-----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, AeDAPvqgArQOnNsDPvsIJfoBHKMbGXMltI/9lvYmlEMzqfZbmPmn+Lgamf5XBZkl Q61Ff0zGN5DsMvRkSq93IA== 0001047469-97-004871.txt : 19971117 0001047469-97-004871.hdr.sgml : 19971117 ACCESSION NUMBER: 0001047469-97-004871 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL PAPER CO /NEW/ CENTRAL INDEX KEY: 0000051434 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 130872805 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03157 FILM NUMBER: 97720094 BUSINESS ADDRESS: STREET 1: TWO MANHATTANVILLE RD CITY: PURCHASE STATE: NY ZIP: 10577 BUSINESS PHONE: 9143971500 MAIL ADDRESS: STREET 1: TWO MANHATTANVILLE ROAD CITY: PURCHASE STATE: NY ZIP: 10577 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL PAPER & POWER CORP DATE OF NAME CHANGE: 19710527 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended September 30, 1997 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 --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common stock outstanding on October 31, 1997: 302,290,361 shares. INTERNATIONAL PAPER COMPANY INDEX
PAGE NO. -------- PART I. Financial Information Item 1. Financial Statements Consolidated Statement of Earnings - Three Months and Nine Months Ended September 30, 1997 and 1996 3 Consolidated Balance Sheet - September 30, 1997 and December 31, 1996 4-5 Consolidated Statement of Cash Flows - Nine Months Ended September 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 Item 3. Other Financial Information 16-17 PART II. Other Information Item 1. Legal Proceedings 18 Item 2. Changes in Securities * Item 3. Defaults upon Senior Securities * Item 4. Submission of Matters to a Vote of Security Holders * Item 5. Other Information * Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20
* Omitted since no answer is called for, answer is in the negative or inapplicable. 2 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, -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Net Sales............................................................... $ 5,119 $ 5,108 $ 15,015 $ 14,999 --------- --------- --------- --------- Costs and Expenses Cost of products sold................................................. 3,791 3,760 11,213 11,087 Selling and administrative expenses................................... 404 387 1,174 1,113 Depreciation and amortization......................................... 311 307 949 872 Distribution expenses................................................. 233 240 703 678 Taxes other than payroll and income taxes............................. 52 51 157 148 Business improvement charge........................................... 535 Provision for legal reserve........................................... 150 Restructuring and asset impairment charge............................. 515 --------- --------- --------- --------- Total Costs and Expenses................................................ 4,791 4,745 14,881 14,413 --------- --------- --------- --------- Gain on sale of partnership interest.................................. 592 --------- --------- --------- --------- Earnings Before Interest, Income Taxes and Minority Interest........... 328 363 134 1,178 Interest expense, net................................................. 120 136 375 398 --------- --------- --------- --------- Earnings (Loss) Before Income Taxes and Minority Interest............... 208 227 (241) 780 Income tax provision (benefit)........................................ 71 86 (56) 329 Minority interest expense, net of taxes............................... 35 30 98 143 --------- --------- --------- --------- Net Earnings (Loss)..................................................... $ 102 $ 111 $ (283) $ 308 --------- --------- --------- --------- --------- --------- --------- --------- Earnings (Loss) Per Common Share........................................ $ 0.34 $ 0.37 $ (0.94) $ 1.06 --------- --------- --------- --------- --------- --------- --------- --------- Average Shares of Common Stock Outstanding.............................. 302.3 300.0 301.4 289.4 --------- --------- --------- --------- --------- --------- --------- --------- Cash Dividends Per Common Share......................................... $ 0.25 $ 0.25 $ 0.75 $ 0.75 --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. 3 INTERNATIONAL PAPER COMPANY Consolidated Balance Sheet (Unaudited) (In millions)
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------- Assets Current Assets Cash and temporary investments.................................................... $ 469 $ 352 Accounts and notes receivable, net................................................ 2,618 2,553 Inventories....................................................................... 2,862 2,840 Other current assets.............................................................. 277 253 ------------- ------------- Total Current Assets................................................................ 6,226 5,998 ------------- ------------- Plants, Properties and Equipment, Net............................................... 12,387 13,217 Forestlands......................................................................... 3,152 3,342 Investments......................................................................... 1,227 1,178 Goodwill............................................................................ 2,609 2,748 Deferred Charges and Other Assets................................................... 1,793 1,769 ------------- ------------- Total Assets........................................................................ $ 27,394 $ 28,252 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. 4 INTERNATIONAL PAPER COMPANY Consolidated Balance Sheet (Unaudited) (In millions)
