Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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
October 31, 2002 was 479,678,875.
================================================================================
INTERNATIONAL PAPER COMPANY
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Statement of Earnings -
Three Months and Nine Months Ended September 30, 2002 and 2001 1
Consolidated Balance Sheet -
September 30, 2002 and December 31, 2001 2
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2002 and 2001 3
Consolidated Statement of Common Shareholders' Equity -
Nine Months Ended September 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 15
Financial Information by Industry Segment 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 29
PART II. Other Information
Item 1. Legal Proceedings 30
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 31
Signatures 31
* Omitted since no answer is called for, answer is in the negative or
inapplicable.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Earnings
(Unaudited)
(In millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
2002 2001 2002 2001
-------- -------- --------- ---------
Net Sales $ 6,343 $ 6,529 $ 18,686 $ 20,109
-------- -------- --------- ---------
Costs and Expenses
Cost of products sold 4,611 4,789 13,664 14,841
Selling and administrative expenses 509 530 1,516 1,696
Depreciation and amortization 407 474 1,194 1,407
Distribution expenses 281 287 821 840
Taxes other than payroll and income taxes 65 67 201 213
Merger integration costs - - - 42
Restructuring and other charges 19 481 98 946
Net (gains) losses on sales and impairments of businesses
held for sale (3) (47) (31) 38
-------- -------- --------- ---------
Total Costs and Expenses 5,889 6,581 17,463 20,023
Reversal of reserves no longer required - - 10 -
-------- -------- --------- ---------
Earnings (Loss) Before Interest, Income Taxes, Minority
Interest, Extraordinary Items and Cumulative Effect of
Accounting Change 454 (52) 1,233 86
Interest expense, net 186 235 590 718
-------- -------- --------- ---------
Earnings (Loss) Before Income Taxes, Minority
Interest, Extraordinary Items and Cumulative Effect of
Accounting Change 268 (287) 643 (632)
Income tax provision (benefit) 85 (45) 118 (174)
Minority interest expense, net of taxes 38 33 100 112
-------- -------- --------- ---------
Earnings (Loss) Before Extraordinary Items and
Cumulative Effect of Accounting Change 145 (275) 425 (570)
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) $ 145 $ (275) $ 425 $ (632)
======== ======== ========= =========
Basic and Diluted Earnings Per Common Share
Earnings (loss) before extraordinary items and accounting change $ 0.30 $ (0.57) $ 0.88 $ (1.18)
Extraordinary items - - - (0.10)
Cumulative effect of accounting change - - - (0.03)
-------- -------- --------- ---------
Net earnings (loss) $ 0.30 $ (0.57) $ 0.88 $ (1.31)
======== ======== ========= =========
Average Shares of Common Stock Outstanding 481.1 482.9 482.0 482.9
======== ======== ========= =========
Cash Dividends Per Common Share $ 0.25 $ 0.25 $ 0.75 $ 0.75
======== ======== ========= =========
The accompanying notes are an integral part of these financial statements.
1
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
September 30, December 31,
2002 2001 (1)
--------------- ---------------
Assets
Current Assets
Cash and temporary investments $ 994 $ 1,224
Accounts and notes receivable, net 2,882 2,778
Inventories 2,846 2,877
Assets of businesses held for sale (1) 131 219
Other current assets 1,162 1,057
-------- --------
Total Current Assets 8,015 8,155
-------- --------
Plants, Properties and Equipment, net 14,020 14,616
Forestlands 3,792 4,197
Investments 204 239
Goodwill 6,584 6,543
Deferred Charges and Other Assets 3,660 3,427
-------- --------
Total Assets $ 36,275 $ 37,177
======== ========
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 732 $ 957
Accounts payable 2,023 1,793
Accrued payroll and benefits 473 435
Liabilities of businesses held for sale (1) 41 77
Other accrued liabilities 1,864 2,079
-------- --------
Total Current Liabilities 5,133 5,341
-------- --------
Long-Term Debt 11,926 12,457
Deferred Income Taxes 3,937 3,996
Other Liabilities 1,919 2,012
Minority Interest 1,396 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 6,478 6,465
Retained earnings 4,685 4,622
Accumulated other comprehensive income (loss) (1,307) (1,175)
-------- --------
10,341 10,396
Less: Common stock held in treasury, at cost, 2002 - 4.6 shares
2001 - 2.7 shares 182 105
-------- --------
Total Common Shareholders' Equity 10,159 10,291
-------- --------
Total Liabilities and Common Shareholders' Equity $ 36,275 $ 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)
Nine Months Ended
September 30,
-----------------------------------------
2002 2001
------------------- ------------------
Operating Activities
Net earnings (loss) $ 425 $ (632)
Cumulative effect of accounting change - 16
Depreciation and amortization 1,194 1,407
Deferred income tax benefit (114) (369)
Payments related to restructuring, legal reserves and merger
integration costs (257) (315)
Merger integration costs - 42
Restructuring and other charges 98 946
Reversal of reserves no longer required (10) -
Net (gains) losses on sales and impairments of businesses held for sale (31) 38
Extraordinary item- Net losses on sales and impairments of businesses
held for sale - 73
Other, net 5 (10)
Changes in current assets and liabilities
Accounts and notes receivable (62) 4
Inventories 74 283
Accounts payable and accrued liabilities 128 (349)
Other (22) (108)
----------- ----------
Cash Provided by Operations 1,428 1,026
----------- ----------
Investment Activities
Invested in capital projects
Ongoing businesses (613) (670)
Businesses sold and held for sale (4) (18)
Mergers and acquisitions, net of cash acquired - (150)
Proceeds from divestitures 535 1,552
Other (80) (86)
----------- ----------
Cash (Used for) Provided by Investment Activities (162) 628
----------- ----------
Financing Activities
Issuance of common stock 43 20
Issuance of debt 837 2,753
Reduction of debt (1,763) (2,996)
Change in bank overdrafts (51) (176)
Purchases of treasury stock (124) (44)
Dividends paid (362) (361)
Other (7) 46
----------- ----------
Cash Used for Financing Activities (1,427) (758)
----------- ----------
Effect of Exchange Rate Changes on Cash (69) (75)
----------- ----------
Change in Cash and Temporary Investments (230) 821
Cash and Temporary Investments
Beginning of the period 1,224 1,198
----------- ----------
End of the period $ 994 $ 2,019
=========== ==========
The accompanying notes are an integral part of these financial statements.
