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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended December 31, 2003
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ___________
COMMISSION FILE NO. 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 or organization) Identification No.)
400 Atlantic Street
Stamford, Connecticut
06921
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: 203-541-8000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $1 per share par value New York Stock Exchange
7 7/8% Debentures due 2038 New York Stock Exchange
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Securities Registered Pursuant to Section 12(g) of the Act: None
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 Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 75 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[_]
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Indicate by check mark whether the registrant is an accelerated filer (as
defined by Exchange Act Rule 12b-2) of the Act. Yes [X] or No [_]
The aggregate market value of the Registrant's outstanding common stock
held by non-affiliates of the registrant, computed by reference to the closing
price as reported on the New York Stock Exchange, as of the last business day of
the registrant's most recently completed second fiscal quarter (June 30, 2003)
was approximately $17,112,383,280.
The number of shares outstanding of the Company's common stock, as of
February 27, 2004 was 485,683,526
Documents incorporated by reference:
Portions of the registrant's proxy statement filed within 120 days of the
close of the registrant's fiscal year in connection with registrant's 2004
annual meeting of shareholders are incorporated by reference into Parts III and
IV of this Form 10-K.
INTERNATIONAL PAPER COMPANY
Index to Annual Report on Form 10-K
For the Year Ended December 31, 2003
PART I
ITEM 1. BUSINESS
General 1
Financial Information Concerning Industry Segments 1
Financial Information About International and Domestic
Operations 1
Competition and Costs 2
Marketing and Distribution 2
Description of Principal Products 2
Sales Volumes by Product 2
Research and Development 3
Environmental Protection 3
Employees 3
Executive officers of the Registrant 3
Raw Materials 4
Forward-looking Statements 4
ITEM 2. PROPERTIES
Forestlands 4
Mills and Plants 5
Capital Investments and Dispositions 5
ITEM 3. LEGAL PROCEEDINGS 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 5
ITEM 6. SELECTED FINANCIAL DATA 6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Executive Summary 9
Corporate Overview 10
Results of Operations 11
Description of Industry Segments 14
Industry Segment Results 16
Liquidity and Capital Resources 20
Critical Accounting Policies 23
Significant Accounting Estimates 24
Income Taxes 26
Recent Accounting Developments 26
Litigation Issues 28
Effect of Inflation 30
Foreign Currency Effects 30
Market Risk 30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Information by Industry Segment and Geographic Area 32
Report of Management on Financial Statements 34
Report of Deloitte & Touche LLP, Independent Auditors 35
Report of Independent Public Accountants 35
Consolidated Statement of Earnings 36
Consolidated Balance Sheet 37
Consolidated Statement of Cash Flows 38
Consolidated Statement of Common Shareholders' Equity 39
Notes to Consolidated Financial Statements 40
Interim Financial Results 74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 76
ITEM 9A. CONTROLS AND PROCEDURES 76
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 76
ITEM 11. EXECUTIVE COMPENSATION 76
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS 76
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 76
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 77
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 77
Additional Financial Data 77
Reports on Form 8-K 79
Report of Independent Auditors on Financial Statement
Schedule 80
Schedule II-Valuation and Qualifying Accounts 81
SIGNATURES 82
APPENDIX I 2004 LISTING OF FACILITIES A-1
APPENDIX II 2004 CAPACITY INFORMATION A-5
PART I
ITEM 1. BUSINESS
General
International Paper Company (the "Company" or "International Paper" which may be
referred to as "we" or "us"), is a global forest products, paper and packaging
company that is complemented by an extensive distribution system, with primary
markets and manufacturing operations in the United States, Canada, Europe, the
Pacific Rim and South America. We are a New York corporation and were
incorporated in 1941 as the successor to the New York corporation of the same
name organized in 1898. Our home page on the Internet is
www.internationalpaper.com. You can learn more about us by visiting that site.
In the United States at December 31, 2003, the Company operated 26 pulp, paper
and packaging mills, 88 converting and packaging plants, 25 wood products
facilities, and seven specialty chemicals plants. Production facilities at
December 31, 2003, in Europe, Asia, Latin America, South America and Canada
included 10 pulp, paper and packaging mills, 44 converting and packaging plants,
10 wood products facilities, two specialty panels and laminated products plants
and six specialty chemicals plants. We distribute printing, packaging, graphic
arts, maintenance and industrial products principally through over 270
distribution branches located primarily in the United States. At December 31,
2003, we owned or managed approximately 8.3 million acres of forestlands in the
United States, mostly in the South, approximately 1.5 million acres in Brazil
and had, through licenses and forest management agreements, harvesting rights on
government- owned forestlands in Canada and Russia. Substantially all of our
businesses have experienced, and are likely to continue to experience, cycles
relating to available industry capacity and general economic conditions.
Carter Holt Harvey, a New Zealand company which is approximately 50.5% owned by
International Paper, operates five mills producing pulp, paper, packaging and
tissue products, 23 converting and packaging plants and 72 wood products
manufacturing and distribution facilities, primarily in New Zealand and
Australia. In New Zealand, Carter Holt Harvey owns or leases approximately
795,000 acres of forestlands.
For management and financial reporting purposes, our businesses are separated
into six segments: Printing Papers; Industrial and Consumer Packaging;
Distribution; Forest Products; Carter Holt Harvey; and Specialty Businesses and
Other. A description of these business segments can be found on pages 14 through
16 of Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
From 1998 through 2003, International Paper's capital expenditures approximated
$7.0 billion, excluding mergers and acquisitions. These expenditures reflect our
continuing efforts to improve product quality and environmental performance,
lower costs, and improve forestlands. Capital spending in 2003 was $1.2 billion
and is expected to be approximately $1.3 billion in 2004. This amount is below
our expected annual depreciation and amortization expense of $1.6 billion. You
can find more information about capital expenditures on page 21 of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Discussions of mergers and acquisitions can be found on page 21 of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
You can find discussions of restructuring charges and other special items on
pages 12 and 13 of Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Throughout this Annual Report on Form 10-K, we "incorporate by reference"
certain information in parts of other documents filed with the Securities and
Exchange Commission (the "SEC"). The SEC permits us to disclose important
information by referring to it in that manner. Please refer to such information.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K, along with all other reports and any amendments thereto
filed with or furnished to the SEC, are publicly available free of charge on the
Investor Relations section of our Internet Web site at
www.internationalpaper.com as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. The
information contained on or connected to our Web site is not incorporated by
reference into this Form 10-K and should not be considered part of this or any
other report that we filed with or furnished to the SEC.
Financial Information Concerning Industry Segments
The financial information concerning segments is set forth on pages 32 and 33 of
Item 8. Financial Statements and Supplementary Data.
Financial Information About International and Domestic Operations
The financial information concerning international and domestic operations and
export sales is set forth on page 33 of Item 8. Financial Statements and
Supplementary Data.
1
Competition and Costs
Despite the size of the Company's manufacturing capacities for paper,
paperboard, packaging and pulp products, the markets in all of the cited product
lines are large and highly fragmented. The markets for wood and specialty
products are similarly large and fragmented. There are numerous competitors, and
the major markets, both domestic and international, in which the Company sells
its principal products are very competitive. These products are in competition
with similar products produced by others, and in some instances, with products
produced by other industries from other materials.
Many factors influence the Company's competitive position, including prices,
costs, product quality and services. You can find more information about the
impact of prices and costs on operating profits on pages 9 through 20 of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations. You can find information about the Company's manufacturing
capacities on A-5 of Appendix II.
Marketing and Distribution
The Company sells paper, packaging products, building materials and other
products directly to end users and converters, as well as through resellers. We
have a large merchant distribution business that sells products made both by
International Paper and by other companies making paper, packaging and supplies.
Sales offices are located throughout the United States as well as
internationally. We also sell significant volumes of products through paper
distributors, including facilities in our distribution network, and brokers. We
market our U.S. production of lumber and plywood through independent and
Company-owned distribution centers. Specialty products are marketed through
various channels of distribution.
Description of Principal Products
The Company's principal products are described on pages 14 through 16 of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Sales Volumes by Product
Sales volumes of major products for 2003, 2002, and 2001 were as follows:
Sales Volumes by Product (1) (2)
(Unaudited)
International Paper Consolidated
(excluding Carter Holt Harvey)
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Printing Papers (In thousands of tons)
Uncoated Papers and Bristols 6,238 6,332 6,305
Coated Papers 2,113 2,212 2,132
Market Pulp (3) 2,012 2,013 2,013
Packaging (In thousands of tons)
Containerboard 1,946 1,862 1,706
Bleached Packaging Board 1,348 1,247 1,157
Kraft 606 626 587
Industrial and Consumer Packaging 4,383 4,372 4,533
Forest Products (In millions)
Panels (sq. ft. 3/8"-basis) 2,037 2,233 2,730
Lumber (board feet) 3,573 3,681 3,595
MDF and Particleboard (sq. ft. 3/4"-basis) -- 129 246
Carter Holt Harvey (4)
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Printing Papers (In thousands of tons)
Uncoated Papers and Bristols 132 137 134
Market Pulp (3) 499 512 518
Packaging (In thousands of tons)
Containerboard 361 400 385
Bleached Packaging Board 84 89 90
Industrial and Consumer Packaging 153 154 150
Forest Products (In millions)
Panels (sq. ft. 3/8"-basis) 179 200 261
Lumber (board feet) 503 546 494
MDF and Particleboard (sq. ft. 3/4"-basis) 582 494 414
(1) Includes third party and inter-segment sales.
(2) Sales volumes for divested businesses are included through the date of
sale.
(3) Includes internal sales to mills.
(4) Includes 100% of volumes sold.
2
Research and Development
The Company operates research and development centers at Sterling Forest, New
York; Loveland, Ohio; Kaukauna, Wisconsin; Jacksonville, Florida; Savannah,
Georgia; a regional center for applied forest research in Bainbridge, Georgia; a
forest biotechnology center in Rotorua, New Zealand; and several product
laboratories. We direct research and development activities to short-term,
long-term and technical assistance needs of customers and operating divisions;
to process equipment and product innovations; and to improve profits through
tree generation and propagation research. Activities include studies on improved
forest species and management; innovation and improvement of pulping, bleaching,
chemical recovery, papermaking and coating processes; packaging design and
materials development; reduction of environmental discharges; re-use of raw
materials in manufacturing processes; recycling of consumer and packaging paper
products; energy conservation; applications of computer controls to
manufacturing operations; innovations and improvement of products; and
development of various new products. Our development efforts specifically
address product safety as well as the minimization of solid waste. The cost to
the Company of its research and development operations in 2003 was $73 million;
$77 million in 2002; and $92 million in 2001.
We own numerous patents, copyrights, trademarks, and trade secrets relating to
our products and to the processes for their production. We also license
intellectual property rights to and from others where necessary. Many of the
manufacturing processes are among our trade secrets. Some of our products are
covered by U.S. and foreign patents and are sold under well known trademarks. We
derive competitive advantage by protecting our trade secrets, patents,
trademarks and other intellectual property rights, and by using them as required
to support our businesses.
Environmental Protection
Information concerning the effects of the Company's compliance with federal,
state and local provisions enacted or adopted relating to environmental
protection matters is set forth on pages 28 and 29 of Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Employees
As of December 31, 2003, we had approximately 83,000 employees, 52,000 of whom
were located in the United States. Of the domestic employees, approximately
34,000 are hourly; unions represent approximately 20,000. Approximately 16,000
of the union employees are represented by the Paper, Allied- Industrial,
Chemical and Energy International Union under individual location contracts.
During 2003, no labor agreements were ratified at paper mills. Two late-year
2003 paper mill contracts, Vicksburg and Riverdale, carried over into 2004.
During 2004, labor agreements are scheduled to be negotiated at three paper
mills: Bastrop, Pine Bluff and Prattville.
During 2003, 22 labor agreements were settled in non-papermill operations.
Settlements included 10 in paper converting, one in building materials, two in
chemicals and seven in distribution. Two 2003 paper converting locations and one
distribution location had contracts that carried over into 2004. During 2004, 11
non-paper mill operations will negotiate new labor agreements.
Executive Officers of the Registrant
John V. Faraci, 54, chairman and chief executive officer since November 2003.
Prior to this he was president since February 2003, and executive vice president
and chief financial officer from 2000 to 2003. From 1999 to 2000, he was senior
vice president-finance and chief financial officer. From 1995 until 1999, he was
chief executive officer and managing director of Carter Holt Harvey Limited of
New Zealand.
Robert M. Amen, 54, president of International Paper Company since November
2003. Previously, he served as executive vice president responsible for the
Company's paper business, technology and corporate marketing. He also served as
president of International Paper-Europe and as vice president of various
businesses, including consumer packaging, bleached board, and folding carton and
label. He has also held various positions in the finance organization, including
serving as vice president and corporate controller.
Newland A. Lesko, 58, executive vice president-manufacturing and technology
since June 2003. He previously served as senior vice president-industrial
packaging group from 1998 to 2003. From 1995 to 1998, he served as vice
president-coated papers and bristols. From 1992-1995, he served as vice
president-specialty industrial papers. From 1990 to 1992, he served as vice
president and general manager-coated papers. In 1990, he served as staff vice
president and director-quality management. He joined International Paper in
1967.
Marianne M. Parrs, 59, executive vice president since 1999. Prior to this, she
was senior vice president and chief financial officer from 1995 to 1999.
H. Wayne Brafford, 52, senior vice president-industrial packaging group since
June 2003. He previously served as vice president and general
manager-converting, specialty and pulp from 1999 to 2003. From 1997 to 1999, he
served as vice president, converting, forms, specialty and uncoated bristols. He
joined International Paper in 1975.
3
Jerome N. Carter, 55, senior vice president-human resources since 1999. Since
1997, he served as senior vice president-human resources of Union Camp.
Thomas E. Gestrich, 57, senior vice president-consumer packaging since 2001. He
previously served as vice president and general manager-beverage packaging from
1999 to 2001. From 1994 to 1999, he served as vice president-bleached board. He
joined International Paper in 1990.
Andrew R. Lessin, 61, senior vice president-internal audit since 2002. He
previously served as vice president-finance from 2000 to 2002. From 1995 to
2000, he served as vice president-controller. From 1990 to 1995, he served as
corporate controller. He joined International Paper in 1977.
Christopher P. Liddell, 45, senior vice president and chief financial officer
since 2003. Prior to this, he served as vice president-finance and controller
since February 2003. From 2002 to 2003, he served as vice president-finance.
From 1999 to 2002, he served as chief executive officer of Carter Holt Harvey
Limited. From 1995 to 1998, he served as chief financial officer of Carter Holt
Harvey Limited.
Richard B. Lowe, 49, senior vice president-xpedx since April 2003. He previously
served as region president-xpedx from 1995 to 2003. He joined International
Paper in 1977.
George A. O'Brien, 55, senior vice president-forest resources and wood products
since November 2001. Prior to this, he was senior vice president-forest
resources from 1999 to 2001. From 1997 to 1999, he was vice president-forest
resources. From 1994 to 1997, he was chief executive-pulp, paper and tissue of
Carter Holt Harvey Limited in New Zealand.
Maura A. Smith, 48, senior vice president, general counsel and corporate
secretary since April 2003. From 1998 to 2003, she served as senior vice
president, general counsel and corporate secretary of Owens Corning and in
addition, from 2000 to 2003, as chief restructuring officer.
W. Dennis Thomas, 60, senior vice president-public affairs and communications
since 1998. He previously served as vice president-federal corporate affairs
from 1989 to 1998. He joined International Paper in 1987.
Robert J. Grillet, 48, vice president-finance and controller since April 2003.
He previously served as group senior vice president-xpedx from 2000 to 2003. He
joined International Paper in 1976.
Raw Materials
For information on the sources and availability of raw materials essential to
our business, see Item 2. Properties.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, and in particular,
statements found in Item 7. 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, changes in overall demand, whether expected non-price improvements can
be realized, the effects of competition from foreign and domestic producers, the
level of housing starts, changes in the cost or availability of raw materials,
unanticipated expenditures relating to 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 note these factors for investors as permitted by
the Private Securities Litigation Reform Act of 1995. We undertake no obligation
to publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 2. PROPERTIES
Forestlands
The principal raw material used by International Paper is wood in various forms.
As of December 31, 2003, the Company or its subsidiaries owned or managed
approximately 8.3 million acres of forestlands in the United States, 1.5 million
acres in Brazil and had, through licenses and forest management agreements,
harvesting rights on government-owned forestlands in Canada and Russia. An
additional 795,000 acres of forestlands in New Zealand were held through Carter
Holt Harvey, a consolidated subsidiary of International Paper.
4
During 2003, the Company's U.S. forestlands supplied 15.6 million tons of
roundwood to its U.S. facilities, representing 25% of its wood fiber
requirements. The balance was acquired from other private industrial and
nonindustrial forestland owners, with only an insignificant amount coming from
public lands of the United States government. In addition, in 2003, 4.6 million
tons of wood were sold to other users. All of our forestlands are independently
third party certified under the operating standards of the Sustainable Forestry
Principles developed by the American Forest and Paper Association.
Mills and Plants
A listing of our production facilities, the vast majority of which we own, can
be found in Appendix I hereto, which is incorporated herein by reference.
The Company's facilities are in good operating condition and are suited for the
purposes for which they are presently being used. We continue to study the
economics of modernization or adopting other alternatives for higher cost
facilities.
Capital Investments and Dispositions
Given the size, scope and complexity of our business interests, we continuously
examine and evaluate a wide variety of business opportunities and planning
alternatives, including possible acquisitions and sales or other dispositions of
properties. You can find a discussion about the level of planned capital
investments for 2004 on pages 22 and 23 of Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations. You can find a
discussion about dispositions and restructuring activities as of December 31,
2003, on pages 12 and 13 of Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations, and on pages 46 through 54 of
Item 8. Financial Statements and Supplementary Data.
ITEM 3. LEGAL PROCEEDINGS
Information concerning the Company's legal proceedings is set forth on pages 28
through 30 of Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, and on pages 56 through 61 of Item 8.
Financial Statements and Supplementary Data.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Dividend per share data on the Company's common stock and the high and low sales
prices for the Company's common stock for each of the four quarters in 2002 and
2003 are set forth on page 74 of Item 8. Financial Statements and Supplementary
Data. The Company's common shares (symbol: IP) are traded on the following
exchanges: New York, Swiss and Amsterdam. International Paper options are traded
on the Chicago Board of Options Exchange. As of February 27, 2004, there were
approximately 29,478 record holders of common stock of the Company.
Information regarding securities authorized for issuance under equity
compensation plans is hereby incorporated by reference to our definitive proxy
statement that will be filed with the SEC within 120 days of the close of our
fiscal year.
5
ITEM 6. SELECTED FINANCIAL DATA
Six-Year Financial Summary
- ---------------------------------------------------------------------------------------
Dollar amounts in millions, except per share
amounts and stock prices 2003 2002 2001
- ---------------------------------------------------------------------------------------
Results of Operations
Net sales $25,179 $24,976 $ 26,363
Cost and expenses, excluding interest 24,107 23,890 26,716
Earnings (loss) before income taxes, minority
interest, extraordinary items and
cumulative effect of accounting changes 346(a) 371(d) (1,265)(g)
Minority interest expense, net of taxes 123(a) 130(d) 147(g)
Extraordinary items -- -- (46)(h)
Cumulative effect of accounting changes (13)(b) (1,175)(e) (16)(h)
Net earnings (loss) 302(a-c) (880)(d-f) (1,204)(g,h)
Earnings (loss) applicable to common shares 302(a-c) (880)(d-f) (1,204)(g,h)
------- ------- --------
Financial Position
Working capital $ 2,534 $ 3,159 $ 2,814
Plants, properties and equipment, net 14,275 14,167 14,616
Forestlands 4,069 3,846 4,197
Total assets 35,525 33,792 37,177
Long-term debt 13,450 13,042 12,457
Common shareholders' equity 8,237 7,374 10,291
------- ------- --------
Per Share of Common Stock -
Assuming No Dilution
Earnings (loss) before extraordinary items
and cumulative effect of accounting changes $ 0.66 $ 0.61 $ (2.37)
Extraordinary items -- -- (0.10)
Cumulative effect of accounting changes (0.03) (2.44) (0.03)
Net earnings (loss) 0.63 (1.83) (2.50)
Cash dividends 1.00 1.00 1.00
Common shareholders' equity 16.97 15.21 21.25
------- ------- --------
Common Stock Prices
High $ 43.32 $ 46.19 $ 43.25
Low 33.09 31.35 30.70
Year-end 43.11 34.97 40.35
------- ------- --------
Financial Ratios
Current ratio 1.4 1.7 1.5
Total debt to capital ratio 60.8 55.1 50.1
Return on equity 3.9(a-c) (8.8)(d-f) (10.6)(g,h)
Return on investment before extraordinary items
and cumulative effect of accounting changes 2.9(a,c) 2.6(d,f) (0.7)(g)
------- ------- --------
Capital Expenditures $ 1,166 $ 1,009 $ 1,049
------- ------- --------
Number of Employees 82,800 91,000 100,100
======= ======= ========
- --------------------------------------------------------------------------------------
Dollar amounts in millions, except per share
amounts and stock prices 2000 1999 1998
- --------------------------------------------------------------------------------------
Results of Operations
Net sales $ 28,180 $24,573 $23,979
Cost and expenses, excluding interest 26,675 23,620 23,039
Earnings (loss) before income taxes, minority
interest, extraordinary items and
cumulative effect of accounting changes 723(i) 448(k) 429(m)
Minority interest expense, net of taxes 238(i) 163(k) 87(m)
Extraordinary items (226) (16) --
Cumulative effect of accounting changes -- -- --
Net earnings (loss) 142(i,j) 183(k,l) 247(m)
Earnings (loss) applicable to common shares 142(i,j) 183(k,l) 247(m)
-------- ------- -------
Financial Position
Working capital $ 2,880 $ 2,859 $ 2,675
Plants, properties and equipment, net 16,132 14,381 15,320
Forestlands 5,966 2,921 3,093
Total assets 42,109 30,268 31,466
Long-term debt 12,648 7,520 7,697
Common shareholders' equity 12,034 10,304 10,738
-------- ------- -------
Per Share of Common Stock -
Assuming No Dilution
Earnings (loss) before extraordinary items
and cumulative effect of accounting changes $ 0.82 $ 0.48 $ 0.60
Extraordinary items (0.50) (0.04) --
Cumulative effect of accounting changes -- -- --
Net earnings (loss) 0.32 0.44 0.60
Cash dividends 1.00 1.01 1.05
Common shareholders' equity 24.85 24.85 25.99
-------- ------- -------
Common Stock Prices
High $ 60.00 $ 59.50 $ 55.25
Low 26.31 39.50 35.50
Year-end 40.81 56.44 44.81
-------- ------- -------
Financial Ratios
Current ratio 1.4 1.7 1.6
Total debt to capital ratio 49.3 38.1 39.0
Return on equity 1.2(i,j) 1.7(k,l) 2.3(m)
Return on investment before extraordinary items
and cumulative effect of accounting changes 3.3(i) 2.6(k) 2.5(m)
-------- ------- -------
Capital Expenditures $ 1,352 $ 1,139 $ 1,322
-------- ------- -------
Number of Employees 112,900 98,700 98,300
======== ======= =======
6
FINANCIAL GLOSSARY
Current ratio -
current assets divided by current liabilities.
Total debt to capital ratio -
long-term debt plus notes payable and current maturities of long-term debt
divided by long-term debt, notes payable and current maturities of
long-term debt, minority interest and total common shareholders' equity.
Return on equity -
net earnings divided by average common shareholders' equity (computed
monthly).
Return on investment -
the after-tax amount of earnings before interest, minority interest,
extraordinary items and cumulative effect of accounting changes divided by
the average of total assets minus accounts payable and accrued liabilities
(computed on a monthly basis).
FOOTNOTES TO SIX-YEAR FINANCIAL SUMMARY
2003:
(a) Includes restructuring and other charges of $298 million before taxes and
minority interest ($184 million after taxes and minority interest),
including a $236 million charge before taxes and minority interest ($144
million after taxes and minority interest) for asset shutdowns of excess
internal capacity and cost reduction actions, a $63 million charge before
taxes ($39 million after taxes) for legal reserves, and a $1 million credit
before taxes ($1 million charge after taxes) for early debt retirement
costs. Also included are a pre-tax charge of $32 million ($33 million after
taxes) for net losses on sales and impairments of businesses held for sale,
and a credit of $40 million before taxes and minority interest ($25 million
after taxes and minority interest) for the net reversal of restructuring
reserves no longer required.
(b) Includes a charge of $10 million after taxes for the cumulative effect of
an accounting change for the adoption of SFAS No. 143, "Accounting for
Asset Retirement Obligations," and a charge of $3 million after taxes for
the cumulative effect of an accounting change related to the adoption of
Financial Accounting Standards Board Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51."
(c) Includes a $123 million reduction after minority interest of the income tax
provision recorded for significant tax events occurring in 2003.
2002:
(d) Includes restructuring and other charges of $695 million before taxes and
minority interest ($435 million after taxes and minority interest),
including a $199 million charge before taxes and minority interest ($130
million after taxes and minority interest) for asset shutdowns of excess
internal capacity and cost reduction actions, 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. Also
included are a credit of $41 million before taxes and minority interest
($101 million after taxes and minority interest) to adjust accrued costs of
businesses sold or held for sale, and a pre-tax credit of $68 million ($43
million after taxes) for the reversal of 2001 and 2000 reserves no longer
required.
(e) Includes a $1.2 billion charge for the cumulative effect of an accounting
change for the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets."
(f) Reflects a decrease of $46 million in income tax provision for a reduction
of deferred state income tax liabilities.
2001:
(g) Includes restructuring and other charges of $1.1 billion before taxes and
minority interest ($752 million after taxes and minority interest),
including an $892 million charge before taxes and minority interest ($606
million after taxes and minority interest) for asset shutdowns of excess
internal capacity and cost reduction actions and a $225 million pre-tax
charge ($146 million after taxes) for additional exterior siding legal
reserves. Also included are a net pre-tax charge of $629 million ($587
million after taxes) related to dispositions and asset impairments of
businesses held for sale, a $42 million pre-tax charge ($28 million after
taxes) for Champion merger integration costs, and a $17 million pre-tax
credit ($11 million after taxes) for the reversal of excess 2000 and 1999
restructuring reserves.
(h) Includes an extraordinary pre-tax charge of $73 million ($46 million after
taxes) related to the impairment of the Masonite business and the
divestiture of the Petroleum and Minerals assets, and a charge of $25
million before taxes and minority interest ($16 million after taxes and
minority interest) for the cumulative effect of a change in accounting for
derivatives and hedging activities.
7
2000:
(i) Includes restructuring and other charges of $949 million before taxes and
minority interest ($589 million after taxes and minority interest),
including an $824 million charge before taxes and minority interest ($509
million after taxes and minority interest) for asset shutdowns of excess
internal capacity and cost reduction actions and a $125 million pre-tax
charge ($80 million after taxes) for additional exterior siding legal
reserves. Also included are $54 million pre-tax charge ($33 million after
taxes) for merger-related expenses and a $34 million pre-tax credit ($21
million after taxes) for the reversal of reserves no longer required.
(j) Includes an extraordinary gain of $385 million before taxes and minority
interest ($134 million after taxes and minority interest) on the sale of
International Paper's investment in Scitex and Carter Holt Harvey's sale of
its share of Compania de Petroleos de Chile (COPEC), an extraordinary loss
of $460 million before taxes ($310 million after taxes) related to the
impairment of the Zanders and Masonite businesses, an extraordinary gain
before taxes and minority interest of $368 million ($183 million after
taxes and minority interest) related to the sale of Bush Boake Allen, an
extraordinary loss of $5 million before taxes and minority interest ($2
million after taxes and minority interest) related to Carter Holt Harvey's
sale of its Plastics division, and an extraordinary pre-tax charge of $373
million ($231 million after taxes) related to impairments of the Argentine
investments and the Chemical Cellulose Pulp and the Fine Papers businesses.
1999:
(k) Includes restructuring and other charges of $338 million before taxes and
minority interest ($204 million after taxes and minority interest,
including a $298 million charge before taxes and minority interest ($180
million after taxes and minority interest) for asset shutdowns of excess
internal capacity and cost reduction actions, a $10 million pre-tax charge
($6 million after taxes) to increase existing environmental remediation
reserves related to certain former Union Camp facilities and a $30 million
pre-tax charge ($18 million after taxes) to increase existing legal
reserves. Also included are a $148 million pre-tax charge ($97 million
after taxes) for Union Camp merger-related termination benefits, a
$107 million pre-tax charge ($78 million after taxes) for merger-related
expenses and a $36 million pre-tax credit ($27 million after taxes) for
the reversal of reserves no longer required.
(l) Includes an extraordinary loss of $26 million before taxes ($16 million
after taxes) for the extinguishment of high-interest debt that was assumed
in the merger with Union Camp.
1998:
(m) Includes restructuring and other charges of $256 million before taxes and
minority interest ($150 million after taxes and minority interest),
including a $111 million pre-tax charge ($68 million after taxes) for the
impairment of oil and gas reserves due to low prices and a $145 million
restructuring and asset impairment charge before taxes and minority
interest ($82 million after taxes and minority interest). Also included are
a $16 million pre-tax charge ($10 million after taxes) related to
International Paper's share of charges taken by Scitex, a 13% investee
company, for the write-off of in-process research and development related
to an acquisition and costs to exit the digital video business, a $20
million pre-tax gain ($12 million after taxes) on the sale of the Veratec
nonwovens business and an $83 million pre-tax credit ($50 million after
taxes) from the reversals of previously established reserves that were no
longer required.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Executive Summary
The business environment for International Paper in 2003 was difficult. Demand
for paper and packaging products declined from 2002. Average prices were also
lower than in 2002, except for wood products, pulp, coated papers and bleached
board. Total industry segment operating profits were down from 2002 as benefits
from cost reduction initiatives, and improved operating performance and a more
favorable product mix, were more than offset by higher energy and raw material
costs and lower prices.