SEPTEMBER 30, DECEMBER 31, LIABILITIES AND COMMON SHAREHOLDER'S EQUITY 1997 1996 ------------- ------------ Current Liabilities Notes payable and current maturities of long-term debt............................ $ 3,079 $ 3,296 Accounts payable.................................................................. 1,405 1,426 Accrued liabilities............................................................... 1,463 1,172 ------------- ------------ Total Current Liabilities........................................................... 5,947 5,894 ------------- ------------ Long-Term Debt...................................................................... 6,656 6,691 Deferred Income Taxes............................................................... 2,590 2,768 Other Liabilities................................................................... 1,190 1,240 Minority Interest................................................................... 1,812 1,865 International Paper-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely International Paper Subordinated Debentures..................................................... 450 450 Common Shareholders' Equity Common stock, $1 par value, issued 1997 - 302.8 shares, 1996 - 300.8 shares........................................ 303 301 Paid-in capital................................................................... 3,342 3,426 Retained earnings................................................................. 5,130 5,639 ------------- ------------ 8,775 9,366 Less: Common stock held in treasury, at cost, 1997 - 0.5 shares, 1996 - 0.6 shares............................................ 26 22 ------------- ------------ Total Common Shareholders' Equity................................................... 8,749 9,344 ------------- ------------ Total Liabilities and Common Shareholders' Equity................................... $ 27,394 $ 28,252 ------------- ------------ ------------- ------------
The accompanying notes are an integral part of these financial statements. 5 INTERNATIONAL PAPER COMPANY Consolidated Statement of Cash Flows (Unaudited) (In millions)
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1997 1996 --------- --------- Operating Activities Net earnings (loss).......................................................................... $ (283) $ 308 Depreciation and amortization................................................................ 949 872 Deferred income taxes........................................................................ (117) 133 Business improvement charge.................................................................. 535 Provision for legal reserve.................................................................. 150 Payments, net of proceeds, related to restructuring and legal reserves....................... (67) Restructuring and asset impairment charge.................................................... 515 Gain on sale of partnership interest......................................................... (592) Other, net................................................................................... 91 61 Changes in current assets and liabilities Accounts and notes receivable.............................................................. (200) 128 Inventories................................................................................ (139) 157 Accounts payable and accrued liabilities................................................... (131) (331) Other...................................................................................... (9) (2) --------- --------- Cash Provided by Operations.................................................................... 779 1,249 --------- --------- Investment Activities Invested in capital projects................................................................. (706) (944) Mergers and acquisitions, net of cash acquired............................................... (37) (1,524) Other........................................................................................ (24) 27 --------- --------- Cash Used for Investment Activities............................................................ (767) (2,441) --------- --------- Financing Activities Issuance of common stock..................................................................... 135 79 Issuance of debt............................................................................. 489 1,713 Reduction of debt............................................................................ (426) (252) Change in bank overdrafts.................................................................... 95 (71) Dividends paid............................................................................... (226) (215) Other........................................................................................ 39 29 --------- --------- Cash Provided by Financing Activities.......................................................... 106 1,283 --------- --------- Effect of Exchange Rate Changes on Cash........................................................ (1) 2 --------- --------- Change in Cash and Temporary Investments....................................................... 117 93 Cash and Temporary Investments Beginning of the period...................................................................... 352 312 --------- --------- End of the period............................................................................ $ 469 $ 405 --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. 6 INTERNATIONAL PAPER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. 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 the Company's Form 10-K for the year ended December 31, 1996, which has previously been filed with the Commission. 2. In September 1997, the Company acquired Merbok Formtec. In August 1996, the Company acquired Forchem, a tall oil and turpentine processor in Finland. In September 1996, Carter Holt Harvey, a consolidated subsidiary of the Company, acquired Forwood Products, the timber processing business of the South Australian Government. On March 12, 1996, the Company completed the merger with Federal Paper Board (Federal), a diversified forest and paper products company. Under the terms of the merger agreement, Federal shareholders received, at their election and subject to certain limitations, either $55 in cash or a combination of cash and International Paper common stock worth $55 for each share of Federal common stock. To complete the merger, Federal shares were acquired for approximately $1.3 billion in cash and $1.4 billion in International Paper common stock, and approximately $800 million of debt was assumed. The results of Federal are included in the consolidated statement of earnings from March 12, 1996. All of the above acquisitions were accounted for using the purchase method. The consolidated balance sheet at December 31, 1996 includes preliminary purchase price allocations for Forchem and Forwood Products. 