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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
[ ] 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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2) of the Exchange Act.
Yes X No
--- ---
The number of shares outstanding of the registrant's common stock as of July 31,
2003 was 479,524,181.
INTERNATIONAL PAPER COMPANY
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Earnings -
Three Months and Six Months Ended June 30, 2003 and 2002 1
Consolidated Balance Sheet -
June 30, 2003 and December 31, 2002 2
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2003 and 2002 3
Consolidated Statement of Common Shareholders' Equity -
Six Months Ended June 30, 2003 and 2002 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 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
* Omitted since no answer is called for, answer is in the negative or
inapplicable.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Earnings
(Unaudited)
(In millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
2003 2002 2003 2002
------ ------ ------- -------
Net Sales $6,264 $6,305 $12,339 $12,343
------ ------ ------- -------
Costs and Expenses
Cost of products sold 4,664 4,588 9,170 9,053
Selling and administrative expenses 478 492 975 1,007
Depreciation, amortization and cost of timber harvested 412 405 810 787
Distribution expenses 279 269 549 540
Taxes other than payroll and income taxes 66 65 130 136
Restructuring and other charges 81 79 104 79
Net losses (gains) on sales and impairments of businesses
held for sale 10 (28) 10 (28)
------ ------ ------- -------
Total Costs and Expenses 5,990 5,870 11,748 11,574
Reversal of reserves no longer required 9 -- 9 10
------ ------ ------- -------
Earnings Before Interest, Income Taxes, Minority
Interest and Cumulative Effect of Accounting Changes 283 435 600 779
Interest expense, net 194 199 378 404
------ ------ ------- -------
Earnings Before Income Taxes, Minority
Interest and Cumulative Effect of Accounting Changes 89 236 222 375
Income tax (benefit) provision (38) (10) 1 33
Minority interest expense, net of taxes 39 31 79 62
------ ------ ------- -------
Earnings Before Cumulative Effect of
Accounting Changes 88 215 142 280
Cumulative effect of accounting changes:
Asset retirement obligations, net of taxes -- -- (10) --
Transitional goodwill impairment charge, net of minority interest -- -- -- (1,175)
------ ------ ------- -------
Net Earnings (Loss) $ 88 $ 215 $ 132 $ (895)
====== ====== ======= =======
Basic and Diluted Earnings Per Common Share
Earnings before cumulative effect of accounting changes $ 0.19 $ 0.45 $ 0.30 $ 0.58
Asset retirement obligations -- -- (0.02) --
Transitional goodwill impairment charge -- -- -- (2.44)
------ ------ ------- -------
Net earnings (loss) $ 0.19 $ 0.45 $ 0.28 $ (1.86)
====== ====== ======= =======
Average Shares of Common Stock Outstanding 479.0 482.7 479.0 482.5
====== ====== ======= =======
Cash Dividends Per Common Share $ 0.25 $ 0.25 $ 0.50 $ 0.50
====== ====== ======= =======
The accompanying notes are an integral part of these financial statements.
1
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
June 30, December 31,
2003 2002
------- -------
Assets
Current Assets
Cash and temporary investments $ 1,430 $ 1,074
Accounts and notes receivable, net 2,995 2,780
Inventories 3,012 2,879
Assets of businesses held for sale 160 128
Other current assets 972 877
------- -------
Total Current Assets 8,569 7,738
------- -------
Plants, Properties and Equipment, net 14,248 14,167
Forestlands 3,967 3,846
Investments 241 227
Goodwill 5,336 5,307
Deferred Charges and Other Assets 2,715 2,507
------- -------
Total Assets $35,076 $33,792
======= =======
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 498 $ --
Accounts payable 2,151 2,014
Accrued payroll and benefits 423 523
Liabilities of businesses held for sale 45 44
Other accrued liabilities 1,991 1,998
------- -------
Total Current Liabilities 5,108 4,579
------- -------
Long-Term Debt 13,496 13,042
Deferred Income Taxes 1,781 1,765
Other Liabilities 3,842 3,778
Minority Interest 1,737 1,449
International Paper - Obligated Mandatorily Redeemable Preferred
Securities of Subsidiaries Holding International Paper Debentures 1,255 1,805
Common Shareholders' Equity
Common stock, $1 par value, 484.8 shares in both 2003 and 2002 485 485
Paid-in capital 6,486 6,493
Retained earnings 3,153 3,260
Accumulated other comprehensive loss (2,053) (2,645)
------- -------
8,071 7,593
Less: Common stock held in treasury, at cost, 2003 - 5.6 shares
2002 - 5.7 shares 214 219
------- -------
Total Common Shareholders' Equity 7,857 7,374
------- -------
Total Liabilities and Common Shareholders' Equity $35,076 $33,792
======= =======
The accompanying notes are an integral part of these financial statements.
2
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
Six Months Ended
June 30,
------------------
2003 2002
------ --------
Operating Activities
Net earnings (loss) $ 132 $ (895)
Cumulative effect of accounting changes 10 1,175
Depreciation and amortization 810 787
Deferred income tax benefit (72) (94)
Payments related to restructuring and legal reserves (105) (168)
Restructuring and other charges 104 79
Reversal of reserves no longer required (9) (10)
Net losses (gains) on sales and impairments of businesses held for sale 10 (28)
Other, net 76 --
Changes in current assets and liabilities
Accounts and notes receivable (100) (155)
Inventories (52) 52
Accounts payable and accrued liabilities (63) 68
Other (48) (103)
------ -------
Cash Provided by Operations 693 708
------ -------
Investment Activities
Invested in capital projects
Ongoing businesses (427) (382)
Businesses sold and held for sale -- (4)
Proceeds from divestitures 53 332
Other (41) (5)
------ -------
Cash Used for Investment Activities (415) (59)
------ -------
Financing Activities
Issuance of common stock 14 43
Issuance of debt 1,367 587
Reduction of debt (616) (1,428)
Change in bank overdrafts (47) 64
Purchases of treasury stock (26) (42)
Dividends paid (239) (241)
Sale of minority interest 150 --
Redemption of preferred securities of a subsidiary (550) --
Other (88) --
------ -------
Cash Used for Financing Activities (35) (1,017)
------ -------
Effect of Exchange Rate Changes on Cash 113 (18)
------ -------
Change in Cash and Temporary Investments 356 (386)
Cash and Temporary Investments
Beginning of the period 1,074 1,224
------ -------
End of the period $1,430 $ 838
====== =======
The accompanying notes are an integral part of these financial statements.
3
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Common Shareholders' Equity
(Unaudited)
(In millions, except share amounts in thousands)
Six Months Ended June 30, 2003
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, 2002 484,760 $ 485 $ 6,493 $ 3,260 $ (2,645) 5,680 $ 219 $ 7,374
Issuance of stock for various
plans 36 - (7) - - (779) (31) 24
Repurchases of stock - - - - - 713 26 (26)
Cash dividends - Common
stock ($0.50 per share) - - - (239) - - - (239)
Comprehensive income (loss):
Net earnings - - - 132 - - - 132
Foreign currency translation
adjustments - - - - 585 - - 585
Cash flow hedging derivatives:
Net gain arising during the period
(less tax expense of $28) - - - - 52 - - 52
Reclassification adjustments
for gains included in net income
(less tax expense of $22) - - - - (45) - - (45)
-------------
Total comprehensive income 724
---------- ---------- ----------- ---------- -------------- ---------- ---------- -------------
Balance, June 30, 2003 484,796 $ 485 $ 6,486 $ 3,153 $ (2,053) 5,614 $ 214 $ 7,857
========== ========== =========== ========== ============== ========== ========== =============
Six Months Ended June 30, 2002
Accumulated Total
Other Common
Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
---------- ---------- ----------- ---------- -------------- ---------- ---------- -------------
Balance, December 31, 2001 484,281 $ 484 $ 6,465 $ 4,622 $ (1,175) 2,693 $ 105 $ 10,291
Issuance of stock for various
plans 403 1 8 - - (1,195) (47) 56
Repurchases of stock - - - - - 980 42 (42)
Cash dividends - Common
stock ($0.50 per share) - - - (241) - - - (241)
Comprehensive income (loss):
Net loss - - - (895) - - - (895)
Foreign currency translation
adjustments - - - - 53 - - 53
Cash flow hedging derivatives:
Net gain arising during the period
(less tax expense of $19) - - - - 41 - - 41
Reclassification adjustments
for losses included in net income
(less tax benefit of $5) - - - - 12 - - 12
-------------
Total comprehensive loss (789)
---------- ---------- ----------- ---------- -------------- ---------- ---------- -------------
Balance, June 30, 2002 484,684 $ 485 $ 6,473 $ 3,486 $ (1,069) 2,478 $ 100 $ 9,275
========== ========== =========== ========== ============== ========== ========== =============
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. Results for the first half of the year may not necessarily be
indicative of full year results. It is suggested that these consolidated
financial statements be read in conjunction with the audited financial
statements and the notes thereto included in International Paper's (the Company)
Annual Report on Form 10-K for the year ended December 31, 2002, which has
previously been filed with the Securities and Exchange Commission.