Looking forward to 2004, we expect a seasonally slow first quarter, with
continuing low prices and high wood and energy costs. However, due to signs of
increasing strength in U.S. and world economies, and growth in business activity
at many of our customers, we expect improvements in demand as 2004 progresses.
Given the generally low levels of inventories at our facilities, along with
better order backlogs, we have announced price increases in containerboard,
uncoated free sheet, pulp and certain bleached board grades. While these price
increases will have only a slight impact on margins in the first quarter, their
benefits will progressively flow through to earnings as the year progresses. The
weaker U.S. dollar should also benefit our exports and reduce the
competitiveness of imports of competitor products into the United States. The
outlook for wood products operating results as 2004 begins is favorable.
Forestland sales continue to be dependent upon various factors including tract
location and the level of investor interest.
Results of Operations
Industry segment operating profits are used by International Paper's management
to measure the earnings performance of its businesses. Management believes that
this measure allows a better understanding of trends in costs, operating
efficiencies, prices and volumes. Industry segment operating profits are defined
as earnings before taxes and minority interest, interest expense, corporate
items and special corporate items. Industry segment operating profits are
defined by the Securities and Exchange Commission as a non-GAAP financial
measure, and are not GAAP alternatives to net income or any other operating
measure prescribed by accounting principles generally accepted in the United
States. International Paper operates in six segments: Printing Papers,
Industrial and Consumer Packaging, Distribution, Forest Products, Carter Holt
Harvey, and Specialty Businesses and Other.
The following table shows the components of net earnings (loss) for each of the
last three years:
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Industry segment operating profits $1,801 $ 1,935 $ 1,787
Corporate items (466) (253) (369)
Special items* (290) (586) (1,771)
Interest expense, net (766) (783) (929)
Minority interest (56) (72) (130)
Income tax benefit 92 54 270
Accounting changes and extraordinary items (13) (1,175) (62)
------ ------- -------
Net earnings (loss) $ 302 $ (880) $(1,204)
====== ======= =======
*Special items include restructuring and other charges, net (gains) losses on
sales and impairments of businesses held for sale, and reversals of reserves no
longer required.
Industry segment operating profits declined by $134 million in 2003 due
principally to higher energy and raw material costs ($270 million) and lower
average prices ($75 million), partially offset by the effect of cost reduction
initiatives, improved operating performance and a more favorable product mix
($245 million).
Description of Graph
The following graph compares 2002 with 2003 segment operating profit in bar
chart format (in millions). The first bar is 2002 segment operating profits of
$1,935. This is followed by bars representing major changes in segment operating
profit including: Costs/Operations/Mix of $245, Energy/Raw Materials of $(270),
Price of $(75), and Volume/Other of $(34). The last bar is 2003 segment
operating profits of $1,801.
Segment Operating Profit
(in millions)
[BAR CHART]
2002 $1,935
Costs/Operations/Mix $ 245
Energy/Raw Materials $ (270)
Price $ (75)
Volume/Other $ (34)
2003 $1,801
The principal changes by segment were as follows: Printing Papers' profits were
$68 million lower as higher raw material and energy costs were partially offset
by improved operations and lower overhead costs. Industrial and Consumer
Packaging's profits were down $100 million. Higher raw material costs and lower
prices more than offset the effect of reduced overhead costs and improved
operations. Forest Products' profit was $41 million higher. Higher average
prices for wood products, lower raw material costs and improved plant operations
offset the effect of lower harvest volumes and lower earnings from Weldwood of
Canada.
Corporate items, a $466 million net expense in 2003, increased from $253 million
in 2002 due to higher pension and supply chain initiative costs, offset in part
by gains on energy hedging transactions. In addition, 2002 charges were reduced
by gains from an insurance company demutualization stock sale and foreign
exchange.
9
Special items, including restructuring and other charges, gains/losses on sales
and impairments of businesses held for sale, and reversals of reserves no longer
required, declined to $290 million from $586 million in 2002, and from $1.8
billion in 2001. The decline in 2003 reflects lower restructuring charges that
relate to excess capacity shutdowns and sales of non-core businesses, and lower
legal costs. The multi-year corporate consolidation program following the
Champion acquisition is now essentially complete.
Interest expense, net, decreased to $766 million in 2003, compared with $783
million in 2002 and $929 million in 2001. The decline in 2003 compared with both
2002 and 2001 is principally the result of lower interest rates from the
refinancing of high coupon rate debt.
The $92 million income tax benefit in 2003 included $123 million of benefits for
significant tax items occurring in 2003. The $54 million benefit in 2002 also
reflected adjustments for special tax items. The $270 million tax benefit in
2001 reflected a pre-tax loss due largely to restructuring and other charges.
Accounting changes in 2002 reflect a $1.2 billion charge for the adoption of the
new goodwill accounting standard.
Liquidity and Capital Resources
International Paper generated $1.8 billion of operating cash flow in 2003.
Capital spending totaled $1.2 billion in 2003, or 71% of depreciation and
amortization expense, and is anticipated to be $1.3 billion, or 80% of
depreciation and amortization expense, in 2004. We issued $2.4 billion of debt
and preferred securities and used the proceeds to repay $1.4 billion of existing
debt and preferred securities, with $1.0 billion subsequently used to retire
additional high coupon rate debt in January 2004. Approximately $2.5 billion of
debt, including the $1 billion of debt retired in January and $300 million of
debt at Carter Holt Harvey, is scheduled for refinancing or repayment in 2004.
We intend to meet these obligations with a combination of cash from operations
and refinancings. In addition, the holders of $1.1 billion of zero-coupon
Convertible Senior Debentures have the option to require the Company to
repurchase these securities in June 2004. If this occurs, the repurchase can be
settled in either cash or International Paper stock at the Company's option. Our
liquidity position continues to be strong, supported by existing credit
facilities that we believe to be adequate to meet future short-term liquidity
requirements. We continue to maintain an investment-grade rating for our
long-term debt, which is a core element of our overall financial strategy.
Our focus in 2004 will be to continue maximizing financial flexibility and
preserving liquidity while further reducing interest expense through repayment
or refinancing of high coupon rate debt.
Critical Accounting Policies and Significant Accounting Estimates
Accounting policies that may have a significant effect on our financial position
and results of operations, and that require judgments by management, include
accounting for contingent liabilities, impairments of long-lived assets and
goodwill, pensions and postretirement benefits, income taxes and accounting for
stock options.
Pension charges for our U.S. plans increased by $135 million for 2003 due to a
reduction in the expected long-term rate of return on plan assets and an
increase in the amortization of unrecognized actuarial losses. A further
increase of approximately $46 million is expected in 2004 due also to an
increase in amortization of unrecognized losses and a decrease in the assumed
discount rate. The actual return on plan assets was 26% in 2003 versus a loss of
6.7% in 2002. In 2002, a $1.5 billion after-tax charge to Shareholders' equity
was recorded, with no impact on earnings or cash flow, due to a decline in the
market value of plan assets for the U.S. qualified pension plan.
Recent Accounting Developments
While several new accounting standards and interpretations were effective for
International Paper for 2003, the application of Financial Accounting Standards
Board Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51," had the largest impact. This
resulted in several balance sheet changes, including a $1.3 billion reduction in
mandatorily redeemable preferred securities and a $1.0 billion increase in debt,
and an income statement effect of a $3 million after-tax charge for a cumulative
effect of an accounting change.
Legal
Claims and payments relating to exterior siding and roofing actions continue to
be in line with projections made in 2002. Class action claims brought by
corrugated sheet and container purchasers were settled in 2003 for $24.4
million. Additionally, a class action was certified in 2003 relating to alleged
price fixing by International Paper's Nevamar division (which was sold as part
of Decorative Products in late 2002) and others in sales of high-pressure
laminates. Additional information on these matters is included in Note 10 of the
Notes to Consolidated Financial Statements in Item 8.
Corporate Overview
While the operating results for International Paper's various business segments
are driven by a number of business-specific factors, changes in International
Paper's operating results are closely tied to changes in general economic
conditions in the United States, Europe and Asia. Factors that
10
impact the demand for our products include industrial non-durable goods
production, consumer spending, commercial printing and advertising activity,
white-collar employment levels, new home construction and repair and remodeling
activity, and movements in currency exchange rates. Product prices also tend to
follow general economic trends and are also affected by inventory levels,
currency movements and changes in worldwide operating rates. In addition to
these revenue-related factors, net earnings are impacted by various cost
drivers, the more significant of which include changes in raw material costs,
principally wood fiber and chemical costs, energy costs, salary and benefits
costs, including pensions, and manufacturing conversion costs.
The following is a discussion of International Paper's results of operations for
the year ended December 31, 2003, and the major factors affecting these results
compared to 2002 and 2001.
Results of Operations
For the year ended December 31, 2003, International Paper reported net sales of
$25.2 billion, compared with 2002 and 2001 net sales of $25.0 billion and $26.4
billion, respectively. International net sales (including U.S. exports) totaled
$8.4 billion, or 33% of total sales in 2003. This compares to international
sales of $7.5 billion in 2002 and $7.1 billion in 2001. The increase in 2003
versus 2002 is mainly due to the translation of sales invoiced in foreign
currencies that appreciated against the U.S. dollar. Export sales of $1.4
billion in 2003 were about flat with both 2002 and 2001.
Net earnings totaled $302 million ($0.63 per share) in 2003, compared with a net
loss of $880 million ($1.83 per share) in 2002 and a net loss of $1.2 billion
($2.50 per share) in 2001. Amounts include extraordinary items and the
cumulative effect of accounting changes.
Earnings before extraordinary items and the cumulative effect of accounting
changes in 2003 were $315 million, compared with earnings before extraordinary
items and the cumulative effect of an accounting change of $295 million in 2002
and a loss before extraordinary items and the cumulative effect of an accounting
change of $1.1 billion in 2001. Earnings in 2003 benefited from cost reduction
initiatives, improved mill operations, a lower effective tax rate and reduced
special charges compared with 2002, although these benefits were partially
offset by increased energy and wood fiber costs, higher pension expense, lower
average prices and volumes and other items. See Industry Segment Results on
pages 16-20 for a discussion of the impact of these factors by segment.
Description of Graph
The following graph compares 2002 and 2003 earnings before extraordinary items
and cumulative effect of accounting changes (after taxes) in bar chart format
(in millions). The first bar is the 2002 earnings amount of $295. This is
followed by bars representing major changes in earnings including:
Costs/Operations/Mix of $200, Tax Rate Change of $70, Energy/Raw Materials of
$(175), Pension of $(115), Price of $(60), Volume of $(15), other of $(60),
and Special Items of $175. The last bar is 2003 earnings of $315.
Earnings (Loss) Before Extraordinary Items and Cumulative
Effect of Accounting Changes (after taxes)
(in millions)
[BAR CHART]
2002 $ 295
Costs/Operations/Mix $ 200
Tax Rate Change $ 70
Energy/Raw Materials $(175)
Pension $(115)
Price $ (60)
Volume $ (15)
Other $ (60)
Special Items $ 175
2003 $ 315
The following table presents a reconciliation of International Paper's net
earnings (loss) to its operating profit:
- -------------------------------------------------------------------------------
In millions 2003 2002 2001
- -------------------------------------------------------------------------------
Net Earnings (Loss) $ 302 $ (880) $(1,204)
Add back:
Extraordinary item -- -- 46
Cumulative effect of accounting changes 13 1,175 16
------ ------ -------
Earnings (Loss) Before Extraordinary Item and
Cumulative Effect of Accounting Changes 315 295 (1,142)
Deduct: Income tax benefit (92) (54) (270)
Add back: Minority interest expense, net of taxes 123 130 147
------ ------ -------
Earnings (Loss) Before Income Taxes, Minority
Interest, Extraordinary Item and Cumulative
Effect of Accounting Changes 346 371 (1,265)
Interest expense, net 766 783 929
Minority interest included in operations (67) (58) (17)
Corporate items 466 253 369
Special items:
Restructuring and other charges 298 695 1,117
Net (gains) losses on sales and impairments of
businesses held for sale 32 (41) 629
Reversals of reserves no longer required, net (40) (68) (17)
Merger integration costs -- -- 42
------ ------ -------
$1,801 $1,935 $ 1,787
====== ====== =======
Industry Segment Operating Profit
Printing Papers $ 451 $ 519 $ 538
Industrial and Consumer Packaging 417 517 508
Distribution 82 92 21
Forest Products 741 700 655
Carter Holt Harvey 58 56 13
Specialty Businesses and Other 52 51 52
------ ------ -------
Total Industry Segment Operating Profit $1,801 $1,935 $ 1,787
====== ====== =======
11
Extraordinary Items and Cumulative Effect of Accounting Changes
Net earnings for 2003 included after-tax charges of $3 million and $10 million
for the cumulative effect of accounting changes for the adoption of the
provisions of Financial Accounting Standards Board Interpretation No. 46 (FIN
46), "Consolidation of Variable Interest Entities," and Statement of Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations." Results for 2002 included a charge of $1.2 billion after minority
interest for the cumulative effect of an accounting change to record the
transitional impairment charge for the adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets." Results for 2001 included a charge of $16 million
after taxes and minority interest for the cumulative effect of a change in
accounting for derivatives and hedging activities.
During 2001, pre-tax losses totaling $73 million ($46 million after taxes) were
recorded, including $60 million ($38 million after taxes) for impairment losses
to reduce the assets of Masonite Corporation to their estimated realizable value
based on offers received, and $13 million ($8 million after taxes) from a loss
on the sale of oil and gas properties and fee mineral and royalty interests.
Pursuant to the pooling-of-interest rules, these losses were recorded as
extraordinary items.
Income Tax Benefit
While the Company reported pre-tax income in 2003, a net income tax benefit was
recorded reflecting decreases totaling $123 million in the provision for income
taxes for significant items. These included a $13 million reduction in the
fourth quarter ($26 million before minority interest) for a favorable settlement
with Australian tax authorities of net operating loss carry forwards, a $60
million reduction in the third quarter reflecting a favorable revision of
estimated tax accruals upon filing the 2002 Federal income tax return and
increased research and development credits, and a $50 million reduction in the
second quarter reflecting a favorable tax audit settlement and benefits from a
government sponsored overseas tax program in Italy. The net tax benefit 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, and a $46 million fourth-quarter adjustment of
deferred income tax liabilities for the effects of state tax credits and the
taxability of the Company's operations in various state tax jurisdictions.
Corporate Items and Interest Expense
Minority interest expense, net of taxes, decreased to $123 million in 2003,
compared with $130 million in 2002 and $147 million in 2001. The decrease in
2003 reflects a $44 million reduction in minority interest related to preferred
securities that were replaced by debt obligations in the second half of 2003.
Interest expense, net, decreased to $766 million in 2003, compared with $783
million in 2002 and $929 million in 2001. The decline in 2003 compared with both
2002 and 2001 is the result of lower interest rates from the refinancing of high
coupon debt and the impact of interest rate swaps, net of the additional $44
million expense for the debt securities discussed above.
For the twelve months ended December 31, 2003, Corporate items totaled $466
million of expense compared with $253 million in 2002 and $369 million in 2001.
The increase from 2002 is due to higher pension and supply chain initiative
costs, offset in part by gains on energy hedging transactions. In addition, 2002
included income from an insurance company demutualization and foreign exchange
gains.
Special Items
Restructuring and Other Charges
International Paper continually evaluates its operations for opportunities for
improvement. These evaluations are targeted to (a) focus our portfolio on our
core businesses of paper, packaging and forest products, (b) rationalize and
realign capacity to operate fewer facilities with the same revenue capability
and close high cost facilities, and (c) reduce costs. Annually, strategic
operating plans are developed by each of our businesses to demonstrate that they
will achieve a return at least equal to their cost of capital over an economic
cycle. If it subsequently becomes apparent that a facility's plan will not be
achieved, a decision is then made to (a) invest additional capital to upgrade
the facility, (b) shut down the facility and record the corresponding charge, or
(c) evaluate the expected recovery of the carrying value of the facility to
determine if an impairment of the asset value of the facility has occurred under
SFAS No. 144.
In recent years, this policy has led to the shutdown of a number of facilities
and the recording of significant asset impairment charges and severance costs.
As this profit improvement initiative is ongoing, it is possible that additional
charges and costs will be incurred in future periods in our core businesses
should such triggering events occur.
2003: During 2003, restructuring and other charges before taxes and minority
interest of $298 million ($184 million after taxes and minority interest) were
recorded. These charges included a $236 million charge before taxes and minority
interest ($144 million after taxes and minority interest) for asset shutdowns of
excess internal capacity and cost reduction actions, a $63 million charge before
taxes
12
($39 million after taxes) for legal reserves, and a $1 million credit before
taxes ($1 million charge after taxes) for early debt retirement costs. In
addition, a $40 million credit before taxes and minority interest ($25 million
after taxes and minority interest) was recorded for the net reversal of
restructuring reserves no longer required.
2002: During 2002, restructuring and other charges before taxes and minority
interest of $695 million ($435 million after taxes and minority interest) were
recorded. These charges included a $199 million charge before taxes and minority
interest ($130 million after taxes and minority interest) for asset shutdowns of
excess internal capacity and cost reduction actions, 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 $68 million pre-tax credit ($43 million after taxes) was recorded in 2002 for
the reversal of 2001 and 2000 reserves no longer required.
2001: During 2001, restructuring and other charges before taxes and minority
interest of $1.1 billion ($752 million after taxes and minority interest) were
recorded. These charges included an $892 million charge before taxes and
minority interest ($606 million after taxes and minority interest) for asset
shutdowns of excess internal capacity and cost reduction actions, and a $225
million pre-tax charge ($146 million after taxes) for additional exterior siding
legal reserves. In addition, a $17 million pre-tax credit ($11 million after
taxes) was recorded in 2001 for the reversal of excess 2000 and 1999
restructuring reserves.
A further discussion of restructuring, business improvement and other charges
can be found in Note 6 of the Notes to Consolidated Financial Statements in Item
8. Financial Statements and Supplementary Data.
Net (Gains) Losses on Sales and Impairments of Businesses Held for Sale
Net (gains) losses on sales and impairments of businesses held for sale totaled
$32 million in 2003, ($41) million in 2002, and $629 million in 2001 before
taxes and minority interest. The principle components of these gains/losses
were:
2003: In the fourth quarter of 2003, International Paper recorded a $34 million
pre-tax charge ($34 million after taxes) to write down the assets of its Polyrey
business to estimated fair value. In addition, a $13 million gain ($8 million
after taxes) was recorded to adjust estimated gains/losses of businesses
previously sold.
In the second quarter of 2003, a $10 million pre-tax charge ($6 million after
taxes) was recorded to adjust estimated gains/losses of businesses previously
sold.
2002: In the fourth quarter of 2002, International Paper recorded a $10 million
pre-tax credit ($4 million after taxes) to adjust estimated accrued costs of
businesses previously sold.
During the second quarter of 2002, a net 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 in April 2002 of International Paper's
oriented strand board facilities to Nexfor Inc. for $250 million, 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.
The impairment charge recorded for Arizona Chemical in the fourth quarter of
2001 (see below) 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 gain of $28 million before taxes and minority
interest, with an associated $96 million benefit after taxes and minority
interest.
2001: In the fourth quarter of 2001, a pre-tax impairment loss of $582 million
($524 million after taxes) was recorded, including $576 million to write down
the net assets of Arizona Chemical, Decorative Products and Industrial Papers to
an estimated realizable value of approximately $550 million, and $6 million of
severance for the reduction of 189 employees in the Chemical Cellulose Pulp
business. Also in the fourth quarter, International Paper sold its Mobile,
Alabama Retail Packaging facility to Ampac, resulting in a pre-tax loss of $9
million.
In the third quarter of 2001, International Paper sold Masonite Corporation
(Masonite) to Premdor Inc. of Toronto, Canada, resulting in a pre-tax loss of
$87 million, its Flexible Packaging business to Exo-Tech Packaging, LLC,
resulting in a pre-tax loss of $31 million, and its Curtis/Palmer hydroelectric
generating project in Corinth, New York to TransCanada Pipelines Limited,
resulting in a pre-tax gain of $215 million. Also in the third quarter, 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.
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.
13
Merger Integration Costs
During 2001, International Paper recorded a pre-tax charge of $42 million ($28
million after taxes) for Champion merger integration costs. These costs
consisted primarily of systems integration, employee retention, travel and other
one-time cash costs related to the integration of Champion.
Industry Segment Operating Profit
Industry segment operating profits of $1.8 billion in 2003 declined slightly
from $1.9 billion in 2002, and were about even with 2001. Higher energy and raw
material costs ($270 million) and lower average prices ($75 million) were the
principal factors in the decline in 2003, partially offset by the effect of cost
reduction initiatives, improved operating performance and a more favorable
product mix ($245 million). In 2002, industry segment operating profits
increased by approximately $150 million compared with 2001. Non-price
improvements, including lower overhead and raw material costs, combined with a
favorable product mix, improved operating profits by about $690 million. In
addition, higher volume contributed another $60 million. However, price declines
in 2002 lowered operating profits by about $600 million.
During 2003, International Paper continued to focus on managing the factors it
can control, and further strengthened its core businesses through a
rationalization and realignment program. In July 2003, we announced a program
targeting significant additional reductions in overhead costs by late 2004,
including the elimination of approximately 3,000 salaried positions in the
United States. Additionally, we are engaged in a customer-driven, company-wide
supply chain initiative that will enhance International Paper's customer
relationships and standardize processes while improving overall company
profitability. Ultimately, the initiative will provide the foundation upon which
to build improved customer value propositions while enabling International Paper
to become increasingly competitive.
International Paper continues to balance its production with customer orders,
taking about 590,000 tons of market-related downtime across its mill system in
2003. This was down slightly from 600,000 tons in 2002.
International Paper faced a difficult business environment during 2003 as demand
for paper and packaging products lagged U.S. economic growth and average prices
were weak. Our focus on strong operational performance and improvements to our
internal cost structure and product mix helped mitigate the impact of poor
market conditions. Looking forward to 2004, we anticipate a slow start in the
first quarter as energy and wood costs continue to be high while pricing remains
depressed in most businesses. However, there are clear signs of momentum in the
U.S. and world economies, and indications of increasing business activity at
many of our customers. We believe that the actions taken over the last few years
to restructure our operations and eliminate excess manufacturing capacity, to
reduce overhead costs, and to focus on our customer relationships will favorably
position International Paper as market conditions improve.
Description of Industry Segments
International Paper's industry segments discussed below are consistent with the
internal structure used to manage these businesses. All segments, except for
Carter Holt Harvey, are differentiated on a common product, common customer
basis consistent with the business segmentation generally used in the Forest
Products industry. The Carter Holt Harvey business includes the results of
multiple Forest Products businesses.
Printing Papers
International Paper is one of the world's leading producers of printing and
writing papers. Products in this segment include uncoated and coated papers,
market pulp and bristols.
Uncoated Papers: This business produces papers for use in desktop and laser
copiers and digital imaging printing as well as in advertising and promotional
materials such as brochures, pamphlets, greeting cards, books, annual reports
and direct mail publications. Uncoated Papers also produces a variety of grades
that are converted by our customers into envelopes, tablets, business forms and
file folders. Fine papers are used in high-quality text, cover, business
correspondence and artist papers. Uncoated papers are sold under private label
and International Paper brand names that include Hammermill, Springhill, Great
White, Strathmore, Ballet, Beckett and Rey. The mills producing uncoated papers
are located in the United States, Scotland, France, Poland and Russia. These
mills have uncoated paper production capacity of approximately 5.2 million tons
annually.
Coated Papers: This business produces coated papers used in a variety of
printing and publication end uses such as catalogs, direct mailings, magazines,
inserts and commercial printing. Products include coated free sheet, coated
groundwood and supercalendered groundwood papers. Production capacity in the
United States amounts to approximately 2.0 million tons annually.
Market Pulp: Market pulp is used in the manufacture of printing, writing and
specialty papers. Pulp is also converted into products such as diapers and
sanitary napkins. Pulp products include fluff, northern and southern softwood
pulp, as well as northern, southern, and birch hardwood paper pulps. These
products are produced in the United States, Canada, France, Poland and Russia,
and are sold around the
14
world. International Paper facilities have annual dried pulp capacity of about
2.3 million tons.
Brazilian Paper: Brazilian operations function through International Paper do
Brasil, Ltda, which owns or manages 1.5 million acres of forestlands in Brazil.
Our annual production capacity in Brazil is approximately 675,000 tons of coated
and uncoated papers.
Industrial and Consumer Packaging
Industrial Packaging: With production capacity of about 4.5 million tons
annually, International Paper is the third largest manufacturer of
containerboard in the United States. Over one-third of our production consists
of specialty grades, such as PineLiner and BriteTop. About 65% of our production
is converted domestically into corrugated boxes and other packaging by our 51
U.S. container plants. In Europe, our operations include one recycled
containerboard mill in France and 22 container plants in France, Ireland, Italy,
Spain and the United Kingdom. Global operations also include facilities in
Chile, Turkey and China. Our container plants are supported by regional design
centers, which offer total packaging solutions and supply chain initiatives. We
have the capacity to produce around 470,000 tons of kraft paper each year for
use in multi-wall and retail bags.
Consumer Packaging: International Paper is the world's largest producer of solid
bleached sulfate packaging board with annual production capacity of about 2
million tons. Our Everest, Fortress and Starcote brands are used in packaging
applications for juice, milk, food, cosmetics, pharmaceuticals, computer
software and tobacco products. Approximately 40% of our bleached board
production is converted into packaging products in our own plants. Our Beverage
Packaging business has 17 plants worldwide offering complete packaging systems,
from paper to filling machines, using proprietary technologies including
Tru-Taste brand barrier board technology for premium long-life juices. Shorewood
Packaging Corporation operates 21 plants worldwide, producing packaging with
high-impact graphics for a variety of markets, including home entertainment,
tobacco, cosmetics, general consumer and pharmaceuticals. The Foodservice
business offers cups, lids, cartons, bags, food containers and plates through
four domestic plants and four international facilities. Group-wide product
development efforts will provide customers with innovative packaging solutions,
including radio frequency identification device (RFID) technology that tracks,
traces and authenticates packages throughout the global supply chain.
Distribution
Through xpedx, our North American merchant distribution business, we service the
commercial printing market with printing papers and graphic art supplies, high
traffic/away-from-home markets with facility supplies, and various manufacturers
and processors with packaging supplies and equipment. xpedx is the leading
wholesale distribution marketer in these customer and product segments in North
America, operating 126 warehouse locations and 141 retail stores in the U.S. and
Mexico. Overseas, Papeteries de France and Scaldia serve markets in France,
Belgium and the Netherlands.
Forest Products
Forest Resources: International Paper owns or manages approximately 8.3 million
acres of forestlands in the United States, mostly in the South. All lands are
independently third-party certified under the operating standards of the
Sustainable Forestry Initiative (SFI(TM) ). In 2003, these forestlands supplied
about 25% of the wood fiber requirements of our other businesses. Our
forestlands are managed as a portfolio to optimize the economic value to our
shareholders. Principle revenue-generating activities include the sale of trees
for harvest, the sale of forestlands to investment funds and other buyers for
various uses, real estate development and the leasing of our properties for
third-party recreational and commercial uses. The mix of these activities varies
based on the fiber requirements of our mills and wood products plants,
prevailing stumpage prices, supply and demand for forestlands and market
preferences for timber and forestlands. When stumpage prices are depressed
relative to land values, forestland sales tend to comprise a larger part of our
portfolio mix. Conversely, when stumpage prices are high, stumpage sales may be
the best alternative to maximize the value of our forestland holdings.
Wood Products: International Paper owns and operates 35 plants producing lumber,
plywood, engineered wood products and utility poles. There are 25 plants in the
southern United States and 10 plants in the Canadian provinces of British
Columbia and Alberta operated by Weldwood of Canada Limited, a wholly-owned
subsidiary of International Paper. In our U.S. operations, we produce
approximately 2.4 billion board feet of lumber and 1.6 billion square feet of
plywood annually. In Canada, we produce about 1.2 billion board feet of lumber
and 450 million square feet of plywood annually. Through licenses and forest
management agreements, we have harvesting rights on 7.9 million acres of
government-owned forestlands in Canada.
Carter Holt Harvey
Carter Holt Harvey is approximately 50.5% owned by International Paper. It is
one of the largest forest products companies in the Southern Hemisphere, with
operations mainly in New Zealand and Australia. The Australasian region accounts
for about 80% of its sales. Asia is an important
15
market for its logs, pulp and linerboard products. Carter Holt Harvey's major
businesses include:
Forests, including 795,000 acres of predominantly radiata pine
plantations that yield 5.5-6.0 million tons of logs annually.
Wood Products, including about 600 million board feet of lumber capacity
and about 900 million square feet of plywood and panel production. Carter
Holt Harvey is the largest Australasian producer of lumber, plywood,
laminated veneer lumber and panel products.
Pulp and Paper Products, with overall capacity of more than 1.0 million
tons of annual linerboard and pulp capacity at four mills. Carter Holt
Harvey is New Zealand's largest manufacturer and marketer of pulp and paper
products.
Tissue Products, with nearly 175,000 tons of annual production
capacity from two mills and six converting plants. Carter Holt Harvey is
the largest tissue manufacturer in Australia and New Zealand. Carter Holt
Harvey is currently exploring strategic alternatives for this business.
Carter Holt Harvey also produces corrugated boxes, cartons and paper bags, with
a focus on the horticulture, primary produce and foodservice markets.
