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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _______________ to
---------------
Commission File Number 1-3157
INTERNATIONAL PAPER COMPANY
(Exact name of registrant as specified in its charter)
New York 13-0872805
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
400 Atlantic Street, Stamford, CT 06921
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 541-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
The number of shares outstanding of the registrant's common stock as of
July 31, 2002 was 481,779,322.
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INTERNATIONAL PAPER COMPANY
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Statement of Earnings -
Three Months and Six Months Ended June 30, 2002 and 2001 1
Consolidated Balance Sheet -
June 30, 2002 and December 31, 2001 2
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2002 and 2001 3
Consolidated Statement of Common Shareholders' Equity -
Six Months Ended June 30, 2002 and 2001 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Financial Information by Industry Segment 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II. Other Information
Item 1. Legal Proceedings 27
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 29
* Omitted since no answer is called for, answer is in the negative or
inapplicable.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Earnings
(Unaudited)
(In millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- --------- --------- ---------
Net Sales $ 6,305 $ 6,686 $ 12,343 $ 13,580
---------- --------- --------- ---------
Costs and Expenses
Cost of products sold 4,588 4,914 9,053 10,052
Selling and administrative expenses 492 582 1,007 1,166
Depreciation and amortization 405 457 787 933
Distribution expenses 269 277 540 553
Taxes other than payroll and income taxes 65 71 136 146
Merger integration costs - 32 - 42
Restructuring and other charges 79 465 79 465
Net (gains) losses on sales and impairments of businesses
held for sale (28) 85 (28) 85
---------- --------- --------- ---------
Total Costs and Expenses 5,870 6,883 11,574 13,442
Reversal of reserves no longer required - - 10 -
---------- --------- --------- ---------
Earnings (Loss) Before Interest, Income Taxes, Minority
Interest, Extraordinary Items and Cumulative Effect of
Accounting Change 435 (197) 779 138
Interest expense, net 199 235 404 483
---------- --------- --------- ---------
Earnings (Loss) Before Income Taxes, Minority
Interest, Extraordinary Items and Cumulative Effect of
Accounting Change 236 (432) 375 (345)
Income tax (benefit) provision (10) (156) 33 (129)
Minority interest expense, net of taxes 31 37 62 79
---------- --------- --------- ---------
Earnings (Loss) Before Extraordinary Items and
Cumulative Effect of Accounting Change 215 (313) 280 (295)
Net losses on sales and impairments of businesses held for
sale, net of taxes and minority interest - - - (46)
Cumulative effect of change in accounting for derivatives
and hedging activities, net of taxes and minority interest - - - (16)
---------- --------- --------- ---------
Net Earnings (Loss) $ 215 $ (313) $ 280 $ (357)
========== ========= ========= =========
Basic and Diluted Earnings Per Common Share
Earnings (loss) before extraordinary items and accounting change $ 0.45 $ (0.65) $ 0.58 $ (0.61)
Extraordinary items - - - (0.10)
Cumulative effect of accounting change - - - (0.03)
---------- --------- --------- ---------
Net earnings (loss) $ 0.45 $ (0.65) $ 0.58 $ (0.74)
========== ========= ========= =========
Average Shares of Common Stock Outstanding 482.7 483.1 482.5 482.9
========== ========= ========= =========
Cash Dividends Per Common Share $ 0.25 $ 0.25 $ 0.50 $ 0.50
========== ========= ========= =========
The accompanying notes are an integral part of these financial statements.
1
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
June 30, December 31,
2002 2001 (1)
---------- ----------------
Assets
Current Assets
Cash and temporary investments $ 838 $ 1,224
Accounts and notes receivable, net 2,993 2,778
Inventories 2,885 2,877
Assets of businesses held for sale (1) 233 219
Other current assets 1,180 1,057
--------- ---------
Total Current Assets 8,129 8,155
--------- ---------
Plants, Properties and Equipment, net 14,199 14,616
Forestlands 3,928 4,197
Investments 218 239
Goodwill 6,593 6,543
Deferred Charges and Other Assets 3,720 3,427
--------- ---------
Total Assets $ 36,787 $ 37,177
========= =========
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ - $ 957
Accounts payable 2,034 1,793
Accrued payroll and benefits 412 435
Liabilities of businesses held for sale (1) 54 77
Other accrued liabilities 1,931 2,079
--------- ---------
Total Current Liabilities 4,431 5,341
--------- ---------
Long-Term Debt 12,661 12,457
Deferred Income Taxes 3,992 3,996
Other Liabilities 2,019 2,012
Minority Interest 1,429 1,275
International Paper - Obligated Mandatorily Redeemable Preferred
Securities of Subsidiaries Holding International Paper Debentures 1,805 1,805
Common Shareholders' Equity
Common stock, $1 par value, 484.7 shares in 2002 and 484.3 shares in 2001 485 484
Paid-in capital 6,473 6,465
Retained earnings 4,661 4,622
Accumulated other comprehensive income (loss) (1,069) (1,175)
--------- ---------
10,550 10,396
Less: Common stock held in treasury, at cost, 2002 - 2.5 shares
2001 - 2.7 shares 100 105
--------- ---------
Total Common Shareholders' Equity 10,450 10,291
--------- ---------
Total Liabilities and Common Shareholders' Equity $ 36,787 $ 37,177
========= =========
(1) December 31, 2001 amounts have been revised to reclassify the assets and
liabilities of the Arizona Chemical and Industrial Papers businesses from
Assets and Liabilities of businesses held for sale.
The accompanying notes are an integral part of these financial statements.
2
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
Six Months Ended
June 30,
-------------------------
2002 2001
---------- -----------
Operating Activities
Net earnings (loss) $ 280 $ (357)
Cumulative effect of accounting change - 16
Depreciation and amortization 787 933
Deferred income tax benefit (94) (202)
Payments related to restructuring, legal reserves and merger
integration costs (168) (212)
Merger integration costs - 42
Restructuring and other charges 79 465
Reversal of reserves no longer required (10) -
Net (gains) losses on sales and impairments of businesses held for sale (28) 85
Net losses on sales and impairments of investments and businesses
held for sale - 72
Other, net - (15)
Changes in current assets and liabilities
Accounts and notes receivable (155) (85)
Inventories 52 81
Accounts payable and accrued liabilities 68 (404)
Other (103) (124)
----------- ----------
Cash Provided by Operations 708 295
----------- ----------
Investment Activities
Invested in capital projects
Ongoing businesses (382) (428)
Businesses sold and held for sale (4) (30)
Mergers and acquisitions, net of cash acquired - (150)
Proceeds from divestitures 332 881
Other (5) 11
----------- ----------
Cash (Used for) Provided by Investment Activities (59) 284
----------- ----------
Financing Activities
Issuance of common stock 43 15
Issuance of debt 587 1,047
Reduction of debt (1,428) (1,731)
Change in bank overdrafts 64 (79)
Dividends paid (241) (240)
Other (42) 4
----------- ----------
Cash Used for Financing Activities (1,017) (984)
----------- ----------
Effect of Exchange Rate Changes on Cash (18) (50)
----------- ----------
Change in Cash and Temporary Investments (386) (455)
Cash and Temporary Investments
Beginning of the period 1,224 1,198
----------- ----------
End of the period $ 838 $ 743
=========== ==========
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)
Six Months Ended June 30, 2002
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, 2001 484,281 $ 484 $ 6,465 $ 4,622 $ (1,175) 2,693 $ 105 $ 10,291
Issuance of stock for various
plans 403 1 8 - - (1,195) (47) 56
Repurchases of stock - - - - - 980 42 (42)
Cash dividends - Common
stock ($0.50 per share) - - - (241) - - - (241)
Comprehensive income (loss):
Net earnings - - - 280 - - - 280
Change in cumulative foreign
currency translation adjustment - - - - 53 - - 53
Net gain on cash flow
hedging derivatives:
Net gain arising during the period - - - - 41 - - 41
Less: Reclassification adjustment
for losses included in net income - - - - 12 - - 12
-------------
Total comprehensive income 386
---------- ---------- ----------- ---------- -------------- ---------- ---------- -------------
Balance, June 30, 2002 484,684 $ 485 $ 6,473 $ 4,661 $ (1,069) 2,478 $ 100 $ 10,450
========== ========== =========== ========== ============== ========== ========== =============
Six Months Ended June 30, 2001
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, 2000 484,160 $ 484 $ 6,501 $ 6,308 $ (1,142) 2,690 $ 117 $ 12,034
Issuance of stock for various
plans 25 - (58) - - (1,485) (66) 8
Cash dividends - Common
stock ($0.50 per share) - - - (240) - - - (240)
Comprehensive income (loss):
Net loss - - - (357) - - - (357)
Change in cumulative foreign
currency translation adjustment - - - - (157) - - (157)
Net loss on cash flow
hedging derivatives:
Net loss arising during the period - - - - (65) - - (65)
Less: Reclassification adjustment
for losses included in net income - - - - 6 - - 6
-------------
Total comprehensive loss (573)
---------- ---------- ----------- ---------- -------------- ---------- ---------- -------------
Balance, June 30, 2001 484,185 $ 484 $ 6,443 $ 5,711 $ (1,358) 1,205 $ 51 $ 11,229
========== ========== =========== ========== ============== ========== ========== =============
The accompanying notes are an integral part of these financial statements.