NOTE 2 - EARNINGS PER COMMON SHARE
Earnings per common share before the cumulative effect of accounting changes
were computed by dividing earnings before the cumulative effect of accounting
changes by the weighted average number of common shares outstanding. Earnings
per common share before the cumulative effect of accounting changes, 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 per common share before the cumulative effect of
accounting changes, and earnings per common share before the cumulative effect
of accounting changes, assuming dilution, is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
In millions, except per share amounts 2003 2002 2003 2002
- ------------------------------------- ---------- --------- --------- ----------
Earnings before the cumulative effect of
accounting changes $ 88 $ 215 $ 142 $ 280
Effect of dilutive securities - - - -
------ ------ ------ ------
Earnings before the cumulative effect of
accounting changes - assuming dilution $ 88 $ 215 $ 142 $ 280
====== ====== ====== ======
Average common shares outstanding 479.0 482.7 479.0 482.5
Effect of dilutive securities
Stock options 1.2 2.0 1.0 2.0
------ ------ ------ ------
Average common shares outstanding - assuming dilution 480.2 484.7 480.0 484.5
====== ====== ====== ======
Earnings per common share before the cumulative
effect of accounting changes $ 0.19 $ 0.45 $ 0.30 $ 0.58
====== ====== ====== ======
Earnings per common share before the cumulative
effect of accounting changes - assuming dilution $ 0.19 $ 0.45 $ 0.30 $ 0.58
====== ====== ====== ======
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.
5
NOTE 3 - MERGERS AND ACQUISITIONS
In December 2002, Carter Holt Harvey acquired Starwood Australia's Bell Bay
medium density fiberboard plant in Tasmania for $28 million in cash.
NOTE 4 - RESTRUCTURING, BUSINESS IMPROVEMENT AND OTHER CHARGES
During the second quarter of 2003, restructuring and other charges totaling $81
million before taxes ($50 million after taxes) were recorded, including $51
million before taxes ($32 million after taxes) for facility shutdown costs and
severance costs associated with organizational restructuring programs, $20
million pre-tax ($12 million after taxes) for legal reserves, and $10 million
before taxes ($6 million after taxes) for early debt retirement costs. In
addition, a $10 million pre-tax adjustment ($6 million after taxes) to reduce
previous divestiture costs and a $9 million credit before taxes and minority
interest ($5 million after taxes and minority interest) for the reversal of
restructuring reserves no longer required were recorded in the quarter. Also, a
$50 million tax provision reduction was recorded reflecting a favorable tax
audit settlement and benefits from an overseas tax program.
The $51 million charge includes a $16 million charge for asset write-downs and a
$35 million charge for severance and other costs. The following table presents
additional detail related to this charge:
Asset Severance
In millions Write-downs and Other Total
- -------------- ----------------- ----------------- -----------------
Printing and Communications Papers (a) $ 3 $ 2 $ 5
Consumer Packaging (b) - 6 6
Forest Products (c) 13 7 20
Distribution (d) - 4 4
Specialty Businesses and Other (e) - 16 16
----------------- ----------------- -----------------
$16 $35 $51
================= ================= =================
(a) The Printing and Communications Papers business recorded a charge of $2
million for severance costs relating to 19 employees associated with an
organizational restructuring initiative. The business also recorded an
additional charge of $3 million to write off obsolete equipment.
(b) The Consumer Packaging business implemented a rationalization plan at the
Clifton and Englewood, New Jersey plants as a result of increased
competition and slowing growth rates in key market segments. Management
also approved a plan to exit leased space at the Montvale, New Jersey
office in connection with the realignment of the Beverage Packaging and
Foodservice businesses. Additionally, the Consumer Packaging business
initiated an organizational restructuring program at several of its
Bleached Board facilities. Charges associated with these programs included
$2 million to cover the termination of 79 employees, lease termination
costs of $3 million, and other cash costs of $1 million.
(c) The Forest Products business approved plans to shut down the Springhill,
Louisiana lumber facility and the Slaughter Industries Distribution Center
in Portland, Oregon, and to temporarily cease operations at the Tuskalusa
lumber mill in Moundville, Alabama. Charges associated with these shutdowns
included $12 million of asset write-downs to salvage value at Springhill
and Slaughter, $5 million of severance costs covering the termination of
198 employees at all three facilities, and $1 million of other exit costs.
Management also approved the closure of the Madison, New Hampshire lumber
mill. Charges associated with this plan included $1 million to write down
assets to their net realizable value and other cash costs of $1 million.
6
(d) The Distribution business (xpedx) recorded a severance charge of $4 million
covering the termination of 176 employees in a continuing effort to
consolidate duplicative facilities and reduce ongoing operational expenses.
(e) Specialty Businesses recorded a severance charge of $16 million associated
with the termination of 447 employees in connection with the July 15th
shutdown of the Natchez, Mississippi mill. Additional shutdown charges,
estimated at approximately $30 million, primarily for environmental and
other exit costs, will be recorded in the third quarter of 2003.
During the first quarter of 2003, special charges totaling $23 million before
taxes and minority interest ($14 million after taxes and minority interest) were
recorded for asset shutdowns of excess internal capacity and cost reduction
actions. This amount included a $2 million charge for asset write-downs and a
$21 million charge for severance and other charges. The following table presents
additional detail related to the $23 million charge:
Asset Severance
In millions Write-downs and Other Total
- -------------- ----------------- ----------------- -----------------
Industrial Packaging (a) $- $ 2 $ 2
Specialty Businesses and Other (b) 2 18 20
Carter Holt Harvey (c) - 1 1
----------------- ----------------- -----------------
$2 $21 $23
================= ================= =================
(a) The Industrial Packaging business implemented a plan to reorganize the
Creil and Mortagne locations in France into a single complex. Charges
associated with the reorganization include $1 million for severance costs
covering the termination of 31 employees and other cash costs of $1
million.
(b) Arizona Chemical recorded a charge of $1 million for severance costs for 51
employees associated with the Valkeakoski, Finland plant closure. Chemical
Cellulose implemented a plan to shut down the Natchez, Mississippi
dissolving pulp mill by mid-2003. Charges associated with this shutdown
included a $1 million charge to write down assets to their salvage value
and $12 million of severance costs covering the termination of 141
employees in April and other employees to be terminated upon closure.
Additionally, Industrial Papers approved a plan to restructure converting
operations at the Kaukauna, Wisconsin facility, modify its release products
organization and implement division-wide productivity improvement actions.
Charges associated with these plans included $1 million to write down
assets to their salvage value and $5 million of severance costs covering
the termination of 130 employees.
(c) Carter Holt Harvey recorded a charge of $1 million for severance costs for
33 employees associated with a headcount reduction initiative.
The following table presents a roll forward of the cumulative severance and
other costs included in the 2003 restructuring plans:
Severance
In millions and Other
- ----------- ----------------
Opening balance - first quarter 2003 $21
Additions - second quarter 2003 35
Cash charges - second quarter 2003 (5)
-----------------
Balance, June 30, 2003 $51
=================
The severance charges recorded in the first and second quarters of 2003 related
to 1,305 employees. As of June 30, 2003, 228 employees had been terminated.
7
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, including a $42 million charge for asset
write-downs and a $37 million charge for severance and other charges.
