689 $ 22,179 Earnings Before Extraordinary Items 366 9 Net Earnings (Loss) 190 (9) Earnings Per Common Share Before Extraordinary Items 0.76 0.02 Earnings (Loss) Per Common Share 0.39 (0.02)
NOTE 13 - BUSINESSES HELD FOR SALE The sales of Bush Boake Allen (BBA), Masonite and Zanders were approved as specific elements of our previously announced intention to sell more than $3 billion in assets by the end of 2001. The sale of our interest in BBA closed on November 8, 2000; definitive agreements to sell Masonite and Zanders were entered into on September 30, 2000, and November 7, 2000, respectively. BBA is included in the Chemicals and Petroleum segment, Masonite in the Forest Products segment and Zanders in the Printing and Communications Papers segment. Sales and operating earnings for the year ended December 31, 1999 and the nine-months ended September 30, 2000, were as follows:
Nine Months Ended Year Ended September 30, 2000 December 31, 1999 -------------------------- -------------------------- Operating Operating In millions Sales Earnings Sales Earnings ----------- ---------- ---------- ---------- ---------- BBA $ 363 $ 26 $ 499 $ 28 Masonite 362 12 512 26 Zanders 484 -- 594 8
The assets of these businesses amounting to $1.3 billion were reclassified to "other current assets" and the liabilities amounting to $454 million were reclassified as "other accrued liabilities" on our balance sheet. Masonite and Zanders were written down to their estimated net realizable value based on sales prices, resulting in an extraordinary charge of $310 million after taxes in the third quarter. The sale of BBA will result in a profit which will be shown as an extraordinary item in the fourth quarter. This treatment is in accordance with the pooling-of-interests rules. 15 NOTE 14 - SUBSEQUENT EVENTS On October 18, 2000, we announced the planned closings of three mills and the scaling back of another in the coming months. The shutdowns will result in reductions of approximately 820,000 tons (18%) of our U.S. uncoated papers capacity, 120,000 tons (7%) of our North American market pulp capacity, 230,000 tons (5%) of our U.S. Containerboard capacity, and 50,000 tons of our unbleached Kraft paper capacity. Approximately 2,500 employees at these mills and related forestry operations will be impacted by the shutdowns. The affected facilities include mills in Mobile and Courtland, Alabama, Lock Haven, Pennsylvania and Camden, Arkansas. We estimate that the asset write-downs and cash costs, including severance, associated with these actions will be in the $500 million range (pre-tax) and will be accounted for in the fourth quarter of 2000. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Our consolidated results of operations include Champion International Corporation (Champion) for the full third quarter. The Champion acquisition was completed on June 20, 2000 in a purchase accounting transaction. Therefore, our results include Champion from that date forward. Prior periods have not been restated. International Paper's third-quarter 2000 net sales were $7.8 billion, well ahead of net sales recorded in both the 2000 second-quarter and the 1999 third-quarter of $6.8 billion and $6.3 billion, respectively. The increase was primarily the result of the Champion acquisition which accounted for 17% of third quarter sales. International Paper posted third-quarter 2000 earnings of $260 million, or $.53 per share, before special and extraordinary items. This represents a 15% increase over third-quarter 1999 earnings of $193 million, or $.46 per share, before special and extraordinary items. Earnings held up well despite very significant downtime in our Packaging and Paper segments and a decline in wood products prices. Our profit improvement initiatives are having a moderating effect on sharply rising energy and raw material prices. The U.S. dollar also strengthened during the quarter negatively impacting earnings from non-U.S. businesses and reducing demand for products produced in the U.S. We reported a loss of $135 million, or $.38 per share, after special and extraordinary items, in the third-quarter of 2000. In order for the 2000 third-quarter earnings per share to add up to the year-to-date earnings per share, a loss of $.38 per share is required. On the basis of the weighted-average number of shares outstanding for the third quarter, the loss per share was $.28. The difference between the two calculations relates to the 68.7 million shares that were issued in June, 2000 in connection with the Champion acquisition. Special items in the third quarter totaled $85 million after taxes, or $.18 per share, and consisted of Masonite legal reserves and merger-related expenses. Extraordinary items in the 2000 third-quarter included a charge of $310 million after taxes, or $.64 per share, resulting from the announced plans to sell Masonite and Zanders. Second-quarter 2000 earnings were $270 million, or $.64 per share, after special items totaling $75 million before taxes and minority interests which consisted of $71 million associated with facility closures and the simplification of manufacturing operations and $4 million of merger-related expenses. The results for Champion are included in each applicable segment although their segment results have been adjusted to conform to International Paper's classifications. The following segment discussions are based on results before third-quarter special and extraordinary items. PRINTING AND COMMUNICATIONS PAPERS net sales of $2.4 billion for the third quarter of 2000 showed significant improvement over prior quarter net sales of $1.6 billion and 1999 third-quarter net sales of $1.5 billion. Champion contributed over one-third of total segment sales for the 2000 third-quarter. The segment posted operating profit of $303 million in the 2000 third-quarter, $135 million of which resulted from the Champion acquisition. Third quarter operating profit was up 43% from $212 million in the previous quarter and well ahead of the third-quarter 1999 operating profit of $84 million. Strong pulp pricing and internal cost-cutting activities managed to offset the sluggish demand for uncoated papers and higher energy costs experienced during the quarter. In addition, the segment was able to recognize some of the price increase announced in mid-September for uncoated papers. Market-related uncoated papers and pulp downtime of 180,000 tons has helped balance inventories with demand. Continued downtime is expected to be taken as needed in the fourth quarter to keep supply aligned with demand. 17 Printing and Communications Papers - ----------------------------------