3. The following unaudited pro forma financial information for the three months and nine months ended September 30, 1996 presents the combined results of the continuing operations of International Paper, Federal, and the other acquisitions completed during 1996. The 1997 amounts presented in the following table are actual results for the third quarter and first nine months. These amounts include the results of all of the 1996 acquisitions for the entire period and are presented for comparative purposes only. The pro forma information is presented as if the transactions occurred as of the beginning of the three-month and nine-month periods ended September 30, 1996. The pro forma adjustments are based on available information, preliminary purchase price allocations and certain assumptions that the Company believes are reasonable. There can be no assurance that the assumptions and estimates would have been realized. The pro forma information does not purport to represent the Company's actual results of operations if the transactions described above would have occurred at the beginning of the 1996 periods, nor is it indicative of the actual results since acquisition. In addition, the information may not be indicative of future results. 7 PRO FORMA FINANCIAL INFORMATION
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 1997 1996 1997 1996 (ACTUAL) (ACTUAL) ----------- --------- ----------- --------- (UNAUDITED) (UNAUDITED) Net Sales....................................................... $ 5,119 $ 5,149 $ 15,015 $ 15,462 --------- --------- ---------- --------- --------- --------- ---------- --------- Net Earnings (Loss)............................................. $ 102 $ 111 (283) $ 294 --------- --------- ---------- --------- --------- --------- ---------- --------- Earnings (Loss) Per Common Share................................ $ 0.34 $ 0.37 $ (0.94) $ 0.98 --------- --------- ---------- --------- --------- --------- ---------- ---------
4. In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1, "Environmental Remediation Liabilities" (the SOP), which was adopted by the Company in the first quarter of 1997. The SOP provides guidance concerning the recognition, measurement and disclosure of environmental remediation liabilities. The adoption of the SOP did not have a material effect on the Company's financial position or results of operations. 5. In February 1997, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share", which specifies the computation, presentation and disclosure requirements for earnings per share. This statement is effective for fiscal years ending after December 15, 1997, and earlier adoption is not permitted. Adoption of the provisions of this statement is not expected to have a material effect on reported earnings per share. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and display of comprehensive income and its components. This statement is effective for fiscal years beginning after December 15, 1997. 6. On March 29, 1996, IP Timberlands, Ltd. (IPT), a consolidated subsidiary of International Paper, completed the sale of a 98% general partnership interest in a subsidiary partnership that owns approximately 300,000 acres of forestlands located in Oregon and Washington. Included in the net assets of the partnership interest sold were forestlands, roads and $750 million of long-term debt. As a result of this transaction, International Paper recognized in its consolidated results for the first quarter of 1996 a $592 million pre-tax gain ($336 million after taxes and minority interest expense or $1.25 per share). IPT and International Paper retained non-operating interests in the partnership. 7. In June 1997, a $535 million pre-tax business improvement reserve ($385 million after taxes or $1.28 per share) was established under a plan to improve the Company's financial performance through closing or divesting of operations that no longer meet financial or strategic objectives. The second-quarter charge to establish the business improvement reserve included approximately $230 million for asset write-downs, $210 million for the estimated losses on sales of businesses included in the reserve and $95 million for severance and other expenses. The majority of the reserve relates to the restructuring of the printing papers business in the United States and overseas and the sale of certain specialty businesses. Annual improvement in earnings before interest and income taxes of approximately $100 million is expected by the end of 1998. 8 8. Also in June 1997, the Company recorded a $150 million pre-tax charge ($93 million after taxes or $.31 per share) to add to its legal reserves. On July 14, 1997, Masonite Corporation, a wholly-owned subsidiary of the Company, announced that it had reached a proposed settlement in a class action pending in Mobile County, Alabama. The Company believes its legal reserves are adequate to cover any amounts to be paid pursuant to the proposed settlement, which is subject to Court approval. 9. During the first quarter of 1996, the Company's Board of Directors authorized a series of management actions to restructure and strengthen existing businesses which resulted in a pre-tax charge to earnings of $515 million ($362 million after taxes or $1.35 per share). The charge included $305 million for the write-off of certain assets, $100 million for asset impairments, $80 million in associated severance costs and $30 million of other expenses, including the cancellation of leases. Accruals for one-time cash costs, which include severance costs and other expenses, totaled $110 million. Approximately $34 million of these costs were incurred in 1996 and the remainder is being incurred in 1997. 10. 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. Preferred securities distributions of $18 million were paid during each of the nine months ended September 30, 1997 and 1996. 11. Inventories by major category include (in millions):