3
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Common Shareholders' Equity
(Unaudited)
(In millions, except share amounts in thousands)
Nine Months Ended September 30, 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 404 1 13 - - (1,181) (47) 61
Repurchases of stock - - - - - 3,110 124 (124)
Cash dividends - Common
stock ($0.75 per share) - - - (362) - - - (362)
Comprehensive income (loss):
Net earnings - - - 425 - - - 425
Change in cumulative foreign
currency translation adjustment - - - - (178) - - (178)
Net gain on cash flow
hedging derivatives:
Net gain arising during the period - - - - 41 - - 41
Less: Reclassification adjustment
for losses included in net income - - - - 5 - - 5
------------
Total comprehensive income 293
---------- ---------- ----------- ---------- -------------- ---------- ---------- -----------
Balance, September 30, 2002 484,685 $ 485 $ 6,478 $ 4,685 $ (1,307) 4,622 $ 182 $ 10,159
========== ========== =========== ========== ============== ========== ========== ===========
Nine Months Ended September 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 52 - (42) - - (1,656) (73) 31
Repurchases of stock - - - - - 1,240 44 (44)
Cash dividends - Common
stock ($0.75 per share) - - - (361) - - - (361)
Comprehensive income (loss):
Net loss - - - (632) - - - (632)
Change in cumulative foreign
currency translation adjustment - - - - (139) - - (139)
Net loss on cash flow
hedging derivatives:
Net loss arising during the period - - - - (73) - - (73)
Less: Reclassification adjustment
for losses included in net income - - - - 24 - - 24
-----------
Total comprehensive loss (820)
---------- ---------- ----------- --------- -------------- ---------- ---------- ------------
Balance, September 30, 2001 484,212 $ 484 $ 6,459 $ 5,315 $ (1,330) 2,274 $ 88 $ 10,840
========== ========== =========== ========= ============== ========== ========== ============
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 (loss) 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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
In millions, except per share amounts 2002 2001 2002 2001
- ------------------------------------- --------- --------- --------- ----------
Earnings (loss) before extraordinary items
and cumulative effect of accounting change $ 145 $ (275) $ 425 $ (570)
Effect of dilutive securities - - - -
---------- --------- --------- -----------
Earnings (loss) before extraordinary items and cumulative
effect of accounting change - assuming dilution $ 145 $ (275) $ 425 $ (570)
========== ========= ========= ===========
Average common shares outstanding 481.1 482.9 482.0 482.9
Effect of dilutive securities
Stock options 1.2 - 1.8 -
---------- --------- --------- -----------
Average common shares outstanding - assuming dilution 482.3 482.9 483.8 482.9
========== ========= ========= ===========
Earnings (loss) per common share before extraordinary items
and cumulative effect of accounting change $ 0.30 $(0.57) $ 0.88 $ (1.18)
========== ========= ========= ===========
Earnings (loss) per common share before extraordinary items
and cumulative effect of accounting change - assuming dilution $ 0.30 $(0.57) $ 0.88 $ (1.18)
========== ========= ========= ===========
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 third quarter of 2002, special charges totaling $19 million before
taxes and minority interest ($9 million after taxes and minority interest),
including $9 million for asset impairment charges and $10 million for severance
and other charges, were recorded. The following table presents additional detail
related to the $19 million charge:
Asset Severance
In millions Write-downs and Other Total
- -------------- ----------- ----------- -----------
Specialty Businesses and Other (a) $ - $ 3 $ 3
Carter Holt Harvey (b) 5 7 12
Other (c) 4 - 4
----------- ----------- -----------
$ 9 $ 10 $ 19
=========== =========== ===========
(a) The Specialty Businesses and Other charge of $3 million relates to the
termination of 43 employees at Arizona Chemical's U.S. operations to
reduce costs.
(b) The Carter Holt Harvey severance and other charge of $7 million relates
primarily to severance for job reductions at the Kinleith, New Zealand
mill (102 employees) and at packaging operations in Australia (45
employees). The Kinleith reductions are part of a continuing program to
improve the cost structure at the mill. In addition, Carter Holt Harvey
recorded a $5 million loss related to a write-down of non-refundable
tax credits to their estimated realizable value.
(c) This $4 million charge relates to the write-down to zero of
International Paper's investment in Forest Express, a joint venture
engaged in electronic commerce transaction processing for the forest
products industry.
During the second quarter of 2002, special charges before taxes of $79 million
($50 million after taxes) were recorded for asset shutdowns of excess internal
capacity and cost reduction actions. 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
======== ========= =========
6
(a) The Printing Papers business approved a plan to 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 mill was closed in November 2002. 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 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 reduce operating and selling costs.
(d) During the second quarter of 2002, International Paper implemented the
second phase of its cost reduction program, which was initiated in the
second quarter of 2001, 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.
The following table presents a roll forward of the cumulative severance and
other costs included in the 2002 restructuring plans:
Severance
Dollars in millions and Other
- ---------------------- ---------
Opening balance - second quarter 2002 (593 employees) $ 37
Additions - third quarter 2002 (190 employees) 10
Cash charges - 2002 (50 employees) (2)
--------
Balance, September 30, 2002 (733 employees) $ 45
========
During the first quarter of 2002, special items consisted of a $10 million
pre-tax credit ($7 million after taxes) for the reversal of fourth-quarter 2001
restructuring reserves no longer required.
During the fourth quarter of 2001, a restructuring charge of $171 million before
taxes ($111 million after taxes) for asset shutdowns of excess internal capacity
and cost reduction actions were recorded, including $84 million for asset
write-downs and $87 million for severance and other charges.
During the third quarter of 2001, restructuring and other charges totaling a net
pre-tax charge of $481 million ($341 million after taxes) were recorded. These
items included a $256 million pre-tax charge ($195 million after taxes) for
asset shutdowns of excess internal capacity and cost reduction actions, and a
$225 million pre-tax charge ($146 million after taxes) for additional Masonite
legal reserves. The $256 million pre-tax charge included $183 million of asset
write-downs and $73 million of severance and other charges.
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.
7
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)
Cash charges - third quarter 2002 (361 employees) (24)
Reversal of reserves no longer required (314 employees) (3)
--------
Balance, September 30, 2002 (97 employees) $ 137
========
The balance of $137 million at September 30, 2002 includes approximately $5
million for severance relating to the remaining 97 employees, $55 million
representing deferred payments to employees already severed and $77 million for
other exit costs.