2000 1999 ------------------------------------------------ ----------------------------------------------- In millions 2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months ------------------------------------------------ ----------------------------------------------- Sales $ 1,620 $ 2,440 $ 5,710 $ 1,385 $ 1,480 $ 4,315 Operating Profit 212 303 693 22 84 114
INDUSTRIAL AND CONSUMER PACKAGING 2000 third-quarter net sales of $1.9 billion were down from the $2.0 billion of net sales recorded in the second quarter of 2000, but 8% ahead of $1.8 billion in net sales recorded in the third quarter of the previous year. Before Champion's contribution, third quarter net sales would have shown an increase of 5% over the prior year's third-quarter. The business reported operating profit of $194 million for the 2000 third-quarter, a decline from the $234 million of operating profit recorded in the prior quarter, but a 13% increase over 1999 third-quarter operating profit of $171 million. Industrial Packaging's mill operations performed exceptionally well during the third quarter, continuing the trend of improvement seen in the first half of the year. However, operating results declined in the third quarter versus the second quarter due to extensive downtime taken to match supply with our customers demand. The Containerboard system took over 400,000 tons of downtime during the quarter in order to balance production with customer demand. Earnings for the domestic box converting operations also fell below prior quarter earnings due primarily to the softening in demand. Kraft Paper earnings for the quarter were ahead of prior quarter despite market-related downtime. Consumer Packaging and Industrial Papers third quarter earnings were in line with prior year and prior quarter; however, softer demand for most of the Consumer Packaging converting businesses was experienced, as well as weaker pressure sensitive product volume from Industrial Papers. The Bleached Board business also encountered some market softness during the third quarter which carried over to the converting operations. Industrial and Consumer Packaging - ---------------------------------
2000 1999 ------------------------------------------------ ----------------------------------------------- In millions 2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months ------------------------------------------------ ----------------------------------------------- Sales $ 1,985 $ 1,930 $ 5,720 $ 1,760 $ 1,780 $ 5,215 Operating Profit 234 194 624 142 171 369
DISTRIBUTION net sales of $1.9 billion for the 2000 third-quarter were ahead of 2000 second-quarter net sales of $1.7 billion, as well as the 1999 third-quarter net sales of $1.7 billion. However, before Champion's contribution, 2000 third-quarter net sales would have been about even with both prior quarter and the 1999 third-quarter. Operating profit of $32 million in the 2000 third-quarter was down slightly from prior quarter operating profit of $35 million but showed a 28% improvement over 1999 third-quarter results of $25 million. Weak July and early August sales were primarily responsible for the decrease in operating profit from the 2000 second-quarter, despite expense reduction efforts offsetting part of the sales shortfall. Sales of the European distribution division dropped as a result of seasonal summer weakness and supply disruptions due to the widespread European fuel tax protests. Continuing benefits from the Zellerbach acquisition, combined with profit improvement efforts and merger synergies from the integration of Alling and Cory, are primarily driving the improvement over prior year. Distribution - ------------
2000 1999 ------------------------------------------------ ----------------------------------------------- In millions 2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months ------------------------------------------------ ----------------------------------------------- Sales $ 1,700 $ 1,930 $ 5,380 $ 1,675 $ 1,740 $ 5,115 Operating Profit 35 32 97 27 25 76
CHEMICALS AND PETROLEUM, which includes results from our approximately 68% owned subsidiary, Bush Boake Allen, reported 2000 third-quarter net sales of $375 million which were slightly above both the $365 million in the previous quarter and the $370 million in the 1999 third-quarter. Third-quarter 2000 operating profit of $49 million increased 36% over 2000 second-quarter earnings of $36 million and was up 29% over 1999 third-quarter 18 earnings of $38 million. The improvement in the chemicals businesses over prior year can be attributed to increased demand for chemical products and higher oil and gas prices. An improved mix of higher valued products and reduced manufacturing costs resulting from the shutdowns of facilities also positively impacted results. Chemicals and Petroleum - -----------------------
2000 1999 ------------------------------------------------ ----------------------------------------------- In millions 2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months ------------------------------------------------ ----------------------------------------------- Sales $ 365 $ 375 $ 1,085 $ 360 $ 370 $ 1,080 Operating Profit 36 49 118 28 38 85
FOREST PRODUCTS 2000 third-quarter net sales of $1.0 billion were up 36% from the $750 million reported in the 2000 second-quarter and 24% from the $825 million recorded in the 1999 third-quarter. Champion contributed 20% of total segment sales and approximately 6% of operating profit for the 2000 third-quarter. Current quarter operating profit of $169 million showed declines from prior quarter operating profit of $174 million and 1999 third-quarter operating profit of $199 million. Included in the third quarter operating profit was $93 million from land and bulk timber sales. Demand for both pulpwood and sawtimber softened during the quarter as paper mills and wood products plants curtailed operations to balance supply with demand. The Forest Resources group also reported a decline in harvest volumes for the quarter from volumes reported in the prior quarter and the 1999 third-quarter. Third quarter results for the Building Materials group were down from prior year primarily due to significant price erosion, sales volume declines and higher input costs. Forest Products - ---------------