Specialty Businesses and Other
Chemicals: Arizona Chemical is a leading producer of specialty resins based on
crude tall oil, a byproduct of the wood pulping process. These products, used in
adhesives and inks, are made at 13 plants in the United States and Europe.
Industrial Papers: Industrial Papers is a manufacturer of lightweight and
pressure sensitive papers and converted products with an annual capacity of
375,000 tons. These products are used in applications such as pressure sensitive
labels, food and industrial packaging, industrial sealants and tapes, and
consumer hygiene products.
Products and brand designations appearing in italics are trademarks of
International Paper or a related company.
Industry Segment Results
Printing Papers
Demand for Printing Papers products is closely correlated with changes in
commercial printing and advertising activity, direct mail volumes and, for
uncoated free sheet products, with changes in white-collar employment levels
that affect the usage of copy and laser printer paper. Market pulp is further
affected by changes in currency rates that can enhance or disadvantage producers
in different geographic regions.
Principle cost drivers include manufacturing efficiency and raw material and
energy costs.
Printing Papers net sales for 2003 increased 1% from 2002 but were down 3% from
2001. Operating profits in 2003 were down 13% and 16% from 2002 and 2001,
respectively. Lower earnings in our Uncoated and Coated Papers businesses in
2003 more than offset improvements in our Market Pulp and Brazilian Papers
businesses. Higher raw material and energy costs ($175 million) and lower
average prices ($20 million) contributed to the decline in earnings versus 2002,
although these were partially offset by improved mill operations and lower
overhead costs ($70 million), a more profitable product mix ($30 million) and
higher sales volumes ($20 million). The Printing Papers segment took 750,000
tons of downtime during 2003, including 335,000 tons of lack-of-order downtime
to align production with customer demand. This compared with 655,000 tons of
downtime in 2002, of which 325,000 tons related to lack-of-orders.
Printing Papers
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Sales $7,555 $7,510 $7,815
Operating Profit $ 451 $ 519 $ 538
Uncoated Papers sales were $4.8 billion in 2003, even with 2002, but down from
$4.9 billion in 2001. Overall average prices in 2003 declined from both 2002 and
2001. After some recovery in U.S. uncoated papers pricing at the end of 2002,
prices across major products began to decline in the second quarter of 2003. The
decline reflected weak customer demand, which also had a negative impact on U.S.
operating rates. Average prices in Europe declined throughout most of 2003 as
the strong euro led to an increase in imports combined with weak Western
European demand. Annual U.S. and European shipping volumes in 2003 were slightly
lower than in 2002. Operating profits declined 25% compared with 2002, but were
2% higher than 2001. In addition to the softer pricing and lower shipments, the
business was adversely impacted by higher energy and wood costs in 2003 compared
with 2002. Partially offsetting these unfavorable impacts were continued
improvements in mill operations and lower overhead expenses.
Coated Papers sales were $1.4 billion in 2003, compared with $1.5 billion in
2002 and $1.6 billion in 2001. Operating losses increased during 2003 compared
with 2002. The business was profitable in 2001. The decline in earnings in 2003
compared with 2002 was primarily due to higher energy and wood costs, although
the effect of recent cost reduction efforts helped mitigate the losses. Average
prices in 2003 remained flat following a 15% decline in 2002 compared with 2001.
Facility rationalizations at the end of 2002 had a significant impact on 2003
shipments which declined 6% compared with 2002.
16
Market Pulp sales from our U.S., European and Canadian facilities were $850
million in 2003 compared with $765 million and $815 million in 2002 and 2001,
respectively. Operating losses decreased in 2003 compared with both 2002 and
2001 as higher average prices, lower overhead costs, and improved mill
operations more than offset increases in raw material costs. U.S. pulp prices
improved steadily during the first half of 2003, then declined slightly during
the third quarter before making a slight recovery in the fourth quarter. U.S.
pulp volumes in 2003 were 2% lower than 2002 primarily due to periodic hardwood
shortages during the year. Canadian pulp volumes were flat year over year while
European pulp volumes increased 9% from 2002.
Brazilian Paper sales were $540 million in 2003 compared with $440 million in
2002 and $460 million in 2001. Operating profits in 2003 were up 14% and 12%
from 2002 and 2001, respectively. Shipments and average prices both increased in
2003 versus 2002, although these benefits were partially offset by unfavorable
foreign exchange rates and increased energy and chemical costs.
As 2004 begins, the outlook for Printing Papers is more encouraging. Although
selling prices are at or near historic lows, industry-wide inventory levels are
also low, and improvements are expected in both customer demand and pricing as
improving economic conditions lead to increased employment and higher demand.
Operating rates should benefit from the shutdown of high-cost industry capacity
during the second half of 2003. Energy and wood costs are expected to decline
gradually in 2004, although they likely will remain above historical averages.
We will continue our focus on further improvements in manufacturing efficiency
and overall cost structure.
Industrial and Consumer Packaging
Demand for Industrial Packaging products is closely correlated with non-durable
industrial goods production in the United States, as well as with demand for
processed foods, poultry, meat and agricultural products. Demand and pricing for
Consumer Packaging products correlate closely with consumer spending and general
economic activity. In addition to prices and volumes, major factors affecting
the profitability of both Industrial and Consumer Packaging are raw material and
energy costs, manufacturing efficiency and product mix.
Industrial and Consumer Packaging net sales for 2003 were 2% higher than 2002
and were down 1% from 2001. Operating profits in 2003 were down 19% and 18% from
2002 and 2001, respectively. Higher raw material costs ($130 million) and lower
average prices ($90 million) resulted in a decline in 2003 operating profits
versus 2002, although improved mill operations and reduced overhead costs ($90
million), a more favorable product/customer mix ($10 million), and increased
sales volumes ($20 million) helped mitigate these impacts. The segment took
390,000 tons of downtime during 2003, including 240,000 tons of lack-of-order
downtime to balance internal supply with customer demand. This compared with
445,000 tons of downtime in 2002, of which 270,000 tons related to
lack-of-orders.
Industrial and Consumer Packaging
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Sales $6,200 $6,095 $6,280
Operating Profit $ 417 $ 517 $ 508
Industrial Packaging net sales for 2003 were $3.7 billion compared with $3.6
billion in 2002, and were flat compared with 2001. Weak U.S. demand, coupled
with pressure on pricing, continued to adversely affect results for this
business. Operating profits in 2003 declined 14% and 32% from 2002 and 2001,
respectively. The impacts of lower average prices and increased raw material
costs in 2003 versus 2002 were partially offset by successful overhead cost
reduction efforts, operating efficiency improvements, a more favorable
product/customer mix and a slight increase in shipments. Domestic box shipments
were over 3% higher than in 2002 despite soft market conditions, reflecting an
improvement in market position. Demand for European Container products was
slightly down versus 2002, but operating results improved due to higher
converting margins and cost reduction programs. During 2003, the Industrial
Packaging business took 230,000 tons of lack-of-order downtime, as we continued
our policy of adjusting production to be in line with customer demand.
Entering 2004, although prices are at low levels, demand for boxes and
containerboard is expected to improve as the year progresses. Current order
volumes for both containerboard and boxes are strengthening, while inventory
levels are at the lowest level in years. As a result, operating rates entering
2004 have increased, and we announced price increases for containerboard and
boxes in the first quarter. Production realignments, as well as business and
plant overhead reductions begun in late 2003, will benefit operating results in
2004. We expect the European operating results to improve as a result of
internal process improvement programs implemented in 2003.
Consumer Packaging 2003 net sales of $2.5 billion were flat versus 2002 but were
lower than 2001 sales of $2.6 billion. Average prices in 2003 increased about 2%
over 2002 for bleached board, but were down around 3% for the converting
businesses. Our bleached board mills ran about at capacity for the year, with
very little market-related downtime, and shipments were up slightly over prior
year. Operating profits in 2003 declined 25% from 2002, but were 11%
17
higher than in 2001. Cost control programs implemented in 2003 in mills and
converting operations, and improved bleached board pricing, did not fully offset
the significant impact of cost increases in raw materials, especially wood and
energy. During 2003, manufacturing improvement, rationalization, and
organizational restructuring plans were implemented throughout this business to
reduce costs and improve alignment with our markets.
Although competitive pressures remain strong for Consumer Packaging entering
2004, market conditions are showing signs of improvement. Several key supply
agreements were finalized during the fourth quarter of 2003 with strategic
customers, further strengthening our market positions. Progress made in 2003 in
wood yield optimization, reductions of purchased energy, and cost curtailment
efforts, will also benefit operating results in 2004.
Distribution
Our Distribution business buys and re-sells a diverse array of products to
customers in the commercial printing, general manufacturing, and other market
segments. Distribution sales margins are generally stable, though customer
demand and revenue are sensitive to changes in general economic conditions.
Business from customers in the commercial printing segment is heavily dependent
on the levels of corporate advertising and promotional spending. In addition to
sales volumes and profit margins, efficient customer service and logistics and
focused working capital management are key factors in this segment's
profitability.
Distribution's 2003 net sales declined 2% and 8% from 2002 and 2001,
respectively. Operating profits in 2003 declined 11% from 2002, but remained
significantly higher than in 2001. Lower average margins and sales volumes
during 2003 compared with 2002 reduced earnings by $30 million, partially offset
by $20 million in lower operating costs and bad debt expenses.
Distribution
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Sales $6,230 $6,345 $6,790
Operating Profit $ 82 $ 92 $ 21
xpedx, our North American distribution operation, posted sales of $6 billion,
down 2% and 9% from 2002 and 2001 levels, respectively. Combined sales to our
two primary U.S. market segments, commercial printing and general manufacturing,
declined slightly from 2002 reflecting generally weak domestic economic
conditions.
Earnings in 2003 declined 13% from 2002 but remained well ahead of 2001. The
decline from 2002 was primarily due to lower average prices and sales volume
partially offset by lower operating costs and bad debt expenses. The reduction
in operating costs in 2003 resulted primarily from consolidations and
operational restructuring actions taken in recent years. Since 2001,
consolidation actions taken by xpedx have resulted in a 24% reduction in its
work force. Significant improvements in credit control led to decreases in bad
debt expenses of 46% and 70% from 2002 and 2001 levels, respectively.
European distribution operations posted sales of $375 million in 2003, even with
2002 and up 7% from 2001. The European businesses' earnings increased in 2003
following a small profit in 2002 and a small loss in 2001.
Looking ahead to 2004, Distribution will focus on increasing market share in our
primary customer segments. The initiatives undertaken in recent years to reduce
overhead costs and working capital will continue. Distribution's management
anticipates improved sales volumes as economic conditions and product prices
continue to improve during 2004.
Forest Products
Forest Products manages approximately 8.3 million acres of forestlands in the
United States, and operates wood products plants in the United States and Canada
that produce lumber, plywood, engineered wood products and utility poles. Forest
Resources' operating results are largely driven by demand and pricing for
softwood sawtimber, and to a lesser extent for softwood pulpwood, by the volume
of merchantable timber on Company forestlands, and by demand and pricing for
specific forestland tracts offered for sale. Wood Products operating results are
driven by new housing starts and repair and remodeling activity. Fiber costs are
a major factor in Wood Products' profitability.
Forest Products net sales for 2003 were 2% lower than in 2002, and were 6%
higher than in 2001. Operating profits in 2003 were 6% and 13% higher than in
2002 and 2001, respectively. Earnings in 2003 reflected strong contributions
from the U.S. Wood Products business, primarily as a result of higher average
plywood and lumber prices ($50 million) and reduced raw material costs and
improved plant operations ($70 million). Lower earnings from reduced harvest
volumes in Forest Resources ($40 million) and lower earnings from Weldwood of
Canada ($40 million) due to lower prices and a stronger Canadian dollar,
partially offset the improved U.S. Wood Products contributions.
Forest Products
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Sales $3,025 $3,090 $2,855
Operating Profit $ 741 $ 700 $ 655
18
Forest Resources sales in 2003 were $1.1 billion compared with $1.2 billion in
2002 and $960 million in 2001. Operating profit was 4% lower than in 2002, due
to lower stumpage sales and recreation income, partially offset by lower
operating costs. Operating profit in 2003 was 2% higher than in 2001, primarily
due to lower operating costs and increased contributions from forestland sales,
partially offset by lower stumpage sales and recreation income.
Gross margins from stumpage sales and recreational income were $268 million in
2003, down from $324 million in 2002 and $386 million in 2001. Harvest volumes
declined 7% in 2003, compared with 2002, and 26% from 2001, reflecting a lower
inventory of mature sawtimber in 2003. Sawtimber prices were down 11% versus
2002 and 2001, and were 30% below long-term trend line prices. Gross margins
from forestland sales were $462 million in 2003, about the same as $461 million
in 2002 and up from $388 million in 2001, reflecting higher average per-acre
sales realizations. Operating expenses declined to $157 million in 2003 from
$190 million in 2002 and $220 million in 2001, reflecting the impact of
restructuring and cost reduction actions. Operating profits for the Real Estate
division were $71 million, $75 million and $78 million in 2003, 2002 and 2001,
respectively. 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 sales of timberlands.
For 2004, our harvest is projected to be down due to a lower inventory of mature
timber. Over time, harvests are expected to increase due to higher
yield-per-acre initiatives and maturities of premerchantable timber inventories.
Average first quarter 2004 southern pine pulpwood and sawtimber prices are
expected to remain close to fourth quarter 2003 levels, while hardwood pulpwood
prices should begin to decline. Forestland sales will continue to be dependent
upon various factors including tract location and the level of investor
interest.
Wood Products sales in the United States in 2003 of $1.3 billion were even with
2002 but were slightly lower than sales of $1.4 billion in 2001. Operating
profits in 2003 increased substantially from 2002 as a result of higher average
prices, lower raw material costs and improved manufacturing operations. Average
2003 plywood prices rose 17% above 2002 levels and were 10% higher than 2001.
Plywood sales volume was flat with 2002 and was slightly higher than 2001.
Average prices for lumber were up 2% in 2003 versus 2002 but were flat with
2001. Lumber sales volume declined 5% from 2002 and 5% from 2001, reflecting
the closures of high cost facilities during those periods. Both lumber and
plywood plant operations have lower manufacturing costs compared with both 2002
and 2001. Wood costs also were lower in 2003 than in 2002. In 2003, the
Tuskalusa and Springhill lumber plants were closed, eliminating approximately
200 million board feet of capacity.
Canadian wood products, operated through Weldwood of Canada, reported net sales
of $635 million in 2003 compared with $565 million in 2002 and $480 million in
2001. Operating profits in 2003 were down 64% and 50% from 2002 and 2001,
respectively. The impact of a substantially stronger Canadian dollar, coupled
with lower average lumber prices more than offset the effect of lower raw
material costs. Average lumber prices in 2003 were down 17% from 2002 while
sales volumes increased 1%. Plywood average prices and sales volumes in 2003
were 5% higher than in 2002.
The outlook for Wood Products' operating results as 2004 begins is favorable.
Lumber and plywood prices began the year well above prior year levels. Current
low interest rates and expected improving economic conditions during 2004 should
continue to support strong construction and remodeling activity. Customer
inventory levels in the distribution pipeline should support strong demand in
the first part of the year. Negotiations to settle the U.S./Canada softwood
lumber dispute, if finalized, should help market stability. The business will
continue to focus on cost reduction and productivity improvement initiatives and
improving its product and customer mix in 2004.
Carter Holt Harvey
Carter Holt Harvey, International Paper's approximately 50.5% owned subsidiary
operating principally in New Zealand and Australia, is in many of the same
businesses as International Paper, and is thus affected by many of the same
economic factors as our other segments. Additionally, Carter Holt Harvey's
reported operating results are sensitive to changes in currency exchange rates,
especially changes in the New Zealand dollar versus the U.S. dollar since most
operating costs are New Zealand dollar denominated while a large portion of its
export sales are denominated in U.S. dollars. Demand for wood products is
largely driven by housing and remodeling activity in Australia and New Zealand.
International Paper's results shown below 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. The weighted average currency exchange rate
used to translate New Zealand dollars to U.S. dollars was 0.58 in 2003,
0.47 in 2002 and 0.41 in 2001.
3. Carter Holt Harvey reports under New Zealand accounting standards, but our
segment results comply with generally
19
accepted accounting principles in the United States. The major differences
in standards relate to cost of timber harvested (COTH), goodwill
amortization, recognition of asset impairment losses, depreciation and
financial instruments. These differences reduced segment earnings by
approximately $9 million in 2003, $24 million in 2002 and $30 million in
2001. In addition, Carter Holt Harvey recorded a $533 million impairment
charge in 2003 to write down its forestlands that was not recordable under
generally accepted accounting principles in the United States.
Carter Holt Harvey
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Sales $2,250 $1,910 $1,710
Operating Profit $ 58 $ 56 $ 13
Carter Holt Harvey's 2003 U.S. dollar net sales and operating profits were
higher than in 2002 due solely to the translation effect of the stronger New
Zealand dollar. In New Zealand dollars, total sales and operating profits
declined 6% and 8%, respectively, compared to 2002 levels, reflecting the effect
of the strike at the Kinleith mill in early 2003 and difficult trading
conditions in the forest and wood export markets.
Forests' operating results in 2003 were lower than 2002 primarily due to lower
export and domestic log prices, reflecting a stronger New Zealand dollar and
higher freight costs. Harvest levels were reduced in 2003 as a result of these
lower prices. The Wood Products business reported improved sales volumes
compared with 2002 as residential housing markets in Australia and New Zealand
continued to strengthen.
The Pulp and Paper business earnings improved in 2003 despite the three-month
labor strike at the Kinleith mill reflecting higher average prices compared with
2002. Higher earnings in the Packaging business resulted from successful margin
improvement and business restructuring programs. The Tissue business's 2003
operating results were about even with 2002 as the effect of lower sales volumes
was largely offset by cost reduction efforts.
The outlook for operating results in 2004 is mixed. Housing and construction
activity in Australia and New Zealand is expected to remain steady after
reaching peak volumes during 2003, resulting in stable demand for domestic log
and lumber volumes in New Zealand and Australia. The Company has also continued
to build on its hedging position for 2004 with projected U.S. dollar exposures
at around 63% hedged at a rate of U.S. $0.49. The Company continues to maintain
additional U.S. dollar strategic hedges to 2007. Export earnings will continue
to be adversely affected by a strong New Zealand dollar somewhat offset by
improved pricing for linerboard and pulp. Operational improvements are expected
across all businesses.
Specialty Businesses and Other
The Specialty Businesses and Other segment includes the operating results of
Arizona Chemical, Industrial Papers and divested businesses whose results are
included in this segment for periods prior to their sale.
Specialty Businesses and Other
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Sales $1,305 $1,535 $2,325
Operating Profit $ 52 $ 51 $ 52
Chemicals sales were $625 million in 2003, compared with $595 million in 2002
and $566 million in 2001. Operating profits in 2003 were 28% and 20% higher than
2002 and 2001, respectively, as the impact of manufacturing and overhead cost
reduction efforts more than offset increased energy costs and lower average
prices compared with 2002.
Industrial Papers sales were $437 million in 2003 compared with sales of $436
million in 2002 and $451 million in 2001. Operating profits in 2003 were down
10% from 2002 but were up 45% from 2001. Higher raw material costs and
unfavorable product mix partially offset by higher average prices contributed to
the decline in operating profits in 2003.
Other businesses in the above totals include operations that have been sold,
closed, or are held for sale, principally Masonite, the oil and gas and mineral
royalty business, Decorative Products, Zanders, Flexible Packaging, Retail
Packaging, and the Natchez Chemical Cellulose Pulp mill. Sales for these
businesses were approximately $245 million in 2003 (mainly Decorative Products
and the Chemical Cellulose Pulp mill) compared with $500 million in 2002 and
$1.3 billion in 2001.
Liquidity and Capital Resources
Overview
A major factor in International Paper's liquidity and capital resource planning
is its generation of operating cash flow, which in turn is highly sensitive to
changes in the pricing and demand for our major products. While changes in key
cash operating costs, such as energy, do have an effect on operating cash
generation, we believe that our strong focus on cost controls has reduced the
variability of our controllable costs over an operating cycle. As a result, we
believe that we are well positioned for a strong increase in future operating
cash flows as the current low average price levels for our products improve with
stronger worldwide economic conditions.
20
As part of the program to improve International Paper's return on investment,
capital spending levels have been focused on high-return, cost reduction and key
maintenance projects in our core businesses, and kept well below depreciation
and amortization charges for each of the last three years. We anticipate
continuing this approach in 2004.
With the low interest rate environment in 2003, financing activities focused
largely on extending the maturities of short-term borrowings and reducing future
interest costs through the refinancing of high coupon rate borrowings.
Additionally, we strengthened our liquidity position, extending the maturity of
our $1.5 billion credit facility to 2006 and increasing our receivables
securitization program to $650 million. We also have an existing $750 million
credit agreement maturing in 2004 that we are in the process of restructuring
and extending. We believe these facilities are adequate to meet any future
short-term liquidity requirements.
Management believes it is important for International Paper to maintain an
investment-grade credit rating in order to facilitate access to favorable terms
in the capital markets.
Cash Provided by Operations
Cash provided by operations totaled $1.8 billion for 2003, compared with $2.1
billion in 2002 and $1.7 billion in 2001. The major components of cash provided
by operations are net income adjusted for non-cash income and expense items and
changes in working capital. Net income adjusted for non-cash income and expense
items increased $108 million in 2003 compared with 2002. The increase for 2002
over 2001 was $291 million.
Working capital, representing International Paper's investments in accounts
receivable and inventory less accounts payable and accrued liabilities, was $2.5
billion at December 31, 2003. Cash working capital components increased by $12
million in 2003, compared with a $368 million decrease in 2002 and a $279
million decrease in 2001.
Investment Activities
Capital spending was $1.2 billion in 2003, or 71% of depreciation and
amortization as compared to $1.0 billion, or 64% of depreciation and
amortization in 2002, and $1.0 billion, or 56% of depreciation and amortization
in 2001.
The following table presents capital spending by each of our business segments
for the years ended December 31, 2003, 2002 and 2001.
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Printing Papers $ 524 $ 399 $ 374
Industrial and Consumer Packaging 269 249 246
Distribution 12 5 16
Forest Products 164 127 175
Carter Holt Harvey 101 69 85
Specialty Businesses and Other 35 71 82
------ ------ ------
Subtotal 1,105 920 978
Corporate and other 61 89 71
------ ------ ------
Total $1,166 $1,009 $1,049
====== ====== ======
We expect capital expenditures in 2004 to be about $1.3 billion, or about 80% of
depreciation and amortization.
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.
In April 2001, Carter Holt Harvey acquired Norske Skog's Tasman Kraft pulp
manufacturing business for $130 million in cash.
Each of the above acquisitions were accounted for using the purchase method. The
operating results of these mergers and acquisitions have been included in the
consolidated statement of earnings from the dates of acquisition.
Financing Activities
Financing activities during 2003 included debt and preferred security issuances
of $2.4 billion and retirements totaling $1.4 billion for a net increase of $1.0
billion, before non-cash adjustments under FIN 46 (see Recent Accounting
Developments). The increase reflects the timing of $1 billion of borrowings in
December 2003 to be used to retire approximately $1 billion of higher coupon
rate debt in January 2004. Other 2003 financing activity included the redemption
of $550 million and the issuance of $150 million of preferred securities of
International Paper subsidiaries.
In December 2003, $500 million of 4.25% Senior Unsecured Notes due January 15,
2009, and $500 million of 5.50% Senior Unsecured Notes due January 15, 2014,
were issued. In January 2004, the proceeds from these issuances were used to
redeem $805 million of 7.875% preferred securities of International Paper
Capital Trust III, that prior to July 1, 2003, was a subsidiary of International
Paper (see Notes 4, 8 and 12 of the Notes to Consolidated Financial Statements
in Item 8. Financial Statements and Supplementary Data). The
21
remaining proceeds were used for the repayment or early retirement of other
debt.
In March 2003, $300 million of 3.80% notes due April 1, 2008, and $700 million
of 5.30% notes due April 1, 2015, were issued. 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. In the same
period, International Paper sold a minority interest in Southeast Timber, Inc.,
a consolidated subsidiary of International Paper, to a private investor for $150
million with future dividend payments based on LIBOR. Other financing activity
included $26 million for the repurchase of approximately 713,000 shares of
International Paper common stock, and the issuance of 2,725,000 treasury shares
under various incentive plans, including stock option exercises that generated
$80 million of cash.
Financing activities during 2002 included debt issuances of $2.0 billion and
retirements of $3.0 billion, for a net debt reduction of $1.0 billion. Debt
issuances in 2002 included $1.2 billion of 5.85% Senior Unsecured Notes due
October 30, 2012, the proceeds of which were used to retire most of
International Paper's $1.2 billion of 8.0% notes due July 2003 that were issued
in connection with the Champion acquisition. Other financing activity included
$169 million for the repurchase of approximately 4,390,000 shares of
International Paper common stock, and the issuance of 1,403,000 shares for
various incentive plans, including stock option exercises that generated $53
million of cash.
Financing activities during 2001 included a net debt reduction of $1.4 billion,
primarily from proceeds from divestitures. Debt issuances in 2001 included $1.0
billion of 6.75% Senior Unsecured Notes due September 1, 2011, and $2.1 billion
of zero-coupon Convertible Senior Debentures due June 20, 2021, which yielded
proceeds of approximately $1.0 billion. Other financing activity included $64
million for the repurchase of approximately 1,730,000 shares of International
Paper common stock and the issuance of 1,727,000 shares for various incentive
plans, including stock option exercises that generated $25 million of cash.
Refinancing of high coupon rate debt in the last three years is one means the
Company uses to manage interest expense. Another action to manage interest is
the use of interest rate swaps to change the mix between fixed and variable rate
debt. At December 31, 2003, International Paper had entered into interest rate
swaps with a total notional amount of $2.1 billion. These swaps reduced 2003
interest expense by $77 million before taxes and minority interest, or 365 basis
points, on $2 billion of related debt. At December 31, 2003, the swaps reduce
the weighted average fixed rate on the debt of 7% to an effective rate of 3.3%
with maturities ranging from one to 11 years.
Dividend payments totaled $480 million in 2003 and $482 million in both 2002 and
2001. The International Paper common stock dividend remained at $1.00 per share
during the three-year period.
At December 31, 2003 and 2002, cash and temporary investments totaled $2.4
billion and $1.1 billion, respectively, with the increase in 2003 reflecting
funds borrowed in December to retire debt in January 2004.
Capital Resources Outlook for 2004
International Paper can meet projected capital expenditures, service existing
debt and meet working capital and dividend requirements during 2004 through cash
from operations and various sources of short- and long-term borrowings.
International Paper has approximately $3.1 billion of committed liquidity, which
we believe is adequate to cover expected operating cash flow variability during
our industry's economic cycles.
The Company will continue to rely upon debt capital markets for the majority of
any necessary funding not provided by operating cash flow. Funding decisions
will be guided by our capital structure planning and liability management
practices. The primary goals of the Company's capital structure planning are to
maximize financial flexibility and preserve liquidity while reducing interest
expense. In 2004, the Company will continue to access the capital markets where
there are opportunities to replace high coupon debt with new financing
instruments at lower interest rates.
Maintaining an investment grade credit rating is an important element of
International Paper's financing strategy. At December 31, 2003, the Company held
long-term credit ratings of BBB (negative outlook) and Baa2 (stable outlook) by
Standard & Poor's and Moody's Investor Services, respectively. The Company
currently has short-term credit ratings by Standard & Poor's and Moody's
Investor Services of A-3 and P-2, respectively.
In the third quarter of 2003, in connection with a Forest Products industry
review, Standard & Poor's changed the outlook for International Paper's
long-term credit rating from BBB (stable outlook) to BBB (negative outlook).
This change in long-term credit rating did not have a significant effect on our
ability to raise long-term capital as evidenced by the $1.0 billion in long-term
debt issued in December 2003 and discussed above. At the same time, the Standard
& Poor's short-term rating was downgraded to A-3.
The change in the short-term ratings excludes International Paper from the
largest investor segment of the commercial paper market. At the time of the
downgrade, and at December 31, 2003, International Paper had no commercial
22
paper outstanding. The Company has committed credit facility alternatives for
working capital funding. Availability of these facilities is not affected by the
change of our short-term ratings. International Paper's facilities include a
$750 million committed bank Revolving Credit Facility which expires March 2004,
a $1.5 billion committed bank Revolving Credit Facility which was put in place
in March 2003 and expires March 2006, and a $650 million asset-backed accounts
receivable securitization facility that expires in December 2004. The Company
intends to restructure and extend the $750 million Revolving Credit Facility
that expires in March 2004 with a new multi-year facility. At December 31, 2003,
the Revolving Credit Facilities and the receivables securitization facility were
unused. Additionally, at CHH, there is a $222 million Multi-Currency Credit
Facility put in place by CHH to support its commercial paper program, maturing
in two tranches, 2005 and 2007.
In 2003, approximately $1.7 billion of long-term debt with a weighted average
coupon rate of 6% and maturities ranging from four to 35 years was replaced
during 2003 with debt having a weighted average coupon rate of 4.8% and maturing
in four to 11 years.
International Paper has approximately $2.5 billion of debt, including the $1
billion of debt retired in January and $300 million of debt at Carter Holt
Harvey, scheduled for refinancing or repayment in 2004. We intend to meet these
obligations with a combination of cash from operations and refinancing.
In addition, the holders of International Paper's zero-coupon convertible debt
have the option to require the Company to repurchase these securities on June
20, 2004, at a price equal to the accreted principal amount of $1.1 billion plus
interest. The repurchase may be settled in International Paper common stock or
cash, or a combination of both, at the Company's option, in an amount equal to
53% of each debenture's principal amount at maturity. We anticipate using a
combination of cash from operations and new debt issuances to retire and
refinance maturing debt balances and the potential repurchase of the convertible
debt issuance.