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,
second and third quarters of 2002 were $9 million relating to 58 employees, $13
million relating to 270 employees and $8 million relating to 75 employees,
respectively, leaving a balance of $37 million at September 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 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.
Extraordinary Items:
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 $13 million ($8 million after taxes)
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.
8
NOTE 5 - INVENTORIES
Inventories by major category were:
September 30, December 31,
In millions 2002 2001
- -------------- --------- -----------
Raw materials $ 421 $ 486
Finished pulp, paper and packaging products 1,710 1,681
Finished lumber and panel products 157 174
Operating supplies 520 506
Other 38 30
--------- ---------
Total $ 2,846 $ 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 September 30, 2002, more than $3
billion had 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 September 30, 2002 being marketed for
sale included some of International Paper's smaller businesses.
Sales and operating earnings for each of the nine month periods ended September
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 $ 294 $ 1,015
Operating Profit 8 43
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 $131 million at September 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 $41 million at September 30, 2002 are included in Liabilities of
businesses held for sale in Current Liabilities in the accompanying consolidated
balance sheet.
In June 2002, International Paper announced that it would discontinue efforts to
divest its Arizona Chemical and Industrial Papers businesses after these efforts
did not generate acceptable offers. International Paper has made a decision to
operate these two businesses. International Paper discontinued efforts to
divest the Chemical Cellulose Pulp business in February 2002. As a result of
these actions, 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.
9
Divestitures:
Net (Gains) Losses on Sales and Impairments of Businesses Held for Sale
In the third quarter of 2002, International Paper completed the sale of its
Decorative Products Division to an affiliate of Kohlberg & Co. for
approximately $100 million in cash and a note receivable with a fair market
value of $13 million. This transaction resulted in no gain or loss as these
assets had previously been written down to fair market value in the second
quarter of 2002 (see below). Also during the third quarter of 2002, a net
pre-tax gain of $3 million before taxes ($1 million after taxes) was recorded
related to adjustments of previously recorded costs of businesses held for sale.
During the second quarter of 2002, a net pre-tax gain on sales of businesses
held for sale of $28 million before taxes and minority interest ($96 million
after taxes and minority interest) was recorded, including a gain of $63 million
($40 million after taxes) from the sale in April 2002 of International Paper's
Oriented Strand Board facilities to Nexfor Inc. for $250 million, 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;
(3) $11 million of additional expenses relating to the decision to
continue to operate Arizona Chemical, including a $3 million
adjustment of previously estimated costs incurred in connection with
the prior sale effort and an $8 million charge to permanently close a
production facility; and
(4) a $10 million charge for additional expenses relating to prior
divestitures.
The impairment charge recorded for Arizona Chemical in 2001 included a tax
expense based on the form of sale being negotiated at that time. As a result of
the decision in the second quarter of 2002 to discontinue sale efforts and to
hold and operate Arizona Chemical in the future, this provision was no longer
required. Consequently, special items for the second quarter include a larger
tax benefit, resulting in a net after-tax gain.
In September 2001, International Paper sold Masonite Corporation (Masonite) to
Premdor Inc. of Toronto, Canada for approximately $300 million in cash and a
note receivable with a face value of $113 million, resulting in a pre-tax loss
of $87 million. In August 2001, International Paper sold its Flexible Packaging
business to Exo-Tech Packaging, LLC, a company sponsored by the Sterling Group,
L.P., for approximately $85 million in cash and a $25 million note, resulting in
a pre-tax loss of $31 million. In July 2001, International Paper sold its
Curtis/Palmer hydroelectric generating project in Corinth, New York to
TransCanada Pipelines Limited for approximately $285 million, resulting in a
pre-tax gain of $215 million. Also, in the third quarter of 2001, a pre-tax
impairment loss of $50 million ($32 million after taxes) was recorded to write
down the Chemical Cellulose assets to their expected realizable value of
approximately $25 million. The net gain of $47 million from these transactions
is included in Net (gains) losses on sales and impairments of businesses held
for sale in the accompanying consolidated statement of earnings.
In 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 approximately $85 million
based on preliminary offers received. This charge is included in Net (gains)
losses on sales and impairments of businesses held for sale in the accompanying
consolidated statement of earnings.
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
10
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 would 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 deferred charges and other assets 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 $646
million and $828 million at September 30, 2002 and December 31, 2001,
respectively.
NOTE 8 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Interest payments made during the nine-month periods ended September 30, 2002
and 2001 were $712 million and $784 million, respectively. Capitalized net
interest costs were $6 million for the nine months ended September 30, 2002 and
$10 million for the nine months ended September 30, 2001. Total interest expense
was $671 million for the first nine months of 2002 and $808 million for the
first nine months of 2001. Income tax payments of $204 million and $326 million
were made during the first three quarters of 2002 and 2001, respectively.
Distributions paid under all of International Paper's preferred securities of
subsidiaries were $89 million and $102 million during the first nine months of
2002 and 2001, respectively, and are included in minority interest expense.
Accumulated depreciation was $17.3 billion at September 30, 2002 and $16.6
billion at December 31, 2001. The allowance for doubtful accounts was $178
million at September 30, 2002 and $179 million at December 31, 2001.
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 does not believe it will be significant.
11
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
had to be completed by June 30, 2002, with any initial impairment charges
finalized no later than December 31, 2002 and then recorded as a cumulative
effect of accounting change 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 required 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
exceeded a unit's fair value, the second step of the impairment test was
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 will 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 charge will not 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 will be
required with no impact on cash flows.
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 three months and nine months of 2002 and pro forma net earnings
for the first three months and nine months of 2001 exclusive of goodwill
amortization.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
In millions, except per share amounts 2002 2001 2002 2001
- ------------------------------------------------- ------------- ---------- --------- -----------
Earnings (loss) before extraordinary items and cumulative $ 145 $ (275) $ 425 $ (570)
effect of accounting change
Add back: Goodwill amortization - 46 - 137
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) $ 145 $ (229) $ 425 $ (495)
======== ========== ========= ========
Basic and Diluted Earnings Per Common Share
Earnings (loss) before extraordinary items and
cumulative effect of accounting change $ 0.30 $ (0.57) $ 0.88 $ (1.18)
Goodwill amortization - 0.09 - 0.28
Loss per share - extraordinary items - - - (0.10)
Loss per share - cumulative effect of
accounting change - - - (0.03)
---------- ----------- ---------- ---------
Adjusted net earnings (loss) $ 0.30 $ (0.48) $ 0.88 $ (1.03)
========== =========== ========== =========
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.