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 last two quarters of 2002, restructuring and other charges totaling
$616 million before taxes and minority interest ($385 million after taxes and
minority interest) were recorded. These charges included a $120 million charge
before taxes and minority interest ($80 million after taxes and minority
interest), including $38 million for asset shutdowns of excess internal capacity
and $82 million for severance and other charges, a $450 million pre-tax charge
($278 million after taxes) for additional exterior siding legal reserves, and a
charge of $46 million before taxes and minority interest ($27 million after
taxes and minority interest) for early debt retirement costs. In addition, a $58
million pre-tax credit ($36 million after taxes) was recorded in the last two
quarters of 2002, including $35 million for the reversal of 2001 and 2000
reserves no longer required and $23 million for the reversal of excess Champion
purchase accounting reserves.
The following table presents a roll forward of the cumulative severance and
other costs included in the 2002 restructuring plans:
Severance
In millions and Other
- ----------- ----------------
Opening balance - second quarter 2002 $ 37
Additions - third quarter 2002 10
Additions - fourth quarter 2002 72
Cash charges - 2002 (15)
Cash charges - first quarter 2003 (43)
Cash charges - second quarter 2003 (16)
Reclassifications:
Environmental remediation and other exit costs (4)
Reversal of reserves no longer required (9)
-----------------
Balance, June 30, 2003 $ 32
=================
The severance charges recorded in the second, third and fourth quarters of 2002
related to 1,989 employees. As of June 30, 2003, 1,685 employees had been
terminated. An additional 74 employees were retained, and the associated
severance reserves were reversed in the 2003 second quarter.
International Paper continually evaluates its operations for improvement. In
July 2003, the Company announced a program targeting an additional reduction of
$500 million in annual overhead costs. When any such improvement plans are
finalized, we may incur costs or charges in future periods related to the
implementation of such plans. As this review process is ongoing, it is possible
that significant charges will be incurred in future periods should such
triggering events occur.
NOTE 5 - BUSINESSES HELD FOR SALE AND DIVESTITURES
Businesses Held for Sale:
Sales and operating earnings for each of the six month periods ended June 30,
2003 and 2002 for small businesses currently held for sale, as well as results
for businesses sold through their respective divestiture dates, were:
8
- -------------------------------------------------------------
In millions 2003 2002
- -------------------------------------------------------------
Sales $69 $263
Operating Profit (1) 6
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 $160 million at June 30, 2003 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 $45 million at June 30, 2003 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, and in January 2003,
announced it would close the Natchez mill comprising this business in mid-2003.
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 pre-tax gain of $63
million ($40 million after taxes) from the sale of International Paper's
Oriented Strand Board facilities (see "Divestitures" below), and a net charge of
$35 million before taxes and minority interest (a gain of $56 million after
taxes and minority interest) relating to other sales and adjustments of
previously recorded estimated costs of businesses held for sale. This net
pre-tax charge included:
(1) a $2 million net loss associated with the sales of the Wilmington
carton plant and Carter Holt Harvey's distribution business;
(2) an additional loss of $12 million to write down the net assets of
Decorative Products to the amount realized on the subsequent sale
of this business in July 2002;
(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.
Divestitures:
In April 2002, International Paper sold its Oriented Strand Board facilities to
Nexfor Inc. for $250 million, resulting in a pre-tax gain of $63 million ($40
million after taxes).
NOTE 6 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Inventories by major category were:
9
June 30, December 31,
In millions 2003 2002
- -------------- ----------------- -----------------
Raw materials $ 412 $ 469
Finished pulp, paper and packaging products 1,793 1,694
Finished lumber and panel products 209 158
Operating supplies 543 517
Other 55 41
----------------- -----------------
Total $3,012 $2,879
================= =================
Temporary investments with a maturity of three months or less are treated as
cash equivalents and are stated at cost. Temporary investments totaled $887
million and $689 million at June 30, 2003 and December 31, 2002, respectively.
Interest payments made during the six-month periods ended June 30, 2003 and 2002
were $398 million and $454 million, respectively. Capitalized net interest costs
were $3 million and $5 million for the six months ended June 30, 2003 and 2002,
respectively. Total interest expense was $433 million for the first half of 2003
and $456 million for the first half of 2002. Income tax payments of $106 million
and $123 million were made during the 2003 and 2002 first halves, respectively.
Distributions paid under all of International Paper's preferred securities of
subsidiaries were $62 million during the first six months of both 2003 and 2002
and are included in minority interest expense.
Accumulated depreciation was $18.5 billion at June 30, 2003 and $18.1 billion at
December 31, 2002. The allowance for doubtful accounts was $156 million at June
30, 2003 and $169 million at December 31, 2002.
NOTE 7 - RECENT ACCOUNTING DEVELOPMENTS
Financial Instruments With Characteristics of Both Liabilities and Equity:
In May 2003, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity." It establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. This standard is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. International Paper will adopt this standard for the quarter ending
September 30, 2003. At that time, approximately $1.3 billion of Mandatorily
Redeemable Preferred Securities, currently classified in a separate line item on
the Company's consolidated balance sheet, will be included in Long-term debt,
with no effect on existing debt covenants. Also, beginning in the 2003 third
quarter, preferred dividends of approximately $90 million per year relating to
these securities that had been reported in Minority interest expense will be
reported as Interest expense in the Company's consolidated income statement.
Dividends for periods prior to the 2003 third quarter will continue to be
reported in Minority interest expense, as required under the new standard.
Implementation of this standard will have no cash effect and no significant
effect on net earnings.
Asset Retirement Obligations:
Effective January 1, 2003, International Paper adopted the provisions of SFAS
No. 143, "Accounting for Asset Retirement Obligations." 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 using a credit-adjusted risk-free rate.
International Paper's asset retirement obligations under this standard generally
relate to closure costs for landfills and other environmental liabilities
resulting from the normal operations of long-lived assets. The estimated future
liability was determined using historical experience in other similar landfill
closures and
10
federal and state regulatory requirements. The liability was discounted using a
credit-adjusted risk-free rate of approximately 5%. Revisions to the liability
could occur due to changes in the estimated costs or timing of environmental
closures, or possible new federal or state regulations affecting these closures.
Upon adoption of SFAS No. 143, International Paper recorded a discounted
liability of $22 million, increased Plants, properties and equipment, net by $7
million and recognized a one-time cumulative effect charge of $10 million (net
of a deferred tax benefit of $5 million). Pro forma effects on earnings from
continuing operations before the cumulative effect of the accounting change for
the six months ended June 30, 2002, assuming the adoption of SFAS No. 143 as of
January 1, 2002, were not material to net earnings or earnings per share. No
significant additional liabilities were incurred or settled during the six-month
period ended June 30, 2003. Accretion expense for the three and six-month
periods ended June 30, 2003 was not significant.
Costs Associated With Exit or Disposal Activities:
International Paper adopted SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," effective January 1, 2003, with no material effect
on the Company's financial position or results of operations.
Consolidation of Variable Interest Entities:
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," addressing consolidation of certain entities in
which equity investors do not have the characteristics of a controlling
financial interest, or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. International Paper will be required to apply the consolidation
provisions of the Interpretation as of the beginning of the third quarter of
2003 to variable interest entities in which its interest was acquired prior to
February 1, 2003. The Company is currently evaluating the impact of implementing
this Interpretation, but does not believe it will have a material effect on its
financial position, results of operations or cash flows.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
International Paper has established reserves relating to certain liabilities
associated with exterior siding and roofing 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 on Form 10-K for the year ended December 31,
2002.
In November 1995, International Paper and Masonite commenced a lawsuit in the
Superior Court of the State of California against certain of their insurance
carriers (the "Indemnification Lawsuit"). This lawsuit sought to recover amounts
paid by International Paper and Masonite to property owners in connection with
the settlement of a lawsuit referred to as Judy Naef v. Masonite and
International Paper (the "Hardboard Lawsuit"), as well as damages for the
refusal of one insurer, Employer's Insurance of Wausau (Wausau), to provide a
defense of that lawsuit. During the fall of 2001, a trial of Masonite's claim
that Wausau breached its duty to defend (the "Breach of Duty Lawsuit") was
conducted in a state court in California. The jury found in favor of Masonite,
and awarded Masonite $13 million for its expenses to defend the Hardboard
Lawsuit. The jury also awarded $12 million in attorneys' fees and interest for
Masonite's expense to prosecute the Breach of Duty Lawsuit against Wausau,
finding that Wausau had acted in bad faith, and an additional $68 million in
punitive damages. In a post-trial proceeding, the court awarded an additional $2
million in attorneys' fees, also based on the finding that Wausau had acted in
bad faith. As of July 31, 2003, all post-trial motions brought by Wausau seeking
to upset the jury verdict have been denied, but the court has not yet entered a
judgment. Masonite has agreed to pay amounts equal to the proceeds of its bad
faith and
11
punitive damage award to International Paper and has assigned its breach of
contract claim against Wausau to International Paper.