4
INTERNATIONAL PAPER COMPANY
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, in the opinion of
Management, include all adjustments (consisting only of normal recurring
accruals) that are necessary for the fair presentation of results for the
interim periods. 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 Annual Report on Form 10-K
for the year ended December 31, 2001, which has previously been filed with the
Securities and Exchange Commission.
NOTE 2 - EARNINGS PER COMMON SHARE
Earnings (loss) per common share before extraordinary items and cumulative
effect of accounting change were computed by dividing earnings before
extraordinary items and cumulative effect of accounting change by the weighted
average number of common shares outstanding. Earnings (loss) per common share
before extraordinary items and cumulative effect of accounting change, assuming
dilution, were computed assuming that all potentially dilutive securities,
including "in-the-money" stock options, were converted into common shares at the
beginning of each period. A reconciliation of the amounts included in the
computation of earnings (loss) per common share before extraordinary items and
cumulative effect of accounting change, and earnings (loss) per common share
before extraordinary items and cumulative effect of accounting change, assuming
dilution, is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- --------- -----------
In millions, except per share amounts 2002 2001 2002 2001
- ------------------------------------- --------- --------- --------- -----------
Earnings (loss) before extraordinary items
and cumulative effect of accounting change $ 215 $ (313) $ 280 $ (295)
Effect of dilutive securities - - - -
---------- --------- --------- -----------
Earnings (loss) before extraordinary items and cumulative
effect of accounting change - assuming dilution $ 215 $ (313) $ 280 $ (295)
========== ========= ========= ===========
Average common shares outstanding 482.7 483.1 482.5 482.9
Effect of dilutive securities
Stock options 2.0 - 2.0 -
---------- --------- --------- -----------
Average common shares outstanding - assuming dilution 484.7 483.1 484.5 482.9
========== ========= ========= ===========
Earnings (loss) per common share before extraordinary items
and cumulative effect of accounting change $ 0.45 $(0.65) $ 0.58 $ (0.61)
========== ========= ========= ===========
Earnings (loss) per common share before extraordinary items
and cumulative effect of accounting change - assuming dilution $ 0.45 $(0.65) $ 0.58 $ (0.61)
========== ========= ========= ===========
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented. Antidilutive securities included
preferred securities of a subsidiary trust for the periods presented. Stock
options are antidilutive in periods when net losses are recorded.
5
NOTE 3 - MERGERS AND ACQUISITIONS
In April 2001, Carter Holt Harvey acquired Norske Skog's Tasman Kraft pulp
manufacturing business for $130 million in cash.
In March 2001, International Paper and Carter Holt Harvey each acquired a 25%
interest in International Paper Pacific Millennium Limited. The resulting
investment is accounted for under the equity method and is included in
Investments in the accompanying consolidated balance sheet.
NOTE 4 - SPECIAL AND EXTRAORDINARY ITEMS INCLUDING RESTRUCTURING AND BUSINESS
IMPROVEMENT ACTIONS
Restructuring and Other Charges:
During the second quarter of 2002, special charges before taxes and minority
interest of $79 million ($50 million after taxes and minority interest) were
recorded for asset shutdowns of excess internal capacity and cost reduction
actions. This amount included a $42 million charge for asset write-downs and a
$37 million charge for severance and other charges. The following table presents
additional detail related to the $79 million charge:
Asset Severance
In millions Write-downs and Other Total
- -------------- ----------- ---------------- -----------------
Printing Papers (a) $ 39 $ 18 $ 57
Consumer Packaging (b) 3 - 3
Distribution (c) - 7 7
Administrative Support Groups (d) - 12 12
-------- ---------------- -----------------
$ 42 $ 37 $ 79
======== ================ =================
(a) The Printing Papers business approved a plan to permanently shut down
the Hudson River, New York mill by December 31, 2002, as many of the
specialty products produced at the mill are not competitive in current
markets. The assets of the mill are currently being marketed for sale.
Impairment charges associated with the shutdown included $39 million to
write the assets down to their estimated realizable value of
approximately $5 million, $9 million of severance costs covering the
termination of 294 employees, and other cash costs of $7 million. The
Printing Papers business also recorded an additional charge of $2
million related to the termination of 52 employees in conjunction with
the business's plan to streamline and realign administrative functions
at several of its locations.
(b) The Consumer Packaging business approved the first phase of a plan to
consolidate duplicate facilities and eliminate excess internal
capacity. The $3 million charge recorded relates to the write-down of
assets to their estimated salvage value.
(c) The Distribution business (xpedx) severance charge of $7 million
reflects the termination of 145 employees in conjunction with the
business's plan to consolidate duplicate facilities and eliminate
excess internal capacity.
(d) During the second quarter of 2002, International Paper implemented the
second phase of its cost reduction program to realign its
administrative functions across all business and staff support groups.
As a result, a $12 million severance charge was recorded covering the
termination of 102 employees.
6
During the first quarter of 2002, special items consisted of a $10 million
pre-tax credit ($7 million after taxes) for the reversal of fourth-quarter 2001
restructuring reserves no longer required.
During the second quarter of 2001, International Paper recorded a restructuring
charge totaling $465 million before taxes and minority interest ($300 million
after taxes and minority interest) for asset shutdowns of excess internal
capacity and cost reduction actions, including $240 million for asset
write-downs and $225 million for severance and other charges.
During the last two quarters of 2001, restructuring charges of $427 million
before taxes ($306 million after taxes) for asset shutdowns of excess internal
capacity and cost reduction actions were recorded. In addition, a $225 million
pre-tax charge ($146 million after taxes) was recorded for additional Masonite
legal reserves. The following table presents a roll forward of the cumulative
severance and other costs included in the 2001 restructuring plans:
Severance
Dollars in millions and Other
- ---------------------- ----------
Opening balance - second quarter 2001 (3,450 employees) $ 225
Additions - third quarter 2001 (1,176 employees) 73
Additions - fourth quarter 2001 (1,463 employees) 87
Cash charges - 2001 (3,383 employees) (131)
----------
Balance, December 31, 2001 (2,706 employees) 254
Cash charges - first quarter 2002 (1,178 employees) (49)
Cash charges - second quarter 2002 (756 employees) (41)
Reversal of reserves no longer required (314 employees) (3)
----------
Balance, June 30, 2002 (458 employees) $ 161
==========
Also during the fourth quarter of 2001, International Paper recorded a pre-tax
credit of $17 million ($11 million after taxes) for excess 1999, and 2000 second
and fourth quarter restructuring reserves no longer required.
During 2000, International Paper recorded charges totaling $824 million before
taxes and minority interest ($509 million after taxes and minority interest) for
asset shutdowns of excess internal capacity and cost reduction actions. At
December 31, 2001, the balance remaining for cumulative severance and other
costs totaled $67 million relating to 466 employees. Cash payments in the first
and second quarters of 2002 were $9 million relating to 58 employees and $13
million relating to 270 employees, respectively, leaving a balance of $45
million at June 30, 2002.
International Paper continually evaluates its operations for improvement. When
any such improvement plans are finalized, we may incur costs or charges in
future periods related to the implementation of such plans. As this review
process is ongoing, it is possible that significant additional charges will be
incurred in future periods in our businesses should such triggering events
occur.