12
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 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 September 30, 2002 and December 31, 2001, reserve balances for these matters
totaled $98 million and $208 million, respectively. The following table presents
an analysis of the net reserve activity related to these lawsuits for the nine
months ended September 30, 2002.
RESERVE ANALYSIS
- ------------------------------------------------------------------------
Hard - Omni-
In millions board wood Woodruf Total
- ------------------------------------------------------------------------
Balance, December 31, 2001 $ 179 $ 20 $ 9 $ 208
Payments (125) (11) (7) (143)
Insurance collections 33 - - 33
-------- -------- -------- --------
Balance, September 30, 2002 $ 87 $ 9 $ 2 $ 98
======== ======== ======== ========
The following table shows an analysis of claims statistics related to these
lawsuits for the nine months ended September 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 37.9 8.0 2.5 0.4 1.0 0.1 41.4 8.5 49.9
No. of Claims Paid (27.2) (7.0) (1.7) (0.3) (1.0) - (29.9) (7.3) (37.2)
No. of Claims Dismissed (12.2) (2.7) (0.3) - (0.4) - (12.9) (2.7) (15.6)
September 30, 2002 28.5 3.7 1.9 0.4 1.1 0.3 31.5 4.4 35.9
As discussed in Note 11 to the Financial Statements included in International
Paper's Annual Report for the year ended December 31, 2001, the reserve balances
for these matters were determined based on statistical outcomes developed by an
independent third party. These statistical outcomes were based on certain key
13
assumptions, including projections of the number of future claim filings and the
amount of average claim settlement payments. Work is currently being performed
to prepare updated future projections for these lawsuits, taking into account
recent claims information.
International Paper believes additional amounts will be recovered from its
insurance carriers in the future relating to these claims. However, the company
is unable to estimate at this time the amount of additional charges, if any,
that may be required for these matters in the future. At this time,
International Paper believes that the reserve balances established for
these matters are adequate.
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
On October 29, 2002, International Paper completed a private placement with
registration rights of $1 billion aggregate principal amount 5.85% notes due
October 30, 2012. On November 5, 2002, the sale of an additional $200 million
principal amount of 5.85% notes due October 30, 2012 was completed. The net
proceeds of these sales will be used to refinance most of International Paper's
$1.2 billion aggregate principal amount of 8% notes due July 8, 2003 that were
issued in connection with the Champion acquisition.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
International Paper reported net earnings of $145 million, or $.30 per share, in
the 2002 third quarter. This compared with a net loss of $275 million, or $.57
per share, in the third quarter of 2001 and net earnings of $215 million, or
$.45 per share, in the second quarter of 2002.
Special items in the 2002 third quarter consisted of a pre-tax charge of $10
million ($4 million after taxes and minority interest) for business realignment
severance costs, a pre-tax charge of $9 million ($5 million after taxes and
minority interest) for asset impairment charges, and a net $3 million gain
before taxes ($1 million after taxes) related to adjustments of gains (losses)
of businesses previously sold. Third-quarter 2001 special items included a net
gain of $47 million before taxes (net loss of $2 million after taxes) related to
disposition and impairment losses on assets of businesses held for sale, and
charges in the amount of $481 million before taxes ($341 million after taxes) in
connection with facility and business rationalizations and an increase in
litigation related reserves. Special items in the 2002 second quarter included 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.
Third-quarter 2002 net sales totaled $6.3 billion compared with $6.5 billion for
the same period in 2001 and $6.3 billion in the second quarter of 2002. The
year-over-year reduction in sales principally reflects lower average selling
prices and lost contributions from businesses sold as part of our divestment
program.
Earnings Before Special and Extraordinary Items
Before special items, third-quarter 2002 earnings were $153 million, or $.32 per
share. Earnings for the same period in 2001 were $68 million, or $.14 per share,
before special items. Second-quarter 2002 earnings before special items were
$169 million, or $.35 per share.
Earnings in 2002 continue to benefit from cost reduction initiatives and
restructuring actions taken in prior periods. Third-quarter 2002 earnings
benefited approximately $30 million before taxes from operating cost
improvements compared with the 2002 second quarter, as both overhead and raw
material costs declined. The benefit of these lower costs, combined with a
slight increase in volumes, largely offset the effects of lower average prices,
capital project start up costs in our packaging business and lower foreign
exchange gains. Second-quarter 2002 earnings also include income from the
reversal of previously accrued countervailing and antidumping duties related to
our Weldwood operations in Canada.
Compared with the prior-year third quarter, operating cost improvements
contributed about $125 million before taxes to the 2002 results, reflecting
lower overhead, raw material and energy costs. The benefit of these lower costs,
combined with improved volume, more than offset the impact of lower average
prices. The current year third quarter also benefited from lower interest costs
and the elimination of goodwill amortization that resulted in an increase of
$.09 per share in the third quarter ($.28 per share for the first nine months)
compared with 2001 results.
During the third quarter, International Paper took approximately 200,000 tons of
downtime, including 50,000 tons for lack-of-orders, compared with 300,000 tons
in the 2002 second quarter, which included 65,000 tons for lack-of-order
downtime. These actions kept inventory levels relatively flat compared with
prior year levels. Lack-of-order downtime is taken to balance internal supply
with our customer demand to help manage inventory levels, while maintenance
downtime, which makes up the difference between total downtime and lack-of-order
downtime, is taken periodically during the year. The costs for planned
maintenance are charged to
15
expense 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 third quarter of 2002 are based on
results before special and extraordinary items.