The trial of the Indemnification Lawsuit against 22 insurers (the "Defendants")
began in April 2003 and concerned $470 million paid to claimants pursuant to the
settlement of the Hardboard Lawsuit through May 2003. In July 2003, the jury
determined that $383 million of International Paper's payments to settle these
claims are covered by its insurance policies (the "Phase 1 verdict"). The next
phase of the case will determine how much of the $383 million will be allocated
to the policies of the Defendants. The Company anticipates that the California
court will also make a determination about indemnification for future claims
based on the Phase 1 verdict. The court will also determine whether amounts paid
to the plaintiff class counsel pursuant to the settlement of the Hardboard
Lawsuit, and administrative expenses incurred in connection with that
settlement, are covered by insurance. In addition to the foregoing proceedings,
the Company intends to seek indemnification from other insurance carriers in
arbitration proceedings as required by the policies.
Because of the uncertainties inherent in the litigation and arbitration,
International Paper is unable to estimate the amount that it will recover
against its insurance carriers. However, as of June 30, 2003, International
Paper had received an aggregate of $94 million from certain of its insurance
carriers, and had signed a settlement agreement with one of its insurers that
provides for the payment to International Paper of an additional $10 million in
January 2004.
Under a financial collar arrangement, International Paper contracted with a
third party for payment in an amount up to $100 million for certain costs
relating to the Hardboard Lawsuit if payments by International Paper with
respect thereto exceeded $165 million. The arrangement with the third party is
in excess of insurance otherwise available to International Paper as determined
by the court in the Indemnification Lawsuit. Accordingly, International Paper
believes that the obligation of the third party with respect to the financial
collar does not constitute "other valid and collectible insurance" that would
either eliminate or otherwise affect its right to collect insurance coverage
available to it and Masonite under the insurance policies. At December 31, 2001,
International Paper had received the $100 million. A dispute between
International Paper and the third party concerning a number of issues, including
the timing of International Paper's obligation to repay the third party, is the
subject of an arbitration commenced in 2002 by the third party in London,
England. The arbitration hearing is expected to take place in February 2004.
The following table presents an analysis of the net reserve activity related to
these lawsuits for the six months ended June 30, 2003.
RESERVE ANALYSIS
- ------------------------------------------------------------------------
Hard- Omni-
In millions board wood Woodruf Total
- ------------------------------------------------------------------------
Balance, December 31, 2002 $ 357 $ 138 $ 12 $ 507
Payments (64) (10) (2) (76)
Insurance collections 33 - - 33
----- ----- ---- -----
Balance, June 30, 2003 $ 326 $ 128 $ 10 $ 464
===== ===== ==== =====
The following table shows an analysis of claims statistics related to these
lawsuits for the six months ended June 30, 2003.
12
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, 2002 28.6 4.0 1.9 0.4 1.1 0.3 31.6 4.7 36.3
No. of Claims Filed 23.3 5.9 2.4 0.2 0.5 - 26.2 6.1 32.3
No. of Claims Paid (15.0) (3.7) (1.7) (0.2) (0.5) - (17.2) (3.9) (21.1)
No. of Claims Dismissed (8.6) (2.2) (0.5) - (0.2) - (9.3) (2.2) (11.5)
June 30, 2003 28.3 4.0 2.1 0.4 0.9 0.3 31.3 4.7 36.0
While International Paper believes that the reserve balances established for
these matters are adequate, and that additional amounts will be recovered from
its insurance carriers in the future relating to these claims, International
Paper is unable to estimate at this time the amount of additional charges, if
any, that may be required for these matters in the future.
International Paper is also involved in various other inquiries, administrative
proceedings and litigation relating to contracts, sales of property,
environmental protection, tax, antitrust, personal injury and other matters,
some of which allege substantial monetary damages. While any proceeding or
litigation has the element of uncertainty, International Paper believes that the
outcome of any of the other lawsuits or claims that are pending or threatened,
or all of them combined, will not have a material adverse effect on its
consolidated financial position or results of operations.
NOTE 9 - DEBT
In March 2003, International Paper completed a private placement with
registration rights of $300 million 3.80% notes due April 1, 2008 and $700
million 5.30% notes due April 1, 2015. Proceeds from the notes were used to
repay approximately $450 million of commercial paper and long-term debt and to
redeem $550 million of preferred securities of IP Finance (Barbados) Limited, a
non-U.S. consolidated subsidiary of International Paper.
NOTE 10 - PREFERRED SECURITIES OF SUBSIDIARIES
In March 2003, Southeast Timber, Inc. (Southeast Timber), a consolidated
subsidiary of International Paper, issued $150 million of preferred securities
to a private investor with future dividend payments based on LIBOR plus a
defined margin. Southeast Timber, which through a subsidiary holds approximately
1.5 million acres of forestlands in the southern United States, will be
International Paper's primary vehicle for future sales of southern forestlands.
The preferred securities may be put back to International Paper by the private
investor upon the occurrence of certain events, and have a liquidation
preference that approximates their face amount. The securities are included in
Minority interest in the accompanying consolidated balance sheet.
The agreement with the private investor also places certain limitations on
International Paper's ability to sell forestlands in the southern United States
outside of Southeast Timber without either the investor's consent or upon a cash
contribution of up to a maximum of $80 million to Southeast Timber, its
consolidated subsidiary. In addition, because Southeast Timber is a separate
legal entity, the assets of Southeast Timber and its subsidiaries, consisting
principally of forestlands having a book value of approximately $430 million,
will not be available to satisfy future liabilities and obligations of
International Paper, although the value of International Paper's interests in
Southeast Timber and its subsidiaries will be available for these purposes.
13
NOTE 11 - STOCK OPTIONS
International Paper has a Long-Term Incentive Compensation Plan (LTICP) that
includes a Stock Option Program, a Restricted Performance Share Program and a
Continuity Award Program, administered by a committee of non-employee members of
the Board of Directors who are not eligible for awards. The Company accounts for
stock options granted under the plan using the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations and the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." These plans are discussed in detail
in Note 18 to the Financial Statements included in International Paper's Annual
Report on Form 10-K for the year ended December 31, 2002. No stock option-based
employee compensation cost is reflected in net earnings, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net earnings and earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
In millions, except per share amounts 2003 2002 2003 2002
- ----------------------------------------- ------------- ------------ ------------ ------------
Net earnings (loss), as reported $ 88 $ 215 $ 132 $ (895)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (11) (11) (21) (23)
----- ----- ----- ------
Pro forma net income (loss) $ 77 $ 204 $ 111 $ (918)
===== ===== ===== ======
Earnings (loss) per common share
Basic and diluted - as reported $0.19 $0.45 $0.28 $(1.86)
===== ===== ===== ======
Basic and diluted - pro forma $0.17 $0.43 $0.24 $(1.90)
===== ===== ===== ======
The effect for the six months ended June 30, 2003 and 2002 on pro forma net
earnings, earnings per common share and earnings per common share-assuming
dilution of expensing the estimated fair market value of stock options is not
necessarily representative of the effect on reported earnings for future periods
due to the vesting period of stock options and the potential for issuance of
additional stock options in future periods.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
International Paper Company (the "Company" or "International Paper"), reported
net earnings of $88 million, or $.19 per share, in the 2003 second quarter. This
compared with net earnings of $215 million, or $.45 per share, in the second
quarter of 2002 and net earnings of $44 million, or $.09 per share in the first
quarter of 2003. Amounts include the effects of special items in all periods,
and the cumulative effect of accounting changes in the first quarter of 2003.
Second-quarter 2003 net sales totaled $6.2 billion, compared with $6.3 billion
in the second quarter of 2002 and $6.1 billion in the first quarter of 2003.
Second-quarter 2003 earnings benefited from a $9 million reduction ($.02 per
share) in the provision for income taxes due to a reduction in the projected
2003 full year effective tax rate before special items from 31% to 28%. The
full-year effective tax rate projection is lower due to a higher proportion of
earnings in lower tax rate jurisdictions.