2000 1999 ------------------------------------------------ ----------------------------------------------- In millions 2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months ------------------------------------------------ ----------------------------------------------- Sales $ 750 $ 1,020 $ 2,550 $ 815 $ 825 $ 2,425 Operating Profit 174 169 492 175 199 548
CARTER HOLT HARVEY reported 2000 third-quarter net sales of $435 million compared with $460 million recorded in the prior quarter and $410 million recorded in the 1999 third-quarter. Operating profit in the 2000 third-quarter of $21 million was down slightly from $23 million recorded in the previous quarter, but reflected a significant improvement over the $12 million reported in the same period a year ago. Third quarter results were down slightly from prior quarter due to general price weakening in both the domestic and export markets for Forest Products, as well as the negative impacts of weaker New Zealand and Australian markets on the Wood Products business, particularly related to residential construction. Earnings for Carter Holt Harvey's Packaging business were comparable to the previous quarter; however, price improvement and enhanced operating efficiencies in the New Zealand operations were offset by the inability to get price improvements in Australia. Both the Pulp and Paper and Tissues businesses showed earnings improvement due to higher export prices, margin improvement and increased sales volumes. For the three and nine months ended September 30, 2000, the New Zealand dollar weakened against the U.S. dollar by 13% and 19%, respectively. The results for Carter Holt Harvey were adversely impacted by the weakened New Zealand dollar. Carter Holt Harvey - ------------------
2000 1999 ------------------------------------------------ ----------------------------------------------- In millions 2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months ------------------------------------------------ ----------------------------------------------- Sales $ 460 $ 435 $ 1,305 $ 400 $ 410 $ 1,175 Operating Profit 23 21 61 8 12 20
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 ending 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 19 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 $1.9 billion for the first nine months of 2000 compared with $1.2 billion for the 1999 nine month period. Higher earnings for the first nine months of 2000 were partially offset by increased working capital requirements. Working capital changes decreased operating cash flow by $294 million for the first nine months of 2000 and increased operating cash flow by $4 million for the same period in 1999. Investments in capital projects totaled $908 million and $706 million for the 2000 and 1999 nine month periods. 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 nine month periods include a $4.4 billion net increase and a $372 million net decrease in debt. The 2000 increase includes both the $5.0 billion debt issuance to finance the Champion merger and the $640 million debt issuance to finance the Shorewood merger. Debt reductions include the repayment of $279 million of assumed Shorewood debt, $172 million of assumed Champion debt, and approximately $700 million of debt repayments by Carter Holt Harvey. Common stock dividend payments were $327 million, or $.75 per common share for the first nine months of 2000 compared with $314 million or $.76 per common share for the same period in 1999. Dividend payments for the third quarters ended September 30, 2000 and 1999 were $120 million and $102 million or $.25 per common share for both periods. Actual cash dividends paid for the first nine months of 1999 were $.75 per common share, however, dividend payments on a per common share basis have been restated to include dividends paid by Union Camp. At September 30, 2000, cash and temporary investments totaled $1.2 billion compared to $453 million at December 31, 1999. The increase in cash and temporary investments is due primarily to proceeds of $1.2 billion from Carter Holt Harvey's sale of COPEC and cash acquired through the Champion merger of approximately $325 million, less Carter Holt Harvey debt reductions of $700 million and Carter Holt Harvey's acquisition of CSR for approximately $200 million. MERGERS AND ACQUISITIONS On June 20, 2000, International Paper completed the previously announced merger with Champion, a leading manufacturer of paper for business communications, commercial printing and publications with significant market pulp, plywood, lumber and wood chip manufacturing operations. Under the terms of the merger agreement, Champion shareholders received $50 in cash per share and $25 worth of International Paper common stock per share. Champion shares were acquired for approximately $5 billion in cash and 68.7 million shares of International Paper common stock totaling $2.4 billion. Approximately $2.3 billion of debt was assumed. The results of Champion are included in the consolidated statement of earnings from June 20, 2000. In connection with the merger announcement, International Paper also announced its intention to sell more than $3 billion of assets by the end of 2001 as part of its increased focus on its core businesses. When the decision has been made to sell a specific business, costs and charges may be incurred in future periods. See the discussion titled "Businesses Held for Sale" on page 25 regarding the announced plans to sell Masonite, Zanders and Bush Boake Allen and related charges under this program. Also as a result of the merger announcement, Moody's lowered our long-term debt rating to Baa1. At September 30, 2000, outstanding debt included approximately $3 billion of commercial paper and bank notes with interest rates that fluctuate based on market conditions and our credit rating. 