Contractual obligations for future payments under existing debt and lease
commitments at December 31, 2003, were as follows:
- --------------------------------------------------------------------------------
In millions 2004 2005 2006 2007 2008 Thereafter
- --------------------------------------------------------------------------------
Total debt $2,087 $1,239 $2,150 $556 $342 $9,163
Lease obligations 187 155 121 102 86 260
Purchase obligations 293 204 152 129 122 112
------ ------ ------ ---- ---- ------
Total $2,567 $1,598 $2,423 $787 $550 $9,535
====== ====== ====== ==== ==== ======
Total debt obligations included in the above table reflect $1.5 billion that is
scheduled for maturity in 2004 as maturing in 2006 since International Paper has
the intent and ability to renew or convert these obligations through 2006 under
an existing credit agreement. Purchase obligations represent contractual
agreements to purchase goods or services that are not cancellable without
penalty.
Funding requirements for pension and postretirement plans are discussed in Notes
15 and 16 of the Notes to Consolidated Financial Statements in Item 8. Financial
Statements and Supplementary Disclosures.
The majority of International Paper's debt is accessed through global public
capital markets where we have a wide base of investors. The Company was well
within the requirements for compliance with all its debt covenants at December
31, 2003. Principal financial covenants include maintenance of a minimum net
worth, as defined, of $9 billion and a maximum total debt to capital ratio, as
defined, of 60%.
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"
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," as amended by SFAS No. 132 and 132(R), "Employers' Disclosures About
Pension and Other Postretirement Benefits," and SFAS No. 109, "Accounting for
Income Taxes." The following is a discussion of the impact of these accounting
policies on International Paper:
Contingent Liabilities. Accruals for contingent liabilities, including legal and
environmental matters, are recorded when it is probable that a liability has
been incurred or an asset impaired and the amount of the loss can be reasonably
estimated. Liabilities accrued for legal matters require judgments regarding
projected outcomes and range of loss based on historical experience and
recommendations of legal counsel. Additionally, as discussed in Note 10 of the
Notes to Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data, reserves for projected future claims settlements relating to
exterior siding products previously manufactured by Masonite require judgments
regarding projections of future claims rates and amounts. International Paper
utilizes independent third parties to assist
23
in developing these estimates. Liabilities for environmental matters require
evaluations of relevant environmental regulations and estimates of future
remediation alternatives and costs. International Paper determines these
estimates after a detailed evaluation of each site.
Impairment of Long-Lived Assets and Goodwill. An impairment of a long-lived
asset exists when the asset's 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.
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.
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 future financial statements.
Significant Accounting Estimates
Pension and Postretirement Benefit Accounting. The calculations of pension and
postretirement benefit obligations and expenses require decisions about a number
of key assumptions that can significantly affect liability and expense amounts,
including the expected long-term rate of return on plan assets, the discount
rate used to calculate plan liabilities, the projected rate of future
compensation increases and health care cost trend rates.
Benefit obligations and fair values of plan assets as of December 31, 2003, for
International Paper's pension and postretirement plans are as follows:
- --------------------------------------------------------------------------------
Benefit Fair Value of
In millions Obligation Plan Assets
- --------------------------------------------------------------------------------
U.S. qualified pension $7,623 $6,436
U.S. nonqualified pension 276 --
U.S. postretirement 1,000 --
Non-U.S. pension 587 423
Non-U.S. postretirement 43 --
The table below shows the assumptions that were used by International Paper to
calculate U.S. pension expenses for the years shown:
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Discount rate 6.50% 7.25% 7.50%
Expected long-term return on
plan assets 8.75% 9.25% 10.00%
Rate of compensation increase 3.75% 4.50% 4.75%
Additionally, the following assumptions, including health care cost trend rates,
were used in the calculation of U.S. postretirement expenses for the years
shown:
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Discount rate 6.38% 7.25% 7.50%
Health care cost trend rate assumed
for next year 9.00% 9.00% 6.00%
Rate that the cost trend rate gradually
declines to 5.00% 5.00% 5.00%
Year that the rate reaches the rate
it is assumed to remain 2007 2006 2003
International Paper determines these actuarial assumptions, after consultation
with our actuaries, on December 31 of each year to calculate liability
information as of that date and pension and postretirement 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 reflects projected returns for an
investment mix, determined upon completion of a detailed asset/liability study
that meets the plans' investment objectives. Increasing (decreasing) the
expected
24
long-term rate of return on U.S. plan assets by an additional 0.25% would
decrease (increase) 2004 pension expense by approximately $17 million, while a
(decrease) increase of 0.25% in the discount rate would (increase) decrease
pension expense by approximately $17 million. The effect of net postretirement
benefit cost from a 1% increase or decrease in the annual trend rate would be
approximately $4 million.
Actual rates of return earned on U.S. pension plan assets for each of the last
10 years were:
- -----------------------------
Year Return Year Return
- -----------------------------
2003 26.0% 1998 10.0%
2002 (6.7)% 1997 17.2%
2001 (2.4)% 1996 13.3%
2000 (1.4)% 1995 19.9%
1999 21.4% 1994 0.7%
The following chart, prepared by International Paper, illustrates the quarterly
performance ranking of our pension fund investments compared with approximately
100 other corporate and public pension funds. The peer group, of which
International Paper is one, is the "State Street Corporate and Public Master
Trusts Universe."
Pension Fund
Rolling Three-Year Performance vs. Peers
[LINE CHART]
Percentile ranking (100% equals best)
-----------
3-Year Rank
-----------
1Q98 29
2Q98 15
3Q98 18
4Q98 16
1Q99 17
2Q99 30
3Q99 21
4Q99 54
1Q00 47
2Q00 16
3Q00 10
4Q00 49
1Q01 45
2Q01 74
3Q01 67
4Q01 85
1Q02 87
2Q02 84
3Q02 71
4Q02 72
1Q03 77
2Q03 83
3Q03 84
4Q03 93
SFAS No. 87, "Employers' Accounting for Pensions," provides for delayed
recognition of actuarial gains and losses, including amounts arising from
changes in the estimated projected plan benefit obligation due to changes in the
assumed discount rate, differences between the actual and expected return on
plan assets and other assumption changes. These net gains and losses are
recognized in pension expense 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, 2003,
unrecognized net actuarial losses for International Paper's U.S. pension plans
totaled approximately $2.6 billion, principally reflecting declines in the fair
value of plan assets and discount rates during 2000-2002, offset somewhat by
gains from stronger than projected asset returns in 2003. While actual future
amortization charges will be affected by future gains/losses, amortization of
cumulative unrecognized losses as of December 31, 2003, is expected to increase
U.S. pension expense by approximately $30 million in 2004, $20 million in 2005,
and $10 million in 2006.
Net periodic pension and postretirement plan expense (income), calculated for
International Paper's U.S. plans using the assumptions above were as follows:
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Pension expense (income) - U.S. plans
(non-cash) (a) $ 60 $(75) $(141)
Pension expense - Non-U.S. plans 39 26 19
Postretirement benefit cost - U.S. plans (a) 55 59 56
Postretirement benefit cost - non-U.S. plans 5 2 --
---- ---- -----
Net expense (income) $159 $ 12 $ (66)
==== ==== =====
(a) Excludes $10.9 million, $0.7 million and $66.0 million of expense in 2003,
2002 and 2001, respectively, for curtailments, settlements and special
termination benefits related to divestitures and restructurings that were
recorded in Restructuring and other charges and Net (gains) losses on sales and
impairments of businesses held for sale in the consolidated statement of
earnings.
The change in 2003 to net pension expense from income in 2002 for U.S. plans was
principally due to a reduction in the expected long-term rate of return on plan
assets and an increase in the amortization of unrecognized actuarial losses,
with smaller impacts from reductions in the assumed discount rate and the
assumed rate of future compensation increase. The decrease in pension income for
U.S. plans in 2002 was principally due to reductions in the expected long-term
rate of return on plan assets and reductions in the assumed discount rate and in
the assumed rate of future compensation increase.
For 2004, net pension expense is expected to increase by approximately $46
million, principally reflecting the $30 million increase in amortization of
unrecognized actuarial losses discussed above, and approximately $16 million
from a decrease in the assumed discount rate to 6.00% in 2004 from 6.50% in
2003.
The market value of plan assets for International Paper's U.S. plan at December
31, 2003, totaled approximately $6.4 billion, consisting of approximately 62%
equity securities, 27% fixed income securities and 11% real estate and other
assets. Plan assets did not include International Paper common stock.
While International Paper may elect to make voluntary contributions to its U.S.
qualified plan in the coming years, it is unlikely that any minimum
contributions to the plan will be required before at least 2006 unless interest
rates decline below current levels or investment performance is significantly
below projections. The U.S. nonqualified plans are only funded to the extent of
benefits paid which are expected to be $46 million in 2004.
25
At December 31, 2002, the market value of plan assets was less than the
accumulated benefit obligation (ABO) for International Paper's U.S. qualified
pension plan. As a result, as required under U.S. Generally Accepted Accounting
Principles, a prepaid benefit cost of approximately $1.7 billion at December 31,
2002, was reversed, and an additional minimum liability of approximately $2.7
billion was established, by an after-tax charge of approximately $1.5 billion to
Accumulated other comprehensive income (OCI) with no impact on earnings or cash
flow. This reduction of Shareholders' equity had no adverse effect on
International Paper's debt covenants.
At December 31, 2003, the strong actual return on plan assets in 2003 had
increased the market value of plan assets by more than the increase in the ABO,
resulting in a decrease since December 31, 2002 in the required additional
minimum pension liability. As a result, an after-tax credit to OCI of $163
million (an increase in Shareholders' equity) was recognized at December 31,
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.
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 service
period. Had this method of accounting been applied, additional expense of $44
million in 2003, $41 million in 2002 and $53 million in 2001 would have been
recorded, decreasing reported earnings per share by 14% to $.54 in 2003, 5% to
($1.92) in 2002 and 4% to ($2.60) in 2001.
At December 31, 2003, 42.8 million options were outstanding with exercise prices
ranging from $29.31 to $69.63 per share. At December 31, 2002, 37.2 million
options were outstanding with exercise prices ranging from $29.31 to $69.63 per
share.
Income Taxes
Before minority interest, extraordinary items and the cumulative effect of
accounting changes, the effective income tax rates were (27%), (15%) and 21% for
2003, 2002 and 2001, respectively. These effective tax rates include the tax
effects of certain special and unusual items that can affect the effective
income tax rate in a given year, but may not recur in subsequent years.
Management believes that the effective tax rate computed after excluding these
special or unusual items may provide a better estimate of the rate that might be
expected in future years if no additional special or unusual items were to occur
in those years. Excluding these special and unusual items, the effective income
tax rate for 2003 was 22% of pre-tax earnings compared with 29% in 2002 and 28%
in 2001. The decrease in the rate in 2003 reflects a higher proportion of
taxable income in jurisdictions having a lower tax rate. The effective income
tax rates were less than the U.S. federal statutory tax rate primarily because
of this geographic mix of taxable earnings and the impact of tax credits. We
estimate that the 2004 effective income tax rate will be approximately 31% based
on expected earnings and business conditions, which are subject to change.
Recent Accounting Developments
Consolidation of Variable Interest Entities:
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51." This
interpretation changed existing consolidation rules for certain entities, those
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 the entity's activities without additional subordinated financial
support.
The interpretation applied immediately to variable interest entities (VIE's)
created after January 31, 2003, and to VIE's in which an enterprise obtains an
interest after that date. International Paper neither entered into nor obtained
an interest in any VIE's after January 31, 2003. For VIE's created before
February 1, 2003, this interpretation was effective for the first reporting
period ending after December 15, 2003, although early application of the
provisions of this interpretation was allowed. During December 2003, the FASB
issued a revision to FIN 46 (FIN 46(R)) with varying effective dates.
International Paper applied FIN 46(R) to its variable interest entities as of
December 31, 2003.
As a result of the application of the provisions of FIN 46(R) during 2003, four
entities that were required to be consolidated under prior accounting rules were
deconsolidated, and one previously unconsolidated entity was consolidated, at
December 31, 2003.
26
The cumulative effect of adoption of FIN 46(R) amounted to a $3 million charge
after taxes. As a result of this adoption, certain preferred securities were
replaced by debt obligations, and $44 million was recorded as interest expense
in the last half of 2003, replacing preferred dividends that would have been
recorded as minority interest expense.
The following table summarizes increases (decreases) in the 2003 consolidated
balance sheet captions resulting from the application of FIN 46(R). The primary
changes are a decrease in Mandatorily redeemable preferred securities of
approximately $1.3 billion and an increase in debt of $1.0 billion.
- --------------------------------------------------------------------------------
In millions Total
- --------------------------------------------------------------------------------
Assets
Plants, Properties and Equipment, net $ 50
Investments 505
Deferred Charges and Other Assets (895)
-------
Total Assets $ (340)
=======
Liabilities
Current Maturities of Long-Term Debt $ 830
Long-Term Debt 155
Minority Interest (70)
Mandatorily Redeemable Preferred Securities (1,255)
-------
Total Liabilities $ (340)
=======
See Note 4 of the Notes to Consolidated Financial Statements in Item 8.
Financial Statements and Supplementary Data, for a detailed discussion of FIN
46(R).
Financial Instruments With Characteristics of Both Liabilities and Equity:
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." It established
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. This standard
was effective for financial instruments entered into or modified after May 31,
2003, and otherwise was effective at the beginning of the first interim period
beginning after June 15, 2003. International Paper adopted this standard during
the third quarter ended September 30, 2003, with no material effect on the
Company's financial position or results of operations.
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 changed the measurement and
timing of recognition for exit costs, including restructuring charges, and was
effective for activities initiated after December 31, 2002. It requires that a
liability for costs associated with an exit or disposal activity, such as
one-time termination benefits, be recognized when the liability is incurred,
rather than at the date of a company's commitment to an exit plan. It had no
effect on charges recorded for exit activities begun prior to December 31, 2002.
International Paper adopted this standard effective January 1, 2003, with no
material effect on the Company's financial position or results of operations.
Impairment and Disposal of Long-Lived Assets:
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." It established a single accounting model for the
impairment of long-lived assets to be held and used or to be disposed of by sale
or abandonment, and broadened the definition of discontinued operations.
International Paper adopted SFAS No. 144 in 2002, with no significant change in
the accounting for the impairment and disposal of long-lived assets.
Asset Retirement Obligations:
In August 2001, the FASB issued 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 adopted SFAS No. 143 effective January 1, 2003, recording a
discounted liability of $22 million, an increase in Property, plant and
equipment, net, of $7 million, and a one-time cumulative effect charge of $10
million (net of a deferred tax benefit of $5 million). The pro forma effects on
earnings (loss) before extraordinary items and cumulative effect of accounting
changes, and net earnings, for the years ended December 31, 2002 and 2001,
assuming the adoption of SFAS No. 143 as of January 1, 2001, were not material
to net earnings or earnings per share.
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 recorded goodwill for impairment. The initial test for impairment had to be
completed by December 31, 2002, with any impairment charge recorded as a
cumulative effect of accounting change to be retroactively reflected in the
first quarter of 2002. Any subsequent impairment charges would be recorded in
operating results.
27
The initial test compared the fair value of each of International Paper's
business reporting units having recorded goodwill balances with the business
unit's carrying amount. Fair value was determined using discounted projected
future operating cash flows for all business reporting units except Carter Holt
Harvey, where the average quoted market price for Carter Holt Harvey shares was
used. Where the carrying amount exceeded fair value, additional testing was
performed for possible goodwill impairment. The fair value for these business
reporting units was then allocated to individual assets and liabilities, using a
depreciated replacement cost approach for fixed assets, and outside appraised
values for intangible assets. Any excess of fair value over the allocated
amounts was equal to the implied fair value of goodwill. Where this implied
goodwill value was less than the goodwill book value of the business reporting
unit, an impairment charge was recorded.
Based on testing completed in the fourth quarter of 2002, a transitional
goodwill impairment loss was recorded for the Industrial and Consumer Packaging,
Carter Holt Harvey and Printing Papers business segments totaling $1.2 billion.
This charge had no impact on cash flow.
International Paper ceased recording goodwill amortization effective January 1,
2002. This had no effect on cash flow.
The following table shows net earnings (loss) for the years ended December 31,
2003 and 2002, and pro forma net earnings (loss) for the year ended December 31,
2001, exclusive of goodwill amortization.
- -------------------------------------------------------------------------------
In millions, for years ended December 31 2003 2002 2001
- -------------------------------------------------------------------------------
Net earnings (loss) $ 302 $ (880) $(1,204)
Add back: Goodwill amortization -- -- 201
----- ------ -------
Adjusted net earnings (loss) $ 302 $ (880) $(1,003)
===== ====== =======
Basic and Diluted Earnings (Loss)
Per Common Share:
Net earnings (loss) $0.63 $(1.83) $ (2.50)
Goodwill amortization -- -- 0.42
----- ------ -------
Adjusted net earnings (loss) $0.63 $(1.83) $ (2.08)
===== ====== =======
Derivatives and Hedging:
On January 1, 2001, International Paper adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS Nos. 137, 138
and 149. 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 in 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 in OCI primarily resulted from adjusting the
foreign currency contracts used as hedges of net investments in foreign
operations to fair value.
Litigation Issues
Environmental Matters
International Paper is subject to extensive U. S. federal and state
environmental regulation as well as similar regulations in all other
jurisdictions in which we operate. Our continuing objectives are to: (1) control
emissions and discharges from our facilities into the air, water and groundwater
to avoid adverse impacts on the environment, (2) make continual improvements in
environmental performance, and (3) maintain 100% compliance with applicable laws
and regulations. A total of $88 million was spent in 2003 for capital projects
to control environmental releases into the air and water, and to assure
environmentally sound management and disposal of waste. We expect to spend
approximately $116 million in 2004 for similar capital projects, including the
costs to comply with the Environmental Protection Agency's (EPA) Cluster Rule
regulations. Amounts to be spent for environmental control projects in future
years will depend on new laws and regulations and changes in legal requirements
and environmental concerns. Taking these uncertainties into account, our
preliminary estimate for additional environmental appropriations during the year
2005 is approximately $181 million, and during the year 2006 is approximately
$149 million.
On April 15, 1998, the EPA issued final Cluster Rule regulations that
established new requirements regarding air emissions and wastewater discharges
from pulp and paper mills to be met by 2006. The projected costs included in our
estimate related to the Cluster Rule regulations for the year 2004 are $57
million. Included in this estimate are costs associated with pulp and paper
industry combustion source standards that were issued by the EPA on January 12,
2001. Total projected Cluster Rule costs for 2005 through 2006 are $192 million.
In 2004, the EPA is expected to issue new standards for industrial boiler
hazardous air emission controls. The costs to comply with this new rule are
estimated to be $56 million from 2004 through 2006.
The EPA is continuing development of new programs and standards such as
additional wastewater discharge allocations and water intake structure
requirements and national ambient air quality standards. When regulatory
requirements for new and changing standards are finalized, we will add any
resulting future cost projections to our expenditure forecast.
28
International Paper has been named as a potentially liable party in a number of
environmental remediation actions under various federal and state laws,
including the Comprehensive Environmental Response, Compensation and Liability
Act (CERCLA). Related costs are recorded in the financial statements when they
are probable and reasonably estimable. As of December 31, 2003, these
liabilities totaled approximately $25 million. In addition to CERCLA, other
remediation costs recorded as liabilities in the balance sheet totaled
approximately $73 million. Completion of these actions is not expected to have a
material adverse effect on our financial condition or results of operations. A
discussion of CERCLA proceedings can be found below.
In February 2000, the Town of Lyman, South Carolina issued an administrative
order alleging past violations of a wastewater pretreatment permit at the former
Union Camp folding carton facility in Spartanburg, South Carolina. International
Paper has satisfied the terms of the order and in March 2003, agreed to resolve
the matter for a payment of $400,000 for past wastewater treatment fees and
other expenses allegedly incurred by the Town of Lyman.
In connection with the EPA's well-publicized PSD air permit enforcement
initiative against the paper industry, the EPA has issued requests for
information related to air permit compliance to five International Paper mills.
As of February 2004, none of these requests for information has resulted in
enforcement actions.
In March 2003, the 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. On October 10, 2003, the Company was
served with a civil administrative complaint seeking a civil penalty of
$673,969. The Company and the EPA are pursuing settlement discussions.
As of February 2004, there were no other pending judicial proceedings, brought
by government authorities against International Paper, for alleged violations of
applicable environmental laws or regulations. International Paper is engaged in
various other proceedings that arise under applicable environmental and safety
laws or regulations, including approximately 117 active proceedings under CERCLA
and comparable state laws. Most of these proceedings involve the cleanup of
hazardous substances at large commercial landfills that received waste from many
different sources. While joint and several liability is authorized under CERCLA,
as a practical matter, liability for CERCLA cleanups is allocated among the many
potential responsible parties. Based upon previous experience with respect to
the cleanup of hazardous substances and upon presently available information,
International Paper believes that it has no, or de minimis, liability with
respect to 20 of these sites; that liability is not likely to be significant at
55 sites; and that estimates of liability at the other 42 sites is likely to be
significant, but not material to International Paper's consolidated financial
position or results of operations. International Paper believes that the
probable liability associated with all of the CERCLA proceedings is
approximately $57 million.
Litigation
See Note 10 of the Notes to Consolidated Financial Statements in Item 8.
Financial Statements and Supplementary Data, for a detailed discussion of each
of the following litigation matters.
Exterior Siding and Roofing Litigation: Three nationwide class action lawsuits
filed against International Paper have been settled in recent years. Provisions
of $225 million and $450 million were recorded in 2001 and 2002, respectively,
to increase existing reserve balances to projected settlement amounts. At
December 31, 2003, reserves for these actions totaled $387 million.
Insurance Matters: In connection with one of the exterior siding and roofing
actions above, International Paper commenced a lawsuit against certain insurance
carriers relating to their refusal to indemnify International Paper and, in the
case of one insurance carrier, also for its refusal to provide a defense. In
July 2003, a jury determined that $383 million of International Paper's payments
to settle these claims are covered by its insurance policies. International
Paper is engaged in further court proceedings to determine each carrier's
allocable share. International Paper is also participating in court-ordered
mediation with a number of these insurance carriers.
In addition, International Paper was involved in a dispute with a third party
regarding $100 million of payments made to International Paper under an
alternative risk-transfer agreement. In February 2004, an agreement was reached
whereby International Paper agreed to pay the third party a portion of future
insurance proceeds as they are recovered by International Paper beginning in
2004, up to a maximum of $95 million.
Antitrust Matters: In 1999, two lawsuits were filed in federal court against
International Paper and other manufacturers of linerboard alleging that they
conspired to fix prices for corrugated sheets and containers during the period
from October 1, 1993 through November 30, 1995. International Paper settled
these claims (along with claims brought against Union Camp) in 2003 for $24.4
million.
In 2000, direct and indirect purchasers of high-pressure laminates (HPL) filed
various suits in federal and state court alleging that HPL manufacturers
conspired to fix prices. A class was certified in the consolidated federal case
in 2003, while the state cases have been stayed.
29
International Paper is involved in other contractual disputes, administrative
and legal proceedings and investigations of various types. While any litigation,
proceeding or investigation has an element of uncertainty, we believe that the
outcome of any proceeding, lawsuit or claim that is pending or threatened, or
all of them combined, will not have a material adverse effect on our
consolidated financial position or results of operations.
Effect of Inflation
General inflation has had minimal impact on our operating results in the last
three years. Sales prices and volumes are more strongly influenced by supply and
demand factors in specific markets and by exchange rate fluctuations than by
inflationary factors.
Foreign Currency Effects
International Paper has operations in a number of countries. Its operations in
those countries also export to, and compete with imports from, other regions. As
such, currency movements can have a number of direct and indirect impacts on the
Company's financial statements. Direct impacts include the translation of
international operations' local currency financial statements into U.S. dollars.
Indirect impacts include the change in competitiveness of imports into, and
exports out of, the United States (and the impact on local currency pricing of
products that are traded internationally). In general, a lower U.S. dollar and
stronger local currency is beneficial to International Paper. The currencies
that have the most impact are the Euro, the Canadian dollar, the New Zealand
dollar, the Brazilian real, the Polish zloty and the Russian ruble.
Market Risk
We use financial instruments, including fixed and variable rate debt, to finance
operations, for capital spending programs and for general corporate purposes.
Additionally, financial instruments, including various derivative contracts, are
used to hedge exposures to interest rate, commodity and foreign currency risks.
We do not use financial instruments for trading purposes. Information related to
International Paper's debt obligations is included in Note 12 of the Notes to
Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data. A discussion of derivatives and hedging activities is
included in Note 13 of the Notes to Consolidated Financial Statements in Item 8.
Financial Statements and Supplementary Data.
The fair value of our debt and other financial instruments varies due to changes
in market interest and foreign currency rates and commodity prices since the
inception of the related intruments. We assess this market risk utilizing a
sensitivity analysis. The sensitivity analysis measures the potential loss in
earnings, fair values and cash flows based on a hypothetical 10% change
(increase and decrease) in interest and currency rates and commodity prices.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to
short- and long-term debt obligations and investments in marketable securities.
We invest in investment grade securities of financial institutions and
industrial companies and limit exposure to any one issuer. Our investments in
marketable securities at December 31, 2003, are stated at cost, which
approximates market due to their short-term nature. Our interest rate risk
exposure related to these investments was immaterial.
We issue fixed and floating rate debt in a proportion consistent with
International Paper's optimal capital structure, while at the same time taking
advantage of market opportunities to reduce interest expense as appropriate.
Derivative instruments, such as interest rate swaps, may be used to implement
the optimal capital structure. At December 31, 2003 and 2002, the net fair value
liability of financial instruments with exposure to interest rate risk was
approximately $11.8 billion and $10.2 billion, respectively. The potential loss
in fair value resulting from a 10% adverse shift in quoted interest rates would
be approximately $430 million and $325 million for 2003 and 2002, respectively.
Commodity Price Risk
The objective of our commodity exposure management is to minimize volatility in
earnings due to large fluctuations in the price of commodities. Commodity swap
and option contracts are currently used to manage risks associated with market
fluctuations in energy prices. At December 31, 2003 and 2002, the net fair value
of such contracts was a $5 million asset and an $18 million asset, respectively.
The potential loss in fair value resulting from a 10% adverse change in the
underlying commodity prices would be immaterial for both 2003 and 2002.
Foreign Currency Risk
International Paper transacts business in many currencies and is also subject to
currency exchange rate risk through investments and businesses owned and
operated in foreign countries. Our objective in managing the associated foreign
currency risks is to minimize the effect of adverse exchange rate fluctuations
on our after-tax cash flows. We address these risks on a limited basis through
financing a portion of our
30
investments in overseas operations with borrowings denominated in the same
currency as the operation's functional currency, or by entering into long-term
cross-currency and interest rate swaps, or short-term foreign exchange
contracts. At December 31, 2003 and 2002, the net fair value liability of
financial instruments with exposure to foreign currency risk was approximately
$540 million and $570 million, respectively. The potential loss in fair value
for such financial instruments from a 10% adverse change in quoted foreign
currency exchange rates would be immaterial for both 2003 and 2002.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the discussion under Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations on page 30 and under Item 8.
Financial Statements and Supplementary Data in Note 13 on pages 64 and 65.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Information by Industry Segment and Geographic Area
For information about our industry segments, see the "Description of Industry
Segments" included on pages 14 through 16 of Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
For management purposes, we report the operating performance of each business
based on earnings before interest and income taxes ("EBIT") excluding special
and extraordinary items, gains or losses on sales of businesses and cumulative
effects of accounting changes. Our Carter Holt Harvey segment includes our
share, about half, of their operating earnings adjusted for U.S. generally
accepted accounting principles. The remaining half is included in minority
interest. Intersegment sales and transfers are recorded at current market
prices.
External Sales by Major Product is determined by aggregating sales from each
segment based on similar products or services. External sales are defined as
those that are made to parties outside International Paper's consolidated group,
whereas sales by segment in the Net Sales table are determined by the management
approach and include intersegment sales.