Compared with the first quarter of 2003, earnings for the second quarter of 2003
were positively impacted by improved mill operating performance, improvements in
product mix and our ongoing overhead cost reduction efforts. Overall, sales
volumes were about flat, and average prices were flat to slightly down, compared
with last quarter. Earnings continue to be adversely impacted by high energy and
weather-related wood costs.
Compared with the second quarter of 2002, higher pension costs, lower average
prices, higher energy and raw material costs, lower average sales volumes, and
lower foreign exchange income contributed to lower earnings in the current
quarter. Continued cost reduction efforts and a lower effective tax rate helped
mitigate the earnings decline from the second quarter of 2002.
During the quarter, International Paper took approximately 380,000 tons of
downtime, including 90,000 tons for lack-of-orders, compared with approximately
180,000 tons of downtime in the first quarter of 2003, which included 70,000
tons for lack-of-orders. 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 majority of the difference between
total downtime and lack-of-order downtime, is taken periodically during the
year. The costs for annual planned maintenance downtime are charged to expense
evenly in each quarter. Downtime costs due to lack-of-orders are expensed in the
periods that they are taken. In addition, the labor strike at Carter Holt
Harvey's Kinleith mill also resulted in about 130,000 tons and 45,000 tons of
downtime in New Zealand during the first and second quarters of 2003,
respectively.
To measure the performance of the Company's business segments from period to
period without variations caused by special or unusual items, International
Paper's management focuses on business segment operating profit. This is defined
as earnings before taxes and minority interest, excluding interest expense,
corporate charges and special items that include charges for asset shutdowns of
excess internal capacity and cost reduction actions and the reversal of reserves
no longer required. The following table presents a reconciliation of
International Paper's net earnings to its operating profits:
15
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
In millions 2003 2002 2003 2002
- ----------- ---- ---- ---- ------
Net Earnings (Loss) $ 88 $215 $132 $ (895)
Add back: Cumulative effect of accounting changes - - 10 1,175
---- ---- ---- ------
Earnings Before Cumulative Effect of Accounting Changes 88 215 142 280
Add back: Income tax (benefit) provision (38) (10) 1 33
Minority interest expense, net of taxes 39 31 79 62
---- ---- ---- ------
Earnings Before Income Taxes, Minority Interest and
cumulative effect of accounting changes 89 236 222 375
Interest expense, net 194 199 378 404
Minority interest included in operations (13) (15) (31) (25)
Corporate items 96 37 184 131
Special items:
Restructuring and other charges 81 79 104 79
Reversal of reserves no longer required (9) - (9) (10)
Net losses (gains) on sales and impairments of businesses
held for sale 10 (28) 10 (28)
---- ---- ---- ------
$448 $508 $858 $ 926
==== ==== ==== ======
Segment Operating Profit
Printing Papers $143 $106 $265 $ 182
Industrial and Consumer Packaging 121 145 210 273
Distribution 22 23 37 41
Forest Products 143 204 304 380
Carter Holt Harvey 9 14 25 24
Specialty Businesses and Other 10 16 17 26
---- ---- ---- ------
Total Segment Operating Profit $448 $508 $858 $ 926
==== ==== ==== ======
In the 2003 second quarter, a $50 million reduction of the income tax provision
was recorded reflecting settlements of prior period tax issues.
Net interest expense was $194 million in the second quarter of 2003 compared
with $184 million in the first quarter of 2003, largely due to higher average
debt levels in the quarter as proceeds from $1.0 billion of new borrowings in
March were used to redeem $550 million of preferred securities and approximately
$450 million of debt and commercial paper borrowings late in the quarter.
Corporate items, net totaled $96 million in the 2003 second quarter, higher than
the $37 million in the second quarter of 2002, principally due to higher pension
and supply chain initiative costs ($47 million) and lower foreign exchange gains
($25 million), partially offset by lower benefit costs ($16 million). The
increase from $88 million in the 2003 first quarter reflects lower natural gas
hedging gains ($13 million), partially offset by lower benefit costs ($7
million).
Special items in the second quarter of 2003 included pre-tax charges of $81
million ($50 million after taxes) consisting of $43 million for facility
shutdown costs, and $38 million for severance costs associated with
organizational restructuring programs, early debt extinguishment costs and legal
reserves. Special items also included a pre-tax charge of $10 million ($6
million after taxes) to adjust accrued costs of businesses previously sold, and
a credit of $9 million before taxes and minority interest ($5 million after
taxes and minority interest) for the reversal of restructuring and realignment
reserves no longer required.
Special items in the second quarter of 2002 consisted of a charge of $79 million
before taxes ($50 million after taxes) for facility closures, administrative
realignment and related severance costs, and a net $28 million
16
gain before taxes and minority interest ($96 million after taxes and minority
interest) related to sales and expenses of businesses held for sale.
Special items in the first quarter of 2003 included a net charge of $23 million
before taxes and minority interest ($14 million after taxes and minority
interest or $.03 per share) for certain costs related to the shutdown of the
Natchez, Mississippi, dissolving pulp mill, and other charges for organizational
realignments and related severance. Also in the quarter, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations," resulting in a $10 million after-tax charge ($.02
per share) for the cumulative effect of a change in accounting.
BUSINESS SEGMENT OPERATING RESULTS
- ----------------------------------
The following presents segment discussions for the second quarter of 2003.
Printing Papers
- ---------------
2003 2002
------------------------------------------- ------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
------------------------------------------- ------------------------------------------
Sales $ 1,885 $ 1,870 $ 3,755 $ 1,820 $ 1,815 $ 3,635
Operating Profit 122 143 265 76 106 182
Printing Papers net sales for the second quarter of 2003 were 3% higher than in
the second quarter of 2002, but were slightly lower than in the first quarter of
2003. Operating profits in the second quarter of 2003 were 35% higher than in
the second quarter of 2002 and were 17% higher than in the first quarter of
2003. Printing Papers' 2003 second-quarter earnings increased versus 2002 as
improved mill operating efficiencies and higher average prices more than offset
increases in energy and raw material costs. Compared with the first quarter of
2003, Printing Papers' second-quarter earnings benefited from improved mill
operations and cost improvement initiatives, partially offset by lower sales
volumes. During the second quarter of 2003, the segment took 245,000 tons of
downtime, including 55,000 tons of lack-of-order downtime and 190,000 tons that
was maintenance-related. This compared with the previous quarter total downtime
of 80,000 tons that included 40,000 tons due to lack-of-orders.
In the United States, operating profits for Printing Papers were impacted by
very wet weather conditions across the South during the 2003 second quarter that
limited harvesting operations, leading to higher wood costs, especially for
hardwood. Earnings in our uncoated free sheet business improved during the
second quarter as higher manufacturing productivity and lower energy costs more
than offset the impact of lower average sales prices and volumes. Losses in our
market pulp business declined during the quarter, primarily as a result of
higher average prices and mill operating improvements. Compared to the previous
quarter, coated paper operating results improved due to better mill operations,
although both sales volumes and average prices were flat. European Papers'
second-quarter earnings were about equal to the previous quarter as lower
average prices and a decline in volume were offset by favorable foreign exchange
rates and strong mill operating performance. In Brazil, operating profits
increased from the previous quarter reflecting continued strong manufacturing
performance, higher average prices and favorable foreign exchange rates.
The focus of this segment going forward is to continue to balance internal
supply with customer demand, and to further reduce overhead and manufacturing
costs to help offset pricing pressure and uncertain market conditions.
Industrial and Consumer Packaging
- ---------------------------------
2003 2002
---------------------------------------------- ----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
---------------------------------------------- ----------------------------------------------
Sales $ 1,500 $ 1,565 $ 3,065 $ 1,460 $ 1,530 $ 2,990
Operating Profit 89 121 210 128 145 273
17
Industrial and Consumer Packaging net sales for the second quarter of 2003 were
2% higher than in the second quarter of 2002 and were 4% higher than in the
first quarter of 2003. Operating profits in the second quarter of 2003 were 17%
lower than in the second quarter of 2002 but were 36% higher than in the first
quarter of 2003. Higher energy and raw material costs continued to negatively
affect earnings during the 2003 second quarter. Higher volumes and improved
operating performance resulted in higher earnings compared with the previous
quarter, although average prices for linerboard and boxes were lower. The
segment took 81,000 tons of downtime in the second quarter, including 35,000
tons of lack-of-order downtime to balance internal supply with customer demand.