Printing Papers
2002 2001
--------------------------------------------- --------------------------------------------
In millions 3rd Quarter 2nd Quarter Nine Months 3rd Quarter 2nd Quarter Nine Months
--------------------------------------------- --------------------------------------------
Sales $ 1,965 $ 1,815 $ 5,600 $ 1,945 $ 1,945 $ 5,975
Operating Profit 180 106 362 146 119 419
Printing Papers net sales for the third quarter of 2002 were up 8% from the
second quarter of 2002 and were slightly higher than in the third quarter of
2001. Operating profits in the third quarter of 2002 increased 70% from the
second quarter of 2002 and 23% from the third quarter of 2001. Strong
manufacturing performance and broad-based cost reduction efforts throughout the
system continued to have a positive impact on earnings. Compared with the 2002
second quarter, the uncoated free sheet business continued to show slow but
steady improvement in the third quarter. Volumes increased slightly in the
quarter while average prices remained about flat. In our pulp business, average
prices and volumes were up versus the 2002 second quarter, resulting in a
continued decline in the business's operating loss. By the end of the third
quarter, the pulp market appeared to be showing some softness as inventories
increased slightly during the quarter. The seasonally strong catalog market
drove increased volumes in coated paper in the third quarter versus the second
quarter of 2002. This volume increase combined with reduced costs to offset the
impact of slightly weaker coated paper prices during the quarter. European
Papers operations showed modest improvement in the third quarter versus the
second quarter of 2002 coming off a strong second quarter. In Brazil, operating
profits improved during the quarter with increased volumes offsetting the
negative impact of lower export prices. The Printing Papers segment took 45,000
tons of lack-of-order downtime and 55,000 tons of maintenance-related downtime
in the third quarter of 2002. This compared with the previous quarter's downtime
that included 45,000 tons due to lack-of-orders and 170,000 tons related to
maintenance. The segment's ongoing focus is to realize the price increases
initiated during the third quarter with continued emphasis on cost reduction
efforts and operating efficiencies.
Industrial and Consumer Packaging
2002 2001
--------------------------------------------- --------------------------------------------
In millions 3rd Quarter 2nd Quarter Nine Months 3rd Quarter 2nd Quarter Nine Months
--------------------------------------------- --------------------------------------------
Sales $ 1,565 $ 1,530 $ 4,555 $ 1,550 $ 1,585 $ 4,725
Operating Profit 128 145 401 127 139 379
Industrial and Consumer Packaging net sales for the third quarter of 2002 were
up 2% from the second quarter of 2002 and were flat compared with the third
quarter of 2001. Operating profits in the third quarter of 2002 were down 12%
from the second quarter of 2002 and were about even with the third quarter of
2001. Compared with the second quarter of 2002, third quarter average prices for
this business remained relatively flat, although prices were somewhat higher at
quarter end, while volumes improved slightly. The volume improvement was
principally the result of higher export sales in the Industrial Packaging
business. Average prices for the quarter were slightly below expectations as
price increases announced in the second quarter for certain bleached board and
linerboard grades were realized more slowly than anticipated. Consumer
Packaging's third quarter results were lower due primarily to start-up costs
associated with a machine upgrade in the bleached board system. The segment took
no lack-of-order downtime in the third quarter as our internal supply was well
balanced with customer demand. Fourth quarter 2002 results for this segment
should benefit from previously announced price increases and completion of the
machine upgrade, offset by a seasonal drop in product demand.
16
Distribution
2002 2001
--------------------------------------------- --------------------------------------------
In millions 3rd Quarter 2nd Quarter Nine Months 3rd Quarter 2nd Quarter Nine Months
--------------------------------------------- --------------------------------------------
Sales $ 1,605 $ 1,575 $ 4,715 $ 1,665 $ 1,710 $ 5,175
Operating Profit 23 23 64 5 12 31
Distribution's 2002 third-quarter net sales were up 2% from the 2002 second
quarter and down 4% from the third quarter of 2001. Operating profits in the
third quarter of 2002 were flat compared with the second quarter of 2002 and
were up significantly from the third quarter of 2001. Domestic sales volumes
reflected a slight improvement in the current quarter compared with the second
quarter of 2002. In addition to higher volumes, third quarter earnings benefited
from lower overhead and operating costs, offset by higher bad debt expense and a
less profitable sales mix versus the 2002 second quarter. Third-quarter 2002
earnings improved from the same quarter a year earlier reflecting benefits from
aggressive cost control efforts, facility consolidation and lower bad debt
expense. In addition to ongoing internal cost reduction efforts, we continue to
focus on improving our market share and customer profitability to strengthen
financial results.
Forest Products
2002 2001
-------------------------------------------- ---------------------------------------------
In millions 3rd Quarter 2nd Quarter Nine Months 3rd Quarter 2nd Quarter Nine Months
-------------------------------------------- ---------------------------------------------
Sales $ 745 $ 815 $ 2,325 $ 725 $ 720 $ 2,130
Operating Profit 164 204 544 184 182 502
Forest Products net sales for the third quarter of 2002 were 3% higher than the
third quarter of 2001 and were 9% lower than the second quarter of 2002.
Operating profits in the third quarter of 2002 were 20% lower than the second
quarter of 2002 and were 11% lower than the third quarter of 2001. The decline
in third-quarter 2002 earnings versus the second quarter of 2002 reflected lower
average lumber prices in North America. In addition, second-quarter 2002 results
included the favorable impact of the reversal of previously accrued
countervailing and anti-dumping duties at Weldwood in Canada. Overall, both
harvest volumes and average stumpage prices were lower than in 2001 third
quarter. Compared with the 2002 second quarter, harvest volumes were about flat,
while average prices were slightly lower. Earnings in the third quarter also
benefited from seasonally higher recreational income. The earnings decrease from
the 2001 third quarter was principally due to lower harvest volumes. Earnings
from timberland sales for the 2002 third quarter were essentially flat compared
with both the second and first quarters of 2002. Earnings from major land and
timber sales (over $10 million) in the third quarter of 2002 were about $35
million lower than in the 2002 second quarter, and about $10 million higher than
2001 third-quarter totals; however, year-to-date earnings from major land and
timber sales were approximately the same in 2002 as in 2001. 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 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 3rd Quarter 2nd Quarter Nine Months 3rd Quarter 2nd Quarter Nine Months
-------------------------------------------- ---------------------------------------------
Sales $ 500 $ 480 $ 1,390 $ 455 $ 400 $ 1,250
Operating Profit 16 14 40 (1) 5 5
Carter Holt Harvey's 2002 third-quarter net sales were 4% higher than the second
quarter of 2002 and were 10% higher than the third quarter of 2001. Operating
profits in the third quarter of 2002 were 14% higher than the second quarter of
2002 and were significantly higher than the third quarter of 2001. Forest
Operations' 2002 third-quarter earnings were about the same as in the previous
quarter, but up significantly for the nine-
17
month period compared with the same period in 2001 due to higher prices and
lower harvesting and distribution costs. The Wood Products business benefited
from the continued strength in both the Australian and New Zealand residential
construction markets as well as improved operational performance. The Pulp
and Paper business benefited from increased pulp prices.