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------------- ------------------- Raw materials......................................................... $ 533 $ 534 Finished pulp, paper and packaging products........................... 1,399 1,365 Finished lumber and panel products.................................... 181 215 Operating supplies.................................................... 396 397 Other................................................................. 353 329 ------ ------ Total.............................................................. $ 2,862 $ 2,840 ------ ------ ------ ------
12. Interest payments made during the nine month periods ended September 30, 1997 and 1996 were $493 million and $536 million, respectively. Interest income for the nine months ended September 30, 1997 and 1996 was $67 million and $37 million, respectively, including income of $27 million for the 1997 third quarter and $13 million for the 1996 third quarter. The company capitalized net interest costs of $47 million and $43 million for the nine month periods ended September 30, 1997 and 1996, respectively. Income tax payments made during the nine months ended September 30, 1997 and 1996 were $161 million and $209 million, respectively. 13. Temporary investments with a maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments totaled $253 million and $221 million at September 30, 1997 and December 31, 1996, respectively. 14. Accumulated depreciation was $10.0 billion at September 30, 1997 and $9.5 billion at December 31, 1996. The allowance for doubtful accounts was $105 million at September 30, 1997 and $101 million at December 31, 1996. 9 15. The Company 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. The Company has a policy of financing a portion of its investments in overseas operations with borrowings denominated in the same currency as the investment or by entering into foreign exchange contracts in tandem with U.S. dollar borrowings. These contracts are effective in providing a hedge against fluctuations in currency exchange rates. Gains or losses from the revaluation of these contracts, which are fully offset by gains or losses from the revaluation of the net assets being hedged, are determined monthly based on published currency exchange rates and are recorded as translation adjustments in common shareholders' equity. Upon liquidation of the net assets being hedged or early termination of the foreign exchange contracts, the gains or losses from the revaluation of foreign exchange contracts are included in earnings. Amounts payable to or due from the counterparties to the foreign exchange contracts are included in accrued liabilities or accounts receivable as applicable. The Company 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 the Company 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. The Company 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. The Company does not hold or issue financial instruments for trading purposes. 16. Through a public tender offer from July 23, 1997 through August 6, 1997, the Company's wholly owned subsidiary, Federal Paper Board, repurchased $164 million of its 10% debentures due April 15, 2011. The earnings impact of the debt retirement was not material. 17. Certain reclassifications have been made to prior-year amounts to conform with the current-year presentation. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS International Paper's third-quarter 1997 net sales of $ 5.1 billion were even with the 1996 third quarter and slightly ahead of the $5.0 billion recorded in the 1997 second quarter. Third-quarter 1997 net earnings were $102 million or $0.34 per share compared with $111 million or $0.37 per share in the 1996 third quarter and 1997 second-quarter earnings before special charges of $59 million or $0.20 per share. Second quarter 1997 results were a net loss of $419 million or $1.39 per share after a $535 million pretax charge ($385 million after taxes or $1.28 per share) to establish a business improvement reserve and a $150 million pretax charge ($93 million after taxes or $0.31 per share) to add to the Company's legal reserves. Results for the 1997 nine months were a net loss of $283 million or $0.94 per share after the special charges. Before these charges, 1997 nine-month earnings were $195 million or $0.65 per share compared with 1996 nine month net earnings of $334 million or $1.16 per share before a $515 million pretax restructuring and asset impairment charge ($362 million after taxes or $1.35 per share) and a $592 million pretax gain ($336 million after taxes and minority interest expense or $1.25 per share) on the sale of a partnership interest. Third-quarter 1997 net earnings were ahead of the 1997 second quarter before special charges reflecting markets that are continuing to improve. Demand for most product lines is high, pricing continues to improve in many categories and industry inventories are lower in general due to good economic growth in the United States and overseas. Third-quarter 1997 earnings declined from the 1996 third quarter primarily due to lower prices for major paper and packaging products. The components of consolidated earnings before and after special charges are presented in the following tables.
1997 ---------------------------------------------------------------------------- SECOND QUARTER NINE MONTHS -------------------------- ------------------------- BEFORE AFTER BEFORE AFTER FIRST SPECIAL SPECIAL SPECIAL THIRD SPECIAL SPECIAL SPECIAL QUARTER CHARGES CHARGES CHARGES QUARTER CHARGES CHARGES CHARGES --------- --------- ------- ------- -------- ------- ------- ------- Earnings Before Interest, Income Taxes and Minority Interest........................... $ 238 $ 253 $ (685) $ (432) $ 328 $ 819 $ (685) $ 134 Interest expense, net................ (130) (125) (125) (120) (375) (375) Income tax (provision) benefit....... (40) (40) 207 167 (71) (151) 207 56 Minority interest expense, net of taxes....................... (34) (29) (29) (35) (98) (98) ----- ----- ----- ----- ----- ----- ----- ----- Net Earnings (Loss).................. $ 34 $ 59 $ (478) $ (419) $ 102 $ 195 $ (478) $(283) ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