Lack-of-order downtime totaled 28,000 tons in the previous quarter.
Industrial Packaging's operating profit increased over first quarter results due
largely to the impact of cost improvement programs. Sales volumes increased from
the previous quarter while average prices for both containerboard and boxes
declined.
Consumer Packaging's earnings increased over the previous quarter due to higher
sales volume and improved operations. Bleached board volumes and average prices
were higher than the first quarter. Compared with the second quarter of 2002,
higher costs for energy, polyethylene and fiber adversely impacted operating
results. Operating results for converting businesses improved due largely to a
seasonal improvement in sales volumes. Continuing realignment of the converting
operations also contributed positively to results.
Looking forward to the third quarter, this segment will focus on further cost
reductions, efficiency improvement initiatives and overhead expense control in
order to improve operating results.
Distribution
- ------------
2003 2002
---------------------------------------------- ----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
---------------------------------------------- ----------------------------------------------
Sales $ 1,530 $ 1,570 $ 3,100 $ 1,535 $ 1,575 $ 3,110
Operating Profit 15 22 37 18 23 41
Distribution's 2003 second-quarter sales were about flat with the second quarter
of 2002, but were up 3% from the previous quarter. Operating profits in the
second quarter of 2003 were down slightly compared with the second quarter of
2002, but were up 47% from the previous quarter. Operational cost improvements
and higher sales volumes during the 2003 second quarter resulted in higher
earnings compared with the previous quarter. Commercial printing sales remained
weak during the quarter while packaging sales continued to show market strength.
Demand was generally weak across most product lines and geographic markets.
Distribution continues to focus on reducing controllable costs and will continue
these initiatives during the third quarter. Although significant improvement in
demand is not expected in the third quarter, this segment expects to benefit
from cost control initiatives and seasonal improvement in demand.
Forest Products
- ---------------
2003 2002
---------------------------------------------- ----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
---------------------------------------------- ----------------------------------------------
Sales $ 675 $ 740 $ 1,415 $ 765 $ 815 $ 1,580
Operating Profit 161 143 304 176 204 380
Forest Products net sales for the second quarter of 2003 were 9% lower than in
the second quarter of 2002, but were 10% higher than in the first quarter of
2003. Operating profits were down 30% in the second quarter of 2003 versus the
second quarter of 2002 and 11% compared with the first quarter of 2003.
18
Second-quarter 2003 earnings were negatively impacted by lower harvest volumes
reflecting harvesting limitations due to very wet weather conditions across the
South during much of the quarter. Average stumpage prices were slightly lower
than in both the 2002 second quarter and the first quarter. Earnings from the
sales of timberlands and other non-harvest income were about the same as in both
the second quarter of 2002 and the first quarter. In our wood products business,
lower average prices resulted in a decline in earnings for the second quarter of
2003 compared with the second quarter of 2002. In addition, the 2002
second-quarter results included a favorable impact from the reversal of
previously accrued countervailing and anti-dumping duties at Weldwood in Canada.
Both sales and earnings for the 2003 second quarter increased slightly from the
previous quarter benefiting from higher lumber and plywood sales volumes. The
effect on profits, however, of higher average U.S. prices was largely offset by
unfavorable foreign exchange rates and lower average prices for products sold in
our Canadian operations.
Looking forward to the third quarter, wood product prices are anticipated to
increase slightly from the second quarter; however, stumpage prices are not
expected to improve significantly. Delivered wood costs to the mills may improve
as a normal summer weather pattern allows for drier harvest conditions.
International Paper monetizes its forest assets in various ways, including sales
of short- and long-term harvest rights, on a pay-as-cut or lump-sum bulk sale
basis, as well as sale 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
- ------------------
2003 2002
---------------------------------------------- ----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
---------------------------------------------- ----------------------------------------------
Sales $ 500 $ 525 $ 1,025 $ 410 $ 480 $ 890
Operating Profit 16 9 25 10 14 24
Carter Holt Harvey's 2003 second-quarter sales were 9% and 5% higher than in the
second quarter of 2002 and the first quarter of 2003, respectively. Operating
profits in the second quarter of 2003 were down 36% from the second quarter of
2002 and 44% from the first quarter of 2003. The decline in earnings during the
second quarter of 2003 compared with both the second quarter of 2002 and the
previous quarter is largely attributable to the labor strike at the Kinleith
mill, partially offset by favorable exchange rates.
Forest's earnings were lower than in the 2002 second quarter and the previous
quarter due to a weakening domestic log market, higher freight costs and lower
stumpage volumes. The Wood Products business was down slightly compared with the
same quarter last year and the 2003 first quarter as a result of weaker Asian
export markets for New Zealand lumber and plywood, although Australian and New
Zealand housing markets continue to show strength. The Pulp and Paper business
was negatively impacted by the strike at the Kinleith Pulp and Paper mill;
however, a settlement was reached in late May, and the Kinleith mill is now at
full production.
International Paper's results for this segment differ from those reported by
Carter Holt Harvey in New Zealand in three major respects: (1) Carter Holt
Harvey's earnings include only our share of Carter Holt Harvey's operating
earnings. Segment sales, however, represent 100% of Carter Holt Harvey's sales;
(2) Carter Holt Harvey reports in New Zealand dollars but our segment results
are reported in U.S. dollars; and (3) Carter Holt Harvey reports under New
Zealand accounting standards, but our segment results comply with generally
accepted accounting principles in the United States. The major differences in
standards relate to cost of timber harvested (COTH), goodwill amortization,
depreciation and financial instruments.
19
Specialty Businesses and Other
- ------------------------------
2003 2002
---------------------------------------------- ----------------------------------------------
In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
---------------------------------------------- ----------------------------------------------
Sales $ 350 $ 340 $ 690 $ 420 $ 445 $ 865
Operating Profit 7 10 17 10 16 26
The Specialty Businesses and Other segment includes the operating results of
Arizona Chemical, Industrial Papers and Chemical Cellulose Pulp. Also included
are businesses identified in our divestiture program whose results are included
in this segment for periods prior to their sale. Second-quarter 2003 net sales
were 24% less than in the second quarter of 2002, and were 3% less than in the
first quarter of 2003. Operating profits in the second quarter of 2003 were 38%
less than in the second quarter of 2002 but were 43% higher than in the first
quarter of 2003. The decrease in sales and the increase in earnings during the
2003 second quarter are principally due to the phasing out of operations at the
Natchez, Mississippi Chemical Cellulose dissolving pulp mill, with production
and sales limited to higher margin acetate pulp. Operations at Natchez ceased on
July 15, 2003. Compared with the previous quarter, Arizona Chemical reported
slightly lower prices during the quarter while volumes increased. Industrial
Papers reported lower volumes and slightly higher prices compared with the
previous quarter.
Other
- -----
The Company is currently implementing a supply chain initiative that includes
targeting a reduction in stores inventories of approximately $175 million over a
four-year period from improved management techniques that will reduce purchases
and improve usage. Some of the reductions may be from dispositions of inventory
that, based on the new approach, will be considered excess.
In addition, in July 2003 the Company announced a program targeting an
additional reduction in overhead costs of $500 million compared to 2003 budgeted
amounts.
International Paper continually evaluates its operations for improvement. When
any such improvement plans are finalized, we may incur costs or charges in
future periods related to the implementation of such plans. As this review
process is ongoing, it is possible that significant additional charges will be
incurred in future periods in our businesses should such triggering events
occur.
Liquidity and Capital Resources
Cash provided by operations totaled $693 million for the 2003 first half,
compared to $708 million for the 2002 first half. Working capital requirements,
reflecting higher accounts and notes receivable and inventory balances and lower
accounts payable and accrued liability balances, decreased operating cash flow
for the first six months of 2003 by $263 million, compared with a decrease of
$138 million in operating cash flow for the first six months of 2002.
Investments in capital projects totaled $427 million and $386 million for the
first six months of 2003 and 2002, respectively. Full year capital spending for
2003 is now expected to be approximately $1.1 billion, which is below projected
depreciation and amortization charges.