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 3rd Quarter 2nd Quarter Nine Months 3rd Quarter 2nd Quarter Nine Months
-------------------------------------------- ---------------------------------------------
Sales $ 340 $ 445 $ 1,205 $ 530 $ 675 $ 1,920
Operating Profit 12 16 38 16 25 49
The Specialty Businesses and Other segment includes the operating results of
Arizona Chemical, Chemical Cellulose Pulp and Industrial Papers. Also included
are 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. Third-quarter 2002
sales were down 24% and 36% from the second quarter of 2002 and the third
quarter of 2001, respectively, mainly due to the exclusion of businesses sold
in prior periods. Similarly, operating profits in the third quarter of 2002
were down 25% from both the second quarter of 2002 and the third quarter of
2001.
Corporate Items and Interest Expense
Corporate charges increased to $71 million in the 2002 third quarter compared
with $37 million in the second quarter of 2002, principally due to a reduction
in foreign exchange gains, as well as a slight decrease in pension income and an
increase in benefit expenses. The decline in corporate charges of $18 million in
the current quarter versus the third quarter of 2001 also reflects the
elimination of goodwill amortization and lower natural gas hedging costs.
Interest expense, net, totaled $186 million during the 2002 third quarter, down
from $199 million in the second quarter and $235 million in the third quarter of
2001, reflecting an overall reduction in borrowings as well as lower average
interest rates.
Liquidity and Capital Resources
Cash provided by operations totaled $1.4 billion for the first nine months of
2002 compared with $1 billion for the comparable 2001 period. A decline in
working capital requirements increased operating cash flow for the first nine
months of 2002 by $118 million. In the first nine months of 2001, working
capital items used $170 million of cash flow.
Investments in capital projects totaled $617 million and $688 million for the
first nine months of 2002 and 2001, respectively. The full year capital spending
forecast is in the $1 billion range, well below depreciation and amortization
charges.
18
Financing activities for the first nine months of 2002 included a $926 million
net reduction in debt versus a $243 million net reduction in the comparable
2001 nine-month period. Also during the 2002 nine-month period, approximately
3.1 million shares were added to treasury stock at a cost of $124 million, while
1.2 million treasury shares were issued for $47 million for various incentive
plans. In the 2001 nine-month period, approximately 1.2 million shares were
added to treasury stock at a cost of $44 million with 1.7 million treasury
shares issued for $73 million for various incentive plans. Common stock
dividend payments were $.75 per share for both the 2002 and 2001 nine-month
periods.
At September 30, 2002, cash and temporary investments totaled $994 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 September 30, 2002.
During the nine months ended September 30, 2002, International Paper entered
into fixed-to-floating interest rate swap agreements with a notional amount of
$650 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.
On October 29, 2002, International Paper completed a private placement of $1
billion aggregate principal amount 5.85% notes due October 30, 2012. On November
5, 2002, the sale of an additional $200 million principal amount of 5.85% notes
due October 30, 2012 was completed. The proceeds of these sales will be used to
refinance most of International Paper's $1.2 billion aggregate principal amount
of 8% notes due July 8, 2003 that was issued in connection with the Champion
acquisition.
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 September 30, 2002, more than $3
billion had been realized under the program, including cash and notes received
plus debt assumed by the buyers.
Net (Gains) Losses on Sales and Impairments of Businesses Held for Sale
In the third quarter of 2002, International Paper completed the sale of its
Decorative Products Division to an affiliate of Kohlberg & Co. for
approximately $100 million in cash and a note receivable with a fair
market value of $13 million. This transaction resulted in no gain or loss
as these assets had been written down to fair market value in the second
quarter of 2002 (see below). Also during the third quarter of 2002, a net
19
pre-tax gain of $3 million before taxes ($1 million after taxes) was
recorded related to adjustments of previously recorded estimated costs of
businesses held for sale.
During the second quarter of 2002, a net pre-tax gain on sales of businesses
held for sale of $28 million before taxes and minority interest ($96 million
after taxes and minority interest) was recorded, including a 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;
(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 third quarter of 2001, International Paper completed the divestitures
of Masonite Corporation for approximately $300 million in cash and a note
receivable with a face value of $108 million, its Flexible Packaging business
for approximately $85 million in cash, and its Curtis/Palmer hydroelectric
generating project in Corinth, New York for approximately $285 million in cash.
Together with an impairment loss of $50 million related to the Chemical
Cellulose assets, these transactions resulted in a net pre-tax gain of $47
million in the 2001 third quarter, which is included in Net (gains) losses on
sales and impairments of businesses held for sale in the accompanying
consolidated statement of earnings.
In the second quarter of 2001, a pre-tax impairment loss of $85 million was
recorded to reduce the carrying value of the Flexible Packaging assets to their
expected realizable value of approximately $85 million based on preliminary
offers received. This charge is included in Net (gains) losses on sales and
impairments of businesses held for sale in the accompanying consolidated
statement of earnings.
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 Deferred charges and other assets 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
20
$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 third quarter of 2002, special charges totaling $19 million before
taxes and minority interest ($9 million after taxes and minority interest) were
recorded for asset write-downs and cost reduction actions. This amount included
a $9 million charge for asset write-downs and a $10 million charge for severance
and other charges, which are discussed further in Note 4 of the accompanying
consolidated financial statements.
During the second quarter of 2002, special charges before taxes of $79 million
($50 million after taxes) were recorded for asset shutdowns of excess internal
capacity and cost reduction actions. This amount included a $42 million charge
for asset write-downs and a $37 million charge for severance and other charges.
During the first quarter of 2002, a $10 million pre-tax credit ($7 million after
taxes) was recorded for the reversal of fourth-quarter 2001 restructuring
reserves no longer required.
During the fourth quarter of 2001, a restructuring charge of $171 million before
taxes ($111 million after taxes) for asset shutdowns of excess internal capacity
and cost reduction actions were recorded, including $84 million for asset
write-downs and $87 million for severance and other charges.