20 Carter Holt Harvey purchased CSR Limited's medium density fiberboard and particleboard businesses and its Oberon sawmill for approximately $200 million in cash on April 28, 2000. International Paper acquired 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 on March 31, 2000. On November 24, 1998, International Paper announced that it had reached an agreement to merge with Union Camp, a diversified paper and forest products company. The transaction was approved by Union Camp and International Paper shareholders, and the merger was completed, 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 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 nine months 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 September 30, 2000, reflects preliminary allocations of the purchase prices of Shorewood Packaging, CSR Limited and Champion to the fair value of the assets and liabilities acquired. RESTRUCTURING, SPECIAL AND EXTRAORDINARY ITEMS During the third quarter of 2000, International Paper recorded special items amounting to a net charge before taxes of $134 million ($85 million after taxes). The special items included a $15 million pre-tax charge ($9 million after taxes) for merger-related expenses, a $6 million pre-tax credit ($4 million after taxes) for the reversal of merger-related termination benefits reserves no longer required and a $125 million pre-tax charge ($80 million after taxes) for additional Masonite legal reserves. The merger-related expenses of $15 million consist primarily of travel expenses, system integration costs and stay bonuses. International Paper also recorded an extraordinary loss of $460 million before taxes ($310 million after taxes) to reflect the estimated losses on the planned sales of Masonite and Zanders. See the discussion titled "Businesses Held for Sale" on page 25 for additional information. During the second quarter of 2000, International Paper recorded special items amounting to a net charge before taxes and minority interest of $75 million ($45 million after taxes and minority interest). The special items included a $4 million pre-tax charge ($3 million after taxes) for merger-related expenses and a $71 million pre-tax charge ($42 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions. The merger-related expenses of $4 million consist primarily of travel expenses and system integration costs related to the Union Camp and Champion mergers. The $71 million charge for asset shutdowns of excess internal capacity and costs reduction actions includes $40 million of asset write-downs and $31 million of severance and other charges. The following table presents additional detail related to the $71 million charge: 21
Second Quarter 2000 --------------------------------- Asset Severance Write- and In millions downs Other Total ----------- ------- --------- ------- Printing and Communications Papers (a) $ 22 $ 7 $ 29 Consumer Packaging (b) 7 9 16 Industrial Papers (c) 9 4 13 Other (d) 2 11 13 ------- ------- ------- $ 40 $ 31 $ 71 ======= ======= =======
(a) The Printing and Communications Papers business shutdown the Millers Falls, Massachusetts mill due to excess capacity. Charges associated with the shutdown include $22 million of asset write-downs, $2 million of severance costs covering the termination of 119 employees and other exit costs of $3 million. At September 30, 2000, 107 employees had been terminated. Also, the Franklin, Virginia mill reduced its salaried workforce in a continuing effort to improve the cost effectiveness and long-term competitive position of the pulp and paper operation. A severance charge of $2 million covers the elimination of 108 salaried positions. At September 30, 2000, 26 employees had been terminated. (b) The Consumer Packaging business has implemented a plan to reduce excess capacity and streamline administrative functions at several of its locations as a result of the Shorewood acquisition. The Richmond, Virginia facility is scheduled to be shut down. Charges associated with the shutdown include $6 million of asset write-downs, $2 million of severance costs covering the termination of 126 employees and other exit costs of $1 million. At September 30, 2000, 123 employees had been terminated. Management also decided to permanently idle the lithographic department of the Clinton, Iowa facility. This action will allow the Retail Packaging business to better focus its resources for further profit improvement. The charge includes $1 million of asset write-downs, $3 million of severance covering the termination of 187 employees and $2 million of other exit costs. At September 30, 2000, 103 employees had been terminated. A severance reserve of $1 million has also been established related to the streamlining effort of the Consumer Packaging business. This reserve covers the termination of 17 employees. At September 30, 2000, 13 employees had been terminated. (c) Industrial Papers announced the shutdown of the Knoxville, Tennessee converting facility in an effort to reduce excess capacity. The charge includes $9 million of asset write-downs, $1 million of severance costs related to the termination of 120 employees and other exit costs of $3 million. At September 30, 2000, 11 employees had been terminated. (d) Other includes $8 million related to Industrial Packaging, primarily for the shutdown of the Tupelo, Mississippi sheet plant. The Industrial Packaging charge includes $5 million of severance costs covering the termination of 221 employees, $2 million of asset write-offs and $1 million of other cash costs. At September 30, 2000, 158 employees had been terminated. Other also includes $5 million related to the indefinite shutdown of Carter Holt Harvey's Mataura paper mill. The Carter Holt Harvey charge includes $3 million of severance costs covering the termination of 158 employees and $2 million of other cash costs. At September 30, 2000, 138 employees had been terminated. 22 The following table is a roll forward of the severance and other costs included in the second quarter 2000 reserves for excess internal capacity and cost reductions.