Capital Spending by Industry Segment is reported on page 21 of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
INFORMATION BY INDUSTRY SEGMENT
Net Sales
- -------------------------------------------------------------------------------
In millions 2003 2002 2001
- -------------------------------------------------------------------------------
Printing Papers $ 7,555 $ 7,510 $ 7,815
Industrial and Consumer Packaging 6,200 6,095 6,280
Distribution 6,230 6,345 6,790
Forest Products 3,025 3,090 2,855
Carter Holt Harvey 2,250 1,910 1,710
Specialty Businesses and Other (a) 1,305 1,535 2,325
Corporate and Intersegment Sales (1,386) (1,509) (1,412)
------- ------- -------
Net Sales $25,179 $24,976 $26,363
======= ======= =======
Assets
- -------------------------------------------------------------------------------
In millions 2003 2002 2001
- -------------------------------------------------------------------------------
Printing Papers $ 9,236 $ 9,260 $ 9,742
Industrial and Consumer Packaging 6,273 6,244 7,338
Distribution 1,521 1,691 1,662
Forest Products 4,181 4,307 5,106
Carter Holt Harvey 4,155 3,442 3,295
Specialty Businesses and Other (a) 788 760 676
Corporate 9,371 8,088 9,358
------- ------- -------
Assets $35,525 $33,792 $37,177
======= ======= =======
Operating Profit
- -------------------------------------------------------------------------------
In millions 2003 2002 2001
- -------------------------------------------------------------------------------
Printing Papers $ 451 $ 519 $ 538
Industrial and Consumer Packaging 417 517 508
Distribution 82 92 21
Forest Products 741 700 655
Carter Holt Harvey 58 56 13
Specialty Businesses and Other (a) 52 51 52
------ ------ -------
Operating Profit 1,801 1,935 1,787
Interest expense, net (766) (783) (929)
Minority interest (b) 67 58 17
Corporate items, net (466) (253) (369)
Merger integration costs -- -- (42)
Restructuring and other charges (298) (695) (1,117)
Reversals of reserves no longer required 40 68 17
Net gains (losses) on sales and impairments of
businesses held for sale (32) 41 (629)
------ ------ -------
Earnings (Loss) Before Income Taxes, Minority
Interest, Extraordinary Items and Cumulative
Effect of Accounting Changes $ 346 $ 371 $(1,265)
====== ====== =======
32
Restructuring and Other Charges
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Printing Papers $ 26 $ 85 $ 185
Industrial and Consumer Packaging 30 31 534
Distribution 7 13 46
Forest Products 31 12 34
Carter Holt Harvey 12 28 10
Specialty Businesses and Other (a) 69 19 8
Corporate 123 507 300
---- ---- ------
Restructuring and Other Charges $298 $695 $1,117
==== ==== ======
Depreciation and Amortization (c)
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Printing Papers $ 703 $ 684 $ 716
Industrial and Consumer Packaging 387 385 424
Distribution 17 18 31
Forest Products 181 170 214
Carter Holt Harvey 213 197 194
Specialty Businesses and Other (a) 31 22 39
Corporate 112 111 252
------ ------ ------
Depreciation and Amortization $1,644 $1,587 $1,870
====== ====== ======
External Sales by Major Product
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Printing Papers $ 7,052 $ 6,668 $ 7,042
Industrial and Consumer Packaging 6,895 6,852 7,263
Distribution 6,191 6,519 6,961
Forest Products 4,305 4,160 4,297
Other (d) 736 777 800
------- ------- -------
Net Sales $25,179 $24,976 $26,363
======= ======= =======
INFORMATION BY GEOGRAPHIC AREA
Net Sales (e)
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
United States (f) $18,187 $18,795 $20,555
Europe 2,928 2,636 2,630
Pacific Rim (g) 2,458 2,104 1,888
Americas, other than U.S. 1,606 1,441 1,290
------- ------- -------
Net Sales $25,179 $24,976 $26,363
======= ======= =======
European Sales by Industry Segment
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Printing Papers $1,291 $1,152 $1,110
Industrial and Consumer Packaging 790 677 694
Distribution 376 374 353
Specialty Businesses and Other (a) 471 433 473
------ ------ ------
European Sales $2,928 $2,636 $2,630
====== ====== ======
Long-Lived Assets (h)
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
United States $12,102 $12,630 $13,627
Europe 1,334 1,206 1,179
Pacific Rim (g) 3,144 2,654 2,325
Americas, other than U.S. 1,457 1,215 1,447
Corporate 307 308 235
------- ------- -------
Long-Lived Assets $18,344 $18,013 $18,813
======= ======= =======
(a) Includes Arizona Chemical, Chemical Cellulose Pulp and Industrial Papers.
Also included are certain other smaller businesses identified in the
Company's divestiture program.
(b) 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 changes.
(c) Includes cost of timber harvested.
(d) Includes sales of products not included in our major product lines.
(e) Net sales are attributed to countries based on location of seller.
(f) Export sales to unaffiliated customers (in billions) were $1.4 in 2003,
$1.3 in 2002 and $1.3 in 2001.
(g) Operations in New Zealand and Australia account for most of the Pacific Rim
amounts.
(h) Long-Lived Assets includes Forestlands and Plants, Properties and
Equipment, net.
33
Report of Management on Financial Statements
The management of International Paper Company is responsible for the fair
presentation of the information contained in the financial statements in this
Annual Report. The statements are prepared in accordance with accounting
principles generally accepted in the United States of America and reflect
management's best judgment as to our financial position, results of operations,
cash flows and related disclosures.
International Paper maintains a system of internal accounting and disclosure
controls designed to provide reasonable assurance: (a) that transactions are
properly recorded and summarized so that reliable financial records and reports
can be prepared and assets safeguarded; and (b) that information required to be
disclosed by us in reports filed with the Securities and Exchange Commission
(SEC) is recorded, processed, summarized and reported on a timely basis. We have
formed a Disclosure Committee to oversee this process. We believe that these
controls are effective and have completed all the certifications required by the
Sarbanes-Oxley Act of 2002 and SEC regulations.
Our ethics program is an important part of the internal controls system. It
includes long-standing principles and policies on ethical business conduct that
require employees to maintain the highest ethical and legal standards in the
conduct of International Paper business, that have been distributed to all
employees, a toll-free telephone helpline whereby any employee may report
suspected violations of law or International Paper's policy, and an office of
ethics and business practice. The internal controls system further includes
careful selection and training of supervisory and management personnel,
appropriate delegation of authority and division of responsibility,
dissemination of accounting and business policies throughout International
Paper, and an extensive program of internal audits with management follow-up.
The independent auditors provide an objective, independent review of
management's discharge of its responsibility for the fair presentation of our
financial statements. They review our internal controls and conduct tests of
procedures and accounting records to enable them to form the opinion set forth
in their report.
The Board of Directors, assisted by the Audit and Finance Committee (Committee),
monitors management's administration of International Paper's financial and
accounting policies and practices, and the preparation of these financial
statements. The Committee, which currently consists of five independent
directors, meets regularly with representatives of management, the independent
auditors and the Internal Auditor to review their activities. The Committee's
Charter takes into account the New York Stock Exchange rules relating to Audit
Committees and the SEC rules and regulations promulgated as a result of the
Sarbanes-Oxley Act of 2002. A copy of the charter is available on our internet
Web site at www.internationalpaper.com, or may be obtained from the Corporate
Secretary at our corporate headquarters. The Committee has reviewed and
discussed the consolidated financial statements for the year ended December 31,
2003, including critical accounting policies and significant management
judgments, with management and the independent auditors. The Committee's report
recommending the inclusion of such financial statements in this Annual Report on
Form 10-K is set forth in our Proxy Statement.
The independent auditors and the Internal Auditor both have free access to the
Committee and meet regularly with the Committee, with and without management
representatives in attendance.
JOHN V. FARACI
JOHN V. FARACI
Chairman and Chief Executive Officer
CHRISTOPHER P. LIDDELL
CHRISTOPHER P. LIDDELL
Senior Vice-President and Chief Financial Officer
34
Report of Deloitte & Touche LLP,
Independent Auditors
To the Shareholders of International Paper Company:
We have audited the accompanying consolidated balance sheet of International
Paper Company and subsidiaries as of December 31, 2003 and 2002, and the related
statements of earnings, common shareholders' equity and cash flows for each of
the years then ended. These financial statements are the responsibility of
International Paper Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements of International Paper Company as of December 31, 2001 and
for the year then ended were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those
consolidated financial statements in their report dated February 12, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated 2003 and 2002 financial statements present
fairly, in all material respects, the financial position of International Paper
Company and subsidiaries, as of December 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
As described in Note 4 to the financial statements, International Paper Company
adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"),
Goodwill and Other Intangible Assets, effective January 1, 2002.
As discussed above, the financial statements of International Paper Company as
of December 31, 2001, and for the year then ended, were audited by other
auditors who have ceased operations. As described in Note 4, these financial
statements have been revised to include the transitional disclosures required by
SFAS No. 142, which was adopted by the Company as of January 1, 2002. Our audit
procedures with respect to the disclosures in Note 4 with respect to 2001
included (a) agreeing the previously reported earnings (loss) to the previously
issued financial statements and the adjustments to reported earnings (loss)
representing amortization expense (including any related tax effects) recognized
in those periods related to goodwill, and (b) testing the mathematical accuracy
of the reconciliation of adjusted earnings (loss) to reported earnings (loss),
and the related earnings-per-share amounts. In our opinion, the disclosures for
2001 in Note 4 are appropriate. However, we were not engaged to audit, review,
or apply any procedures to the 2001 financial statements of the Company other
than with respect to such disclosures and, accordingly, we do not express an
opinion or any other form of assurance on the 2001 financial statements taken as
a whole.
Deloitte & Touche LLP
NEW YORK, N.Y.
MARCH 5, 2004
THIS REPORT SET FORTH BELOW IS A COPY OF A PREVIOUSLY ISSUED AUDIT REPORT BY
ARTHUR ANDERSEN LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH ITS INCLUSION IN THIS FORM 10-K.
Report of Independent Public Accountants
To the Shareholders of International Paper Company:
We have audited the accompanying consolidated balance sheets of International
Paper Company (a New York corporation) and subsidiaries as of December 31, 2001
and 2000, and the related statements of earnings, common shareholders' equity
and cash flows for each of the three years ended December 31, 2001. These
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Paper Company and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years ended December 31,
2001 in conformity with accounting principles generally accepted in the United
States.
As explained in Notes 4 and 14 to the financial statements, effective January 1,
2001, International Paper changed its method of accounting for derivative
instruments and hedging activities.
NEW YORK, N.Y.
FEBRUARY 12, 2002
35
International Paper Company
CONSOLIDATED STATEMENT OF EARNINGS
In millions, except per share amounts,
for the years ended December 31 2003 2002 2001
============================================================================================
Net Sales $25,179 $24,976 $26,363
------- ------- -------
Costs and Expenses
Cost of products sold 18,803 18,256 19,409
Selling and administrative expenses 1,980 2,046 2,279
Depreciation, amortization and cost of timber harvested 1,644 1,587 1,870
Distribution expenses 1,103 1,098 1,105
Taxes other than payroll and income taxes 247 249 265
Restructuring and other charges 298 695 1,117
Net (gains) losses on sales and impairments of businesses
held for sale 32 (41) 629
Merger integration costs -- -- 42
------- ------- -------
Total Costs and Expenses 24,107 23,890 26,716
Reversals of reserves no longer required, net 40 68 17
------- ------- -------
Earnings (Loss) Before Interest, Income Taxes,
Minority Interest, Extraordinary Items and Cumulative
Effect of Accounting Changes 1,112 1,154 (336)
Interest expense, net 766 783 929
------- ------- -------
Earnings (Loss) Before Income Taxes, Minority
Interest, Extraordinary Items and Cumulative
Effect of Accounting Changes 346 371 (1,265)
Income tax benefit (92) (54) (270)
Minority interest expense, net of taxes 123 130 147
------- ------- -------
Earnings (Loss) Before Extraordinary Items and
Cumulative Effect of Accounting Changes 315 295 (1,142)
Extraordinary item - Net losses on sales and impairments of
businesses held for sale, net of taxes -- -- (46)
Cumulative effect of accounting changes, net of taxes
and minority interest:
Asset retirement obligations (10) -- --
Variable interest entities (3) -- --
Transitional goodwill impairment charge -- (1,175) --
Derivatives and hedging activities -- -- (16)
------- ------- -------
Net Earnings (Loss) $ 302 $ (880) $(1,204)
======= ======= =======
Basic and Diluted Earnings (Loss) Per Common Share
Earnings (loss) before extraordinary items and
cumulative effect of accounting changes $ 0.66 $ 0.61 $ (2.37)
Extraordinary item -- -- (0.10)
Cumulative effect of accounting changes:
Asset retirement obligations (0.02) -- --
Variable interest entities (0.01) -- --
Transitional goodwill impairment charge -- (2.44) --
Derivatives and hedging activities -- -- (0.03)
------- ------- -------
Net earnings (loss) $ 0.63 $ (1.83) $ (2.50)
======= ======= =======
The accompanying notes are an integral part of these financial statements.
36
International Paper Company
CONSOLIDATED BALANCE SHEET
In millions at December 31 2003 2002
=========================================================================================================
Assets
Current Assets
Cash and temporary investments $ 2,363 $ 1,074
Accounts and notes receivable, less allowances of
$135 in 2003 and $169 in 2002 2,894 2,780
Inventories 2,983 2,879
Other current assets 1,097 1,005
------- -------
Total Current Assets 9,337 7,738
------- -------
Plants, Properties and Equipment, net 14,275 14,167
Forestlands 4,069 3,846
Investments 773 227
Goodwill 5,341 5,307
Deferred Charges and Other Assets 1,730 2,507
------- -------
Total Assets $35,525 $33,792
======= =======
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 2,087 $ --
Accounts payable 2,294 2,014
Accrued payroll and benefits 476 523
Other accrued liabilities 1,946 2,042
------- -------
Total Current Liabilities 6,803 4,579
------- -------
Long-Term Debt 13,450 13,042
Deferred Income Taxes 1,598 1,765
Other Liabilities 3,637 3,778
Minority Interest 1,800 1,449
International Paper - Obligated Mandatorily Redeemable Preferred Securities
of Subsidiaries Holding International Paper Debentures - Note 8 -- 1,805
Commitments and Contingent Liabilities - Note 10
Common Shareholders' Equity
Common stock, $1 par value, 2003 - 485.2 shares, 2002 - 484.8 shares 485 485
Paid-in capital 6,500 6,493
Retained earnings 3,082 3,260
Accumulated other comprehensive income (loss) (1,690) (2,645)
------- -------
8,377 7,593
Less: Common stock held in treasury, at cost, 2003 - 3.7 shares, 2002 - 5.7 shares 140 219
------- -------
Total Common Shareholders' Equity 8,237 7,374
------- -------
Total Liabilities and Common Shareholders' Equity $35,525 $33,792
======= =======
The accompanying notes are an integral part of these financial statements.
37
International Paper Company
CONSOLIDATED STATEMENT OF CASH FLOWS
In millions for the years ended December 31 2003 2002 2001
- ------------------------------------------------------------------------------------------
Operating Activities
Net earnings (loss) $ 302 $ (880) $(1,204)
Cumulative effect of accounting changes 13 1,175 16
Depreciation, amortization and cost of timber harvested 1,644 1,587 1,870
Deferred income tax benefit (401) (399) (584)
Merger integration costs -- -- 42
Restructuring and other charges 298 695 1,117
Payments related to restructuring reserves, legal
reserves and merger integration costs (270) (340) (431)
Reversals of reserves no longer required, net (40) (68) (17)
Net (gains) losses on sales and impairments of businesses 32 (41) 629
held for sale
Extraordinary items - Net losses on sales and impairments
of businesses held for sale -- -- 73
Other, net 256 (3) (76)
Changes in current assets and liabilities
Accounts and notes receivable 100 127 417
Inventories 32 89 300
Accounts payable (73) 199 (289)
Accrued liabilities (55) (42) (56)
Other (16) (5) (93)
------- ------- -------
Cash Provided By Operations 1,822 2,094 1,714
------- ------- -------
Investment Activities
Invested in capital projects
Ongoing businesses (1,166) (1,005) (1,027)
Businesses sold and held for sale -- (4) (22)
Mergers and acquisitions, net of cash acquired -- (28) (150)
Proceeds from divestitures 78 535 1,552
Other (179) 22 106
------- ------- -------
Cash (Used For) Provided By Investment Activities (1,267) (480) 459
------- ------- -------
Financing Activities
Issuance of common stock 80 53 25
Issuance of debt 2,254 2,011 2,889
Reduction of debt (839) (3,017) (4,268)
Redemption of preferred securities of a subsidiary (550) -- --
Change in bank overdrafts 104 (33) (171)
Purchases of treasury stock (26) (169) (64)
Dividends paid (480) (482) (482)
Sale of preferred securities of a subsidiary 150 50 --
Other (102) (145) (27)
------- ------- -------
Cash Provided By (Used For) Financing Activities 591 (1,732) (2,098)
------- ------- -------
Effect of Exchange Rate Changes on Cash 143 (32) (49)
------- ------- -------
Change in Cash and Temporary Investments 1,289 (150) 26
Cash and Temporary Investments
Beginning of the year 1,074 1,224 1,198
------- ------- -------
End of the year $ 2,363 $ 1,074 $ 1,224
======= ======= =======
The accompanying notes are an integral part of these financial statements.
38
International Paper Company
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
In millions, except share amounts in thousands
Common Stock
Issued
---------------- Paid-in Retained
Shares Amount Capital Earnings
- -----------------------------------------------------------------------------------------
Balance, January 1, 2001 484,160 $484 $6,501 $ 6,308)
Issuance of stock for various plans 121 -- (36) --
Repurchase of stock -- -- -- --
Cash dividends - Common
stock ($1.00 per share) -- -- -- (482)
Comprehensive income (loss):
Net loss -- -- -- (1,204)
Minimum pension liability adjustment
(less tax benefit of $4) -- -- -- --
Change in cumulative foreign currency
translation adjustment
(less tax benefit of $59) -- -- -- --
Net losses on cash flow hedging derivatives:
Net loss arising during the period
(less tax benefit of $25) -- -- -- --
Less: Reclassification adjustment for losses
included in net income
(less tax benefit of $18) -- -- -- --
Total comprehensive loss
------- ---- ------ -------
Balance, December 31, 2001 484,281 484 6,465 4,622
Issuance of stock for various plans 479 1 28 --
Repurchase of stock -- -- -- --
Cash dividends - Common stock ($1.00 per share) -- -- -- (482)
Comprehensive income (loss):
Net loss -- -- -- (880)
Minimum pension liability adjustment(2):
U.S. plans (less tax benefit of $964) -- -- -- --
Non-U.S. plans (less tax benefit of $9) -- -- -- --
Change in cumulative foreign currency
translation adjustment
(less tax expense of $2) -- -- -- --
Net gains on cash flow hedging derivatives:
Net gain arising during the period
(less tax expense of $33) -- -- -- --
Less: Reclassificaton adjustment
for gains included in net income
(less tax expense of $3) -- -- -- --
Total comprehensive loss
------- ---- ------ -------
Balance, December 31, 2002 484,760 485 6,493 3,260
Issuance of stock for various plans 402 -- 7 --
Repurchase of stock -- -- -- --
Cash dividends - Common stock
($1.00 per share) -- -- -- (480)
Comprehensive income (loss):
Net income -- -- -- 302
Minimum pension liability adjustment:
U.S. plans (less tax expense of $94) -- -- -- --
Non-U.S. plans (less tax benefit of $2) -- -- -- --
Change in cumulative foreign currency
translation adjustment
(less tax benefit of $51) -- -- -- --
Net gains on cash flow hedging derivatives:
Net gain arising during the period
(less tax expense of $38) -- -- -- --
Less: Reclassificaton adjustment
for gains included in net income
(less tax expense of $36) -- -- -- --
Total comprehensive income
------- ---- ------ -------
Balance, December 31, 2003 485,162 $485 $6,500 $ 3,082
======= ==== ====== =======
Accumulated
Other Total
Comprehensive Treasury Stock Common
Income (Loss)(1) --------------- Shareholders'
Shares Amount Equity
- -----------------------------------------------------------------------------------------------------
Balance, January 1, 2001 $(1,142) 2,690 $ 117 $12,034
Issuance of stock for various plans -- (1,727) (76) 40
Repurchase of stock -- 1,730 64 (64)
Cash dividends - Common
stock ($1.00 per share) -- -- -- (482)
Comprehensive income (loss):
Net loss -- -- -- (1,204)
Minimum pension liability adjustment
(less tax benefit of $4) (6) -- -- (6)
Change in cumulative foreign currency
translation adjustment
(less tax benefit of $59) (10) -- -- (10)
Net losses on cash flow hedging derivatives:
Net loss arising during the period
(less tax benefit of $25) (67) -- -- (67)
Less: Reclassification adjustment for losses
included in net income
(less tax benefit of $18) 50 -- -- 50
-------
Total comprehensive loss (1,237)
------- ------ ----- -------
Balance, December 31, 2001 (1,175) 2,693 105 10,291
Issuance of stock for various plans -- (1,403) (55) 84
Repurchase of stock -- 4,390 169 (169)
Cash dividends - Common
stock ($1.00 per share) -- -- -- (482)
Comprehensive income (loss):
Net loss -- -- -- (880)
Minimum pension liability adjustment(2):
U.S. plans (less tax benefit of $964) (1,543) -- -- (1,543)
Non-U.S. plans (less tax benefit of $9) (21) -- -- (21)
Change in cumulative foreign currency
translation adjustment
(less tax expense of $2) 27 -- -- 27
Net gains on cash flow hedging derivatives:
Net gain arising during the period
(less tax expense of $33) 71 -- -- 71
Less: Reclassificaton adjustment
for gains included in net income
(less tax expense of $3) (4) -- -- (4)
-------
Total comprehensive loss (2,350)
------- ------ ----- -------
Balance, December 31, 2002 (2,645) 5,680 219 7,374
Issuance of stock for various plans -- (2,725) (105) 112
Repurchase of stock -- 713 26 (26)
Cash dividends - Common stock
($1.00 per share) -- -- -- (480)
Comprehensive income (loss):
Net income -- -- -- 302
Minimum pension liability adjustment:
U.S. plans (less tax expense of $94) 150 -- -- 150
Non-U.S. plans (less tax benefit of $2) (4) -- -- (4)
Change in cumulative foreign currency
translation adjustment
(less tax benefit of $51) 808 -- -- 808
Net gains on cash flow hedging derivatives:
Net gain arising during the period
(less tax expense of $38) 66 -- -- 66
Less: Reclassificaton adjustment
for gains included in net income
(less tax expense of $36) (65) -- -- (65)
-------
Total comprehensive income 1,257
------- ------ ----- -------
Balance, December 31, 2003 $(1,690) 3,668 $ 140 $ 8,237
======= ====== ===== =======
(1) The cumulative foreign currency translation adjustment (in millions) was
$(284), $(1,092) and $(1,119) at December 31, 2003, 2002 and 2001,
respectively, and is included as a component of accumulated other
comprehensive income (loss).
(2) This noncash equity reduction resulted from declines in pension fund asset
market values and increases in computed fund liabilities due to lower
interest rates. See Note 15.
The accompanying notes are an integral part of these financial statements.
39
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Our Business
International Paper is a global forest products, paper and packaging company
that is complemented by an extensive distribution system, with primary markets
and manufacturing operations in the United States, Canada, Europe, the Pacific
Rim and South America. Substantially all of our businesses have experienced, and
are likely to continue to experience, cycles relating to available industry
capacity and general economic conditions.
Financial Statements
These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States that require the use of
management's estimates. Actual future results could differ from management's
estimates.
Consolidation
The consolidated financial statements include the accounts of International
Paper and its wholly-owned, controlled majority-owned and financially controlled
subsidiaries. Minority interest represents minority shareholders' proportionate
share of the equity in several of our consolidated subsidiaries, primarily
Carter Holt Harvey Limited (CHH), Timberlands Capital Corp. II, Georgetown
Equipment Leasing Associates, L.P., Trout Creek Equipment Leasing, L.P. and,
prior to its sale in 2001, Zanders Feinpapiere AG (Zanders). All significant
intercompany balances and transactions are eliminated.
Investments in affiliated companies are accounted for by the equity method,
including companies owned 20% to 50%. International Paper's share of affiliates'
earnings is included in the consolidated statement of earnings.
Revenue Recognition
Revenue is recognized when the customer takes title and assumes the risks and
rewards of ownership. Revenue is recorded at the time of shipment for terms
designated f.o.b. (free on board) shipping point. For sales transactions
designated f.o.b. destination, revenue is recorded when the product is delivered
to the customer's delivery site, when title and risk of loss are transferred.
Timber and timberland sales revenue is recognized when title and risk of loss
pass to the buyer.
Shipping and Handling Costs
Shipping and handling costs, such as freight to our customers' destinations, are
included in distribution expenses in the consolidated statement of earnings.
These costs, when included in the sales price charged for our products, are
recognized in net sales.
Temporary Investments
Temporary investments with an original maturity of three months or less are
treated as cash equivalents and are stated at cost, which approximates market.
Inventories
Inventory is valued at the lower of cost or market and includes all costs
directly associated with manufacturing products: materials, labor and
manufacturing overhead. In the United States, costs of raw materials and
finished pulp and paper products are generally determined using the last-in,
first-out method. Other inventories are valued using the first-in, first-out or
average cost methods.
Plants, Properties and Equipment
Plants, properties and equipment are stated at cost, less accumulated
depreciation. Expenditures for betterments are capitalized whereas normal
repairs and maintenance are expensed as incurred. The units-of-production method
of depreciation is used for major pulp and paper mills and certain wood products
facilities and the straight-line method for other plants and equipment. Annual
straight-line depreciation rates are, for buildings, 2 1/2% to 8 1/2%, and, for
machinery and equipment, 5% to 33%.
Forestlands
At December 31, 2003, International Paper and its subsidiaries controlled about
8.3 million acres of forestlands in the United States, 1.5 million acres in
Brazil, 795,000 acres in New Zealand, and had, through licenses and forest
management agreements, harvesting rights on government-owned forestlands in
Canada and Russia. Forestlands include owned property as well as certain timber
harvesting rights with terms of one or more years, and are stated at cost, less
cost of timber harvested (COTH). Costs attributable to timber are charged
against income as trees are cut. The rate charged is determined annually based
on the relationship of incurred costs to estimated current merchantable volume.
Effective January 1, 2002, International Paper prospectively changed its method
of accounting for mid-rotation fertilization expenditures to include such
expenditures in the capitalized cost of forestlands. Accordingly, these costs
have
40
been subsequently included as part of the COTH as trees are sold. Prior to this
change, these expenditures were capitalized and amortized to expense over a
five-year period. The change was made to better match the total costs of fiber
to the related income when the trees are sold. This accounting change had no
material effect on earnings for the year ended December 31, 2002, and the
effects in future years will not be significant. Due to the cumulative nature of
the COTH computation, calculation of the cumulative effect of the accounting
change on prior periods of including these costs as part of COTH, and disclosure
of pro forma amounts for prior years, are not determinable.
Goodwill
Prior to 2002, goodwill was amortized over its estimated period of benefit on a
straight-line basis, not to exceed 40 years. Effective January 1, 2002,
International Paper adopted Statement of Financial Accounting Standards (SFAS)
No. 142, eliminating the periodic charge to earnings for goodwill amortization
for 2002 and future years. In addition, as required by SFAS No. 142, an initial
assessment of recorded goodwill for possible impairment was conducted as of
January 1, 2002. Annual testing for possible goodwill impairment is performed as
of the end of the third quarter of each year. A transitional impairment charge
of $1.2 billion was recorded upon the initial adoption of this standard in 2002.
No additional impairment charges were recorded in 2003 or 2002.
Goodwill relating to a single business reporting unit is included as an asset of
the applicable segment while goodwill arising from major acquisitions that
involve multiple business segments is classified as a corporate asset for
segment reporting purposes. For goodwill impairment testing, this goodwill was
allocated to business segments.
The following tables present changes in the goodwill balances as allocated to
each business segment for the years ended December 31, 2003 and 2002.
- --------------------------------------------------------------------------------
Balance Balance
January 1, December 31,
In millions 2003 Other (a) 2003
- --------------------------------------------------------------------------------
Printing Papers $2,864 $14 $2,878
Industrial and Consumer
Packaging 1,358 3 1,361
Distribution 326 8 334
Forest Products 735 3 738
Corporate 24 6 30
------ --- ------
Total $5,307 $34 $5,341
====== === ======
(a) Represents effects of foreign currency translations and reclassifications
from other long-term assets.
- --------------------------------------------------------------------------------
Balance Transitional Balance
January 1, Impairment December 31,
In millions 2002 Loss Other 2002
- --------------------------------------------------------------------------------
Printing Papers $3,288 $ (426) $ 2 $2,864
Industrial and Consumer
Packaging 1,827 (467) (2) 1,358
Distribution 323 -- 3 326
Forest Products 735 -- -- 735
Carter Holt Harvey 346 (343)(a) (3) --
Corporate 24 -- -- 24
------ ------- --- ------
Total $6,543 $(1,236) $-- $5,307
====== ======= === ======
(a) Excludes a $61 million credit to minority interest expense.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment upon the occurrence of events or
changes in circumstances that indicate that the carrying value of the assets may
not be recoverable, as measured by comparing their net book value to the
estimated undiscounted future cash flows generated by their use. Impaired assets
are recorded at estimated fair value, determined principally using discounted
future cash flows.
Income Taxes
International Paper uses the asset and liability method of accounting for income
taxes whereby deferred income taxes are recorded for the future tax consequences
attributable to differences between the financial statement and tax bases of
assets and liabilities. Deferred tax assets and liabilities are measured using
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Deferred tax
assets and liabilities are revalued to reflect new tax rates in the periods rate
changes are enacted.
Stock-Based Compensation
Stock options and other stock-based compensation awards are accounted for using
the intrinsic value method prescribed by Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. See Note 17 for required pro forma and additional disclosures
relating to these awards.
Environmental Remediation Costs
Costs associated with environmental remediation obligations are accrued when
such costs are probable and reasonably estimable. Such accruals are adjusted as
further information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are discounted to their
present value when the expected cash flows are reliably determinable.
41
Asset Retirement Obligations
In accordance with the provisions of SFAS No. 143, "Accounting for Asset
Retirement Obligations," adopted effective January 1, 2003 (see Note 4), a
liability and an asset are recorded 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 liability is accreted over time and the asset
is depreciated over the life of the related equipment or facility. International
Paper's asset retirement obligations under this standard relate to closure costs
for landfills. Revisions to the liability could occur due to changes in the
estimated costs or timing of closures, or possible new federal or state
regulations affecting these closures.