During the third quarter of 2001, restructuring and other charges totaling a net
pre-tax charge of $481 million ($341 million after taxes) were recorded. These
items included a $256 million pre-tax charge ($195 million after taxes) for
asset shutdowns of excess internal capacity and cost reduction actions, and a
$225 million pre-tax charge ($146 million after taxes) for additional Masonite
legal reserves. The $256 million pre-tax charge included $183 million of asset
write-downs and $73 million of severance and other charges.
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.
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.
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 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.
21
Extraordinary Items:
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 $13 million ($8 million after taxes)
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.
Other
The effective income tax rate for both the 2002 and 2001 third quarters was 31%.
The effective income tax rate after special items, but before extraordinary
items and cumulative effect of an accounting change was 18% and 28% for the 2002
and 2001 nine-month periods, respectively. The following table presents the
components of pre-tax earnings and losses and the related income tax expense or
benefit for each of the nine-month periods ended September 30, 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 $ 700 $ 216 31% $ 394 $ 123 31%
Merger integration costs - - (42) (14) 33%
Restructuring and other charges (1) (67) (101) 151% (984) (283) 29%
Reversal of reserves no longer
required 10 3 30% - -
-------- ------- ---------- ---------
After special items $ 643 $ 118 18% $ (632) $ (174) 28%
======== ======= ========== =========
(1) The income tax benefit for this charge in 2002 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, principally for 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 for the
year ended
22
December 31, 2001, reserves for 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. Work is currently underway
to prepare updated future projections for these lawsuits based on the most
recent claims information. 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. 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, a prepaid pension cost asset of
approximately $1.6 billion related to International Paper's qualified defined
benefit plans was included in Deferred charges and other assets in the
consolidated balance sheet. If, at December 31, 2002, the market value of plan
assets is less than the plans' accumulated benefit obligation (ABO), this asset
will be written off, net of taxes, together with an amount equal to the
after-tax shortfall of the market value of plan assets below the ABO, by a
direct charge to Shareholders' equity, with no impact on earnings, earnings per
share or cash. International Paper estimates that the impact on our defined
benefit plans of the sharp decline in the stock market (an approximate 12%
negative return on plan assets for the first nine months of 2002) and lower
interest rates will result in a reduction in shareholder's equity of about $1.5
billion based on September 30, 2002 interest rate and stock market levels. This
adjustment is required under U.S. Generally Accepted Accounting Principles when
the accrued pension liability exceeds the market value of plan assets. The exact
amount of the reduction will depend on year-end plan asset values and interest
rates; however, cash will not be impacted this year, and the probability of
required cash contributions for the next several years is low. The reduction in
equity will not adversely affect International Paper's debt covenants.
Net pension income reported in operating income totaled approximately $61
million for International Paper's U.S. plans for the nine months ended September
30, 2002, or about $37 million lower than the amount recorded for the first nine
months of 2001. Net pension expense for non-U.S. plans was about $15 million for
the nine-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% for 2002 from 10% for 2001, and a reduction in the discount
rate (7.25% for 2002 and 7.5% for 2001) and assumed rate of future compensation
increase (4.5% for 2002 and 4.75% for 2001).
SFAS No. 87, "Employers' Accounting for Pensions", provides for delayed
recognition of actuarial gains and
23
losses, including differences between the actual and expected return on plan
assets and changes in the estimated projected plan benefit obligation due to
changes in the assumed discount rate. These net gains and losses are recognized
prospectively over a period that approximates the average remaining service
period of active employees expected to receive benefits under the plans
(approximately 15 years) to the extent that they are not offset by gains and
losses in subsequent years. At December 31, 2001, unrecognized net actuarial
losses for International Paper's plans totaled approximately $1.2 billion.
While the final amount of such net unrecognized losses at December 31, 2002
will be highly dependent upon changes in the market value of plan assets and
movements in interest rates through year end, net unrealized actuarial losses
are projected to total approximately $2.7 billion at December 31, 2002,
reflecting declines in the fair value of plan assets and discount rates during
2002. The sharp decline in the stock market (that resulted in a decline in the
value of pension assets) and lower interest rates is expected to result in a
small noncash net pension expense for the company's U.S. plans in 2003.
Accounting for Stock Options. International Paper accounts for stock options
using the intrinsic value method under APB Opinion No. 25, "Accounting for Stock
Issued to Employees". Under this method, compensation expense is recorded over
the related service period when the market price exceeds the option price at the
measurement date, which is the grant date for International Paper's options. No
compensation expense is recorded as options are issued with an exercise price
equal to the market price of International Paper stock on the grant date.
During each reporting period, fully diluted earnings per share is calculated by
assuming that "in-the-money" options are exercised and the exercise proceeds are
used to repurchase shares in the marketplace. When options are actually
exercised, option proceeds are credited to equity and issued shares are included
in the computation of earnings per common share, with no effect on reported
earnings. Equity is also increased by the tax benefit that International Paper
will receive in its tax return for income reported by the optionees in their
individual tax returns.
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 nine months of 2002,
900,000 options were exercised, and 6.3 million options were granted with a
weighted average exercise price of $41.57 per share. At September 30, 2002, 32.9
million options were outstanding with exercise prices ranging from $29.31 to
$69.63 per share. During the first nine months of 2002, International Paper's
share price ranged from $31.75 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.
24
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, unexpected fluctuations
in interest rates and financial markets, 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.
25
Financial Information by Industry Segment
(Unaudited)
(In millions)
Sales by Industry Segment
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ----------- ------------- -----------
Printing Papers $ 1,965 $ 1,945 $ 5,600 $ 5,975
Industrial and Consumer Packaging 1,565 1,550 4,555 4,725
Distribution 1,605 1,665 4,715 5,175
Forest Products 745 725 2,325 2,130
Carter Holt Harvey 500 455 1,390 1,250
Specialty Businesses and Other(1) 340 530 1,205 1,920
Corporate and Inter-segment Sales (377) (341) (1,104) (1,066)
---------- ----------- ----------- -----------
Net Sales $ 6,343 $ 6,529 $ 18,686 $ 20,109
========== =========== =========== ===========
Operating Profit by Industry Segment
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------------
2002 2001 2002 2001
---------- ----------- ---------- ----------
Printing Papers $ 180 $ 146 $ 362 $ 419
Industrial and Consumer Packaging 128 127 401 379
Distribution 23 5 64 31
Forest Products 164 184 544 502
Carter Holt Harvey 16 (1) 40 5
Specialty Businesses and Other(1) 12 16 38 49
---------- ----------- ---------- ----------
Operating Profit 523 477 1,449 1,385
Interest expense, net (186) (235) (590) (718)
Minority interest(2) 18 (6) 43 7
Corporate items, net(3) (71) (89) (202) (280)
Merger integration costs - - - (42)
Restructuring and other charges (19) (481) (98) (946)
Net gains (losses) on sales and impairments of
businesses held for sale 3 47 31 (38)
Reversal of reserves no longer required - - 10 -
---------- ----------- ---------- ----------
Earnings (loss) before income taxes,
minority interest, extraordinary items, and
cumulative effect of accounting change $ 268 $ (287) $ 643 $ (632)
========== =========== ========== ==========
(1) Includes Arizona Chemical, Chemical Cellulose Pulp and Industrial Papers.