Merger Integration Costs:
During the first and second quarters of 2001, International Paper recorded
pre-tax charges of $10 million ($6 million after taxes) and $32 million ($22
million after taxes), respectively, for Champion merger integration costs. These
merger integration costs consisted primarily of systems integration, employee
retention, travel and other one-time cash costs related to the integration of
Champion.
7
Extraordinary Items:
During the first quarter of 2001, an extraordinary pre-tax loss of $73 million
($46 million after taxes) was recorded for asset impairments related to the
Masonite business held for sale and disposition losses related to the sale of
oil and gas properties and fee mineral and royalty interests. See Note 6 for a
detailed discussion of these charges.
NOTE 5 - INVENTORIES
Inventories by major category were:
June 30, December 31,
In millions 2002 2001
- -------------- --------- -----------
Raw materials $ 399 $ 486
Finished pulp, paper and packaging products 1,721 1,681
Finished lumber and panel products 185 174
Operating supplies 527 506
Other 53 30
--------- ---------
Total $ 2,885 $ 2,877
========= =========
December 31, 2001 balances include amounts for the Arizona Chemical and
Industrial Papers businesses previously classified as businesses held for sale
(see Note 6).
NOTE 6 - BUSINESSES HELD FOR SALE AND DIVESTITURES
In 2000, International Paper announced a divestment program following the
Champion acquisition and the completion of a strategic analysis to focus on
International Paper's core businesses. Through June 30, 2002, more than $3
billion has been realized under the program, including cash and notes received
plus debt assumed by the buyers.
Businesses Held for Sale:
Businesses in the divestment program at June 30, 2002 being marketed for sale
included Decorative Products and some smaller businesses as well as other
non-strategic former Champion forestlands.
Sales and operating earnings for each of the six month periods ended June 30,
2002 and 2001 for these businesses, as well as results for businesses sold
through their respective divestiture dates, were:
- -------------------------------------------------------------------------------
In millions 2002 2001
- -------------------------------------------------------------------------------
Sales $ 263 $ 781
Operating Profit 6 38
The sales and operating earnings for these businesses are included in Specialty
Businesses and Other in management's discussion and analysis. The assets of
businesses held for sale, totaling $233 million at June 30, 2002 are included in
Assets of businesses held for sale in current assets in the accompanying
consolidated balance sheet. The liabilities of businesses held for sale,
totaling $54 million at June 30, 2002 are included in Liabilities of businesses
held for sale in current liabilities in the accompanying consolidated balance
sheet.
8
In June 2002, International Paper announced that it would discontinue
divestiture efforts of its Arizona Chemical and Industrial Papers businesses
after efforts to sell these businesses did not generate acceptable offers.
International Paper discontinued efforts to divest the Chemical Cellulose Pulp
business in February 2002. International Paper has made a decision to operate
these three businesses. As a result, Assets of businesses held for sale and
Liabilities of businesses held for sale as of December 31, 2001 were reduced by
$429 million and $138 million, respectively, with increases in the related
corresponding asset and liability accounts in the accompanying consolidated
balance sheet for all periods presented. Operating results for these businesses
are included in the Specialty Businesses and Other segment.
During the second quarter of 2002, a net pre-tax gain on sales of businesses
held for sale of $28 million before taxes and minority interest ($96 million
after taxes and minority interest) was recorded, including a gain of $63 million
($40 million after taxes) from the sale of International Paper's Oriented Strand
Board facilities (see "Divestitures" below), and a net charge of $35 million (a
gain of $56 million after taxes and minority interest) relating to other sales
and adjustments of previously recorded estimated costs of businesses held for
sale. This net pre-tax charge included:
(1) a $2 million net loss associated with the sales of the Wilmington
carton plant and Carter Holt Harvey's distribution business;
(2) an additional loss of $12 million to write down the net assets of
Decorative Products to the amount realized on the subsequent sale
of this business in July 2002 (see Note 11);
(3) $11 million of additional expenses relating to the decision to
continue to operate Arizona Chemical, including a $3 million
adjustment of previously estimated costs incurred in connection
with the prior sale effort and an $8 million charge to
permanently close a production facility; and
(4) a $10 million charge for additional expenses relating to prior
divestitures.
The impairment charge recorded for Arizona Chemical in 2001 included a tax
expense based on the form of sale being negotiated at that time. As a result of
the decision in the second quarter of 2002 to discontinue sale efforts and to
hold and operate Arizona Chemical in the future, this provision was no longer
required. Consequently, special items for the second quarter include a larger
tax benefit, resulting in a net after-tax gain.
During the second quarter of 2001, a pre-tax impairment loss of $85 million ($55
million after taxes) was recorded to reduce the carrying value of the Flexible
Packaging assets to their expected realizable value of $85 million based on
preliminary offers received. This charge is included in Net (gains) losses on
sales and impairments of businesses held for sale.
During the first quarter of 2001, an extraordinary pre-tax charge of $60 million
($38 million after taxes) was recorded for impairment losses to reduce the
assets of Masonite to their estimated realizable value based on offers received.
This charge is included with the extraordinary loss on the sale of oil and gas
properties and fee mineral and royalty interests in Net losses on sales and
impairments of businesses held for sale in the accompanying consolidated
statement of earnings.
Divestitures:
Net (Gains) Losses on Sales and Impairments of Businesses Held for Sale
In April 2002, International Paper sold its Oriented Strand Board facilities to
Nexfor Inc. for $250 million, resulting in a pre-tax gain of $63 million ($40
million after taxes).
In January 2001, International Paper completed the sale of its interest in
Zanders, a European coated paper business, to M-Real (formerly Metsa Serla) for
approximately $120 million and the assumption of $80 million of debt. This
transaction resulted in an extraordinary loss of $245 million after taxes and
minority interest, which was recorded in the third quarter of 2000 when the
decision was made to sell this business.
9
Structured Transactions - Right of Offset
In connection with a sale of forestlands in the state of Washington in 2001,
International Paper received notes receivable having a value of approximately
$480 million on the date of sale. These notes were then transferred to an
unconsolidated subsidiary in exchange for a preferred interest in that entity
valued at approximately $480 million. Also during 2001, the entity acquired
approximately $561 million of International Paper debt obligations for cash.
Since International Paper has, and intends to effect, a legal right to net
settle these two amounts, we have offset for financial reporting purposes the
$480 million preferred interest against $480 million of the debt obligations.
The unconsolidated entity is a special purpose entity (SPE). The Financial
Accounting Standards Board (the FASB) is currently considering how to modify
accounting for SPEs. Based on new standards proposed by the FASB, International
Paper could be required in the future to either modify the current structure, or
to consolidate this SPE in our financial statements, which would result in an
increase in investments of approximately $485 million, an increase in long-term
debt of approximately $465 million, and an increase in minority interest of
approximately $20 million, with no effect on cash, shareholders' equity or
earnings.
Also, in connection with the sale of the oil and gas properties and fee mineral
and royalty interests in 2001, International Paper received a non-controlling
preferred limited partnership interest valued at approximately $234 million. The
unconsolidated partnership also loaned $244 million to International Paper in
2001. Since International Paper has, and intends to effect, a legal right to net
settle these two amounts, we have offset for financial reporting purposes the
preferred interest against the note payable.
NOTE 7 - 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 $500
million and $828 million at June 30, 2002 and December 31, 2001, respectively.
NOTE 8 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Interest payments made during the six-month periods ended June 30, 2002 and 2001
were $454 million and $549 million, respectively. Capitalized net interest costs
were $5 million for the six months ended June 30, 2002 and $7 million for the
six months ended June 30, 2001. Total interest expense was $456 million for the
first half of 2002 and $547 million for the first half of 2001. Income tax
payments of $123 million and $323 million were made during the 2002 and 2001
first halves, respectively. Distributions paid under all of International
Paper's preferred securities of subsidiaries were $62 million and $74 million
during the first six months of 2002 and 2001, respectively, and are included in
minority interest expense.
Accumulated depreciation was $17.3 billion at June 30, 2002 and $16.6 billion at
December 31, 2001. The allowance for doubtful accounts was $181 million at June
30, 2002 and $179 million at December 31, 2001.