Severance and Dollars in millions Other ------------------- ---------- Opening balance - second quarter 2000 (1,056 employees) $ 31 Cash charges - third quarter 2000 (679 employees) (10) ---------- Balance, September 30, 2000 (377 employees) $ 21 ==========
During the first quarter of 2000, International Paper 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. Also 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-related expenses. The following table shows the impact of special items on 2000 pre-tax earnings by quarter:
Quarter ---------------------------------------------------- In millions First Second Third Year-to-Date - ----------- ------- ------- ------- ------------ Earnings before special items, income taxes, minority interest and extraordinary items $ 443 $ 555 $ 445 $ 1,443 Merger-related expenses (8) (4) (15) (27) Restructuring and other charges (71) (71) Reversal of reserves no longer required 6 6 Provision for legal reserves (125) (125) ------- ------- ------- ------- Earnings before income taxes, minority interest and extraordinary items $ 435 $ 480 $ 311 $ 1,226 ======= ======= ======= =======
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 merger-related 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. 23 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) Merger-related 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 completed in the third quarter of 2000. Under this program, 1,218 employees of the combined company were originally identified for termination. Benefits payable under this program for certain senior executives and managers have been paid from the general assets of International Paper. Benefits for remaining employees have been primarily paid from plan assets of our qualified pension plan. In total, 1,062 employees were terminated. Related cash payments approximated $71 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. Upon termination of the program in the third quarter of 2000, $6 million of the original reserve of $148 million was not used and reversed to income. 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 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 (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) Incurred costs - second quarter 2000 (164 employees) (18) Reversal of reserves no longer required (156 employees) (6) ------------ Balance, September 30, 2000 $ -- ============
Note: Benefit costs are treated as incurred on the termination date of the employee. The 1999 merger-related 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 merger-related cash costs related to the integration of Union Camp. 24 The $298 million charge in 1999 for the asset shutdowns of excess internal capacity consisted of a $113 million charge in the second quarter and a $185 million charge in the 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) Cash charges - second quarter 2000 (673 employees) (14) Cash charges - third quarter 2000 (200 employees) (15) Other charges - third quarter 2000 (5) ------------ Balance, September 30, 2000 (499 employees) $ 48 ============
The 1999 $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. BUSINESSES HELD FOR SALE The sales of Bush Boake Allen (BBA), Masonite and Zanders were approved as specific elements of our previously announced intention to sell more than $3 billion in assets by the end of 2001. The sale of our interest in BBA closed on November 8, 2000; definitive agreements to sell Masonite and Zanders were entered into on September 30, 2000, and November 7, 2000, respectively. BBA is included in the Chemicals and Petroleum segment, Masonite in the Forest Products segment and Zanders in the Printing and Communications Papers segment. Sales and operating earnings for the year ended December 31, 1999 and the nine months ended September 30, 2000 were as follows:
Nine Months Ended Year Ended September 30, 2000 December 31, 1999 -------------------------- -------------------------- Operating Operating In millions Sales Earnings Sales Earnings ----------- ---------- ---------- ---------- ---------- BBA $ 363 $ 26 $ 499 $ 28 Masonite 362 12 512 26 Zanders 484 -- 594 8
25 The assets of these businesses amounting to $1.3 billion were reclassified to "other current assets" and the liabilities amounting to $454 million were reclassified as "other accrued liabilities" on our balance sheet. Masonite and Zanders were written down to their estimated net realizable value based on sales prices, resulting in an extraordinary charge of $310 million after taxes in the third quarter. The sale of BBA will result in a profit which will be shown as an extraordinary item in the fourth quarter. This treatment is in accordance with the pooling-of-interests rules. Other The effective income tax rate before special and extraordinary items increased to 30% for the 2000 first nine months from 28% in the 1999 first nine months. The increase was primarily due to changes in the mix of estimated annual earnings. The effective income tax rate after special items but before extraordinary items was 28% and 21% for the 2000 and 1999 nine month periods, 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 nine month periods ended September 30, 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 $ 1,443 $ 429 30% $ 638 $ 181 28% Merger-related termination benefits -- -- -- (148) (51) 34% Merger-related expenses (27) (10) 37% (77) (17) 22% Restructuring and other charges (196) (72) 37% (149) (58) 39% Reversals of reserves no longer required 6 2 33% 36 9 25% ------- ------- ------- ------- After special items $ 1,226 $ 349 28% $ 300 $ 64 21% ======= ======= ======= =======