11
1996 ---------------------------------------------------------------------------- FIRST QUARTER NINE MONTHS ------------------------- --------------------------- BEFORE AFTER BEFORE AFTER SPECIAL SPECIAL SPECIAL SECOND THIRD SPECIAL SPECIAL SPECIAL CHARGES CHARGES CHARGES QUARTER QUARTER CHARGES CHARGES CHARGES --------- -------- ------- -------- ------- --------- -------- -------- Earnings Before Interest, Income Taxes and Minority Interest.......................... $ 384 $ 77 $ 461 $ 354 $ 363 $ 1,101 $ 77 $ 1,178 Interest expense, net............... (125) (125) (137) (136) (398) (398) Income tax provision................ (92) (71) (163) (80) (86) (258) (71) (329) Minority interest expense, net of taxes...................... (43) (32) (75) (38) (30) (111) (32) (143) ----- --- ----- ----- ----- -------- ------ ------ Net Earnings (Loss)................. $ 124 $ (26) $ 98 $ 99 $ 111 $ 334 $ (26) $ 308 ----- --- ----- ----- ----- -------- ------ ------ ----- --- ----- ----- ----- -------- ------ ------
The consolidated results of operations include Federal Paper Board (Federal) since March 12, 1996. Federal contributed about 8% of consolidated net sales for the 1997 nine-month period. Operating results for Carter Holt Harvey, adjusted as necessary to conform with International Paper's classifications, are also included in each segment as applicable. Printing Papers 1997 third-quarter net sales of $1.4 billion were about even with the 1996 third quarter and ahead of the 1997 second quarter. Net sales of $4.1 billion for the 1997 nine months were down slightly from the $4.2 billion reported in the comparable 1996 period. Operating profits for the 1997 third quarter were ahead of the 1997 second quarter and the 1996 third quarter reflecting higher prices for coated and uncoated paper. Also adding to earnings during the quarter were strong demand in Europe and higher pulp prices. Packaging 1997 third-quarter net sales of $1.2 billion declined slightly from the 1997 second quarter and the 1996 third-quarter. Nine-month 1997 net sales of $3.7 billion were even with the comparable 1996 period. Third-quarter 1997 operating profits declined from the 1997 second quarter and the 1996 third quarter due to lower prices. Compared with the 1997 second quarter, results were off at Carter Holt Harvey because of weaker markets in New Zealand. Linerboard exports from the United States, are continuing at record levels. Overall, linerboard pricing has improved and we believe it should continue to do so reflecting lower inventory levels and strong demand. Corrugated box shipments approached record levels and pricing has begun to move upward, reflecting increased containerboard costs. Bleached board results were comparable to the previous quarter but were down from the 1996 third quarter. Distribution net sales of $1.2 billion for the 1997 third quarter were about even with the 1996 third quarter and the 1997 second quarter. Nine-month net sales were $3.5 billion in 1997 and 1996. Operating profits for the 1997 third quarter were relatively stable compared with the 1997 second quarter and were down slightly from the 1996 third quarter. Specialty Products 1997 third-quarter net sales were $860 million, ahead of 1996 third-quarter net sales of $845 million but below 1997 second-quarter net sales of $890 million. Net sales for the 1997 nine months were $2.6 billion, even with the 1996 nine month period. Third-quarter 1997 operating profits were down slightly from the 1997 second quarter as improvements in the Masonite, Decorative Products and Veratec businesses were offset by traditionally slower European sales for the Chemicals business. Operating profits for the 1997 third quarter were about even with the 1996 third quarter. 12 Forest Products 1997 third-quarter net sales were $720 million compared with $695 million for the 1996 third quarter and $680 million for the 1997 second quarter. Net sales were $2.0 billion for the 1997 and 1996 nine months. Operating profits increased significantly from the 1997 second quarter as a result of both higher harvest volumes and the completion of the first in a series of transactions relating to the sale of a subsidiary partnership interest in approximately 175,000 acres of forestlands in Pennsylvania and New York. This initial transaction, covering approximately 25,000 acres, resulted in earnings before interest and taxes of $37 million. Also prices in the 1997 third quarter were higher than in the 1996 third quarter. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations totaled $779 million for the 1997 nine months compared with $1.2 billion in 1996. Lower earnings and higher working capital levels for the 1997 nine-month period were primarily responsible for the decline in cash provided by operations. Working capital increased $479 million in the 1997 nine-month period compared with an increase of $48 million in 1996. Receivables increased due to higher pricing and sales volumes for some product lines. The increase in inventories reflects seasonally higher purchased timber inventories and higher inventory balances at certain packaging and specialty businesses. The net decrease in accounts payable and accrued liabilities included payments of income tax liabilities. Noncash operating items for the 1997 nine months included a business improvement charge and a provision to add to the Company's legal reserves. Prior-year noncash operating items included the $77 million net impact of special items recorded in the 1996 first quarter. Investments in capital projects totaled $706 million for the 1997 nine months compared with $944 million for the 1996 nine month period. Cash flow generated by operations, supplemented as necessary by short- or long-term borrowings, are anticipated to be adequate to fund expected capital expenditures, which have been reduced to approximately $1.2 billion