10
NOTE 9 - RECENT ACCOUNTING DEVELOPMENTS
Asset Retirement Obligations:
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" which is effective in 2003. It requires the recording of an asset
and a liability equal to the present value of the estimated costs associated
with the retirement of long-lived assets where a legal or contractual obligation
exists. The asset is required to be depreciated over the life of the related
equipment or facility, and the liability accreted each year based on a present
value interest rate. International Paper is in the process of evaluating the
impact of adopting SFAS No. 143 but has not yet quantified the impact on its
consolidated financial position or results of operations.
Goodwill:
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". It changed the accounting for goodwill by eliminating goodwill
amortization beginning in 2002. It also requires at least an annual assessment
of goodwill for impairment. The first step of the initial test for impairment
must be completed by June 30, 2002, with any initial impairment charges
finalized no later than December 31, 2002 and reflected as a cumulative effect
of accounting change to be reflected in the 2002 first quarter. Any impairment
charges in subsequent years would be recorded in operating results.
The first step of the initial test for impairment requires a comparison for each
of International Paper's reporting units of the fair value of each unit with the
carrying amounts of net assets including goodwill. If the carrying amount
exceeds a unit's fair value, the second step of the impairment test is performed
to measure the amount of impairment loss, if any. Based on the completion of
this first step, it is anticipated that an initial goodwill impairment loss
might have to be recorded in the Industrial and Consumer Packaging, Carter Holt
Harvey and Printing Papers business segments. While the determination of the
amount of this initial impairment is not expected to be finalized until the
fourth quarter of 2002, International Paper currently estimates that a total
pre-tax charge of $1 billion to $1.4 billion may be required with no impact on
cash flows.
11
International Paper ceased recording goodwill amortization effective January 1,
2002. This had no effect on cash flow. The following table shows net earnings
for the first half of 2002 and pro forma net earnings for the first half of 2001
exclusive of goodwill amortization.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
In millions, except per share amounts 2002 2001 2002 2001
- ------------------------------------------------- ------------- ------------- ------------ ------------
Earnings (loss) before extraordinary items and cumulative $ 215 $ (313) $ 280 $ (295)
effect of accounting change
Add back: Goodwill amortization - 46 - 91
Net losses on sales and impairments of
businesses held for sale, net of taxes and
minority interest - - - (46)
Cumulative effect of accounting change, net of taxes
and minority interest - - - (16)
------ ------- ------- -------
Adjusted net earnings (loss) $ 215 $ (267) $ 280 $ (266)
====== ======= ======= =======
Basic and Diluted Earnings Per Common Share
Earnings (loss) before extraordinary items and
cumulative effect of accounting change $ 0.45 $ (0.65) $ 0.58 $ (0.61)
Goodwill amortization - 0.09 - 0.19
Loss per share - extraordinary items - - - (0.10)
Loss per share - cumulative effect of
accounting change - - - (0.03)
------ ------- ------- -------
Adjusted net earnings (loss) $ 0.45 $ (0.56) $ 0.58 $ (0.55)
====== ======= ======= =======
Costs Associated with Exit or Disposal Activities:
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". The statement changes the measurement and
timing of recognition for exit costs, including restructuring charges, and is
effective for any such activities initiated after December 31, 2002. It has no
effect on charges recorded for exit activities begun prior to this date.
Derivative Instruments and Hedging Activities:
On January 1, 2001, International Paper adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and
138. The cumulative effect of adopting SFAS No. 133 was a $25 million charge to
net earnings before taxes and minority interest ($16 million after taxes and
minority interest), and a net decrease of $9 million after taxes to Accumulated
Other Comprehensive Income (Loss) (OCI). The charge to net earnings primarily
resulted from recording the fair value of certain interest rate swaps, which do
not qualify under the new rules for hedge accounting treatment. The decrease to
OCI primarily resulted from adjusting the foreign currency contracts used as
hedges of net investments in foreign operations to fair value.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
International Paper has established reserves relating to certain liabilities
associated with products manufactured by its former Masonite subsidiary, which
were the subject of settlements in three nationwide class action lawsuits. These
lawsuits, which were settled during 1998 and 1999, are discussed in detail in
Note 11 to the Financial Statements included in International Paper's Annual
Report for the year ended December 31, 2001 as previously filed on Form 10-K. In
connection with these lawsuits, International Paper and Masonite Corporation
filed litigation against certain of their insurance carriers because of their
refusal to indemnify
12
International Paper and Masonite for the settlement relating to one of the class
actions and against Employer's Insurance of Wausau for its failure to provide a
defense of that lawsuit. This litigation is also discussed in Note 11 to the
Financial Statements included in International Paper's Annual Report for the
year ended December 31, 2001.
At December 31, 2001, reserve balances for these matters totaled $208 million.
The following table presents an analysis of the net reserve activity related to
these lawsuits for the six months ended June 30, 2002.
RESERVE ANALYSIS
- ------------------------------------------------------------------------
Hard- Omni-
In millions board wood Woodruf Total
- ----------------------------------------------------- -----------------
Balance, December 31, 2001 $ 179 $ 20 $ 9 $ 208
Payments (78) (6) (4) (88)
Insurance collections 33 - - 33
-------- --------- ------- --------
Balance, June 30, 2002 $ 134 $ 14 $ 5 $ 153
======== ========= ======= ========
The following table shows an analysis of claims statistics related to these
lawsuits for the six months ended June 30, 2002.
CLAIMS STATISTICS
- ---------------------------------------------------------------------------------------------------
In thousands Hardboard Omniwood Woodruf Total
No. of Single Multi- Single Multi- Single Multi- Single Multi-
Claims Pending Family Family Family Family Family Family Family Family Total
- ----------------------------------------------------------------------------------------------------
December 31, 2001 30.0 5.4 1.4 0.3 1.5 0.2 32.9 5.9 38.8
No. of Claims Filed 23.8 5.0 1.5 0.2 0.6 - 25.9 5.2 31.1
No. of Claims Paid (17.6) (4.0) (1.1) (0.1) (0.7) - (19.4) (4.1) (23.5)
No. of Claims Dismissed (7.8) (1.7) (0.2) - (0.2) - (8.2) (1.7) (9.9)
June 30, 2002 28.4 4.7 1.6 0.4 1.2 0.2 31.2 5.3 36.5
While International Paper believes that the reserve balances established for
these matters are adequate, and that additional amounts will be recovered from
its insurance carriers in the future relating to these claims, International
Paper is unable to estimate at this time the amount of additional charges, if
any, that may be required for these matters in the future.
International Paper is also involved in various other inquiries, administrative
proceedings and litigation relating to contracts, sales of property,
environmental protection, tax, antitrust, personal injury and other matters,
some of which allege substantial monetary damages. While any proceeding or
litigation has the element of uncertainty, International Paper believes that the
outcome of any of the other lawsuits or claims that are pending or threatened,
or all of them combined, will not have a material adverse effect on its
consolidated financial position or results of operations.
NOTE 11 - SUBSEQUENT EVENTS
In July 2002, International Paper completed the sale of its Decorative Products
Division to an affiliate of Kohlberg & Co., for approximately $100 million in
cash and a note receivable with a fair market value of $13 million.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
International Paper reported net earnings of $215 million, or $.45 per share in
the 2002 second quarter. This compared with a net loss of $313 million, or $.65
per share, in the second quarter of 2001 and net earnings of $65 million, or
$.13 per share in the first quarter of 2002.
Special items in the 2002 second quarter consisted of a pre-tax charge of $79
million ($50 million after taxes) for facility closures, administrative
realignment and related severance costs, and a net $28 million gain before taxes
and minority interest ($96 million after taxes and minority interest) related to
sales and expenses of businesses held for sale. Second-quarter 2001 special
items included charges of $465 million before taxes and minority interest ($300
million after taxes and minority interest) for facility closures, administrative
realignment and related severance, $85 million before taxes ($55 million after
taxes) for impairment losses on assets of businesses held for sale, and $32
million before taxes ($22 million after taxes) for additional Champion merger
integration costs. Special items in the 2002 first quarter consisted of a $10
million pre-tax credit ($7 million after taxes) for the reversal of reserves no
longer required.
Second-quarter 2002 net sales totaled $6.3 billion compared with $6.7 billion
for the same period in 2001 and $6 billion in the first quarter of 2002.