Also included are certain other small 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.
(3) The decrease in Corporate items, net for the three months ended September
30, 2002 versus 2001 was primarily the result of the elimination of
goodwill amortization and lower natural gas hedging costs offset in part by
lower pension income, a reduction of foreign exchange gains and higher
benefit expenses. The decrease for the nine-month periods reflects the
elimination of goodwill amortization, lower natural gas hedging and
inventory-related costs offset in part by lower pension income and higher
benefit expenses.
26
INTERNATIONAL PAPER COMPANY
SALES VOLUMES BY PRODUCT (1)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ --------------------------
2002 2001 2002 2001
--------------- -------------- ------------ -------------
Printing Papers (In thousands of short tons)
Uncoated Papers and Bristols 1,664 1,589 4,899 4,850
Coated Papers 615 587 1,657 1,613
Market Pulp 654 699 1,853 1,853
Packaging (In thousands of short tons)
Containerboard 611 527 1,695 1,582
Bleached Packaging Board 343 296 994 919
Kraft 159 148 472 423
Industrial and Consumer Packaging 1,122 1,138 3,403 3,558
Forest Products (In millions)
Panels (sq. ft. 3/8" - basis) 585 819 1,905 2,267
Lumber (board feet) 1,099 1,056 3,222 3,057
MDF and Particleboard (sq. ft. 3/4"- basis) 130 183 500 488
(1) Sales volumes include third party and inter-segment sales and 100% of
volumes sold by Carter Holt Harvey. Volumes for divested businesses are
included through the date of sale.
27
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.
28
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Within 90 days prior to the filing of this report, an evaluation was carried out
under the supervision and with the participation of the company's management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures, as defined in Rule
13a-14 (c) under the Securities Exchange Act (Act). Based upon this evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that the
company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports we file under the Act is
recorded, processed, summarized and reported by management of the company on a
timely basis in order to comply with the company's disclosure obligations under
the Act and the SEC rules thereunder.
Changes in Internal Controls
There were no significant changes in the company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation.
29
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.
Other Litigation
In March and April 2000, Champion and 10 members of its board of directors were
served with six lawsuits that have been filed in the Supreme Court for the State
of New York, New York County. Each of the suits purports to be a class action
filed on behalf of Champion shareholders and alleges that the defendants
breached their fiduciary duties in connection with the proposed merger with
UPM-Kymmene Corporation and the merger proposal from International Paper. On
September 26, 2002, the parties signed a stipulation of settlement providing for
the settlement and final disposition of this lawsuit. Pursuant to the
stipulation, International Paper will donate $100,000 to a law school designated
by the Court to fund educational programs in support of corporate governance and
shareholder rights. International Paper will also pay such attorneys fees and
expenses of plaintiffs' counsel as may be awarded by the Court, up to $300,000.
The Court has scheduled a hearing on the fairness of the proposed settlement on
February 10, 2003.
On May 14, 1999, and May 18, 1999, two lawsuits were filed in federal court in
the Eastern District of Pennsylvania against International Paper, the former
Union Camp Corporation and other manufacturers of linerboard. These suits allege
that the defendants conspired to fix prices for linerboard and corrugated sheets
during the period October 1, 1993, through November 30, 1995. These lawsuits
seek injunctive relief as well as treble damages and other costs associated with
the litigation. The cases have been consolidated. The plaintiffs in these
consolidated cases sought certification on behalf of both corrugated sheet
purchasers and corrugated container purchasers. On September 4, 2001, the
district court certified both classes. Defendants promptly filed a petition
appealing the certification order, which the Court of Appeals for the Third
Circuit, in its discretion, granted. On September 5, 2002, the Court of Appeals
for the Third Circuit affirmed the district court's certification decision.
Discovery in the case is ongoing.
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.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4 In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K,
certain instruments respecting long-term debt of the Company have
been omitted but will be furnished to the Commission upon
request.
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
Five reports on Form 8-K were filed on June 20, 2002 for five
employee benefit plans announcing that the firm of Deloitte &
Touche LLP had been named as their auditors. A report on Form 8-K
was filed on August 13, 2002 under Item 9 reporting that John T.
Dillon, Chairman of the Board and Chief Executive Officer, and
John V. Faraci, Executive Vice President and Chief Financial
Officer, each filed a sworn statement pursuant to the SEC order
under Section 21(a)(1) of the Securities Exchange Act of 1934
No. 4-460. Reports on Form 8-K were filed on September 12, 2002
under Item 5 reporting the resignation of the Senior Vice
President and General Counsel and on September 23, 2002 under
Item 5 announcing the retirement of Director John R. Kennedy in
accordance with Company policy. A report on Form 8-K was filed
on October 23, 2002 under Item 5 reporting earnings for the
quarter ended September 30, 2002, and a report on Form 8-K was
filed on October 24, 2002 announcing the commencement of a
private placement with institutional investors to raise proceeds
from the issuance of 10-year notes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL PAPER COMPANY
(Registrant)
Date: November 13, 2002 By /s/ JOHN V. FARACI
----------------------------------
John V. Faraci
Executive Vice President and Chief
Financial Officer
Date: November 13, 2002 By /s/ ANDREW R. LESSIN
----------------------------------
Andrew R. Lessin
Senior Vice President-Internal
Audit (duly authorized officer)
31
Certifications:
I, John T. Dillon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International Paper
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
.................
/s/ John T. Dillon
- -----------------------
John T. Dillon
Chairman and Chief Executive Officer
32
I, John V. Faraci, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International Paper
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
.................
/s/ John V. Faraci
- -----------------------
John V. Faraci
Executive Vice President and Chief Financial Officer
33