Financing activities for the 2003 first half included a $751 million net
increase in debt versus an $841 million net reduction in the comparable 2002
six-month period. In March 2003, International Paper completed the private
placements for $300 million of 3.80% notes due April 1, 2008 and $700 million of
5.30% notes due April 1, 2015. The proceeds from these notes were used to repay
approximately $450 million of commercial paper and long-term debt and to redeem
$550 million of preferred securities of IP Finance (Barbados) Limited, a
non-U.S. consolidated subsidiary of International Paper. These preferred
securities were classified
20
in the consolidated balance sheet as an Obligated Mandatorily Redeemable
Preferred Securities of a Subsidiary.
Also during the first six months of 2003, approximately 713,000 shares were
added to treasury stock through repurchases at a cost of $26 million, while
779,000 treasury shares were issued for various incentive plans, including stock
option exercises that generated $14 million of cash. In the first six months of
2002, approximately 980,000 shares were added to treasury stock at a cost of $42
million with approximately 1,195,000 treasury shares issued for various
incentive plans, including stock option exercises that generated $43 million of
cash. Common stock dividend payments totaling $239 million and $241 million for
the 2003 and 2002 six-month periods, respectively, were $.50 per share for both
periods.
In March 2003, International Paper sold a minority interest in Southeast Timber,
Inc. (Southeast Timber), a consolidated subsidiary of International Paper, to a
private investor for $150 million. Southeast Timber, through a subsidiary, holds
approximately 1.5 million acres of forestlands in the southern United States,
and will be the primary vehicle for selling International Paper's southern
forestlands over the next five years. Southeast Timber and its subsidiaries will
continue to be consolidated by International Paper. The private investor is
entitled to an annual preferred dividend based on LIBOR plus a defined margin.
The $150 million third-party interest is included in Minority interest in
International Paper's consolidated balance sheet.
At June 30, 2003, cash and temporary investments totaled $1.4 billion compared
with $1.1 billion at December 31, 2002.
In March 2003, International Paper renegotiated its $1.5 billion bank credit
facility. The facility has a maturity of March 2006. This facility was unused
at June 30, 2003.
International Paper believes its capital resources remain adequate to fund
expected working capital requirements.
Income Taxes
The effective income tax rate before the cumulative effect of accounting changes
was .5% and 9% for the 2003 and 2002 six-month periods, respectively, which
included the tax effects of certain special and unusual items that can affect
the effective income tax rate in a given quarter, but may not recur in
subsequent quarters. Management believes that the effective tax rate computed
after excluding these special or unusual items provides a better estimate of the
rate that could be expected in future quarters of the current calendar year if
no additional special or unusual items were to occur in those quarters. The
effective tax rates for the six-month periods ended June 30, 2003 and 2002
excluding these special and unusual items were 28% and 31%, respectively.
Critical Accounting Policies
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.
Accounting policies whose application may have a significant effect on the
reported results of operations and financial position of International Paper,
and that can require judgments by management that affect their application,
include SFAS No. 5, "Accounting for Contingencies," SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," SFAS No. 142, "Goodwill
and Other Intangible Assets," SFAS No. 87, "Employers' Accounting for Pensions,"
as amended by SFAS No. 132, "Employers' Disclosures About Pension and Other
Postretirement Benefits," and SFAS No. 109, "Accounting for Income Taxes."
21
The Company has included in its Annual Report on Form 10-K for the year ended
December 31, 2002, a discussion of these critical accounting policies, which are
important to the portrayal of the Company's financial condition and results of
operations and require management's judgments. The Company has not made any
changes in any of these critical accounting policies during the second quarter
of 2003.
Significant Accounting Estimates
Pension Accounting. Net pension expense reported in operating income totaled
approximately $9.8 million for International Paper's U.S. plans for the six
months ended June 30, 2003, or about $51.4 million lower than the pension income
amount recorded for the first six months of 2002. Net pension expense for
non-U.S. plans was about $17 million and $12 million for the six-month periods
in 2003 and 2002, respectively. 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 8.75% for 2003 from 9.25% for 2002, and reductions in the discount
rate (6.50% for 2003 from 7.25% for 2002) and the assumed rate of future
compensation increase (3.75% for 2003 from 4.5% for 2002).
After consultation with our actuaries, International Paper determines these
actuarial assumptions on December 31 of each year to calculate liability
information as of that date and pension expense for the following year. The
discount rate assumption is determined based on the internal rate of return for
a portfolio of high quality bonds (Moody's Aa Corporate bonds) with maturities
that are consistent with projected future plan cash flows. The expected
long-term rate of return on plan assets is based on historical and projected
average rates of return for current and planned asset classes in the plan
investment portfolio. The market value of plan assets for International Paper's
U.S. plans at December 31, 2002, totaled approximately $5.6 billion, consisting
of approximately 60% equity securities, 30% fixed income securities, and 10%
real estate and other assets. Plan assets included approximately $25 million of
International Paper common stock that was sold in the first quarter of 2003.
At December 31, 2002, the market value of assets was less than the accumulated
benefit obligation for International Paper's qualified pension plans and,
accordingly, a minimum liability of approximately $1.0 billion was established
with an after tax charge of approximately $1.5 billion to Shareholders' equity,
with no impact on earnings or cash flows. If the difference between the market
value of plan assets and the accumulated benefit obligation increases by the
next plan measurement date, December 31, 2003, a further increase to the
recorded minimum liability would be required, with an additional charge to
Shareholders' equity. Factors that could cause this difference to increase
include a further decline in the market value of plan assets or a decrease in
the discount rate used to compute the accumulated benefit obligation. As of June
30, 2003, interest rates have declined approximately 75 basis points since the
December 31, 2002 measurement date while the market value of plan assets has
increased slightly. If a remeasurement had occurred as of June 30, 2003, an
increase in the recorded minimum liability of approximately $470 million would
have been required, with a $195 million reduction in Shareholders' equity.
While International Paper may elect to make voluntary contributions to its plans
in the coming years, it is unlikely that there will be any required minimum
contributions to the plans before 2005 unless interest rates decline below
current levels or investment performance is significantly below projections.
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
22
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.
Under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
expense for stock options is measured at the grant date based on a computed fair
value of options granted, and then charged to expense over the related vesting
period. Had this method of accounting been applied, additional expense of $21
million and $23 million would have been recorded in the first six months of 2003
and 2002, respectively, decreasing the reported earnings per share by 14% to
$0.24 in the first half of 2003 and increasing the reported loss per share by 2%
to ($1.90) in the first half of 2002.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, and in particular,
statements found in Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, that are not historical in nature may
constitute forward-looking statements. These statements are often identified by
the words, "will," "may," "should," "continue," "anticipate," "believe,"
"expect," "plan," "appear," "project," "estimate," "intend," and words of
similar import. Such statements reflect the current views of International Paper
with respect to future events and are subject to risks and uncertainties. Actual
results may differ materially from those expressed or implied in these
statements. Factors which could cause actual results to differ include, among
other things, the timing and strength of an economic recovery, changes in
interest rates and plan asset values which could have an impact on reported
earnings and shareholders' equity, the strength of demand for the Company's
products and changes in overall demand, the effects of competition from foreign
and domestic producers, the level of housing starts, changes in the cost or
availability of raw materials, the cost of compliance with environmental and
other governmental regulations, the ability of the Company to continue to
realize anticipated cost savings, performance of the Company's manufacturing
operations, results of legal proceedings, changes related to international
economic conditions, changes in currency exchange rates, particularly the
relative value of the U.S. dollar to the Euro, economic conditions in developing
countries, specifically Brazil and Russia, and the war on terrorism. In view of
such uncertainties, investors are cautioned not to place undue reliance on these
forward-looking statements. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
23
INTERNATIONAL PAPER COMPANY
Financial Information by Industry Segment
(Unaudited)
(In millions)
Sales by Industry Segment
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
------- ------- ------- --------
Printing Papers $ 1,870 $ 1,815 $ 3,755 $ 3,635
Industrial and Consumer Packaging 1,565 1,530 3,065 2,990
Distribution 1,570 1,575 3,100 3,110
Forest Products 740 815 1,415 1,580
Carter Holt Harvey 525 480 1,025 890
Specialty Businesses and Other (1) 340 445 690 865
Corporate and Inter-segment Sales (346) (355) (711) (727)
------- ------- ------- -------
Net Sales $ 6,264 $ 6,305 $12,339 $12,343
======= ======= ======= =======
Operating Profit by Industry Segment
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -----------------------
2003 2002 2003 2002
------- ------- ------- ------
Printing Papers $ 143 $ 106 $ 265 $ 182
Industrial and Consumer Packaging 121 145 210 273
Distribution 22 23 37 41
Forest Products 143 204 304 380
Carter Holt Harvey 9 14 25 24
Specialty Businesses and Other (1) 10 16 17 26
------- ------- ------- ------
Operating Profit 448 508 858 926
Interest expense, net (194) (199) (378) (404)
Minority interest (2) 13 15 31 25
Corporate items, net (96) (37) (184) (131)
Restructuring and other charges (3) (81) (79) (104) (79)
Net (losses) gains on sales and impairments of
businesses held for sale (10) 28 (10) 28
Reversal of reserves no longer required 9 - 9 10
------- ------- ------- ------
Earnings before income taxes,
minority interest and cumulative effect
of accounting changes $ 89 $ 236 $ 222 $ 375
======= ======= ======= ======
(1) Includes Arizona Chemical, Industrial Papers, Chemical Cellulose Pulp and
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, and cumulative effect of accounting changes.