Earnings Before Special and Extraordinary Items
Before special items, second-quarter 2002 earnings were $169 million, or $.35
per share. Earnings for the same period in 2001 were $64 million, or $.13 per
share, before special items. First-quarter 2002 earnings before special items
were $58 million, or $.12 per share.
As in the 2002 first quarter, second-quarter results reflect the elimination of
goodwill amortization effective January 1, 2002, resulting in an increase of
$.09 per share in the second quarter ($.19 per share for the first six months)
compared with 2001 results. This favorable effect was partially offset by a
reduction in pension income, primarily due to a lower return on assets, that
reduced second-quarter earnings by $.01 per share ($.04 per share for the first
six months), compared with 2001 results.
Second-quarter 2002 earnings also benefited by $18 million before taxes ($.03
per share) from the reversal of previously accrued countervailing and
antidumping duties related to our Weldwood operations in Canada, and $25 million
before taxes ($.04 per share) from favorable foreign exchange gains in Brazil;
both non-cash items.
Excluding these items, the increase in second-quarter earnings compared with the
2002 first quarter principally reflects the benefit of non-price improvements,
including lower overhead and raw material costs, coupled with slightly higher
volumes. Similarly, second-quarter results improved from the 2001 second quarter
due to non-price improvements, coupled with slightly higher volumes and lower
interest costs, that more than offset the effect of lower average product
prices.
During the second quarter, International Paper took approximately 300,000 tons
of downtime, including 65,000 tons for lack-of-orders, compared with 325,000
tons in the 2002 first quarter, which included 215,000 tons for lack-of-order
downtime. This kept inventory levels relatively flat compared with prior year
levels. Maintenance related downtime makes up the difference between total tons
and lack-of-order tons. While maintenance downtime is taken periodically during
the year, the costs for planned maintenance are charged to expense
14
evenly in each quarter of the year. Downtime costs due to lack-of-orders are
expensed in the periods that they are taken.
The following segment discussions for the second quarter of 2002 are based on
results before special and extraordinary items.
Printing Papers
2002 2001
---------------------------------------------- ----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
------------------------------ -------------- ----------------------------------------------
Sales $ 1,820 $ 1,815 $ 3,635 $ 2,085 $ 1,945 $ 4,030
Operating Profit 76 106 182 154 119 273
Printing Papers net sales for the second quarter of 2002 remained flat compared
with the first quarter of 2002, and were down 7% from the second quarter of
2001. Operating profits in the second quarter of 2002 were up 39% from the first
quarter of 2002, but were down 11% from the second quarter of 2001. Favorable
manufacturing operating performance and cost improvement initiatives benefited
earnings for the second quarter of 2002. Average prices and volumes in our
uncoated free sheet business were up slightly versus the 2002 first quarter as
this market is slowly recovering from the downturn. The pulp market strengthened
as inventory levels declined and prices rose incrementally each month during the
second quarter, resulting in a reduction in the business's operating loss.
Coated paper prices continued to decline in the second quarter of 2002 and
advertising pages and catalog mailings were down year to date compared to 2001.
Continued strong cut-size papers demand combined with solid mill operational
performance favorably impacted European Papers results. In Brazil, operating
profits improved during the quarter as strong manufacturing operations and a
more favorable product mix helped overcome the adverse effects of the Argentine
financial crisis and the weak Brazilian currency. During the second quarter of
2002, the segment took 45,000 tons of lack-of-order downtime and 170,000 tons of
maintenance-related downtime. This compared with the previous quarter downtime
that included 110,000 tons due to lack of orders and 50,000 tons related to
maintenance. Lack-of-order downtime is taken to balance internal supply with our
customer demand. The segment's ongoing focus is to sustain and improve on the
cost reduction gains made to date and further improve operating efficiency.
Industrial and Consumer Packaging
2002 2001
---------------------------------------------- ----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
---------------------------------------------- ----------------------------------------------
Sales $ 1,460 $ 1,530 $ 2,990 $ 1,590 $ 1,585 $ 3,175
Operating Profit 128 145 273 113 139 252
Industrial and Consumer Packaging net sales for the second quarter of 2002 were
5% higher than the first quarter of 2002 and 3% lower than the second quarter of
2001. Operating profits in the second quarter of 2002 were 13% higher than the
first quarter of 2002 and 4% higher than the second quarter of 2001. Ongoing
benefits from rationalization efforts and cost improvement programs, as well as
lower input costs, favorably impacted Consumer Packaging's second-quarter
results. Overall volumes in this business were slightly higher while average
prices were about flat compared with both the 2002 first quarter and 2001 second
quarter. The sluggish domestic market and the strong U.S. dollar affected
Industrial Packaging's second-quarter results, although stronger export sales
partially offset some of the domestic shortfalls. Increased volumes in
Industrial Packaging helped to offset lower average prices compared with both
the 2002 first quarter and 2001 second quarter. This segment took 10,000 tons of
lack-of-order downtime in the second quarter of 2002 to balance internal supply
with customer demand. The segment announced price increases for certain bleached
board and linerboard grades during the second quarter that are expected to
favorably impact results over the next several months.
15
Distribution
2002 2001
---------------------------------------------- ----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
---------------------------------------------- ----------------------------------------------
Sales $ 1,535 $ 1,575 $ 3,110 $ 1,800 $ 1,710 $ 3,510
Operating Profit 18 23 41 14 12 26
Distribution's 2002 second-quarter net sales were up 3% from the 2002 first
quarter but were down 8% from the second quarter of 2001. Operating profits in
the second quarter of 2002 were up 28% from the first quarter of 2002 and 92%
from the second quarter of 2001. The earnings improvement was primarily the
result of aggressive cost reduction efforts throughout the segment and lower bad
debt expense. Sales volumes reflected modest improvement compared with the first
quarter of 2002 but were down slightly versus the second quarter of 2001. Both
commercial printing and packaging sales were up slightly from the first quarter
but showed no sustained trend of improvement. Although the primary driver of
improved profits has come from adjusting our cost base through facility
consolidations, downsizing, and efficiency improvements, we continue to focus on
improving our market share, our national service model and customer
profitability to strengthen financial results.
Forest Products
2002 2001
---------------------------------------------- ----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
---------------------------------------------- ----------------------------------------------
Sales $ 765 $ 815 $ 1,580 $ 685 $ 720 $ 1,405
Operating Profit 176 204 380 136 182 318
Forest Products net sales for the second quarter of 2002 were 7% higher than the
first quarter of 2002 and 13% higher than the second quarter of 2001. Operating
profits were up 16% and 12% in the second quarter of 2002 versus the first
quarter of 2002 and the second quarter of 2001, respectively. Second-quarter
2002 earnings increased from the first quarter of 2002 due mainly to higher
average lumber prices in the United States and stronger shipments from the
Canadian lumber operations. Improved operating efficiencies and cost control
measures also continue to positively impact the segment's earnings. In addition,
the segment realized a favorable impact from the countervailing and anti-dumping
duty accrual reversal at Weldwood in Canada. Overall, average stumpage prices
and volumes were slightly lower than in both the 2002 first quarter and 2001
second quarter. Harvest earnings were slightly lower than in last year's second
quarter and were about 25% lower than in the first quarter of 2002. Earnings
from major land and timber sales (over $10 million) in the second quarter of
2002 were about $12 million higher than first quarter 2002 amounts, and about
$33 million higher than second quarter 2001 totals, although year-to-date
earnings were about the same in both years. International Paper monetizes its
forest assets in various ways including sales of short- and long-term harvest
rights on a pay-as-cut or lump-sum bulk sales basis, as well as sales of
timberlands. Accordingly, earnings from quarter to quarter may vary depending
on the number of sales, timber prices and underlying timber volumes of such
sales.
Carter Holt Harvey
2002 2001
---------------------------------------------- ------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
---------------------------------------------- ----------------------------------------------
Sales $ 410 $ 480 $ 890 $ 395 $ 400 $ 795
Operating Profit 10 14 24 1 5 6
16
Carter Holt Harvey's 2002 second-quarter net sales were up 17% from the first
quarter of 2002 and up 20% from the second quarter of 2001. Second quarter 2002
operating profits were up 40% from the first quarter of 2002 and 180% from the
second quarter of 2001. Forest Operations' 2002 second-quarter earnings
benefited from higher prices and improved demand in both export and domestic
markets. Strong demand in the Australian and New Zealand residential
construction market benefited the Wood Products business while weak export
prices for pulp and linerboard continued to adversely affect the Pulp and Paper
business. The Tissue business benefited from price increases and cost
containment in the second quarter.