The following table presents an analysis of activity related to the asset
retirement obligation since January 1, 2003:
- --------------------------------------------------------------------------------
In millions 2003
- --------------------------------------------------------------------------------
Asset retirement obligation at January 1, 2003 $20
Net transition adjustment 22
Liabilities settled (4)
Net adjustments to existing liabilities 8
Accretion expense 2
---
Asset retirement obligation at December 31, 2003 $48
===
Translation of Financial Statements
Balance sheets of international operations are translated into U.S. dollars at
year-end exchange rates, while statements of earnings are translated at average
rates. Adjustments resulting from financial statement translations are included
as cumulative translation adjustments in Accumulated other comprehensive income
(loss) (OCI). See Note 13 related to derivatives and hedging activities.
Reclassifications
Certain reclassifications have been made to prior-year amounts to conform with
the current year presentation.
NOTE 2 EARNINGS PER COMMON SHARE
Earnings (loss) per common share before extraordinary items and cumulative
effect of accounting changes are computed by dividing earnings (loss) before
extraordinary items and cumulative effect of accounting changes by the weighted
average number of common shares outstanding. Earnings (loss) per common share
before extraordinary items and 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 year.
A reconciliation of the amounts included in the computation of earnings (loss)
per common share before extraordinary items and cumulative effect of accounting
changes, and earnings (loss) per common share before extraordinary items and
cumulative effect of accounting changes, assuming dilution, is as follows:
- --------------------------------------------------------------------------------
In millions, except
per share amounts 2003 2002 2001
- --------------------------------------------------------------------------------
Earnings (loss) before
extraordinary items and
cumulative effect of
accounting changes $ 315 $ 295 $(1,142)
Effect of dilutive securities -- -- --
Earnings (loss) before
extraordinary items and
cumulative effect of
accounting changes -
------ ------ -------
assuming dilution $ 315 $ 295 $(1,142)
====== ====== =======
Average common
shares outstanding 479.6 481.4 482.6
Effect of dilutive securities
Long-term incentive plan
deferred compensation -- -- (1.0)
Stock options 1.5 1.6 --
------ ------ -------
Average common shares
outstanding - assuming
dilution 481.1 483.0 481.6
====== ====== =======
Earnings (loss) per common
share before extraordinary
items and cumulative effect
of accounting changes $ 0.66 $ 0.61 $ (2.37)
====== ====== =======
Earnings (loss) per common
share before extraordinary
items and cumulative effect
of accounting changes -
assuming dilution $ 0.66 $ 0.61 $ (2.37)
====== ====== =======
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 2002 and 2001. Stock options are
antidilutive in periods when net losses are recorded.
42
NOTE 3 INDUSTRY SEGMENT INFORMATION
Financial information by industry segment and geographic area for 2003, 2002 and
2001 is presented on pages 32 and 33.
NOTE 4 RECENT ACCOUNTING DEVELOPMENTS
Consolidation of Variable Interest Entities:
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." This Interpretation changed existing
consolidation rules for certain entities, those 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 the entity's activities
without additional subordinated financial support.
The interpretation applied immediately to variable interest entities (VIE's)
created after January 31, 2003, and to VIE's in which an enterprise obtains an
interest after that date. International Paper neither entered into nor obtained
an interest in any VIE's after January 31, 2003. For VIE's created before
February 1, 2003, this interpretation was effective for the first reporting
period ending after December 15, 2003, although early application of the
provisions of this interpretation was allowed. During December 2003, the FASB
issued a revision to FIN 46 (FIN 46(R)) with varying effective dates.
International Paper applied FIN 46(R) to its variable interest entities as of
December 31, 2003.
As a result of the application of the provisions of FIN 46(R) during 2003, four
entities that were required to be consolidated under prior accounting rules were
deconsolidated, and one previously unconsolidated entity was consolidated, at
December 31, 2003. The following paragraphs describe the entities affected by
the new FIN 46(R) consolidation rules and the effects on International Paper's
December 31, 2003 financial statements:
(a) A special purpose leasing entity that was formerly part of an operating
lease arrangement between International Paper and a third party was
determined to be a VIE and required to be consolidated by the Company.
Plants, properties and equipment and Long-term debt of approximately $50
million that were formerly part of this operating lease arrangement were
consolidated and a non-cash, after-tax charge of $3 million was recorded as
the cumulative effect of an accounting change.
(b) In connection with a forestlands sale in 2001, International Paper received
notes having a value of approximately $480 million on the date of sale.
During 2001, International Paper contributed the notes to an unconsolidated
entity in exchange for a preferred interest in that entity valued at
approximately $480 million, and accounted for this transfer as a sale of
the notes for financial reporting purposes with no associated gain or loss.
Also during 2001, the entity acquired approximately $561 million of other
International Paper debt obligations for cash.
In December 2002, International Paper acquired an option to purchase the
third party's interest in the unconsolidated entity and modified the terms
of the entity's special loss allocation between the third party and
International Paper. These actions required the entity to be consolidated
by International Paper at December 31, 2002, resulting in increases in
installment notes receivable (included in Deferred charges and other
assets) of $480 million, Long-term debt of $460 million and Minority
interest of $20 million.
In the fourth quarter of 2003, International Paper determined that it is
not the primary beneficiary of the entity under the provisions of FIN 46(R)
and, accordingly, deconsolidated the entity effective December 31, 2003. At
December 31, 2003, International Paper's $530 million preferred interest in
the entity has been offset against $530 million of International Paper debt
obligations since International Paper has, and intends to effect, a legal
right to net settle these two amounts.
(c) In a similar transaction completed in June 2002, approximately $400 million
of installment notes received in connection with the sale of forestlands in
various states were transferred to a consolidated entity in exchange for a
preferred interest in the entity. In the same period, the entity acquired
International Paper debt obligations of $450 million for cash. Under the
provisions of FIN 46(R), International Paper is not the primary beneficiary
of this entity, resulting in its deconsolidation as of December 31, 2003.
The deconsolidation increased Investments by $465 million, Long-term debt
by $100 million, and decreased Notes receivable by $415 million and
Minority interest by $50 million.
(d) In the third quarter of 2003, International Paper Capital Trust and
International Paper Capital Trust III (the Trusts), were determined to be
VIE's for which International Paper is not the primary beneficiary. Prior
to July 1, 2003, the Trusts had been consolidated in the Company's
financial statements, and the preferred securities of the Trusts of
approximately $1.3 billion were presented in the Consolidated Balance Sheet
as International Paper - Obligated Mandatorily Redeemable Preferred
Securities of Subsidiaries Holding International Paper Debentures.
Effective July 1, 2003, the Trusts were deconsolidated and the previously
consolidated
43
Mandatorily Redeemable Securities were replaced with International Paper's
obligations to the Trusts of approximately $1.3 billion that were
classified as Long-term debt. In addition, interest on the International
Paper debt obligations totaling approximately $44 million was recorded as
Interest expense in the last half of 2003, replacing preferred dividends on
the Mandatorily Redeemable Securities of the Trusts that, prior to the
deconsolidation, would have been recorded as Minority interest expense.
Preferred dividends for periods prior to the July 1, 2003 deconsolidation
continue to be reported as Minority interest expense. A further discussion
of the Company's obligations to the Trusts is presented in Note 8.
In December 2003, International Paper exercised its option to redeem the
securities of one of the Trusts effective January 14, 2004, and,
consequently, reclassified $830 million to current maturities of debt.
The following table summarizes increases (decreases) in 2003 Consolidated
Balance Sheet captions resulting from the application of FIN 46(R) to the
entities described above.
- --------------------------------------------------------------------------------
VIE
-----------------------------
In millions (a) (b) (c) (d) Total
- --------------------------------------------------------------------------------
Assets
Plants, Properties and Equipment,
net $50 $ -- $ -- $ -- $ 50
Investments -- -- 465 40 505
Deferred Charges -- (480) (415) -- (895)
--- ----- ----- ------- -------
Total Assets $50 $(480) $ 50 $ 40 $ (340)
=== ===== ===== ======= =======
Liabilities
Current Maturities of Long-Term Debt $-- $ -- $ -- $ 830 $ 830
Long-Term Debt 50 (460) 100 465 155
Minority Interest -- (20) (50) -- (70)
Mandatorily Redeemable Preferred
Securities -- -- -- (1,255) (1,255)
--- ----- ----- ------- -------
Total Liabilities $50 $(480) $ 50 $ 40 $ (340)
=== ===== ===== ======= =======
The pro forma effects on earnings (loss) before extraordinary items and
cumulative effect of accounting changes, and net earnings, for the years ended
December 31, 2002 and 2001, assuming the adoption of FIN 46(R) as of January 1,
2001, were not material to net earnings or earnings per share.
Financial Instruments With Characteristics of Both Liabilities and Equity:
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity." It established
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. This standard
was effective for financial instruments entered into or modified after May 31,
2003, and otherwise was effective at the beginning of the first interim period
beginning after June 15, 2003. International Paper adopted this standard during
the third quarter ended September 30, 2003, with no material effect on the
Company's financial position or results of operations.
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 changed the measurement and
timing of recognition for exit costs, including restructuring charges, and was
effective for activities initiated after December 31, 2002. It requires that a
liability for costs associated with an exit or disposal activity, such as
one-time termination benefits, be recognized when the liability is incurred,
rather than at the date of a company's commitment to an exit plan. It had no
effect on charges recorded for exit activities begun prior to December 31, 2002.
International Paper adopted this standard effective January 1, 2003, with no
material effect on the Company's financial position or results of operations.
Impairment and Disposal of Long-Lived Assets:
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." It established a single accounting model for the
impairment of long-lived assets to be held and used or to be disposed of by sale
or abandonment, and broadened the definition of discontinued operations.
International Paper adopted SFAS No. 144 in 2002, with no significant change in
the accounting for the impairment and disposal of long-lived assets.
Asset Retirement Obligations:
In August 2001, the FASB issued 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 adopted SFAS No. 143 effective January 1, 2003, recording a
discounted liability of $22 million, an increase in Property, plant and
equipment, net, of $7 million, and a one-time cumulative effect of accounting
change charge of $10 million (net of a deferred tax benefit of $5 million). The
pro forma effects on earnings (loss) before extraordinary items and cumulative
effect of accounting changes, and net
44
earnings, for the years ended December 31, 2002 and 2001, assuming the adoption
of SFAS No. 143 as of January 1, 2001, were not material to net earnings or
earnings per share.
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 recorded goodwill for impairment. The initial test for impairment had to be
completed by December 31, 2002, with any impairment charge recorded as the
cumulative effect of an accounting change to be retroactively reflected in the
first quarter of 2002. Any subsequent impairment charges are to be recorded in
operating results.
The initial test compared the fair value of each of International Paper's
business reporting units having recorded goodwill balances with the business
unit's carrying amount. Fair value was determined using discounted projected
future operating cash flows for all business reporting units except CHH, where
the average quoted market price for CHH shares was used. Where the carrying
amount exceeded fair value, additional testing was performed for possible
goodwill impairment. The fair value for these business reporting units was then
allocated to individual assets and liabilities, using a depreciated replacement
cost approach for fixed assets, and appraised values for intangible assets. Any
excess of fair value over the allocated amounts was equal to the implied fair
value of goodwill. Where this implied goodwill value was less than the goodwill
book value of the business reporting unit, an impairment charge was recorded.
Based on testing completed in the fourth quarter of 2002, a transitional
goodwill impairment loss was recorded for the Industrial and Consumer Packaging,
CHH and Printing Papers business segments totaling $1.2 billion. This charge had
no impact on cash flow.
International Paper ceased recording goodwill amortization effective January 1,
2002. This had no effect on cash flow.
The following table shows net earnings (loss) for the years ended December 31,
2003 and 2002, and pro forma net earnings (loss) for the year ended December 31,
2001, exclusive of goodwill amortization.
- --------------------------------------------------------------------------------
In millions, for the years ended December 31 2003 2002 2001
- --------------------------------------------------------------------------------
Net earnings (loss) $ 302 $ (880) $(1,204)
Add back:
Goodwill amortization -- -- 201
----- ------ -------
Adjusted net earnings (loss) $ 302 $ (880) $(1,003)
===== ====== =======
Basic and Diluted Earnings (Loss) Per Common Share:
Net earnings (loss) $0.63 $(1.83) $ (2.50)
Goodwill amortization -- -- 0.42
----- ------ -------
Adjusted net earnings (loss) $0.63 $(1.83) $ (2.08)
===== ====== =======
Derivatives and Hedging:
On January 1, 2001, International Paper adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as subsequently amended by SFAS
Nos. 137, 138 and 149. 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
in 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 in OCI primarily resulted from
adjusting the foreign currency contracts used as hedges of net investments in
foreign operations to fair value.
NOTE 5 MERGERS AND ACQUISITIONS
In December 2002, CHH acquired Starwood Australia's Bell Bay medium density
fiberboard plant in Tasmania for $28 million in cash.
In April 2001, CHH acquired Norske Skog's Tasman Kraft pulp manufacturing
business for $130 million in cash.
Each of the above acquisitions were accounted for using the purchase method. The
operating results of these acquisitions have been included in the consolidated
statement of earnings from the dates of acquisition.
45
NOTE 6 RESTRUCTURING, BUSINESS IMPROVEMENT AND OTHER CHARGES
Restructuring and Other Charges:
2003: During 2003, restructuring and other charges before taxes and minority
interest of $298 million ($184 million after taxes and minority interest) were
recorded. These charges included a $236 million charge before taxes and minority
interest ($144 million after taxes and minority interest) for asset shutdowns of
excess internal capacity and cost reduction actions, a $63 million charge before
taxes ($39 million after taxes) for legal reserves, and a $1 million credit
before taxes ($1 million charge after taxes) for early debt retirement costs. In
addition, a $40 million credit before taxes and minority interest ($25 million
after taxes and minority interest) was recorded for the net reversal of
restructuring reserves no longer required.
The $236 million charge in 2003 for the asset shutdowns of excess internal
capacity and cost reduction actions consisted of a $91 million charge in the
fourth quarter, a $71 million charge in the third quarter, a $51 million charge
in the second quarter, and a $23 million charge in the first quarter. The
fourth-quarter charge included $49 million of asset write-downs and $42 million
of severance and other charges. The third-quarter charge included $9 million of
asset write-downs and $62 million of severance and other charges. The
second-quarter charge consisted of $16 million of asset write-downs and $35
million of severance and other charges. The first-quarter charge included $2
million of asset write-downs and $21 million of severance and other charges.
The following table and discussion presents detail related to the fourth-quarter
charge:
- --------------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- --------------------------------------------------------------------------------
Printing Papers (a) $19 $ 2 $21
Industrial and Consumer Packaging(b) 16 6 22
Forest Products (c) 10 1 11
Distribution (d) -- 3 3
Carter Holt Harvey (e) 4 7 11
Administrative Support Groups (f) -- 23 23
--- --- ---
$49 $42 $91
=== === ===
(a) The Printing Papers business recorded a charge of $5 million to write-off
certain assets at the Courtland, Alabama and Franklin, Virginia mills.
Management also approved a $14 million charge to write down the assets of
the Maresquel, France mill to its net realizable value of approximately $5
million. The Printing Papers business also recorded a charge of $2 million
for severance costs relating to 42 employees associated with a
manufacturing excellence program.
(b) The Consumer Packaging business recorded an additional charge of $22
million in conjunction with the closure of the Rolark manufacturing
facility and a rationalization plan implemented in the second quarter of
2003. Closure of the Rolark manufacturing facility consisted of an $8
million charge to write down assets to their salvage value, $3 million of
severance costs covering the termination of 178 employees and other exit
costs of $1 million. The charge also included an additional provision for
the previously implemented commercial business rationalization initiative.
These charges included $8 million to write down assets to their salvage
value and $2 million of severance costs covering the termination of 153
employees.
(c) The Forest Products business approved plans in the fourth quarter of 2003
to shut down the Tuskalusa lumber mill in Moundville, Alabama. Operations
at this mill had been temporarily ceased in the second quarter of 2003.
Charges associated with this shut down included $10 million of asset
write-downs to salvage value and $1 million of other exit costs.
(d) The Distribution business (xpedx) recorded a charge of $3 million to cover
lease termination costs related to the Nationwide San Francisco facility
that was vacated in the fourth quarter of 2003.
(e) CHH recorded a charge of $7 million to shut down the Tokoroa sawmill.
Charges associated with this shutdown included $4 million to write down
assets to salvage value, $2 million for severance costs covering the
termination of 115 employees and other exit costs of $1 million. CHH also
implemented a cost reduction initiative recording a charge of $4 million
for severance covering the termination of 229 employees.
(f) During the fourth quarter of 2003, International Paper implemented the
second phase of the previously announced Overhead Reduction Program to
improve competitive performance. Charges associated with this initiative
included $23 million of severance costs covering the termination of 557
employees. The $23 million charge included: Printing Papers - $6 million,
Industrial and Consumer Packaging - $7 million, Forest Products - $5
million, Specialty Businesses and Other - $1 million, and Corporate - $4
million.
46
The following table and discussion presents detail related to the third-quarter
charge:
- --------------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- --------------------------------------------------------------------------------
Administrative Support Groups (a) $-- $38 $38
Specialty Businesses and Other(b) 9 24 33
--- --- ---
$ 9 $62 $71
=== === ===
(a) During the third quarter of 2003, International Paper implemented the
initial phase of an Overhead Reduction Program to improve competitive
performance. Charges associated with this initiative included $37 million
of severance costs covering the termination of 744 employees, and other
cash costs of $1 million. The $38 million charge included: Printing Papers
- $12 million, Industrial and Consumer Packaging - $11 million,
Distribution - $2 million, Forest Products - $6 million, Specialty
Businesses - $2 million, and Corporate - $5 million. At December 31, 2003,
471 employees had been terminated.
(b) Specialty Businesses recorded an additional charge of $33 million in
connection with the July 15th shutdown of the Natchez, Mississippi mill.
The charge included $9 million of asset write-downs to salvage value, $1
million of severance costs covering the termination of 20 employees, $20
million of environmental closure costs and other cash costs of $3 million.
At December 31, 2003, 13 employees had been terminated.
The following table and discussion presents detail related to the second-quarter
charge:
- --------------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- --------------------------------------------------------------------------------
Printing Papers (a) $ 3 $ 2 $ 5
Industrial and
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 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. At December 31, 2003, all 19
employees had been terminated.
(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 the programs included $2
million to cover the termination of 79 employees, lease termination costs
of $3 million, and other cash costs of $1 million. At December 31, 2003, 78
employees had been terminated and one employee retained.
(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 the 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.
At December 31, 2003, 195 employees had been terminated. 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.
(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.
At December 31, 2003, all 176 employees had been terminated.
(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. At December 31, 2003, 436
employees had been terminated.
The following table and discussion presents detail related to the first-quarter
charge:
- --------------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- --------------------------------------------------------------------------------
Industrial and
Consumer Packaging(a) $-- $ 2 $ 2
Specialty Businesses
and Other (b) 2 18 20
Carter Holt Harvey (c) -- 1 1
--- --- ---
$ 2 $21 $23
=== === ===
47
(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. At December 31, 2003, all 31 employees had been terminated.
(b) Arizona Chemical recorded a charge of $1 million for severance costs for 51
employees associated with the Valkeakoski, Finland plant closure. At
December 31, 2003, 43 employees had been terminated. 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. At December 31, 2003, all
141 employees had been terminated. Additional shutdown charges for
severance and closure costs were recorded in the second and third quarters
of 2003. Additionally, Industrial Papers approved a plan to restructure
converting operations at the Kaukana, 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. At December 31,
2003, all 130 employees had been terminated.
(c) CHH recorded a charge of $1 million for severance costs for 33 employees
associated with a headcount reduction initiative. At December 31, 2003, 23
employees had been terminated and 10 employees retained.
The following table presents a roll forward of the 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
Additions (third quarter 2003) 62
Additions (fourth quarter 2003) 42
2003 Activity
Cash charges (72)
Reclassifications:
Pension and postretirement reclass (4)
Reversals of reserves no longer required (3)
----
Balance, December 31, 2003 $ 81
====
The severance charges recorded in the first, second, third and fourth quarters
of 2003 related to 3,343 employees. As of December 31, 2003, 1,756 employees had
been terminated.
2002: During 2002, restructuring and other charges before taxes and minority
interest of $695 million ($435 million after taxes and minority interest) were
recorded. These charges included a $199 million charge before taxes and minority
interest ($130 million after taxes and minority interest) for asset shutdowns of
excess internal capacity and cost reduction actions, a $450 million pre-tax
charge ($278 million after taxes) for additional exterior siding legal reserves
discussed in Note 10, and a charge of $46 million before taxes and minority
interest ($27 million after taxes and minority interest) for early debt
retirement costs discussed in Note 12. In addition, a $68 million pre-tax credit
($43 million after taxes) was recorded in 2002, including $45 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 $199 million charge in 2002 for the asset shutdowns of excess internal
capacity and cost reduction actions consisted of a $101 million charge in the
fourth quarter, a $19 million charge in the third quarter and a $79 million
charge in the second quarter. The fourth-quarter charge included $29 million of
asset write-downs and $72 million of severance and other charges. The
third-quarter charge included $9 million of asset write-downs and $10 million of
severance and other charges. The second-quarter charge consisted of $42 million
of asset write-downs and $37 million of severance and other charges.
The following table and discussion presents detail related to the fourth-quarter
charge:
- --------------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- --------------------------------------------------------------------------------
Printing Papers (a) $ 2 $26 $ 28
Industrial and
Consumer Packaging(b) 16 12 28
Forest Products (c) 10 2 12
Distribution (d) 1 5 6
Specialty Businesses
and Other (e) -- 16 16
Carter Holt Harvey (f) -- 11 11
--- --- ----
$29 $72 $101
=== === ====
(a) The Printing Papers business approved a restructuring plan at the
Maresquel, France plant in an effort to improve efficiencies. Charges
associated with the plan included $1 million of asset write-downs to
salvage value, $7 million of severance costs covering the termination of 80
employees and other cash costs of $1 million. Management also implemented a
reduction in force initiative at several of its Coated and SC mills
resulting in severance charges of $18 million covering the termination of
245 employees. Also, an additional charge of $1 million was recorded to
write down the remaining assets at the Erie, Pennsylvania mill to salvage
value.
48
(b) The Industrial Packaging business recorded a charge of $3 million for
severance costs relating to the Las Palmas facility in the second phase of
an effort to consolidate duplicative facilities and eliminate excess
internal capacity. Redundancies associated with this charge included 56
employees.
The Consumer Packaging business approved a plan to shut down the
Hopkinsville, Kentucky Foodservice plant due to the facility's financial
shortfalls, a continuing weak economy, reduced demand from its Quick
Service Restaurant (QSR) customers and increased competition for remaining
QSR volumes. Charges associated with this shutdown included $10 million to
write down assets to their estimated realizable value of $4 million, $3
million of severance costs covering the termination of 327 employees, and
other exit costs of $1 million. The Hopkinsville plant had revenues of $47
million, $31 million and $24 million in 2002, 2001 and 2000, respectively.
This plant had operating losses of $8 million in 2002, $1 million in 2001
and zero in 2000. Management also implemented a business-reorganization
plan for the foodservice group that included $2 million to write down
assets to salvage value, $3 million of severance costs covering the
termination of 113 employees and other cash costs of $1 million. The
Consumer Packaging charge also included $4 million of asset write-offs and
$1 million of other cash charges associated with its international joint
ventures.
(c) The Forest Products business charge of $12 million resulted from
management's decision to exit the development of the wood plastic composite
business and shut down the Whelen Springs, Arkansas lumber mill. Charges
associated with the wood plastic composite business consisted of $10
million of asset write-downs to salvage value and $1 million of other exit
costs. The Whelen Springs Lumber mill was closed due to the impact of the
strong dollar on export sales. The Whelen Springs shutdown charge consisted
of $1 million of exit costs.
(d) The Distribution business (xpedx) implemented a plan to consolidate
duplicative facilities and reduce ongoing operating logistics and selling
and administrative expenses. Charges associated with this plan included $1
million of asset write-downs to salvage value, $2 million of severance
costs covering the termination of 68 employees, and other cash costs of $3
million.
(e) The Specialty Businesses approved a plan to shut down the Valkeakoski,
Finland chemicals plant, as well as a management plan to implement
headcount reduction programs within the Chemicals group. Charges associated
with the Valkeakoski shutdown included $8 million of other cash costs not
including severance. The Valkeakoski plant had revenues of $20 million, $19
million and $19 million in 2002, 2001 and 2000, respectively. This plant
had operating earnings of $1 million in both 2002 and 2001, and $2 million
in 2000. Charges associated with the headcount reduction programs consisted
of $3 million of severance covering 11 employees to be terminated and $1
million of other related costs. The Specialty Businesses also implemented a
plan to restructure manufacturing operations at the Polyrey facility in
France. The plan includes consolidation of decorative high-pressure
laminate production in order to optimize efficiencies and provide higher
levels of quality and service. Charges associated with the restructuring
included $2 million of severance costs covering the termination of 46
employees and $1 million of other exit costs. Other charges included a $1
million reserve for facility environmental costs at the Natchez,
Mississippi facility.
(f) CHH recorded a charge of $11 million for severance costs associated with a
reduction in force at its Kinleith facility as part of a continuing program
to improve the cost structure at the mill. Redundancies associated with the
charge included 260 employees.
The following table and discussion presents detail related to the third-quarter
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 charge of $3 million relates to the severance
costs for 43 employees in Arizona Chemical's U.S. operations to reduce
costs.
(b) The CHH 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. At December 31, 2002, 45 employees had been
terminated. In addition, CHH 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.
49
The following table and discussion presents detail related to the second-quarter
charge:
- --------------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- --------------------------------------------------------------------------------
Printing Papers (a) $39 $18 $57
Industrial and
Consumer Packaging (b) 3 -- 3
Distribution (c) -- 7 7
Administrative Support Groups(d) -- 12 12
--- --- ---
$42 $37 $79
=== === ===
(a) The Printing Papers business approved a plan to permanently shut down the
Hudson River, New York mill by December 31, 2002, as many of the specialty
products produced at the mill were not competitive in current markets. The
assets of the mill are currently being marketed for sale. Impairment
charges associated with the shutdown included $39 million to write the
assets down to their estimated realizable value of approximately $5
million, $9 million of severance costs covering the termination of 294
employees, and other cash costs of $7 million. The Hudson River mill had
revenues of $61 million, $80 million and $139 million in 2002, 2001 and
2000, respectively, and operating losses of $15 million in 2002 and $22
million in 2001, and operating earnings of $9 million in 2000. At December
31, 2002, all employees had been terminated. The Printing Papers business
also recorded an additional charge of $2 million related to the termination
of 52 employees in conjunction with the business's plan to streamline and
realign administrative functions at several of its locations.
(b) The Consumer Packaging business approved the first phase of a plan to
consolidate duplicative facilities and eliminate excess internal capacity.
The $3 million charge recorded relates to the write-down of assets to their
estimated salvage value.
(c) The Distribution business (xpedx) severance charge of $7 million reflects
the termination of 145 employees in conjunction with the business's plan to
consolidate duplicative facilities and eliminate excess internal capacity.
(d) During the second quarter of 2002, International Paper implemented the
second phase of its cost reduction program to realign its administrative
functions across all business and staff support groups. As a result, a $12
million severance charge was recorded covering the termination of 102
employees.
The following table presents a roll forward of the 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
2002 Activity
Cash charges (15)
2003 Activity
Cash charges (77)
Reclassifications:
Deferred payments to severed employees (2)
Environmental remediation and other exit costs (15)
Reversals of reserves no longer required (10)
----
Balance, December 31, 2003 $ --
====
The severance charges recorded in the second, third and fourth quarters of 2002
related to 1,989 employees. As of December 31, 2003, 1,849 employees had been
terminated.
2001: During 2001, restructuring and other charges of $1.1 billion before taxes
and minority interest ($752 million after taxes and minority interest) were
recorded. These charges included an $892 million charge before taxes and
minority interest ($606 million after taxes and minority interest) for asset
shutdowns of excess internal capacity and cost reduction actions and a $225
million pre-tax charge ($146 million after taxes) for additional exterior siding
legal reserves discussed in Note 10. In addition, a $17 million pretax credit
($11 million after taxes) was recorded in 2001 for the reversal of excess 2000
and 1999 restructuring reserves.
The $892 million charge in 2001 for the asset shutdowns of excess internal
capacity and cost reduction actions consisted of a $171 million charge in the
fourth quarter, a $256 million charge in the third quarter and a $465 million
charge in the second quarter.
The fourth-quarter charge of $171 million consisted of $84 million of asset
write-downs and $87 million of severance and other charges. The third-quarter
charge of $256 million consisted of $183 million of asset write-downs and $73
million of severance and other charges. The second-quarter charge of $465
million consisted of $240 million of asset write-downs and $225 million of
severance and other charges.
50
The following table and discussion presents detail related to the fourth-quarter
charge:
- --------------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- --------------------------------------------------------------------------------
Printing Papers (a) $-- $18 $ 18
Industrial and Consumer Packaging(b) 70 46 116
Forest Products (c) 12 9 21
Distribution (d) 2 14 16
--- --- ----
$84 $87 $171
=== === ====
(a) The Printing Papers business recorded a fourth-quarter charge of $10
million for severance costs related to the reorganization of its
Riegelwood, North Carolina mill, and an $8 million charge for additional
severance costs related to the Erie, Pennsylvania mill shutdown. The total
charge covers the termination of 108 employees.
(b) The Industrial Packaging business announced the shutdown of the Oswego, New
York containerboard mill as part of ongoing optimization efforts. Charges
associated with this shutdown included $17 million to write down assets to
salvage value, $7 million of severance costs covering the termination of
102 employees, and other exit costs of $2 million. The Oswego mill had
revenues of $39 million, $44 million and $37 million in 2001, 2000 and
1999, respectively. This mill had operating earnings of $8 million, $10
million and $6 million in 2001, 2000 and 1999, respectively.