for 1997, about equal to expected 1997 depreciation expense. Financing activities for the 1997 nine months included $63 million of net borrowing activities primarily consisting of issuances of short-term debt and repayments of long-term debt including the Federal Paper Board 10% debentures. Approximately $1.3 billion of short-term debt was issued and $1.4 billion of International Paper common stock was exchanged (35.4 million shares) to acquire the outstanding shares of Federal during the first quarter of 1996. Dividend payments totaled $226 million or $.75 per common share for the 1997 nine-month period compared with $215 million for the 1996 nine months. This change primarily reflects the increase in common shares outstanding due to the Federal merger in March of 1996. SPECIAL CHARGES In June 1997, a $535 million pretax business improvement reserve ($385 million after taxes or $1.28 per share) was established under a plan to improve the Company's financial performance through closing or divesting of operations that no longer meet financial or strategic objectives. The majority of the reserve related to the restructuring of the printing papers business in the United States and overseas and the sale of certain specialty businesses. Included in the reserve were costs to shut down or close the Woronoco, Mass. mill; three production lines at the Erie, Pa. mill (two lines shutdown to date); the de-inking pulp operation at the Lock Haven, Pa. mill; (shutdown complete) a higher-cost paper machine at the Moss Point, Miss. mill (shutdown complete); and two container plants in California. Also included were estimated losses on dispositions of the Imaging Products business (including the Anchor pressroom chemicals business); Papeteries de Lancey, a coated papers mill in France (sale completed); three multiwall kraft bag plants (sale completed); Veratec's InterSpun business; four low pressure laminates plants; two particleboard facilities; two medium density fiberboard facilities; and six Pluswood distribution centers. The second-quarter business improvement charge included approximately $230 million for asset write-downs, $210 million for the estimated losses on the sales of businesses included in the reserve and $95 million for severance and other expenses. Annual improvement in earnings before interest and income taxes of approximately $100 million is expected by the end of 1998. 13 Also in June 1997, the Company recorded a $150 million pretax charge ($93 million after taxes or $0.31 per share) to add to its legal reserves. On July 14, 1997, Masonite Corporation, a wholly-owned subsidiary of the Company, announced that it had reached a proposed settlement in a class action pending in Mobile County, Alabama. The Company believes its legal reserves are adequate to cover any amounts to be paid pursuant to the proposed settlement, which is subject to Court approval. During the first quarter of 1996, the Company's Board of Directors authorized a series of management actions to restructure and strengthen existing businesses, which resulted in a pre-tax charge to earnings of $515 million ($362 million after taxes or $1.35 per share). The charge included $305 million for the write-off of certain assets, $100 million for asset impairments, $80 million in associated severance costs and $30 million of other expenses, including the cancellation of leases. Accruals for one-time cash costs, which include severance costs and other expenses, totaled $110 million. Approximately $34 million of these costs were incurred in 1996 and the remainder is being incurred in 1997. MERGERS AND ACQUISITIONS In September 1997, the Company acquired Merbok Formtec. On March 12, 1996, International Paper completed the merger with Federal Paper Board, a diversified forest and paper products company. Under the terms of the merger agreement, Federal shareholders received, at their election and subject to certain limitations, either $55 in cash or a combination of cash and International Paper common stock worth $55 for each share of Federal common stock. To complete the merger, Federal shares were acquired for approximately $1.3 billion in cash and $1.4 billion in International Paper common stock, and approximately $800 million of debt was assumed. The results of Federal are included in the consolidated statement of earnings from March 12, 1996. As a result of the merger, Federal contributed about 8% of consolidated net sales for the 1997 nine months and between 2% and 13% for each of the components of consolidated costs and expenses. The consolidated balance sheets at September 30, 1997 and December 31, 1996 include the balances of Federal. In August 1996, the Company acquired Forchem, a tall oil and turpentine processor in Finland, for approximately $100 million. In September 1996, Carter Holt Harvey acquired Forwood Products, the timber processing business of the South Australian Government, for approximately $100 million. GAIN ON SALE OF PARTNERSHIP INTEREST On March 29, 1996, IP Timberlands Ltd. (IPT), a consolidated subsidiary of International Paper, completed the sale of a 98% general partnership interest in a subsidiary partnership that owns approximately 300,000 acres of forestlands located in Oregon and Washington. Included in the net assets of the partnership interest sold were forestlands, roads and $750 million of long-term debt. As a result of this transaction, International Paper recognized in its 1996 first-quarter consolidated results a $592 million pre-tax gain ($336 million after taxes and minority interest expense or $1.25 per share). OTHER Minority interest expense for the 1997 nine months decreased significantly from the comparable 1996 period due to the minority interestholders' share of the gain on the sale of a partnership interest that was recorded in the 1996 first quarter. 14 The effective income tax rate for the 1997 nine-month period was a 23% benefit compared with a 42% expense for the 1996 nine month period because of the impact of the special charges. The following table presents the components of pretax earnings and losses and the related income tax expense and benefit for each period.