International Paper's results for this segment differ from those reported by
Carter Holt Harvey in New Zealand due to the following factors: (1) Our segment
earnings include only our share of Carter Holt Harvey's operating earnings while
100% of sales and earnings are included in Carter Holt Harvey's results. The
minority ownership share of operating earnings is shown as "Minority Interest"
in Operating Profit by Industry Segment data. (2) Our results are in U.S.
dollars while Carter Holt Harvey reports in New Zealand dollars. (3) 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 goodwill.
Specialty Businesses and Other
2002 2001
---------------------------------------------- ----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
---------------------------------------------- ----------------------------------------------
Sales $ 420 $ 445 $ 865 $ 715 $ 675 $ 1,390
Operating Profit 10 16 26 8 25 33
The Specialty Businesses and Other segment includes the operating results of
Arizona Chemical, Chemical Cellulose Pulp, Industrial Papers, and certain small
businesses identified in International Paper's divestiture program. The
operating results for the Decorative Products business, Masonite, the oil and
gas and mineral royalty business, the Curtis/Palmer hydroelectric facility, the
Flexible Packaging business, and other minor businesses are included in this
segment for periods prior to their sale. Second-quarter 2002 sales were up 6%
from the first quarter of 2002 but down 34% from the second quarter of 2001.
Operating profits in the second quarter of 2002 were up 60% from the first
quarter of 2002 but were 36% lower than in the second quarter of 2001. Excluding
those businesses that have been sold, this segment's earnings more than doubled
in the second quarter of 2002 compared with the same period a year ago
reflecting the effect of cost reduction initiatives, while sales remained
relatively flat.
Corporate Items and Interest Expense
Corporate charges decreased to $37 million in the 2002 second quarter compared
with $94 million in the first quarter of 2002, due to a $25 million increase in
favorable foreign exchange adjustments from a remeasurement gain on a monetary
asset in Brazil as the Real weakened against the U.S. Dollar, and a $32 million
improvement in the results from a Corporate natural gas hedging program. This
program hedges approximately 50% of International Paper's projected domestic
natural gas purchases. Corporate items in the second quarter of 2001 totaled
$107 million, or $70 million higher than in the 2002 second quarter, including
$32 million of goodwill amortization expense. A $20 million net increase in the
foreign exchange adjustments in Brazil and an $11 million net improvement in
natural gas hedging results accounted for most of the remaining difference.
Interest expense, net, totaled $199 million during the 2002 second quarter, down
from $205 million in the first quarter and $235 million in the second quarter of
2001, reflecting an overall reduction in borrowings as well as lower average
interest rates.
17
Liquidity and Capital Resources
Cash provided by operations totaled $708 million for the 2002 first half
compared with $295 million for the 2001 first half. Higher earnings before
special and extraordinary items and the cumulative effect of an accounting
change and favorable working capital changes accounted for most of the increase.
Working capital requirements decreased operating cash flow for the first six
months of 2002 by $138 million as compared with a decrease of $532 million in
operating cash flow for the first six months of 2001.
Investments in capital projects totaled $386 million and $458 million for the
first six months of 2002 and 2001, respectively. Capital spending continues to
be in line with budget and well below depreciation and amortization charges.
Financing activities for the 2002 first half included an $841 million net
reduction in debt versus a $684 million net reduction in the first half of 2001.
Common stock dividend payments were $.50 per share for both the 2002 and 2001
first halves.
At June 30, 2002, cash and temporary investments totaled $838 million compared
with $1.2 billion at December 31, 2001.
In March 2002, International Paper combined its $1.1 billion and $900 million
364-day commercial paper credit facilities into a single $1.5 billion facility
with a maturity of March 2003. The facility was unused at June 30, 2002.
During the six months ended June 30, 2002, International Paper entered into
fixed-to-floating interest rate swap agreements with a notional amount of $600
million and maturities ranging from 2003 through 2011. The objective of these
transactions, all of which qualify for hedge accounting, was to take advantage
of favorable interest rates.
International Paper believes its capital resources remain adequate to fund
expected working capital requirements.
Mergers, Acquisitions and Divestitures
Acquisitions:
In April 2001, Carter Holt Harvey acquired Norske Skog's Tasman Kraft pulp
manufacturing business for $130 million in cash.
In March 2001, International Paper and Carter Holt Harvey each acquired a 25%
interest in International Paper Pacific Millennium Limited. The resulting
investment is accounted for under the equity method and is included in
Investments in the accompanying consolidated balance sheet.
Divestitures:
In 2000, International Paper announced a divestment program following the
Champion acquisition and the completion of a strategic analysis to focus on
International Paper's core businesses. Through June 30, 2002, more than $3
billion had been realized under the program, including cash and notes received
plus debt assumed by the buyers.
18
Net (Gains) Losses on Sales and Impairments of Businesses Held for Sale
During the second quarter of 2002, a net pre-tax gain on sales of businesses
held for sale of $28 million before taxes and minority interest ($96 million
after taxes and minority interest) was recorded, including a gain of $63 million
($40 million after taxes) from the sale of International Paper's Oriented Strand
Board facilities and a net charge of $35 million (a gain of $56 million after
taxes and minority interest) relating to other sales and adjustments of
previously recorded estimated costs of businesses held for sale. This net
pre-tax charge included:
(1) a $2 million net loss associated with the sales of the Wilmington
carton plant and Carter Holt Harvey's distribution business;
(2) an additional loss of $12 million to write down the net assets of
Decorative Products to the amount realized on the subsequent sale
of this business in July 2002 (see Note 11);
(3) $11 million of additional expenses relating to the decision to
continue to operate Arizona Chemical, including a $3 million
adjustment of previously estimated costs incurred in connection
with the prior sale effort and an $8 million charge to
permanently close a production facility; and
(4) a $10 million charge for additional expenses relating to prior
divestitures.
The impairment charge recorded for Arizona Chemical in 2001 included a tax
expense based on the form of sale being negotiated at that time. As a result of
the decision in the second quarter of 2002 to discontinue sale efforts and to
hold and operate Arizona Chemical in the future, this provision was no longer
required. Consequently, special items for the second quarter include a larger
tax benefit, resulting in a net after-tax gain.
During the second quarter of 2001, a pre-tax impairment loss of $85 million ($55
million after taxes) was recorded to reduce the carrying value of the Flexible
Packaging assets to their expected realizable value of $85 million based on
preliminary offers received. This charge is included in Net (gains) losses on
sales and impairments of businesses held for sale.
During the first quarter of 2001, an extraordinary pre-tax charge of $60 million
($38 million after taxes) was recorded for impairment losses to reduce the
assets of Masonite to their estimated realizable value based on offers received.
This charge is included with the extraordinary loss on the sale of oil and gas
properties and fee mineral and royalty interests in Net losses on sales and
impairments of businesses held for sale in the accompanying consolidated
statement of earnings.
In January 2001, International Paper completed the sale of its interest in
Zanders, a European coated paper business, to M-Real (formerly Metsa Serla) for
approximately $120 million and the assumption of $80 million of debt. This
transaction resulted in an extraordinary loss of $245 million after taxes and
minority interest, which was recorded in the third quarter of 2000 when the
decision was made to sell this business.
Structured Transactions - Right of Offset
In connection with a sale of forestlands in the state of Washington in 2001,
International Paper received notes receivable having a value of approximately
$480 million on the date of sale. These notes were then transferred to an
unconsolidated subsidiary in exchange for a preferred interest in that entity
valued at approximately $480 million. Also during 2001, the entity acquired
approximately $561 million of International Paper debt obligations for cash.
Since International Paper has, and intends to effect, a legal right to net
settle these two amounts, we have offset for financial reporting purposes the
$480 million preferred interest against $480 million of the debt obligations.
The unconsolidated entity is a special purpose entity (SPE). The Financial
Accounting Standards Board is currently considering how to modify accounting for
SPEs. Based on new standards proposed by the FASB, International Paper could be
required in the future to either modify the current structure, or to consolidate
this
19
SPE in our financial statements, which would result in an increase in
investments of approximately $485 million, an increase in long-term debt of
approximately $465 million, and an increase in minority interest of
approximately $20 million, with no effect on cash, shareholders' equity or
earnings.