(3) See Footnote 4 for additional information concerning restructuring and
other charges.
24
INTERNATIONAL PAPER COMPANY
Sales Volumes By Product (1) (2)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2003 2002 2003 2002
-------------------------- --------------------------
Printing Papers (In thousands of short tons)
Uncoated Papers and Bristols 1,565 1,614 3,169 3,235
Coated Papers 500 533 1,006 1,042
Market Pulp 549 588 1,180 1,199
Packaging (In thousands of short tons)
Containerboard 550 580 1,136 1,084
Bleached Packaging Board 361 337 701 651
Kraft 157 140 307 313
Industrial and Consumer Packaging 1,132 1,168 2,249 2,281
Forest Products (In millions)
Panels (sq. ft. 3/8" - basis) 593 541 1,099 1,320
Lumber (board feet) 1,055 1,118 2,019 2,123
MDF and Particleboard (sq. ft. 3/4"- basis) 139 191 286 370
(1) Sales volumes include third party and inter-segment sales and 100% of
volumes sold by Carter Holt Harvey.
(2) Volumes for divested businesses are included through the date of sale.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosures about market
risk are shown on pages 25 and 26 of International Paper's Annual Report to
Shareholders for the year ended December 31, 2002 as previously filed on Form
10-K, which information is incorporated herein by reference.
26
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended
(Exchange Act), Company management, including the Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures, as defined in Exchange Act Rule 13a-15 (e)
as of June 30, 2003. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report. As
required by Exchange Act Rule 13a-15(d), Company management, including the Chief
Executive Officer and Chief Financial Officer, also conducted an evaluation of
the Company's internal control over financial reporting to determine whether any
changes occurred during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting. Based on that evaluation, there has been no
such change during the quarter covered by this report.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following matters discussed in previous filings under the Exchange Act, are
updated as follows:
Exterior Siding and Roofing 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 8 in this
Form 10-Q.
Other Litigation
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 (acquired by International Paper in 1999), 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 filed a petition appealing the certification order. On
September 5, 2002, the Court of Appeals for the Third Circuit affirmed the
district court's certification decision. On January 14, 2003, the defendants
filed a petition for certiorari with the U.S. Supreme Court seeking a review of
the Court of Appeals decision; the Supreme Court denied the petition on April
21, 2003. The deadline by which members of the class had to elect to opt out of
the class action litigation expired on June 9, 2003. Ten opt-out complaints,
most with multiple plaintiffs, have been filed in various federal district
courts around the country. It is expected that they will be consolidated for
pre-trial purposes in the federal court in the Eastern District of Pennsylvania,
where the class action litigation is also pending. Discovery in the opt-out
cases is expected to proceed on a separate schedule from discovery in the class
action litigation. Fact discovery in the class action litigation is scheduled to
conclude on August 31, 2003.
In 2000, purchasers of high-pressure laminates filed a number of purported class
actions under the federal antitrust laws alleging that International Paper's
Nevamar division (which was part of the Decorative Products division)
participated in a price-fixing conspiracy with competitors between January 1,
1994 and June 30, 2000. These lawsuits seek injunctive relief as well as treble
damages and other costs associated with the litigation. These cases have been
consolidated in federal district court in New York. In 2000 and 2001, indirect
purchasers of high-pressure laminates also filed similar purported class action
cases under various state antitrust and consumer protection statutes in Arizona,
California, Florida, Maine, Michigan, Minnesota, New Mexico, New York, North
Carolina, North Dakota, South Dakota, Tennessee, West Virginia, Wisconsin and
the District of Columbia. The case in New York state court and one of the two
Michigan cases have been dismissed, while all of the other state cases have been
stayed. On June 17, 2003, the federal district court certified the consolidated
federal cases as a class action. The deadline by which members of the class must
decide whether to opt out of the class action litigation is forty-five days
following issuance of the class action notice. This notice must be issued by
August 1, 2003. Discovery in the federal case is ongoing. In the third quarter
of 2002, International Paper completed the sale of the Decorative Products
operations, but retained any liability for these cases.
Environmental
In March 2003, the United States Environmental Protection Agency (EPA) notified
the Company that it intends to initiate an enforcement action alleging hazardous
waste deficiencies at the Company's treated pole facility in Joplin, Missouri.
The Company and the EPA have entered into settlement discussions.
28
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.
29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of International Paper was held on May
13, 2003.
(b) The Annual Meeting involved the election of four Class III directors.
Persons elected to this Class were Messrs. Robert J. Eaton, John V. Faraci,
Donald F. McHenry, and Patrick F. Noonan.
Directors whose terms of office continued after the meeting are Samir G.
Gibara, Jane C. Pfeiffer, Charles R. Shoemate, John T. Dillon, James A.
Henderson, Robert D. Kennedy and W. Craig McClelland.
(c) (i) The shareholders voted on the election of four directors as Class III
directors, with terms expiring in 2006.
The votes for or withheld for each nominee were:
For Withheld
----------- ----------
Mr. Robert J. Eaton 398,175,988 25,603,016
Mr. John V. Faraci 413,279,783 10,499,221
Mr. Donald F. McHenry 400,178,906 23,600,098
Mr. Patrick F. Noonan 409,498,642 14,280,362
(ii) The shareholders approved amendments to the Company's Long-Term
Incentive Compensation Plan. There were 298,997,052 votes cast in
favor of the proposal, 117,174,388 votes cast against the proposal,
and 7,606,552 votes in abstention.
(iii) The shareholders approved a shareholder proposal relating to
shareholder approval of certain future severance agreements with
senior executives. There were 224,038,116 votes cast in favor of the
proposal, 143,508,010 votes cast against the proposal, and 8,475,729
votes in abstention.
(d) N/A
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Long-Term Incentive Compensation Plan of the
Company, approved by shareholders on May 13, 2003.
10.2 Form of Confidentiality and Non-Competition
Agreement entered into by Company employees who
may receive restricted stock awards pursuant to
the Long-Term Incentive Compensation Plan of the
Company.
11 Statement of Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of principal executive officer
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification of principal financial officer
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32 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
On April 24, 2003, the Company filed a Current Report on
Form 8-K, furnishing under Item 9. Regulation FD
Disclosure (Information provided under Item 12 - Results
of Operations and Financial Condition) the results of
operations for the quarter ended March 31, 2003.
On June 10, 2003, the Company filed a Current Report on
Form 8-K under Items 5 and 7 for the purpose of
conforming certain items included in the Annual Report
on Form 10-K of the Company for the year ended December
31, 2002 to the new requirements of Item 10 of
Regulation S-K.
On July 15, 2003, the Company filed a Current Report on
Form 8-K under Item 9. Regulation FD Disclosure relating
to a favorable decision in a lawsuit brought by
International Paper against 22 insurers.
On July 24, 2003, the Company filed a Current Report on
Form 8-K, furnishing under Item 9. Regulation FD
Disclosure (Information provided under Item 12 - Results
of Operations and Financial Condition) the results of
its operations for the quarter ended June 30, 2003.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL PAPER COMPANY
(Registrant)
Date: August 14, 2003 By /s/CHRISTOPHER P. LIDDELL
-------------------------
Christopher P. Liddell
Senior Vice President and Chief
Financial Officer
Date: August 14, 2003 By /s/ ROBERT J. GRILLET
---------------------
Robert J. Grillet
Vice President and Controller
32