1997 1996 --------------------------------------- ------------------------------------ PRETAX TAX PRETAX TAX EARNINGS EXPENSE EFFECTIVE EARNINGS EXPENSE EFFECTIVE (LOSS) (BENEFIT) TAX RATE (LOSS) (BENEFIT) TAX RATE ----------- ----------- ------------- ----------- ----------- ---------- Before Special Charges.............. $ 444 $ 151 34% $ 703 $ 258 37% Business Improvement Charge......... (535) (150) 28% Provision for Legal Reserve......... (150) (57) 38% Restructuring and Asset Impairment Charge................. (515) (153) 30% Gain on Sale of Partnership Interest.......................... 592 224 38% --------- --------- --------- --------- Total............................... $ (241) $ (56) 23% $ 780 $ 329 42% --------- --------- --------- --------- --------- --------- --------- ---------
Both the business improvement charge and the restructuring and asset impairment charge included expenses that were not deductible for tax purposes. The effective tax rate on earnings before special charges for the 1997 nine months was 34% compared with 37% for the 1996 nine months. This decline was the result of changes in the mix of estimated earnings. 15 ITEM 3. OTHER FINANCIAL INFORMATION Financial Information by Industry Segment (Unaudited) (In millions) NET SALES BY INDUSTRY SEGMENT
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Printing Papers......................................................... $ 1,415 $ 1,435 $ 4,135 $ 4,220 Packaging............................................................... 1,235 1,265 3,680 3,685 Distribution............................................................ 1,205 1,175 3,485 3,515 Specialty Products...................................................... 860 845 2,610 2,590 Forest Products......................................................... 720 695 2,005 1,965 Less: Intersegment Sales................................................ (316) (307) (900) (976) --------- --------- --------- --------- Net Sales............................................................... $ 5,119 $ 5,108 $ 15,015 $ 14,999 --------- --------- --------- --------- --------- --------- --------- ---------
16 PRODUCTION BY PRODUCTS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- -------------------------- 1997 (D) 1996 (D) (F) 1997 (D) 1996 (E)(F) ----------- --------------- ----------- ------------- Printing Papers (In thousands of tons) White Papers and Bristols........................................ 999 1038 3,004 2,850 Coated Papers.................................................... 316 292 960 792 Market Pulp (A).................................................. 558 537 1,659 1,437 Newsprint........................................................ 23 27 63 73 Packaging (In thousands of tons) Containerboard................................................... 773 724 2,170 2,033 Bleached Packaging Board......................................... 543 507 1,634 1,381 Industrial Papers................................................ 175 181 514 496 Industrial and Consumer Packaging (B)............................ 850 839 2,554 2,470 Specialty Products (In thousands of tons) Tissue........................................................... 39 29 110 82 Forest Products (In millions) Panels (sq. ft. 3/8" basis) (C).................................. 387 322 1,057 886 Lumber (board feet).............................................. 572 509 1,598 1,307 MDF (sq. ft. 3/4" basis)......................................... 48 71 154 209 Particleboard (sq. ft. 3/4" basis)............................... 46 49 138 143
- ------------------------ (A) This excludes market pulp purchases. (B) A significant portion of this tonnage was fabricated from paperboard and paper produced at the Company's own mills and included in the containerboard, bleached packaging board, and industrial papers amounts in this table. (C) Panels include plywood and oriented strand board. (D) Includes Federal for the full period. (E) Includes Federal from March 12, 1996. (F) Certain reclassifications and adjustments have been made to prior-period amounts. 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS MASONITE As previously reported on Forms 10-K and 10-Q, a lawsuit which had been certified as a nationwide class action was filed against the Company and its wholly owned subsidiary, Masonite Corporation, on December 27, 1994, in Mobile County Circuit Court, Mobile, Alabama. The lawsuit alleged that hardboard siding, which is used as exterior cladding for residential dwellings and is manufactured by Masonite, fails prematurely, allowing moisture intrusion. It further alleged that the presence of moisture in turn causes the failure of the structure underneath. In August 1996, the single issue of product defect was tried to a jury and they returned a split decision, finding partly for the plaintiffs and partly for Masonite. The jury was not asked to determine any other liability issues, causation or damages. In July 1997, the Company and Masonite entered into an agreement with counsel for the class providing for settlement of the case. On November 2, 1997, the parties commenced the process of notifying class members of the settlement of the case, the terms of the proposed settlement and their rights. Pursuant to a Settlement Notice Plan approved by the Court, notice in various forms has and will be provided in the media and directly to known class members. The Court approved notice period will continue until December 31, 1997. A hearing to determine the fairness of the settlement is scheduled for January 14, 1998. The settlement permits class members to make claims concerning damage associated with their siding, after which their homes will be inspected to determine whether, pursuant to the terms of the settlement, they are entitled to compensation. The settlement agreement also provides for payment by the defendants of certain costs of administering the settlement and attorneys fees of the plaintiffs. The costs of the proposed settlement are not expected to have a material adverse effect on the Company's consolidated financial position or results of operations. 