Management also approved a plan to reconfigure facility assets at the
Savannah, Georgia mill. This was the second phase in the mill's
rationalization program. Charges associated with the Savannah plan included
$14 million of asset write-downs to salvage value, $11 million of severance
costs covering the termination of 150 employees, and other cash costs of $1
million.
The Industrial Packaging charge also included $4 million of additional
asset write-offs at the previously shut down Gardiner, Oregon mill, a $4
million charge to cover demolition costs at the Durham Paper mill in
Rieglesville, Pennsylvania, a $3 million asset write-off related to the
announced shutdown of the Jackson, Mississippi sheet plant, and a $3
million write-off of deferred software costs related to the discontinued
implementation of a Union Camp order management system.
The Consumer Packaging business implemented a plan to reduce excess
internal capacity and improve profitability across its domestic converting
business. The plan includes $29 million for plant and production line
shutdowns, severance of $12 million to cover the termination of 593
employees, and other cash costs of $9 million.
(c) The Forest Products business approved a plan to shut down the Morton,
Mississippi lumber mill. Charges associated with the shutdown included $12
million of asset write-downs to salvage value, $3 million of severance
costs covering the termination of 185 employees, and $6 million of other
exit costs. The Morton mill had sales of $35 million, $38 million and $51
million in 2001, 2000 and 1999, respectively, and operating losses of $4
million and $3 million in 2001 and 2000, respectively, and operating income
of $3 million in 1999.
(d) The Distribution business (xpedx) implemented a plan to reduce operating
and selling costs. Charges associated with this plan included $2 million of
asset write-downs, $11 million of severance costs covering the termination
of 325 employees, and other cash costs of $3 million.
The following table and discussion presents detail related to the third-quarter
charge:
- --------------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- --------------------------------------------------------------------------------
Printing Papers (a) $ 92 $43 $135
Industrial and Consumer Packaging(b) 89 27 116
Distribution (c) 2 3 5
---- --- ----
$183 $73 $256
==== === ====
(a) The Printing Papers business approved a plan to shut down the Erie,
Pennsylvania mill due to excess capacity in pulp and paper and
non-competitive cost of operations. Charges associated with the Erie
shutdown included $92 million to write the assets down to their estimated
salvage value, $24 million of severance costs covering the termination of
797 employees, and other cash costs of $19 million. The mill had revenues
of $167 million, $206 million and $193 million in 2001, 2000 and 1999,
respectively. The mill had an operating loss of $33 million in 2001,
operating income of $3 million in 2000 and an operating loss of $20 million
in 1999.
(b) The Consumer Packaging business implemented a plan to exit the Aseptic
Packaging business. The plan includes the shutdown or sale of various
Aseptic Packaging facilities. Included in this charge are $89 million to
write the assets down to their estimated realizable value of $35 million,
$15 million of severance costs covering the termination of 300 employees,
and $12 million of other cash costs.
51
(c) The Distribution business (xpedx) approved the shutdown of its Nationwide
Kansas City, Missouri distribution center to eliminate excess internal
capacity. The xpedx Olathe, Kansas facility will continue to service Kansas
City and outlying cities in the states of Missouri and Kansas. Charges
associated with the shutdown included $2 million of asset write-downs, $2
million of severance costs covering the termination of 79 employees, and
other cash costs of $1 million.
The following table and discussion presents detail related to the second-quarter
charge:
- --------------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- --------------------------------------------------------------------------------
Printing Papers (a) $ 9 $ 23 $ 32
Industrial and Consumer Packaging(b) 213 89 302
Industrial Papers (c) 3 5 8
Forest Products (d) 1 12 13
Distribution (e) 4 21 25
Carter Holt Harvey (f) 10 -- 10
Administrative Support Groups (g) -- 75 75
---- ---- ----
$240 $225 $465
==== ==== ====
(a) The Printing Papers business shut down the Hudson River mill No. 3 paper
machine located in Corinth, New York due to excess internal capacity. The
machine was written down by $9 million to its estimated fair value of zero.
A severance charge of $10 million was recorded to cover the termination of
208 employees. Also, the Printing Papers business implemented a plan to
streamline and realign administrative functions at several of its
locations. Charges associated with this plan included $6 million of
severance costs covering the termination of 82 employees, and other cash
costs of $7 million.
(b) The Industrial Packaging business shut down the Savannah, Georgia mill No.
2, No. 4 and No. 6 paper machines due to excess internal capacity. The
machines were written down by $62 million to their estimated fair value of
zero, with severance charges of $11 million also recorded to cover the
termination of 290 employees. Also, Industrial Packaging implemented a plan
to streamline and realign administrative functions at several of its
locations, resulting in a severance charge of $9 million covering the
termination of 146 employees.
In June 2001, the Consumer Packaging business shut down the Moss Point,
Mississippi mill and announced the shutdown of its Clinton, Iowa facility
due to excess internal capacity. Charges associated with the Moss Point
shutdown included $138 million to write the assets down to their estimated
salvage value, $21 million of severance costs covering the termination of
363 employees, and other cash costs of $20 million. The Moss Point mill had
revenues of $37 million, $127 million and $162 million in 2001, 2000 and
1999, respectively. The mill had an operating loss of $11 million in 2001,
and operating earnings of $4 million and zero in 2000 and 1999,
respectively. Charges associated with the Clinton shutdown included $7
million to write the assets down to their estimated salvage value, $7
million of severance costs covering the termination of 327 employees, and
other cash costs of $3 million. The Clinton facility had revenues of $51
million, $100 million and $105 million in 2001, 2000 and 1999,
respectively. The facility had no operating income in 2001, an operating
loss of $1 million in 2000 and operating income of $1 million in 1999.
Additionally, the Consumer Packaging business implemented a plan to reduce
excess internal capacity and streamline administrative functions at several
of its locations. Charges associated with this plan included $6 million of
asset write-downs to salvage value, $15 million of severance costs covering
the termination of 402 employees, and other cash costs of $3 million.
(c) Industrial Papers implemented a plan to reduce excess internal capacity and
streamline administrative functions at several of its locations. Charges
associated with this plan included asset write-downs to salvage value of $3
million and severance costs of $5 million covering the termination of 123
employees.
(d) The Forest Products business charge of $13 million reflects the
reorganization of its regional operating structure and streamlining of
administrative functions. The charge included $1 million of asset
write-downs to salvage value, $9 million of severance costs covering the
termination of 130 employees, and other cash costs of $3 million.
(e) The Distribution business (xpedx) implemented a plan to consolidate
duplicate facilities and eliminate excess internal capacity. Charges
associated with this plan included $4 million of asset write-downs to
salvage value, $14 million of severance costs covering the termination of
394 employees, and other cash costs of $7 million.
(f) The CHH charge of $10 million was recorded to write down the assets of its
Mataura mill to their estimated fair value of zero as a result of the
decision to permanently shut down this facility, which had previously been
indefinitely idled.
(g) During the second quarter of 2001, International Paper implemented a cost
reduction program to realign its administrative functions across all
business and staff support groups. As a result, a $75 million severance
charge was recorded covering the termination of 985 employees.
52
The following table presents a roll forward of the severance and other costs
included in the 2001 restructuring plans:
- --------------------------------------------------------------------------------
Severance
In millions and Other
- --------------------------------------------------------------------------------
Opening Balance (second quarter 2001) $ 225
Additions (third quarter 2001) 73
Additions (fourth quarter 2001) 87
2001 Activity
Cash charges (131)
2002 Activity
Cash charges (131)
Reclassifications:
Deferred payments to severed employees (30)
Environmental remediation and other exit costs (62)
Reversals of reserves no longer required (31)
-----
Balance, December 31, 2002 $ --
=====
Certain deferred payments for severed employees and environmental remediation
have been reclassified to Accounts payable and Other liabilities, respectively.
The severance charges recorded in the second, third and fourth quarters of 2001
related to 6,089 employees. Upon completion of the related severance programs at
December 31, 2002, 6,084 employees had been terminated.
Extraordinary Items:
During the first quarter of 2001, pre-tax losses totaling $73 million ($46
million after taxes) were recorded, including $60 million ($38 million after
taxes) for impairment losses to reduce the assets of Masonite Corporation
(Masonite) to their estimated realizable value based on offers received, and $13
million ($8 million after taxes) from a loss on the sale of oil and gas
properties and fee mineral and royalty interests.
Pursuant to the pooling-of-interest rules, these losses were recorded as
extraordinary items in Net losses on sales and impairments of businesses held
for sale in the accompanying consolidated statement of earnings.
Merger Integration Costs:
During 2001, International Paper recorded a pre-tax charge of $42 million ($28
million after taxes) for Champion merger integration costs. These costs
consisted primarily of systems integration, employee retention, travel and other
one-time cash costs related to the integration of Champion.
NOTE 7 DIVESTITURES
Net (Gains) Losses on Sales and Impairments of Businesses Held for Sale
In the fourth quarter of 2003, International Paper recorded a $34 million
pre-tax charge ($34 million after taxes) to write down the assets of its Polyrey
business to estimated fair value. In addition, a $13 million gain ($8 million
after taxes) was recorded to adjust estimated gains/losses of businesses
previously sold.
In the third quarter of 2003, a $1 million pre-tax charge ($1 million after
taxes) was recorded to adjust estimated gains/losses of businesses previously
sold.
In the second quarter of 2003, a $10 million pre-tax charge ($6 million after
taxes) was recorded to adjust previous estimated gains/losses of businesses
previously sold.
The net 2003 pre-tax losses, totaling $32 million, discussed above are included
in Net (gains) losses on sales and impairments of businesses held for sale in
the accompanying consolidated statement of earnings.
In the fourth quarter of 2002, International Paper recorded a $10 million
pre-tax credit ($4 million after taxes) to adjust estimated accrued costs of
businesses previously sold.
In the third quarter of 2002, International Paper completed the sale of its
Decorative Products operations 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. Also during the
third quarter of 2002, a net gain of $3 million before taxes ($1 million after
taxes) was recorded related to adjustments of previously estimated accrued costs
of businesses held for sale.
During the second quarter of 2002, a net 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 in April 2002 of International Paper's
oriented strand board facilities to Nexfor Inc. for $250 million, 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 CHH's distribution business;
(2) an additional loss of $12 million to write down the net assets of
Decorative Products to fair market value;
53
(3) $11 million of additional expenses relating to the decision to
continue to operate Arizona Chemical, including a $3 million
adjustment of estimated accrued 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 the fourth quarter of
2001 (see below) 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 gain of $28 million before taxes and minority
interest, with an associated $96 million benefit after taxes and minority
interest. The net 2002 pre-tax gains, totaling $41 million, discussed above are
included in Net (gains) losses on sales and impairments of businesses held for
sale in the accompanying consolidated statement of earnings.
In the fourth quarter of 2001, a pre-tax impairment loss of $582 million ($524
million after taxes) was recorded including $576 million to write down the net
assets of Arizona Chemical, Decorative Products and Industrial Papers to an
estimated realizable value of approximately $550 million, and $6 million of
severance for the reduction of 189 employees in the Chemical Cellulose Pulp
business. Also in the fourth quarter, International Paper sold its Mobile,
Alabama Retail Packaging facility to Ampac, resulting in a pre-tax loss of $9
million.
In the third quarter of 2001, International Paper sold Masonite to Premdor Inc.
of Toronto, Canada, resulting in a pre-tax loss of $87 million, its Flexible
Packaging business to Exo-Tech Packaging, LLC, resulting in a pre-tax loss of
$31 million, and its Curtis/Palmer hydroelectric generating project in Corinth,
New York to TransCanada Pipelines Limited, resulting in a pre-tax gain of $215
million. Also, in the third quarter, 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.
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.
The net 2001 pre-tax losses discussed above, totaling $629 million, are included
in Net (gains) losses on sales and impairments of businesses held for sale in
the accompanying consolidated statement of earnings.
NOTE 8 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. Southeast
Timber, which through a subsidiary initially held 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 $150 million preferred third-party interest
is 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.
In September 1998, International Paper Capital Trust III issued $805 million of
International Paper-obligated mandatorily redeemable preferred securities. Prior
to July 1, 2003, International Paper Capital Trust III was a wholly owned
consolidated subsidiary of International Paper (see Note 4). Its sole assets are
International Paper 7 7/8% debentures. The obligations of International Paper
Capital Trust III related to its preferred securities are unconditionally
guaranteed by International Paper. These preferred securities are mandatorily
redeemable on December 1, 2038. In January 2004, International Paper redeemed
these securities at par plus accrued interest.
In the third quarter of 1995, International Paper Capital Trust (the Trust)
issued $450 million of International Paper-obligated mandatorily redeemable
preferred securities. Prior to July 1, 2003, the Trust was a wholly owned
consolidated subsidiary of International Paper (see Note 4) and its sole assets
are International Paper 5 1/4% convertible subordinated debentures. The
obligations of the Trust related to its preferred securities are unconditionally
guaranteed by International Paper. These preferred securities are convertible
into International Paper common stock.
54
Effective July 1, 2003, as required by FIN 46, International Paper
deconsolidated these two trusts holding approximately $1.3 billion of
mandatorily redeemable preferred securities, previously classified as a separate
line item on the Company's balance sheet, and recorded approximately $1.3
billion of borrowings from the Trusts as debt.
In June 1998, IP Finance (Barbados) Limited, a non-U.S. wholly owned
consolidated subsidiary of International Paper, issued $550 million of preferred
securities with a dividend payment based on LIBOR. These preferred securities
were redeemed in June 2003 with the proceeds of debt issuances (see Note 12).
In March 1998, Timberlands Capital Corp. II, Inc., a wholly owned consolidated
subsidiary of International Paper, issued $170 million of 7.005% preferred
securities as part of the financing to repurchase the outstanding units of IP
Timberlands, Ltd. These securities are not mandatorily redeemable and are
classified in the consolidated balance sheet as a minority interest liability.
Distributions paid under all of the preferred securities noted above were $111
million, $115 million and $129 million in 2003, 2002 and 2001, respectively. The
expense related to these preferred securities is shown in minority interest
expense in the consolidated statement of earnings, except for $44 million
included in interest expense related to Trust preferred securities that were
deconsolidated effective July 1, 2003 (see Note 4).
NOTE 9 INCOME TAXES
The components of International Paper's earnings (loss) before income taxes,
minority interest, extraordinary items and cumulative effect of accounting
changes by taxing jurisdiction were:
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Earnings (loss)
U.S. $(249) $(73) $(1,683)
Non-U.S. 595 444 418
----- ---- -------
$ 346 $371 $(1,265)
===== ==== =======
The provision (benefit) for income taxes by taxing jurisdiction was:
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Current tax provision
U.S. federal $ 173 $ 175 $ 186
U.S. state and local 11 54 3
Non-U.S. 125 111 100
----- ----- -----
$ 309 $ 340 $ 289
===== ===== =====
Deferred tax provision (benefit)
U.S. federal $(271) $(231) $(455)
U.S. state and local (73) (146) (116)
Non-U.S. (57) (17) 12
----- ----- -----
$(401) $(394) $(559)
===== ===== =====
Income tax provision (benefit) $ (92) $ (54) $(270)
===== ===== =====
The Company's deferred income tax provision (benefit) includes a $1 million
provision for the effect of changes in Non-U.S. and state tax rates.
International Paper made income tax payments, net of refunds, of $277 million,
$295 million and $333 million in 2003, 2002 and 2001, respectively.
A reconciliation of income tax expense (benefit) using the statutory U.S. income
tax rate compared with actual income tax expense (benefit) follows:
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Earnings (loss) before income taxes, minority
interest, extraordinary items and cumulative
effect of accounting changes $346 $371 $(1,265)
Statutory U.S. income tax rate 35% 35% 35%
---- ---- -------
Tax expense (benefit) using statutory U.S. income tax
rate $121 $130 $ (443)
State and local income taxes (41) (60) (73)
Non-U.S. tax rate differences (95) (50) (19)
Permanent differences on sales of non-strategic assets (1) (70) 180
Nondeductible business expenses 22 13 12
Retirement plan dividends (7) -- --
Tax benefit on export sales (12) (4) (4)
Minority interest (52) (43) (70)
Goodwill amortization -- -- 55
Net U.S. tax on non-U.S. dividends 15 27 108
Tax credits (56) -- --
Other, net 14 3 (16)
---- ---- -------
Income tax benefit $(92) $(54) $ (270)
==== ==== =======
Effective income tax rate -27% -15% 21%
==== ==== =======
55
The tax effects of significant temporary differences representing deferred tax
assets and liabilities at December 31, 2003 and 2002, were as follows:
- -------------------------------------------------------------------------------
In millions 2003 2002
- -------------------------------------------------------------------------------
Deferred tax assets:
Postretirement benefit accruals $ 372 $ 363
Prepaid pension costs 322 397
Alternative minimum and other tax credits 474 423
Net operating loss carryforwards 1,703 1,295
Compensation reserves 196 174
Legal reserves 147 174
Other 449 527
------- -------
Gross deferred tax assets 3,663 3,353
Less: valuation allowance (148) (169)
------- -------
Net deferred tax assets $ 3,515 $ 3,184
======= =======
Deferred tax liabilities:
Plants, properties, and equipment $(2,867) $(2,832)
Forestlands (1,153) (1,092)
Other (264) (253)
------- -------
Total deferred tax liabilities $(4,284) $(4,177)
======= =======
Net deferred tax liability $ (769) $ (993)
======= =======
The valuation allowance for deferred tax assets as of January 1, 2003, was $169
million. The net change in the total valuation allowance for the year ended
December 31, 2003, was a decrease of $21 million.
During 2003, International Paper recorded decreases totaling $123 million in the
provision for income taxes for significant items occurring in 2003, including a
$13 million reduction in the fourth quarter ($26 million before minority
interest) for a favorable settlement with Australian tax authorities of net
operating loss carry-forwards, a $60 million reduction in the third quarter
reflecting a favorable revision of estimated tax accruals upon filing the 2002
federal income tax return and increased research and development credits, and a
$50 million reduction in the second quarter reflecting a favorable tax audit
settlement and benefits from an overseas tax program.
During the fourth quarter of 2002, International Paper completed a review of its
deferred income tax accounts, including the effects of state tax credits and the
taxability of the Company's operations in various state taxing jurisdictions. As
a result of this review, the Company recorded a decrease of approximately $46
million in the income tax provision in the 2002 fourth quarter, reflecting the
effect of the estimated state income tax effective rate applied to these
deferred tax items.
International Paper has federal and non-U.S. net operating loss carryforwards
that expire as follows: years 2004 through 2013 - $176 million, years 2014
through 2023 - $3.5 billion, and indefinite carryforwards - $704 million.
International Paper has tax benefits from net operating loss carryforwards for
state taxing jurisdictions of approximately $322 million that expire as follows:
years 2004 through 2013 - $74 million, and years 2014 through 2023 - $248
million. International Paper also has federal and state tax credit carryforwards
that expire as follows: years 2004 through 2013 - $142 million, and indefinite
carryforward - $387 million.
Deferred taxes are not provided for temporary differences of approximately $3.3
billion, $2.5 billion and $1.8 billion as of December 31, 2003, 2002 and 2001,
respectively, representing earnings of non-U.S. subsidiaries that are intended
to be permanently reinvested. Computation of the potential deferred tax
liability associated with these undistributed earnings is not practicable.
NOTE 10 COMMITMENTS AND CONTINGENT LIABILITIES
Certain property, machinery and equipment are leased under cancelable and
non-cancelable agreements. At December 31, 2003, total future minimum rental
commitments under non-cancelable leases were $911 million, due as follows: 2004
- -$187 million, 2005 - $155 million, 2006 - $121 million, 2007 - $102 million,
2008 - $86 million and thereafter -$260 million. Rent expense was $262 million,
$267 million and $230 million for 2003, 2002 and 2001, respectively.
International Paper entered into an agreement in 2000 to guarantee, for a fee,
an unsecured contractual credit agreement of an unrelated third party customer.
The guarantee, which expires in 2008, was made in exchange for a ten-year
contract as the exclusive paper supplier to the customer. Both the loan to the
customer and the guarantee are unsecured. International Paper would be required
to perform under the guarantee upon default on the loan by the unrelated third
party. The maximum amount of potential future payments is $110 million in
principal plus any accrued but unpaid interest. There is no liability recorded
on International Paper's books for the guarantee.
In connection with sales of businesses, property, equipment, forestlands, and
other assets, International Paper commonly makes representations and warranties
relating to such businesses or assets, and may enter into standard commercial
indemnification arrangements with respect to tax and environmental liabilities
and other matters. Where any liabilities for such matters are probable and
subject to reasonable estimation, accrued liabilities are recorded at the time
of sale as a cost of the transaction. International Paper believes that possible
future unrecorded liabilities for these matters, if any, would not have a
material adverse effect on its consolidated financial position or results of
operations.
56
Exterior Siding and Roofing Litigation
Three nationwide class action lawsuits relating to exterior siding and roofing
products manufactured by Masonite that were filed against International Paper
have been settled in recent years.
The first suit, entitled Judy Naef v. Masonite and International Paper, was
filed in December 1994 (Hardboard Lawsuit). The plaintiffs alleged that
hardboard siding manufactured by Masonite fails prematurely, allowing moisture
intrusion that in turn causes damage to the structure underneath the siding. The
class consisted of all U.S. property owners having Masonite hardboard siding
installed on and incorporated into buildings between January 1, 1980 and January
15, 1998. The Court granted final approval of the settlement on January 15,
1998. The settlement provides for monetary compensation to class members meeting
the settlement requirements on a claims-made basis, which requires a class
member to individually submit proof of damage to, or caused by, Masonite
product, proof of square footage involved, and proofs of various other matters
in order to qualify for payment with respect to a claim. It also provides for
the payment of attorneys' fees equaling 15% of the settlement amounts paid to
class members, with a non-refundable advance of $47.5 million plus $2.5 million
in costs. Those amounts were paid to class counsel in 1998. For siding that was
installed between January 1, 1980 and December 31, 1989, claims must be made by
January 15, 2005, and for siding installed between January 1, 1990 through
January 15, 1998, claims must be made by January 15, 2008.
The second suit, entitled Cosby, et. al. v. Masonite Corporation, et. al., was
filed in 1997 (Omniwood Lawsuit). The plaintiffs made allegations with regard to
Omniwood siding manufactured by Masonite which were similar to those alleged in
the Hardboard Lawsuit. The class consisted of all U.S. property owners having
Omniwood siding installed on and incorporated into buildings from January 1,
1992 to January 6, 1999. The settlement relating to the Omniwood Lawsuit
provides that qualified claims must be made by January 6, 2009, for Omniwood
siding that was installed between January 1, 1992 and January 6, 1999.
The third suit, entitled Smith, et. al. v. Masonite Corporation, et. al., was
filed in 1995 (Woodruf Lawsuit). The plaintiffs alleged that Woodruf roofing
manufactured by Masonite is defective and causes damage to the structure
underneath the roofing. The class consisted of all U.S. property owners who had
incorporated and installed Masonite Woodruf roofing from January 1, 1980 to
January 6, 1999. The settlement relating to the Woodruf Lawsuit provides that
for product installed between January 1, 1980 and December 31, 1989, claims must
be made by January 6, 2006, and for product installed between January 1, 1990
and January 6, 1999, claims must be made by January 6, 2009.
The Court granted final approval of the settlements of the Omniwood and Woodruf
Lawsuits on January 6, 1999. The settlements provide for monetary compensation
to class members meeting the settlement requirements on a claims-made basis,
which requires a class member to individually submit proof of damage to, or
caused by, Masonite product, proof of square footage involved, and proofs of
various other matters. The settlements also provide for payment of attorneys'
fees equaling 13% of the settlement amounts paid to class members with a
non-refundable advance of $1.7 million plus $75,000 in costs for each of the two
cases. Those amounts were paid in 1999.
Claim Filing and Determination
Once a claim is determined to be valid under the respective settlement agreement
covering the claim, the amount of the claim is determined by reference to a
negotiated compensation formula established under the settlement agreement
designed to compensate the homeowner for all damage to the structure. The
compensation formula is based on (1) the average cost per square foot for
product replacement, including material and labor as calculated by industry
standards, in the area in which the structure is located, adjusted for
inflation, or (2) the cost of appropriate refinishing as determined by industry
standards in such area, adjusted for inflation. Persons receiving compensation
pursuant to this formula also agree to release International Paper and Masonite
from all other property damage claims relating to the product in question.
In connection with the products involved in the lawsuits described above, where
there is damage, the process of degradation, once begun, continues until repairs
are made. International Paper estimates that approximately four million
structures have installed products that are the subject of the Hardboard
Lawsuit, 300,000 structures have installed products that are subject to the
Omniwood Lawsuit and 86,000 structures have installed products that are the
subject of the Woodruf Lawsuit. Masonite stopped selling the products involved
in the Hardboard Lawsuit in May 2001, the products involved in the Woodruf
Lawsuit in May 1996, and the products involved in the Omniwood Lawsuit in
September 1996.
Persons who are class members under the Hardboard, Omniwood and Woodruf Lawsuits
who do not pursue remedies under the respective settlement agreement pertaining
to such suits, may have recourse to warranties, if any, in existence at the
expiration of the respective terms established under the settlement agreements
for making claims. The warranty period generally extends for 25 years following
the installation of the product in question and, although the warranties vary
from product to product, they generally provide for a payment of up to two times
the purchase price.
57
Reserve Analysis
The following table presents an analysis of the net reserve activity related to
the Hardboard, Omniwood and Woodruf Lawsuits for the years ended December 31,
2003, 2002 and 2001.
- --------------------------------------------------------------------------------
Hard- Omni-
In millions board wood Woodruf Total
- --------------------------------------------------------------------------------
Balance, December 31, 2000 $ 66 $ 22 $ 4 $ 92
Additional provision 187 22 16 225
Payments (143) (24) (11) (178)
Reimbursement under risk-transfer agreement 52 -- -- 52
Other 17 -- -- 17
----- ---- ---- -----
Balance, December 31, 2001 179 20 9 208
Additional provision 305 134 11 450
Payments (161) (16) (8) (185)
Insurance collections 34 -- -- 34
----- ---- ---- -----
Balance, December 31, 2002 357 138 12 507
Payments (129) (21) (3) (153)
Insurance collections 33 -- -- 33
----- ---- ---- -----
Balance, December 31, 2003 $ 261 $117 $ 9 $ 387
===== ==== ==== =====
Additional Provisions
In the third quarter of 2001, a determination was made that an additional
provision would be required to cover an expected shortfall in the reserves that
had arisen since the third quarter of 2000 due to actual claims experience
exceeding projections. An additional $225 million was added to the existing
reserve balance at that time. This increase was based on an independent third
party statistical study of future costs, which analyzed trends in the claims
experience through August 31, 2001. The amount was based on a statistical
outcome that assumed that Hardboard claims growth continued through mid-2002,
then declined by 50% per year. Omniwood claims growth was assumed to continue
through mid-2002, decline by 50% in 2003 and thereafter increase at the rate of
10% per year. Woodruf claims were assumed to decline at a rate of 50% per year.
Unit costs per claim were assumed to hold at the 2001 level. The statistical
model used to develop this outcome also included assumptions on the geographic
patterns of claims rates and assumptions related to the cost of claims,
including forecasts relating to the rate of inflation. Average claim costs were
calculated from historical claims records, taking into consideration structure
type, location and source of the claim.
During 2002, tracking of the actual versus projected number of claims filed and
average cost per claim indicated that although total claims costs were
approximately equal to projected amounts, the number of claims filed was higher
than projected, offsetting the effect of lower average claims payment amounts.
Accordingly, updated projections were developed by two independent consultants
utilizing the most current claims experience data. Principal assumptions used in
the development of these projections were that the number of Hardboard claims
filed, which account for approximately 85% of all claims costs, would average
slightly above current levels until January 2005, then would decline by about
70% in 2005 and remain flat to the end of the claims period. Average claims
costs were assumed to continue to decline at the rate experienced during the
last twelve months.
While management believes that the assumptions used in developing these outcomes
represent the most probable scenario, factors which could cause actual results
to vary from these assumptions include: (1) area specific assumptions as to
growth in claims rates could be incorrect, (2) locations where previously there
had been little or no claims could emerge as significant geographic locations,
and (3) the cost per claim could vary materially from that projected.
The first consultant provided two statistical outcomes, with the higher outcome
indicating a required provision of approximately $430 million. The second
consultant provided a range of possible outcomes, with the most probable outcome
indicating a required provision of approximately $475 million. The estimate
ranged from a low (a 95% probability that future charges would exceed this
amount) of $338 million to a high (5% probability that future charges would
exceed this amount) of $635 million. Using these projections, management
determined that a provision of $450 million should be recorded in the fourth
quarter of 2002 as an estimate of the most probable outcome based on the
consultants' projections.
During 2003, claims filed and average costs per claim were in line with 2002
projections and no adjustments of reserve balances were required.
Reserve Balances
At December 31, 2003, net reserves for these matters totaled $387 million,
including $261 million for the Hardboard Lawsuit, $117 million for the Omniwood
Lawsuit and $9 million for the Woodruf Lawsuit.
At December 31, 2003, there were $33 million of costs associated with claims
inspected and not paid ($28 million for Hardboard siding, $4 million for
Omniwood and $1 million for Woodruf) and $13 million of costs associated with
claims in process and not yet inspected ($10 million for
58
claims related to the Hardboard Lawsuit, $2 million for claims related to the
Omniwood Lawsuit and $1 million for claims related to the Woodruf Lawsuit). The
reserve at December 31, 2003, was $387 million. The estimated claims reserve
includes $341 million for unasserted claims that are probable of assertion.