Also, in connection with the sale of the oil and gas properties and fee mineral
and royalty interests in 2001, International Paper received a non-controlling
preferred limited partnership interest valued at approximately $234 million. The
unconsolidated partnership also loaned $244 million to International Paper in
2001. Since International Paper has, and intends to effect, a legal right to net
settle these two amounts, we have offset for financial reporting purposes the
preferred interest against the note payable.
Special Items Including Restructuring and Business Improvement Actions
Restructuring and Other Charges:
During the second quarter of 2002, special charges before taxes and minority
interest of $79 million ($50 million after taxes and minority interest) were
recorded for asset shutdowns of excess internal capacity and cost reduction
actions. This amount included a $42 million charge for asset write-downs and a
$37 million charge for severance and other charges, which are discussed further
in Note 4 of the accompanying consolidated financial statements.
During the first quarter of 2002, special items consisted of a $10 million
pre-tax credit ($7 million after taxes) for the reversal of fourth-quarter 2001
restructuring reserves no longer required.
During the second quarter of 2001, International Paper recorded a restructuring
charge totaling $465 million before taxes and minority interest ($300 million
after taxes and minority interest) for asset shutdowns of excess internal
capacity and cost reduction actions, including $240 million for asset write
downs and $225 million for severance and other charges.
During the last two quarters of 2001, restructuring charges of $427 million
before taxes ($306 million after taxes) for asset shutdowns of excess internal
capacity and cost reduction actions were recorded. In addition, a $225 million
pre-tax charge ($146 million after taxes) was recorded for additional Masonite
legal reserves.
Also during the fourth quarter of 2001, International Paper recorded a pre-tax
credit of $17 million ($11 million after taxes) for excess 1999, and 2000 second
and fourth quarter restructuring reserves no longer required.
Merger Integration Costs:
During the first and second quarters of 2001, International Paper recorded
pre-tax charges of $10 million ($6 million after taxes) and $32 million ($22
million after taxes), respectively, for Champion merger integration costs. These
merger integration costs consisted primarily of systems integration, employee
retention, travel and other one-time cash costs related to the integration of
Champion.
Other
The effective income tax rate for both the 2002 and 2001 second quarters was
31%. The effective income tax rate after special items, but before extraordinary
items and cumulative effect of an accounting change was 9% and 37% for the 2002
and 2001 six-month periods, respectively. The following table presents the
components
20
of pre-tax earnings and losses and the related income tax expense or benefit for
each of the six-month periods ended June 30, 2002 and 2001.
2002 2001
------------------------------------------- -----------------------------------------
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
and cumulative effect
of accounting change $416 $128 31% $ 247 $ 77 31%
Merger integration costs - - (42) (14) 33%
Restructuring and other charges (1) (51) (98) 192% (550) (192) 35%
Reversal of reserves no longer
required 10 3 30% - -
---- ---- ----- -----
After special items $375 $ 33 9% $(345) $(129) 37%
==== ==== ===== =====
(1) The income tax benefit for this charge reflects the reversal of the
assumed stock-sale tax treatment of the 2001 fourth-quarter write-down to
net realizable value of the assets of Arizona Chemical upon the decision
to discontinue sale efforts and to hold and operate this business in the
future.
Critical Accounting Policies and Judgmental Matters
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires International Paper to
establish accounting policies and to make estimates that affect both the amounts
and timing of the recording of assets, liabilities, revenues and expenses. Some
of these estimates require judgments about matters that are inherently
uncertain.
Note 1 of the Notes to Consolidated Financial Statements, included in
International Paper's Annual Report on Form 10-K for the year ended December 31,
2001, includes a summary of the significant accounting policies and methods used
in the preparation of International Paper's consolidated financial statements.
The following represent critical accounting policies where estimates and
judgments can have a significant effect on reported results of operations and
financial condition:
Contingent Liabilities for matters including legal and environmental matters are
recorded when it is probable that a liability has been incurred or an asset
impaired and the amount of the loss can be reasonably estimated. Liabilities
accrued for legal matters require judgments regarding projected outcomes and
range of loss based on historical experience and recommendations of legal
counsel. Additionally, as discussed in Note 11 of the Notes to Consolidated
Financial Statements included in International Paper's Annual Report, reserves
for projected future claims settlements relating to products previously
manufactured by Masonite require judgments regarding projections of future
claims rates and amounts. International Paper utilizes an independent third
party to assist in developing these estimates. Liabilities for environmental
matters require evaluations of relevant environmental regulations and estimates
of future remediation alternatives and costs. International Paper determines
these estimates after a detailed evaluation of each site.
Impairment of Long-Lived Assets and Goodwill. An impairment of a long-lived
asset exists when the asset carrying amount exceeds its fair value, and is
recorded when the carrying amount is not recoverable through future operations.
A goodwill impairment exists when the carrying amount of goodwill exceeds its
fair value.
21
Assessments of possible impairments of long-lived assets and goodwill are made
when events or changes in circumstances indicate that the carrying value of the
asset may not be recoverable through future operations. Additionally, testing
for possible impairment of recorded goodwill and intangible asset balances is
required annually. The amount and timing of impairment charges for these assets
require the estimation of future cash flows and the fair market value of the
related assets.
Pension and Postretirement Benefit Obligations. The charges recorded for pension
and other postretirement benefit obligations are determined annually in
conjunction with International Paper's consulting actuary, and are dependent
upon various assumptions including the expected long-term rate of return on plan
assets, discount rates, projected future compensation increases, health care
cost trend rates, and mortality rates.
While the judgments and estimates made by International Paper are based on
historical experience and other assumptions that management believes are
appropriate and reasonable under current circumstances, actual resolution of
these matters may differ from recorded estimated amounts, resulting in charges
or credits that could materially affect a given financial statement period.
Other Financial Statement Items
Pension Accounting. At December 31, 2001 and June 30, 2002, a prepaid pension
cost asset of approximately $1.6 billion related to International Paper's
qualified pension plans was included in Deferred charges and other assets in the
consolidated balance sheet. If the fair value of plan assets ($6.5 billion at
December 31, 2001) were to decline below the plans' calculated accumulated
benefit obligation (ABO) ($5.9 billion at December 31, 2001), this asset would
be charged off, net of taxes, by a direct charge to shareholders' equity, with
no impact on earnings, earnings per share or cash. The most significant variable
that could cause this to occur is the actual return on plan assets. Through June
30, 2002, the fair value of plan assets had declined to approximately $6.1
billion. If the fair value of plan assets were to remain unchanged for the last
six months of 2002, and if the ABO were to increase to an amount in excess of
this asset value and International Paper chose not to make a cash contribution
to plan assets at least equal to the difference between the ABO and the fair
value of plan assets, then a charge of approximately $1 billion (the prepaid
pension cost amount, net of taxes), plus the excess of the ABO over the fair
value of the plan assets, to reduce shareholders' equity would be required.
Net pension income reported in operating income totaled approximately $40
million for International Paper's U.S. plans for the six months ended June 30,
2002, about $30 million lower than the amount recorded for the first six months
of 2001. Net pension expense for non-U.S. plans was about $10 million for the
six-month periods in both years. The decrease in U.S. plan pension income was
principally due to a reduction in the expected long-term rate of return on plan
assets to 9.25% from 10%. For the six months ended June 30, 2002, the actual
return on plan assets was a negative 2.3%. Other assumptions used in the
calculation include the discount rate (7.25% in 2002 and 7.5% in 2001) and
assumed rate of future compensation increase (4.5% in 2002 and 4.75% in 2001).
Accounting for Stock Options. International Paper accounts for stock options
using the intrinsic value method under APB Opinion No. 25, "Accounting for Stock
Issued to Employees". Under this method, compensation expense is recorded over
the related service period when the market price exceeds the option price at the
measurement date, which is the grant date for International Paper's options. No
compensation expense is recorded as options are issued with an exercise price
equal to the market price of International Paper stock on the grant date.