18 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (11) Statement of Computation of Per Share Earnings (12) Computation of Ratio of Earnings to Fixed Charges (27) Financial Data Schedule (b) Reports on Form 8-K No current reports on Form 8-K have been filed during the quarter for which this report is filed, except those previously reported in the second-quarter report on Form 10-Q for the quarter ended June 30, 1997. 19 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 14, 1997 By /s/ MARIANNE M. PARRS --------------------- Marianne M. Parrs Senior Vice President and Chief Financial Officer Date: November 14, 1997 By /s/ ANDREW R. LESSIN --------------------- Andrew R.Lessin Vice President, Controller and Chief Accounting Officer 20 EX-11 2 EX-11 (Exhibit 11) INTERNATIONAL PAPER COMPANY STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Net earnings (loss)................... $ 102 111 $ (283) 308 Reduction in minority interest expense, net of taxes, assuming conversion of preferred securities of subsidiary....................... * * * * -------- -------- -------- -------- Primary and fully diluted net earnings (loss)..................... $ 102 111 $ (283) $ 308 -------- -------- -------- -------- -------- -------- -------- -------- Earnings (loss) per common share...... $ 0.34 $ 0.37 $ (0.94) $ 1.06 -------- -------- -------- -------- -------- -------- -------- -------- Primary earnings (loss) per share..... $ 0.33 $ 0.37 $ (0.94) $ 1.06 -------- -------- -------- -------- -------- -------- -------- -------- Fully diluted earnings (loss) per share............................ $ 0.33 $ 0.37 $(0.94) $ 1.06 -------- -------- -------- -------- -------- -------- -------- -------- PRIMARY SHARES Average shares outstanding............ 302.3 300.0 301.4 289.4 Shares assumed to be repurchased using long-term incentive plan deferred compensation at average market price........................ (0.8) (0.6) (0.9) (0.6) Shares assumed to be issued upon exercise of stock options, net of treasury buyback at average market price............................... 3.1 1.5 * 1.6 -------- -------- -------- -------- Primary shares........................ 304.6 300.9 300.5 290.4 -------- -------- -------- -------- -------- -------- -------- -------- FULLY DILUTED SHARES Average shares outstanding............ 302.3 300.0 301.4 289.4 Shares assumed to be repurchased using long-term incentive plan deferred compensation at period-end market price (if higher than average market price)............... (0.8) (0.6) (0.8) (0.6) Shares assumed to be issued upon exercise of stock options, net of treasury buyback at period-end market price (if higher than average market price)............... 3.1 1.9 * 2.1 Shares assumed to be issued upon conversion of preferred securities of subsidiary............ * * * * -------- -------- -------- -------- Fully diluted shares.................. 304.6 301.3 300.6 290.9 -------- -------- -------- -------- -------- -------- -------- -------- - ------------------------ Note: The Company reports earnings per common share as the effect of dilutive securities is less than 3%. * This item was anti-dilutive for this period.
EX-12 3 EX-12 EXHIBIT 12 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 1992 1993 1994 1995 1996 1996 1997 - ----- ------ ------ ------- -------- ------- -------- ------- A) Earnings (loss) before income taxes, minority interest, extraordinary item and accounting changes.................... $ 226 $538.0 $ 715.0 $2,028.0 $ 802.0 $ 780.0 $(241.0) B) Less: Minority interest expense, net of taxes... (15.0) (36.0) (47.0) (156.0) (169.0) (143.0) (98.0) C) Add: Fixed charges excluding capitalized interest....................................... 325.3 365.3 412.3 605.9 672.4 493.8 503.4 D) Add: Amortization of previously capitalized interest....................................... 9.9 12.2 12.8 13.0 17.8 14.0 14.9 E) Less: Equity in undistributed earnings of affiliates..................................... (19.1) (25.9) (49.1) (94.5) 6.2 (3.4) (28.3) ------- ------- ------- -------- ------- -------- -------- F) Earnings (loss) before income taxes, minority interest, extraordinary item, accounting changes and fixed charges...................... $527.1 $ 853.6 $1,044.0 $2,396.4 $1,329.4 $1,141.4 $ 151.0 ------ ------- -------- ------- ------- -------- ------- ------ ------- -------- ------- ------- -------- ------- Fixed Charges G) Interest and amortization of debt expense....... $297.1 $334.5 $ 371.0 $ 542.3 $ 582.8 $ 435.7 $ 441.1 H) Interest factor attributable to rentals......... 28.2 30.8 41.3 53.0 66.0 40.4 44.6 I) Preferred dividends of subsidiary............... 10.6 23.6 17.7 17.7 J) Capitalized interest............................ 42.0 12.2 18.0 58.0 66.7 43.4 47.0 ------ ------- -------- ------- ------- ------- ------- K) Total fixed charges............................. $367.3 $377.5 $ 430.3 $ 663.9 $ 739.1 $ 537.2 $ 550.4 ------ ------- -------- ------- ------- ------- ------- ------ ------- -------- ------- ------- ------- ------- L) Ratio of earnings to fixed charges.............. 1.44 2.26 2.43 3.61 1.80 2.12 M) Deficiency in earnings necessary to cover fixed charges................................... -- -- -- -- -- -- $399.4 ------ ------- -------- ------- ------- ------- ------- ------ ------- -------- ------- ------- ------- -------
EX-27 4 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 1,000,000 US DOLLARS 9-MOS DEC-31-1997 SEP-30-1997 1 469 0 2,723 105 2,862 6,226 22,411 10,024 27,394 5,947 6,656 0 0 303 8,446 27,394 15,015 15,015 11,213 14,881 0 15 375 (241) (56) (283) 0 0 0 (283) (0.94) (0.94)
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