Increases in the individual line items on the balance sheet are primarily related to the acquisition of Champion on June 20, 2000 and the reclassification of the assets and liabilities of the businesses held for sale to "other current assets" and "other accrued liabilities" at September 30, 2000. The Champion acquisition was accounted for as a purchase and, accordingly, Champion's balances are only included in the September 30, 2000 totals on the consolidated balance sheet. See the discussions titled "Mergers and Acquisitions" and "Businesses Held for Sale" above for more details. 26 Forward-Looking Statements The statements under "Management's Discussion and Analysis" and other statements contained herein that are not historical facts are forward-looking statements (as such term is defined under the Private Securities Litigation Reform Act of 1995). Forward-looking statements reflect our expectations or forecasts of future events. These include statements relating to future actions, future performance or the outcome of contingencies, such as legal proceedings and financial results. Any or all of the forward-looking statements that we make in this report may turn out to be wrong. They can be influenced by inaccurate assumptions we might make or by known or unknown risks and uncertainties. No forward-looking statements can be guaranteed and actual results may vary materially. Factors which could cause actual results to differ include, among other things, changes in overall demand, changes in domestic competition, changes in the cost or availability of raw materials, the cost of compliance with environmental laws and regulations and whether anticipated savings from merger, other restructuring activities, and asset shutdowns relating to excess capacity can be achieved. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. 27 Financial Information by Industry Segment (Unaudited) (In millions) Net Sales by Industry Segment
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Printing and Communications Papers (1) $ 2,440 $ 1,480 $ 5,710 $ 4,315 Industrial and Consumer Packaging 1,930 1,780 5,720 5,215 Distribution 1,930 1,740 5,380 5,115 Chemicals and Petroleum 375 370 1,085 1,080 Forest Products 1,020 825 2,550 2,425 Carter Holt Harvey 435 410 1,305 1,175 Corporate and Intersegment Sales (1) (2) (329) (354) (798) (1,046) ------- ------- ------- ------- Net Sales $ 7,801 $ 6,251 $20,952 $18,279 ======= ======= ======= =======
Operating Profit by Industry Segment
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Printing and Communications Papers $ 303 $ 84 $ 693 $ 114 Industrial and Consumer Packaging 194 171 624 369 Distribution 32 25 97 76 Chemicals and Petroleum 49 38 118 85 Forest Products 169 199 492 548 Carter Holt Harvey (3) 21 12 61 20 Corporate (2) 26 ------- ------- ------- ------- Operating Profit 768 529 2,111 1,212 Interest expense, net (278) (134) (565) (400) Minority interest adjustment 32 21 94 42 Corporate items, net (77) (96) (197) (245) Restructuring and other charges (125) (10) (196) (123) Merger integration costs (15) (68) (27) (225) Reversal of reserves no longer required 6 6 36 Scitex restructuring and other charges 3 ------- ------- ------- ------- Earnings before income taxes, minority interest and extraordinary items $ 311 $ 242 $ 1,226 $ 300 ======= ======= ======= =======
(1) Certain reclassifications and adjustments have been made to prior year amounts. (2) Includes results from operations of Champion acquired on June 20, 2000. Beginning on July 1, 2000, the results of the former Champion business have been included in the appropriate business segment. (3) Includes equity earnings (in millions) of $1 and $14 for the three months ended September 30, 2000 and 1999, respectively, and $10 and $36 for the nine months ended September 30, 2000 and 1999, respectively. Half of these equity earnings amounts are in the Carter Holt Harvey segment and half are in the minority interest adjustment. 28 Production by Product
Three Months Ended Nine Months Ended Sepember 30, September 30, ------------------- ------------------- 2000 1999 2000 1999 ----- ----- ----- ----- Printing Papers (in thousands of tons) White Papers and Bristols (a) (e) 1,684 1,295 4,419 4,010 Coated Papers (e) 720 308 1,362 963 Market Pulp (b) (e) 837 545 1,874 1,538 Newsprint 26 26 81 74 Packaging (in thousands of tons) Containerboard (a) 1,039 1,230 3,433 3,601 Bleached Packaging Board 532 542 1,607 1,592 Industrial Papers 265 221 736 671 Industrial and Consumer Packaging (a) (c) 1,227 1,264 3,953 3,776 Specialty Products (in thousands of tons) Tissue 41 37 124 118 Forest Products (in millions) Panels (sq. ft. 3/8" - basis) (d) (e) 753 510 1,790 1,473 Lumber (board feet) (e) 999 693 2,491 2,164 MDF (sq. ft. 3/4" - basis) 100 53 244 167 Particleboard (sq. ft. 3/4" - basis) 122 51 265 148
(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 the tonnage was fabricated from paperboard and paper produced at International Paper's own mills and included in the containerboard, bleached packaging board and industrial papers amounts in this table. (d) Panels include plywood and oriented strand board. (e) Includes Champion for third quarter 2000. 29 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK On June 20, 2000, International Paper completed the previously announced merger with Champion. To complete the merger, Champion shares were acquired for approximately $5 billion in cash and 68.7 million shares of International Paper common stock totaling $2.4 billion. Approximately $2.3 billion of Champion's debt, mostly long-term fixed rate debt, was assumed. International Paper financed the cash portion of the merger with a combination of short- and long-term, fixed and floating rate notes. The results of our analysis of value at risk, considering the Champion borrowings noted above, were not significant to our consolidated common shareholders' equity, earnings or daily change in market capitalization. 30 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 on which Masonite Woodruf roofing had been incorporated and installed 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 $148 million at September 30, 2000. This amount includes $25 million added to the reserve for hardboard siding claims in the fourth quarter of 1999 (some of which has been paid to claimants), and an additional $125 million added to that reserve in the third quarter of 2000 to cover an expected shortfall, resulting primarily from a higher number of hardboard siding claims 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. Expected insurance recoveries, apart from the insurance recoveries to date, are $51 million. Through September 30, 2000, settlement payments of $292 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 September 30, 2000. International Paper and Masonite have the right to terminate each of the settlements after seven years from the dates of final approval. 