During each reporting period, fully diluted earnings per share is calculated by
assuming that "in-the-money" options are exercised and the exercise proceeds are
used to repurchase shares in the marketplace. When options are actually
exercised, option proceeds are credited to equity and issued shares are included
in the computation of earnings per common share, with no effect on reported
earnings. Equity is also increased by the tax benefit
22
that International Paper will receive in its tax return for income reported by
the optionees in their individual tax returns.
International Paper disclosed in its 2001 Annual Report a pro-forma calculation
of what stock-based compensation expense would have been if recorded under the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", that uses
a fair-value-based method of accounting for stock options. Under this Statement,
expense for options is measured at the grant date based on a computed fair value
of the options and then charged to expense over the related service period. Had
this method of accounting been applied, an additional $53 million of expense
would have been recorded in 2001, increasing the reported net loss per common
share by 4% from $2.50 to $2.60 per share.
At December 31, 2001, 29.1 million options were outstanding with exercise prices
ranging from $29.31 to $69.63 per share. During the first half of 2002, 1.1
million options were exercised, and 6.3 million options were granted with a
weighted average exercise price of $41.60 per share. At June 30, 2002, 33.4
million options were outstanding with exercise prices ranging from $29.31 to
$69.63 per share. During the first half of 2002, International Paper's share
price ranged from $37.89 to $46.19 per share.
Income Taxes. International Paper records provisions for U.S. Federal, state and
foreign income taxes based on the respective tax rules and regulations for the
jurisdictions in which it operates and judgments as to the allocation of income
and the amount of deductions relating to those jurisdictions. Domestic and
foreign tax authorities frequently challenge the timing and amounts of these
income allocations and deductions. International Paper records reserves for
estimated taxes payable and for projected settlements of these disputes,
however, the final resolution of these challenges can differ from estimated
amounts.
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, whether our efforts relating to capacity rationalization and
realignment initiatives will have the results anticipated, the timing and
strength of an economic recovery in the United States and changes to
international economic conditions, the relative strength of the U.S. dollar
compared with other foreign currencies, especially the Euro, economic conditions
in developing countries, specifically Brazil and Russia, and changes in overall
demand, changes in domestic competition, changes in the cost or availability of
raw materials, and the cost of compliance with environmental laws and
regulations. We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
23
Financial Information by Industry Segment
(Unaudited)
(In millions)
Sales by Industry Segment
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- --------------- --------------- --------------
Printing Papers $1,815 $1,945 $ 3,635 $ 4,030
Industrial and Consumer Packaging 1,530 1,585 2,990 3,175
Distribution 1,575 1,710 3,110 3,510
Forest Products 815 720 1,580 1,405
Carter Holt Harvey 480 400 890 795
Specialty Businesses and Other (1) 445 675 865 1,390
Corporate and Inter-segment Sales (355) (349) (727) (725)
------ ------ ------- -------
Net Sales $6,305 $6,686 $12,343 $13,580
====== ====== ======= =======
Operating Profit by Industry Segment
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- --------------- --------------- --------------
Printing Papers $ 106 $ 119 $ 182 $ 273
Industrial and Consumer Packaging 145 139 273 252
Distribution 23 12 41 26
Forest Products 204 182 380 318
Carter Holt Harvey 14 5 24 6
Specialty Businesses and Other (1) 16 25 26 33
----- ----- ----- -----
Operating Profit 508 482 926 908
Interest expense, net (199) (235) (404) (483)
Minority interest (2) 15 10 25 13
Corporate items, net (37) (107) (131) (191)
Merger integration costs - (32) - (42)
Restructuring and other charges (79) (465) (79) (465)
Net gains (losses) on sales and impairments of
businesses held for sale 28 (85) 28 (85)
Reversal of reserves no longer required - - 10 -
----- ----- ----- -----
Earnings (loss) before income taxes,
minority interest, extraordinary items, and
cumulative effect of accounting change $ 236 $(432) $ 375 $(345)
===== ===== ===== =====
(1) Includes Arizona Chemical, Chemical Cellulose Pulp and Industrial Papers,
as well as other smaller businesses identified in our divestiture program.
(2) Operating profits for industry segments include each segment's percentage
share of the profits of subsidiaries included in that segment that are less
than wholly owned. The pre-tax minority interest for these subsidiaries is
added here to present consolidated earnings before income taxes, minority
interest, extraordinary items, and cumulative effect of accounting change.
24
INTERNATIONAL PAPER COMPANY
SALES VOLUMES BY PRODUCT (1) (2)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ --------------------------
2002 2001 2002 2001
--------------- -------------- ------------ -------------
Printing Papers (In thousands of short tons)
Uncoated Papers and Bristols 1,614 1,608 3,235 3,261
Coated Papers 533 493 1,042 1,026
Market Pulp 588 618 1,199 1,154
Packaging (In thousands of short tons)
Containerboard 580 531 1,084 1,055
Bleached Packaging Board 337 316 651 623
Kraft 140 122 313 275
Industrial and Consumer Packaging 1,168 1,217 2,281 2,420
Forest Products (In millions)
Panels (sq. ft. 3/8" - basis) 541 760 1,320 1,448
Lumber (board feet) 1,118 1,025 2,123 2,001
MDF and Particleboard (sq. ft. 3/4"- basis) 191 149 370 305
(1) Includes third party and inter-segment sales.
(2) Sales volumes for divested businesses are included through the date of sale.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosures about market
risk are shown on pages 35 - 37 of International Paper's Annual Report to
Shareholders for the year ended December 31, 2001 as previously filed on Form
10-K, which information is incorporated herein by reference.
26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following matters discussed in previous filings under the Act, are updated
as follows:
Masonite Litigation
A discussion of developments relating to the financial impact of certain class
action lawsuits that were settled in 1998 and 1999 is found in Note 10 in this
Form 10-Q, which information is incorporated herein by reference.
Environmental
In May 2002 an internal environmental audit discovered that two lithographic
presses were being operated without required state air certificates at a
Shorewood Packaging Corporation facility in Edison, New Jersey. Shorewood
Packaging is a wholly owned subsidiary of International Paper. The presses were
shut down and the discovery was voluntarily disclosed to the New Jersey
Department of Environmental Protection (the "Department"). Following the
disclosure, the Department issued appropriate state air certificates. Settlement
discussions with the Department have been initiated.
International Paper is also involved in various other inquiries, administrative
proceedings and litigation relating to contracts, sales of property,
environmental protection, tax, antitrust, personal injury and other matters,
some of which allege substantial monetary damages. While any proceeding or
litigation has the element of uncertainty, International Paper believes that the
outcome of any of the other lawsuits or claims that are pending or threatened,
or all of them combined, will not have a material adverse effect on its
consolidated financial position or results of operations.
27
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of International Paper was held on May
7, 2002.
Shareholders elected three directors to Class II for three-year terms
expiring at the annual meeting in 2005. The vote tabulation for individual
directors was:
For Withheld
- -------------------------------------------------------------------------
Samir G. Gibara 401,000,374 7,121,420
- -------------------------------------------------------------------------
Jane C. Pfeiffer 401,641,652 6,480,142
- -------------------------------------------------------------------------
Charles R. Shoemate 410,026,163 7,095,631
- -------------------------------------------------------------------------
Other directors whose terms of office continued after the meeting were John T.
Dillon, James A. Henderson, Robert D. Kennedy, W. Craig McClelland, Robert J.
Eaton, John R. Kennedy, Donald F. McHenry and Patrick F. Noonan.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Nonfunded Deferred Compensation Plan for Directors (As amended
through May 7, 2002)
10.2 Amendment No. 3 to International Paper Company Restricted
Stock Plan for Non-Employee Directors
11 Statement of Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Reports on Form 8-K were filed on January 22, 2002 under Item 5
reporting earnings for the quarter ended December 31, 2001 and full
year 2001 results, and on April 19, 2002 and July 18, 2002 under Item 5
reporting earnings for the quarters ended March 31, 2002 and
June 30, 2002, respectively. A report on Form 8-K was filed on
April 9, 2002 under Item 4 announcing a change in International
Paper's independent auditor.
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: August 13, 2002 By /s/ JOHN V. FARACI
------------------
John V. Faraci
Executive Vice President and Chief
Financial Officer
Date: August 13, 2002 By /s/ ANDREW R. LESSIN
--------------------
Andrew R. Lessin
Vice President and
Chief Accounting Officer
29
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as.................................'SS'