31 OTHER LITIGATION On May 14, 1999, and May 18, 1999, two lawsuits were filed against International Paper, the former Union Camp Corporation and other manufacturers of linerboard. These suits allege that the defendants conspired to fix prices for linerboard and corrugated sheets during the period October 1, 1993, through November 30, 1995. Both lawsuits were filed seeking nationwide class certification. The lawsuits allege that various purchasers of corrugated sheets and corrugated containers were injured as a result of the alleged conspiracy. The cases have been consolidated in federal court in the Eastern District of Pennsylvania. Defendants' motions to dismiss the cases were denied on October 4, 2000. Purchasers of high-pressure laminates have filed a number of purported class actions under the federal antitrust laws in various federal district courts in different states, alleging that International Paper's Nevamar division participated in a price-fixing conspiracy with competitors; these cases have been consolidated in federal district court in New York. Indirect and direct purchasers of high-pressure laminates have also filed similar purported class action cases under various state antitrust and consumer protection statutes in California, Florida, Michigan, New Mexico, New York, North Dakota, South Dakota, Tennessee and the District of Columbia. International Paper has filed a motion to dismiss one of the cases in federal court. As of October 16, 2000, the Company has not filed a pleading responsive to any other complaint. On June 19, 2000, before International Paper completed its acquisition of the stock of Champion, Champion entered into a Consent Order with the Maine Department of Environmental Protection which resolved allegations of past wastewater and reporting deficiencies at Champion's lumber mills in Milford and Passadumkeag, Maine. The U.S. EPA and the U.S. Attorney's Office in Maine have since that time commenced a grand jury investigation of the same allegations. 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. 32 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (10.1) Champion Merger Integration Chief Executive Officer Performance Plan (10.2) Champion Merger Integration Savings and Synergy Plan (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 International Paper filed reports on Form 8-K on July 12, 2000, October 4, 2000, and October 18, 2000 reporting information under Item 5, Other Events. 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, 2000 By /s/ JOHN V. FARACI ------------------------------ John V. Faraci Executive Vice President and Chief Financial Officer Date: November 13, 2000 By /s/ ANDREW R. LESSIN ------------------------------ Andrew R. Lessin Vice President, Finance and Chief Accounting Officer 33 EX-10.1 2 0002.txt CHIEF EXECUTIVE OFFICER PERFORMANCE INCENTIVE PLAN International Paper Champion Merger Integration Chief Executive Officer Performance Incentive Plan July 1, 2000 I. Purpose The purpose of the Chief Executive Officer Performance Incentive Plan (the Plan) is to provide additional incentive and recognition to the Participant for achieving the aggressive integration of Champion International Corporation and International Paper Company resulting in savings of $425,000,000 by December 31, 2001. II. Plan Description The Plan provides shares of stock, performance units, and/or cash to the Participant upon successful completion. Awards are forfeited if performance objectives are not achieved as determined by the Management Development and Compensation Committee (the "Committee"). A. Participation Participation in this plan is limited to the Chairman of the Board and Chief Executive Officer. Participation in the Plan, or receipt of an award under this Plan, does not give the Participant any right to a subsequent award, nor any right to continued employment by the Company for any period. B. Objectives The primary objective is to achieve $425,000,000 of annual savings by December 31, 2001. The actual amount of savings will determine the amount of the earned award according to the following table: Savings: $340mm $425mm $485mm % of Target: 50% 100% 125% Earned Award: 50,000 100,000 125,000 C. Earned Awards The Target Award is expressed as 125,000 performance units. The performance units will be granted to the Participant and will be earned in full or in part based upon the committee's determination of the level of achievement of the performance objective as identified in Section I. Earned awards are paid in cash. Each performance unit will be equal to one share of International Paper common stock at December 31, 2001. (Share price used to calculate the award will be the average between the high and low for the ten business days immediately proceeding the last day of the period). III. Administration The Plan operates at the discretion of the Committee. The Committee may exercise considerable discretion and judgment in interpreting the Plan and adapting, from time to time, rules and regulations that govern the administration of the Plan. Decisions of the Committee are final, conclusive and binding on all parties, including the Company, its Shareholders, and employees. The Committee may at any time suspend, terminate, modify, or amend any or all of the provisions of this Plan. IV. Method and Timing of Payment of Awards Performance units will be earned on the date the Committee determines the performance objective has been achieved. Payment may be in cash, in shares of International Paper common stock, or in any combination of cash and/or stock as determined by the Committee in its discretion. The Committee, in its discretion, may award all or part of any unearned award to the Participant, Participant's estate or beneficiary upon the Participant's death or total disability. V. Governing Law The Plan is governed by the laws of the State of New York. VI. Tax Withholding The Company will deduct from any award made under the Plan, a sufficient amount to cover withholding of any federal, state or local taxes required by law, or to take such other action as may be necessary to satisfy any such withholding obligations. VII. Non-Transferability of Award No award, Under this Plan, and no rights or interests therein, will be assignable or transferable by a Participant (or legal representative). VIII. Change of Control Should the Company experience a Change of Control as described in the Participant's letter agreement dated February 11, 1997, all awards described in the Plan will be 2 awarded in full at the earlier of the date of the change of control or the Participant's termination from the Company. IX. Cost Estimate Stock Price: $35 $40 $45 At 100% Performance: $4,375,000 $5,000,000 $5,625,000 At 175% Performance: $7,656,250 $8,750,000 $9,843,750 EX-10.2 3 0003.txt CHAMPION MERGER INTEGRATION SAVINGS & SYNERGY PLAN International Paper Champion Merger Integration Savings and Synergy Plan July 1, 2000 I. Purpose The purpose of this plan is to encourage and promote focused and united efforts and interests by Integration Team Members by providing additional incentive compensation to achieve the most effective and successful integration of Champion International Corporation and International Paper Company by December 31, 2001. II. Plan Description The performance period begins July 1, 2000 and ends December 31, 2001. Awards may be earned provided stated savings have been achieved during the period and specific conditions pertaining to the integration have been met. Target awards are considered stock units and are assigned at the beginning of the period. The actual amount of the award depends upon the level of achievement of the objectives and the stock price at the end of the period. A. Participation Executives identified as the Integration Steering Committee and Integration Team Leaders are eligible to participate in the plan. As the organization is finalized the Chairman and Chief Executive Officer may add or delete participants as required. B. Objectives The primary objective is to achieve $425,000,000 of annual savings by December 31, 2001. The projected on-going savings will determine the amount of the earned award according to the following table: Savings: $340mm $425mm $485mm $550mm % of Target: 50% 100% 125% 175% These awards can be further adjusted by plus or minus 25% depending upon the overall success of the integration process as measured by the following: o Retention of all major customers, o Retention of high potential individuals identified for placement in the combined company, and o Integration of best practices of each of the combined companies to include social integration of corporate cultures. C. Earned Awards Earned awards are paid in cash. The value of the earned award depends upon performance relative to the established objectives and to the share price at December 31, 2001. (Share price used to calculate the award will be the average between the high and low for the ten business days immediately proceeding the last day of the period). Target awards are expressed as stock units and are determined by the level of the participant. Level Description Target Award -------------------------------------------------------------- I Integration Steering Committee 10,000 units II Integration Team Leader 3,000 units III. Administration The plan is administered by the Chairman and Chief Executive Officer. Earned awards and degree of objective achievement are recommended by the Chairman for final approval to the Management Development and Compensation Committee of the Board of Directors. Earned awards are paid as soon as practicable following the close of the performance period. IV. Cost Estimate Stock Price $35 $40 $45 At 100% Performance 8.0mm 9.2mm 10.3mm At 175% Performance 14.0mm 16.0mm 18.0mm (Note: Cost Estimate Assumes 16 participants at Level I and 23 at Level II) 2 EX-11 4 0004.txt STATEMENT OF COMPUTATION OF PER SHARE EARNINGS INTERNATIONAL PAPER COMPANY STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (Unaudited) (In millions, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Earnings before extraordinary items $ 175 $ 145 $ 689 $ 119 Effect of dilutive securities Preferred securities of subsidiary trust 12 ------- ------- ------- ------- Earnings before extraordinary items - assuming dilution $ 175 $ 145 $ 701 $ 119 ======= ======= ======= ======= Average common shares outstanding 481.6 413.5 438.9 412.9 Effect of dilutive securities Preferred securities of subsidiary trust 8.3 Long-term incentive plan deferred compensation Stock options 0.1 3.3 0.3 3.3 ------- ------- ------- ------- Average common shares outstanding - assuming dilution 481.7 416.8 447.5 416.2 ======= ======= ======= ======= Earnings per common share before extraordinary items $ 0.36 $ 0.35 $ 1.57 $ 0.29 ======= ======= ======= ======= Earnings per common share before extraordinary items - assuming dilution $ 0.36 $ 0.35 $ 1.57 $ 0.29 ======= ======= ======= =======
Note: If an amount does not appear in the above table, the security was antidilutive for the period presented. EX-12 5 0005.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES INTERNATIONAL PAPER COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollar amounts in millions) (Unaudited)
Nine Months Ended For the Years Ended December 31, September 30, ----------------------------------------------------------- -------------------- 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 $ 300.0 $ 1,226.0 B) Minority interest expense, net of taxes (166.0) (180.0) (140.0) (87.0) (163.0) (117.0) (188.0) C) Fixed charges excluding capitalized interest 740.3 802.1 826.6 866.7 820.9 611.0 790.9 D) Amortization of previously capitalized interest 29.6 34.2 37.0 38.8 17.0 12.6 15.6 E) Equity in undistributed earnings of affiliates (94.5) 6.2 (40.4) 23.7 (41.6) (24.6) (2.4) --------- --------- --------- --------- --------- --------- --------- F) Earnings before income taxes, extraordinary items, accounting changes and fixed charges $ 3,251.4 $ 1,601.5 $ 826.2 $ 1,271.2 $ 1,081.3 $ 782.0 $ 1,842.1 ========= ========= ========= ========= ========= ========= ========= Fixed Charges G) Interest and amortization of debt expense $ 664.9 $ 699.5 $ 720.0 $ 716.9 $ 611.5 $ 456.8 $ 632.7 H) Interest factor attributable to rentals 64.8 79.0 83.0 80.7 76.3 54.8 52.9 I) Preferred dividends of subsidiary 10.6 23.6 23.6 69.1 133.1 99.4 105.3 J) Capitalized interest 66.9 71.2 71.6 53.4 29.3 27.0 18.9 --------- --------- --------- --------- --------- --------- --------- K) Total fixed charges $ 807.2 $ 873.3 $ 898.2 $ 920.1 $ 850.2 $ 638.0 $ 809.8 ========= ========= ========= ========= ========= ========= ========= L) Ratio of earnings to fixed charges 4.03 1.83 1.38 1.27 1.23 2.27 ========= ========= ========= ========= ========= ========= M) Deficiency in earnings necessary to cover fixed charges $ (72.0) =========
EX-27 6 0006.txt FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-2000 JAN-01-1999 SEP-30-2000 1,171 0 3,849 120 3,398 10,164 33,096 15,724 42,965 7,586 12,690 1,805 0 484 12,088 42,965 20,952 20,952 14,945 19,167 0 27 565 1,226 349 689 0 (176) 0 513 1.17 1.17
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