Claims Statistics
The average settlement cost per claim for the years ended December 31, 2003,
2002, and 2001 for the Hardboard, Omniwood and Woodruf Lawsuits is set forth in
the table below:
Average Settlement Cost Per Claim
- --------------------------------------------------------------------------------
Hardboard Omniwood Woodruf
--------------- --------------- ---------------
Single Multi- Single Multi- Single Multi-
In thousands Family Family Family Family Family Family
- --------------------------------------------------------------------------------
December 31, 2003 $2.2 $3.0 $3.8 $5.4 $3.9 $1.2
December 31, 2002 $2.4 $4.3 $4.4 $7.7 $4.7 $9.3
December 31, 2001 $3.3 $7.0 $5.9 $6.8 $5.3 $4.2
The above information is calculated by dividing the amount of claims paid by the
number of claims paid.
Through December 31, 2003, net settlement payments totaled $732 million ($604
million for claims relating to the Hardboard Lawsuit, $85 million for claims
relating to the Omniwood Lawsuit and $43 million for claims relating to the
Woodruf Lawsuit), including $51 million of non-refundable attorneys' advances
discussed above ($47.5 million for the Hardboard Lawsuit and $1.7 million for
each of the Omniwood Lawsuit and Woodruf Lawsuit). Also, payments of $36 million
have been made to the attorneys for the plaintiffs in the Hardboard, Omniwood
and Woodruf Lawsuits. In addition, International Paper has received $94 million
related to the Hardboard Lawsuit from our insurance carriers through December
31, 2003. International Paper has the right to terminate each of the settlements
after seven years from the dates of final approval. The liability for these
matters has been retained after the sale of Masonite.
The following table shows an analysis of claims statistics related to the
Hardboard, Omniwood and Woodruf Lawsuits for the years ended December 31, 2003,
2002 and 2001.
Claims Activity
- ------------------------------------------------------------------------------------------------------
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, 2000 15.9 4.5 1.0 0.2 1.2 0.2 18.1 4.9 23.0
No.of Claims Filed 46.2 8.7 2.2 0.4 1.9 0.1 50.3 9.2 59.5
No.of Claims Paid (23.1) (6.1) (1.4) (0.2) (1.2) (0.1) (25.7) (6.4) (32.1)
No.of Claims Dismissed (9.0) (1.7) (0.4) (0.1) (0.4) -- (9.8) (1.8) (11.6)
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 48.3 10.9 3.5 0.5 1.4 0.1 53.2 11.5 64.7
No.of Claims Paid (36.0) (9.2) (2.6) (0.4) (1.3) -- (39.9) (9.6) (49.5)
No.of Claims Dismissed (13.7) (3.1) (0.4) -- (0.5) -- (14.6) (3.1) (17.7)
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 45.0 9.2 4.9 0.3 1.0 -- 50.9 9.5 60.4
No.of Claims Paid (30.9) (7.1) (4.1) (0.2) (0.9) -- (35.9) (7.3) (43.2)
No.of Claims Dismissed (16.3) (3.3) (0.9) -- (0.4) -- (17.6) (3.3) (20.9)
December 31, 2003 26.4 2.8 1.8 0.5 0.8 0.3 29.0 3.6 32.6
59
Insurance Matters
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") because of their refusal to indemnify
International Paper and Masonite for, among other things, the settlement
relating to the Hardboard Lawsuit and the refusal of one insurer, Employer's
Insurance of 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 that Wausau had breached its duty to defend Masonite and awarded Masonite
$13 million for its expense to defend the Hardboard Lawsuit; an additional $12
million in attorneys' fees and interest for Masonite's expense to prosecute the
Breach of Duty Lawsuit based on a finding that Wausau had acted in bad faith in
refusing to defend the Hardboard Lawsuit and an additional $68 million in
punitive damages. In a post-trial proceeding, the court awarded an additional $2
million in attorneys' fees which Masonite had incurred in the trial of the
Breach of Duty Lawsuit. 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 punitive damage award to International Paper and has
assigned its breach of contract claim against Wausau to International Paper.
Because of the uncertainties inherent in the Breach of Duty Lawsuit, including
the outcome of any appeal that Wausau may take, International Paper is unable to
estimate the amount that may ultimately be recovered in connection with the
Breach of Duty Lawsuit.
The trial of the Indemnification Lawsuit against 22 insurers (the "Defendants")
began in April 2003 to recover $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 I verdict"). The next
phase of the case will determine how much of the $383 million can be allocated
to the policies of the Defendants. The Company anticipates that, before a
judgment is entered, the California court will also make a determination about
indemnification for future claims based on the Phase I verdict. The court will
also determine whether amounts paid and to be paid to the plaintiff class
counsel pursuant to the settlement of the Hardboard Lawsuit, and administrative
expenses that have been and will be incurred in connection with that settlement,
are covered by insurance. The Company is presently engaged in court-ordered
mediation with several of the Defendants.
As noted above, no judgment has yet been entered on the verdicts in either the
Breach of Duty Lawsuit or the Indemnification Lawsuit. It is difficult to
predict when the judgment will be entered. This judgment will be subject to
appeal when entered. Because of the uncertainties inherent in the litigation,
including the outcome of any appeal, International Paper is unable to estimate
the amount that it ultimately may recover against its insurance carriers.
In addition to the foregoing proceedings, the Company intends to seek
indemnification from other insurance carriers in arbitration proceedings as
required by the policies.
As of December 31, 2003, International Paper had received an aggregate of $94
million in settlement payments from certain of its insurance carriers which had
been named as defendants in the Indemnification Lawsuit, and received the
payment of an additional $10 million in January 2004 from one of the settling
insurers.
Under an alternative risk-transfer agreement, 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 a specified retention that was indexed to account for
inflation over a several year period. The agreement with the third party is in
excess of liability insurance recoveries obtained by International Paper, which
are the subject of the separate litigation referred to above. Accordingly,
International Paper believes that the obligation of the third party with respect
to this agreement does not constitute "other valid and collectible insurance"
that would either eliminate or otherwise affect the Company's right to collect
insurance coverage available to it and Masonite under the insurance policies,
which are the subject of this separate litigation. At December 31, 2001,
International Paper had received the $100 million from the third party.
A dispute between International Paper and the third party, concerning a number
of issues, including the relationship of the contract funding obligation to
insurance proceeds recovered in the Indemnification Lawsuit, was the subject of
an arbitration commenced in 2002 by the third party in London, England and
scheduled to begin February 9, 2004. Before the hearing started, the parties
settled the dispute. Under the settlement, International Paper has agreed to pay
the third party a portion of insurance proceeds recovered by International Paper
under its insurance policies, beginning on January 1, 2004 and thereafter, up to
a maximum of $95 million. The precise amount that International Paper will pay
to the third party under the settlement will depend upon, and will be in
proportion to, the amount of insurance recoveries received by International
Paper in the future.
60
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.
Antitrust Matters
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 (the "Defendants"). These suits allege that the
Defendants conspired to fix prices for corrugated sheets and containers during
the period October 1, 1993, through November 30, 1995. These lawsuits, which
seek injunctive relief as well as treble damages and other costs associated with
the litigation, were consolidated and, on September 4, 2001, certified as a
class action. On September 22, 2003, International Paper, along with
Weyerhaeuser Co. and Georgia-Pacific Corp., agreed with the class plaintiffs to
settle the litigation for an aggregate amount of $68 million. The settlement, of
which International Paper's and Union Camp's shares totaled $24.4 million, was
approved by the court in an order entered on December 10, 2003.
Twelve opt-out complaints, most with multiple plaintiffs, have been filed in
various federal district courts around the country. One opt-out plaintiff
voluntarily dismissed its complaint on October 10, 2003. All of the remaining
federal opt-out cases have been consolidated for pre-trial purposes in the
federal court in the Eastern District of Pennsylvania. Discovery in the federal
opt-out cases is scheduled to conclude September 30, 2004. Additionally, one
opt-out case has been filed in state court in Kansas. Defendants removed the
matter to federal court, but the federal court in Wichita remanded it on
December 19, 2003. The Defendants have sought further review of the remand
decision.
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. Thirty-one plaintiffs have opted not to
participate in the class litigation. Discovery in the federal case regarding
liability is complete, and dispositive motions are scheduled for hearing on
April 23, 2004. In the third quarter of 2002, International Paper completed the
sale of the Decorative Products operations, but retained any liability for these
cases.
Summary
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, including the preceding antitrust matters, will not
have a material adverse effect on its consolidated financial position or results
of operations.
NOTE 11 SUPPLEMENTARY BALANCE SHEET INFORMATION
Inventories by major category were:
- --------------------------------------------------------------------------------
In millions at December 31 2003 2002
- --------------------------------------------------------------------------------
Raw materials $ 467 $ 469
Finished pulp, paper and packaging products 1,785 1,694
Finished lumber and panel products 182 158
Operating supplies 533 517
Other 16 41
------ ------
Inventories $2,983 $2,879
====== ======
While inventory quantities decreased from December 31, 2002 to December 31,
2003, U.S. dollar inventory amounts increased due to the effect of currency
translation rates.
The last-in, first-out inventory method is used to value most of International
Paper's U.S. inventories. Approximately 68% of total raw materials and finished
products inventories were valued using this method. If the first-in, first-out
method had been used, it would have increased total inventory balances by
approximately $133 million and $150 million at December 31, 2003 and 2002,
respectively.
61
Plants, properties and equipment by major classification were:
- --------------------------------------------------------------------------------
In millions at December 31 2003 2002
- --------------------------------------------------------------------------------
Pulp, paper and packaging facilities
Mills $21,407 $21,998
Packaging plants 6,196 6,168
Wood products facilities 2,205 1,963
Other plants, properties and equipment 2,091 2,135
------- -------
Gross cost 31,899 32,264
Less: Accumulated depreciation 17,624 18,097
------- -------
Plants, properties and equipment, net $14,275 $14,167
======= =======
Interest costs related to the development of certain long-term assets are
capitalized and amortized over the related assets' estimated useful lives.
Capitalized net interest costs were $9 million in 2003, $12 million in 2002 and
$13 million in 2001. Interest payments made during 2003, 2002 and 2001 were $855
million, $904 million and $986 million, respectively. Total interest expense was
$875 million in 2003, $891 million in 2002 and $1.1 billion in 2001.
NOTE 12 DEBT AND LINES OF CREDIT
In December 2003, International Paper completed a private placement with
registration rights of $500 million 4.25% notes due January 15, 2009 and $500
million 5.50% notes due January 15, 2014. The net proceeds from the notes were
used in January 2004 for the redemption of all of the outstanding $805 million
aggregate principal amount of International Paper Capital Trust III 7 7/8%
Capital Securities originally due December 1, 2038 and for the repayment or
early retirement of other debt.
In conjunction with the Company's adoption of FIN 46(R) (see Note 4), Long-term
debt at December 31, 2003 (1) increased by $50 million due to the consolidation
of an entity that was formerly treated as an operating lease arrangement; (2)
decreased by $460 million due to the deconsolidation of an entity that had
previously been consolidated; and (3) increased by a net $100 million upon the
deconsolidation of an entity created in June 2002. The net $100 million increase
included an addition to debt of $450 million representing International Paper's
obligations to the deconsolidated entity and a reduction of $350 million due to
the deconsolidation of third-party debt owed by the entity.
Also, related to the application of FIN 46 to certain entities effective July 1,
2003, International Paper deconsolidated two Trusts that hold approximately $1.3
billion of Mandatorily Redeemable Preferred Securities, previously classified as
a separate line item on the Company's balance sheet, and recorded approximately
$1.3 billion of borrowings from the Trusts as Long-term debt.
In December 2003, International Paper exercised its option to redeem the
securities of one of the Trusts effective January 2004, and consequently,
reclassified $830 million to current maturities of long-term debt.
The implementation of FIN 46 and FIN 46(R) had no adverse effect on existing
debt covenants.
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.
A pre-tax early debt retirement benefit of $1 million related to the redemptions
discussed above is included in Restructuring and other charges in the
accompanying consolidated statement of earnings.
In October 2002, International Paper completed a private placement with
registration rights of $1.0 billion aggregate principal amount 5.85% notes due
October 30, 2012. On November 15, 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 were 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. The pre-tax early retirement
cost of $41 million is included in Restructuring and other charges in the
accompanying consolidated statement of earnings.
Also during 2002, approximately $1.8 billion of long-term debt was repaid,
including about $800 million of Champion acquisition debt. Increases in 2002
included approximately $800 million from new borrowings, and noncash increases
of approximately $620 million, including $460 million relating to the
consolidation of a debt obligation of a special purpose entity following the
modification of the terms of the related agreement.
62
A summary of long-term debt follows:
- --------------------------------------------------------------------------------
In millions at December 31 2003 2002
- --------------------------------------------------------------------------------
8 7/8% to 10.5% notes - due 2004 - 2012 $ 392 $ 436
8 7/8% notes - due 2004 305 306
9.25% debentures - due 2011 125 125
8 3/8% to 9 1/2% debentures - due 2015 - 2024 300 300
8 1/8% notes - due 2005 1,000 1,000
7 7/8% subordinated debentures - due 2004 830 --
7% to 7 7/8% notes - due 2004 - 2007 1,041 946
6 7/8% to 8 1/8% notes - due 2023 - 2029 544 742
6.75% notes - due 2011 1,000 1,000
6.65% notes - due 2037 94 94
6.5% notes - due 2007 149 149
6.4% to 7.75% debentures - due 2023 - 2027 791 878
6 1/8% notes -- 200
5.85% notes - due 2012 1,202 1,202
5 1/4% convertible subordinated debentures - due 2025 464 --
5.3% to 5.5% notes - due 2014 - 2015 1,197 --
5 3/8% euro notes - due 2006 308 255
5 1/8% debentures - due 2012 99 95
3.8% to 4.25% notes - due 2008 - 2009 799 --
Zero-coupon convertible debentures - due 2021 1,099 1,058
Medium-term notes - due 2004 - 2009 (a) 52 82
Floating rate notes - due 2006 - 2010 (b) 1,127 1,499
Environmental and industrial development
bonds - due 2004 - 2033 (c,d) 2,317 2,337
Commercial paper and bank notes (e) 53 44
Other (f) 249 294
------- -------
Total (g) 15,537 13,042
Less: Current maturities 2,087 --
------- -------
Long-term debt $13,450 $13,042
======= =======
(a) The weighted average interest rate on these notes was 8.1% in 2003 and 8.2%
in 2002.
(b) The weighted average interest rate on these notes was 2.4% in 2003 and 2.1%
in 2002.
(c) The weighted average interest rate on these bonds was 5.8% in 2003 and 5.9%
in 2002.
(d) Includes $23 million of bonds at December 31, 2003, and $97 million of
bonds at December 31, 2002, which may be tendered at various dates and/or
under certain circumstances.
(e) The weighted average interest rate was 4.5% in 2003 and 4.9% in 2002.
Includes $40 million in 2003 of non-U.S. dollar denominated borrowings with
a weighted average interest rate of 5.1%.
(f) Includes $86 million at December 31, 2003, and $111 million at December 31,
2002, related to interest rate swaps treated as fair value hedges.
(g) The fair market value was approximately $16.4 billion at December 31, 2003,
and $13.7 billion at December 31,2002.
In August 2001, under a previously filed shelf registration statement,
International Paper issued $1.0 billion principal amount of 6.75% Senior
Unsecured Notes due September 1, 2011, which yielded net proceeds of $993
million. These notes carry a fixed interest rate with interest payable
semiannually on March 1 and September 1 of each year. Most of the proceeds of
this issuance were used to retire $800 million of money market notes due in
2002.
In June 2001, International Paper completed a private placement offering of $2.1
billion principal amount at maturity zero-coupon Convertible Senior Debentures
due June 20, 2021, which yielded net proceeds of approximately $1.0 billion. The
debt accretes to face value at maturity at a rate of 3.75% per annum, subject to
annual upward adjustment after June 20, 2004 if International Paper's stock
price falls below a certain level for a specified period. The securities are
convertible into shares of International Paper common stock at the option of
debenture holders subject to certain conditions as defined in the debt
agreement. The repurchase may be for International Paper common stock or cash,
or a combination of both, at the Company's option. International Paper may be
required to repurchase the securities on June 20th in each of the years 2004,
2006, 2011 and 2016 at a repurchase price equal to the accreted principal amount
to the repurchase date. International Paper also has the option to redeem the
securities on or after June 20, 2006 under certain circumstances. The net
proceeds of this issuance were used to retire higher interest rate commercial
paper borrowings.
Total maturities of long-term debt over the next five years are 2004 - $2.1
billion, 2005 - $1.2 billion, 2006 - $2.2 billion, 2007 - $556 million and 2008
- - $342 million.
At December 31, 2003 and 2002, International Paper classified $1.5 billion and
$485 million, respectively, of tenderable bonds, commercial paper and bank notes
and current maturities of long-term debt as long-term debt. International Paper
has the intent and ability to renew or convert these obligations, as evidenced
by the $1.5 billion credit facility described below.
At December 31, 2003, International Paper's unused contractually committed bank
credit agreements amounted to $2.25 billion. The agreements generally provide
for interest rates at a floating rate index plus a predetermined margin
dependent upon International Paper's credit rating. A $750 million agreement
extends through March 2004, and has a facility fee of 0.15% that is payable
quarterly. The Company is currently negotiating a new five-year credit facility
to replace this facility. A $1.5 billion credit facility extends through March
2006, and has a facility fee of 0.15% that is payable quarterly. In addition,
International Paper has up to $650 million of commercial paper financings
available under a receivables securitization program established in December
2001. The program extends through December 2004 with a facility fee of 0.20%.
63
CHH has one multi-currency credit facility that supports its commercial paper
program. The $222 million line of credit matures in three tranches from 2005 to
2007. The facility fee ranges from 0.41% to 0.49% at current credit ratings and
is payable quarterly.
At December 31, 2003, outstanding debt included approximately $53 million of
commercial paper and bank notes with interest rates that fluctuate based on
market conditions and our credit rating.
In September 2003, in connection with a Forest Products industry review,
Standard & Poor's announced that it had changed the outlook on International
Paper's long-term credit rating from BBB/stable to BBB/negative. Standard &
Poor's also downgraded the short-term credit rating of International Paper from
A-2 to A-3. While this downgrade does limit the Company's access to commercial
paper markets, alternative sources of committed short-term liquidity in the form
of revolving credit facilities and an accounts receivables securitization
facility are expected to be adequate to meet the Company's expected future
short-term requirements. International Paper continues to maintain a long-term
credit rating of Baa2/stable and a short-term credit rating of P-2 from Moody's
Investor Services. The Standard & Poor's rating actions had no effect on any of
the covenants contained in any of International Paper's debt obligations.
NOTE 13 DERIVATIVES AND HEDGING ACTIVITIES
International Paper periodically uses derivatives and other financial
instruments to hedge exposures to interest rate, commodity and currency risks.
For hedges that meet the criteria under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," International Paper, at inception, formally
designates and documents the instrument as a hedge of a specific underlying
exposure, as well as the risk management objective and strategy for undertaking
each hedge transaction. Because of the high degree of effectiveness between the
hedging instrument and the underlying exposure being hedged, fluctuations in the
value of the derivative instruments are generally offset by changes in the value
or cash flows of the underlying exposures being hedged. Derivatives are recorded
in the consolidated balance sheet at fair value, determined using available
market information or other appropriate valuation methodologies, in other
current or noncurrent assets or liabilities. The earnings impact resulting from
the change in fair value of the derivative instruments is recorded in the same
line item in the consolidated statement of earnings as the underlying exposure
being hedged. The financial instruments that are used in hedging transactions
are assessed both at inception and quarterly thereafter to ensure they are
effective in offsetting changes in either the fair value or cash flows of the
related underlying exposures. The ineffective portion of a financial
instrument's change in fair value, if any, would be recognized currently in
earnings together with the changes in fair value of derivatives not designated
as hedges.
Interest Rate Risk
Interest rate swaps may be used to manage interest rate risks associated with
International Paper's debt. Some of these instruments qualify for hedge
accounting in accordance with SFAS No. 133 and others do not. Interest rate swap
agreements with a total notional amount at December 31, 2003, of approximately
$800 million and maturities ranging from one to 21 years do not qualify as
hedges under SFAS No. 133 and, consequently, were recorded at fair value on the
transition date by a pre-tax charge of approximately $20 million to earnings.
For the years ended December 31, 2003, 2002 and 2001, the change in fair value
of the swaps was immaterial.
The remainder of International Paper's interest rate swap agreements qualify as
fully effective fair value hedges under SFAS No. 133. At December 31, 2003 and
2002, outstanding notional amounts for its interest rate swap fair value hedges
amounted to approximately $2.1 billion and $1.9 billion, respectively. The fair
values of these swaps were net assets of approximately $91 million and $141
million at December 31, 2003 and 2002, respectively.
In November 2002, interest rate swaps with a notional value of $550 million were
terminated in connection with the early retirement of International Paper's $1.2
billion notes due in July 2003. The resulting gain of approximately $6 million
is included in Restructuring and other charges in the accompanying consolidated
statement of earnings (see Note 6).
During 2002, International Paper entered into agreements to fix interest rates
on an anticipated $1.15 billion issuance of debt. Upon issuance of the debt in
the fourth quarter of 2002, these agreements generated a pre-tax loss of $2.8
million that was recorded in Accumulated other comprehensive income (OCI). This
amount is being amortized to interest expense over the term of the bonds through
October 30, 2012, yielding an effective interest rate of 5.94%.
Commodity Risk
To minimize volatility in earnings due to large fluctuations in the price of
commodities, International Paper currently uses swap and option contracts to
manage risks associated with market fluctuations in energy prices. Such cash
flow hedges with maturities of 12 months or less are accounted for by deferring
the after-tax quarterly change in fair value of the outstanding contracts in
OCI. On the date a contract matures, the gain or loss is reclassified into cost
of products sold
64
concurrently with the recognition of the commodity purchased. For the years
ended December 31, 2003, 2002 and 2001, International Paper reclassified from
OCI, after-tax gains of $24 million and after-tax losses of $10 million and $48
million, respectively. This amount represents the after-tax cash settlements on
the maturing energy hedge contracts. Unrealized after-tax gains of $12 million
and $24 million and after-tax losses of $69 million were recorded to OCI during
the years ended December 31, 2003, 2002 and 2001, respectively. After-tax gains
of approximately $3 million as of December 31, 2003, are expected to be
reclassified into earnings in 2004.
Foreign Currency Risk
International Paper's policy has been to hedge certain investments in foreign
operations with borrowings denominated in the same currency as the operation's
functional currency or by entering into long-term cross-currency and interest
rate swaps, or short-term foreign exchange contracts. These financial
instruments are effective as a hedge against fluctuations in currency exchange
rates. Gains or losses from changes in the fair value of these instruments,
which are offset in whole or in part by translation gains and losses on the
foreign operation's net assets hedged, are recorded as translation adjustments
in OCI. Upon liquidation or sale of the foreign investments, the accumulated
gains or losses from the revaluation of the hedging instruments, together with
the translation gains and losses on the net assets, are included in earnings.
For the years ended December 31, 2003, 2002 and 2001, net losses included in the
cumulative translation adjustment on derivative and debt instruments hedging
foreign net investments amounted to $89 million, $46 million and $23 million
after taxes and minority interest, respectively.
Long-term cross-currency and interest rate swaps and short-term currency swaps
are used to mitigate the risk associated with changes in foreign exchange rates,
which will affect the fair value of debt denominated in a foreign currency.
These hedges existing as of December 31, 2003, totaling a net fair value
liability of $150 million have not been designated as hedges pursuant to SFAS
No. 133. The impact on earnings from changes in the derivative values is
substantially offset by the earnings impact from remeasuring the foreign
currency debt each period.
Foreign exchange contracts (including forward, swap and purchase option
contracts) are also used to hedge certain transactions, primarily trade receipts
and payments denominated in foreign currencies, to manage volatility associated
with these transactions and to protect International Paper from currency
fluctuations between the contract date and ultimate settlement. These contracts,
most of which have been designated as cash flow hedges, had maturities of four
years or less as of December 31, 2003. For the years ended December 31, 2003,
2002 and 2001, net unrealized gains totaling $53 million, $49 million and $2
million after taxes and minority interest, respectively, were recorded to OCI.
Gains (losses) after taxes and minority interest of $41 million, $14 million and
($2) million were reclassified to earnings for the years ended December 31,
2003, 2002 and 2001, respectively. As of December 31, 2003, gains of $26 million
after taxes and minority interest are expected to be reclassified to earnings in
2004. Other contracts are used to offset the earnings impact relating to the
variability in exchange rates on certain short-term monetary assets and
liabilities denominated in non-functional currencies and are not designated as
hedges. Changes in the fair value of these instruments, recognized currently in
earnings to offset the remeasurement of the related assets and liabilities, were
not significant.
International Paper does not hold or issue financial instruments for trading
purposes. The counterparties to swap agreements and foreign exchange contracts
consist of a number of major international financial institutions.International
Paper continually monitors its positions with and the credit quality of these
financial institutions and does not expect nonperformance by the counterparties.
NOTE 14 CAPITAL STOCK
The authorized capital stock at both December 31, 2003 and 2002 consisted of
990,850,000 shares of common stock, $1 par value; 400,000 shares of cumulative
$4 preferred stock, without par value (stated value $100 per share); and
8,750,000 shares of serial preferred stock, $1 par value. The serial preferred
stock is issuable in one or more series by the Board of Directors without
further shareholder action.
NOTE 15 RETIREMENT PLANS
International Paper maintains pension plans that provide retirement benefits to
substantially all employees. Employees generally are eligible to participate in
the plans upon completion of one year of service and attainment of age 21.
The plans provide defined benefits based on years of credited service and either
final average earnings (salaried employees), hourly job rates or specified
benefit rates (hourly and union employees).
U.S. Defined Benefit Plans
International Paper makes contributions that are sufficient to fully fund its
actuarially determined costs, generally equal to the minimum amounts required by
the Employee Retirement Income Security Act (ERISA). International Paper made no
65
contribution in 2002 or 2003 and does not expect to make any contribution in
2004 to the qualified defined benefit plan. The nonqualified plan is only funded
to the extent of benefits paid which are expected to be $46 million in 2004.
Net Periodic Pension Expense (Income)
Service cost is the actuarial present value of benefits attributed by the plans'
benefit formula to services rendered by employees during the year. Interest cost
represents the increase in the projected benefit obligation, which is a
discounted amount, due to the passage of time. The expected return on plan
assets reflects the computed amount of current year earnings from the investment
of plan assets using an estimated long-term rate of return.
Net periodic pension expense (income) for qualified and nonqualified defined
benefit plans comprised the following:
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Service cost $ 107 $ 96 $ 101
Interest cost 469 466 459
Expected return on plan assets (598) (663) (727)
Actuarial loss 57 7 6
Amortization of prior service cost 25 19 20
----- ----- -----
Net periodic pension expense (income) (a) $ 60 $ (75) $(141)
===== ===== =====
(a) Excludes $14.9 million, $3 million and $75 million of expense in 2003, 2002
and 2001, respectively, for curtailment, settlement and special termination
benefit charges relating to divestitures and restructurings that were
recorded in Restructuring and other charges and Net (gains) losses on sales
and impairments of businesses held for sale in the consolidated statement
of earnings.
The change in 2003 to net pension expense from income in 2002 was principally
due to a reduction in the expected long-term rate of return on plan assets and
an increase in the amortization of unrecognized actuarial losses, with smaller
impacts from reductions in the discount rate and the assumed rate of future
compensation increase. The decrease in 2002 U.S. pension income was principally
due to reductions in the expected long-term rate of return on plan assets and
reductions in the assumed discount rate and in the assumed rate of future
compensation increase.
International Paper evaluates its actuarial assumptions annually as of December
31 (the measurement date) and considers changes in these long-term factors based
upon market conditions and the requirements of SFAS No. 87, "Employers'
Accounting for Pensions." These assumptions are used to calculate benefit
obligations as of December 31 of the current year and pension expense to be
recorded in the following year.
Weighted average assumptions used to determine net pension expense (income) for
2003, 2002 and 2001 were as follows:
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Discount rate 6.50% 7.25% 7.50%
Expected long-term return on plan assets 8.75% 9.25% 10.00%
Rate of compensation increase 3.75% 4.50% 4.75%
Weighted average assumptions used to determine benefit obligations as of
December 31, 2003 and 2002, were as follows:
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Discount rate 6.00% 6.50%
Rate of compensation increase 3.25% 3.75%
The expected long-term rate of return on plan assets is based on projected rates
of return for current and planned asset classes in the plan's investment
portfolio. Projected rates of return are developed through an asset/liability
study, in which projected returns for each of the plan's asset classes are
determined after analyzing historical experience and future expectations of
returns and volatility of the various asset classes. Based on the target asset
allocation for each asset class, the overall expected rate of return for the
portfolio is developed considering the effects of active portfolio management
and expenses paid from plan assets. 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. To calculate pension expense for 2004, the Company will
use an expected long-term rate of return on plan assets of 8.75%, a discount
rate of 6.00% and an assumed rate of compensation increase of 3.25%. The Company
estimates that it will record net pension expense of approximately $106 million
for its U.S. defined benefit plans in 2004, principally reflecting the increased
amortization of unrecognized actuarial losses and a decrease in the assumed
discount rate to 6.00% in 2004 from 6.50% in 2003.
The following illustrates the effect on pension expense for 2004 of a 25 basis
point decrease in these assumptions:
- --------------------------------------------------------------------------------
In millions 2004
- --------------------------------------------------------------------------------
Expense/(Income):
Discount rate $17
Expected long-term return on plan assets 17
Rate of compensation increase (4)
66
Investment Policy / Strategy
Plan assets are invested to maximize returns within prudent levels of risk and
to maintain full funding of the benefit obligations. The target allocations by
asset class are summarized below. Investments are diversified across classes and
within each class to minimize risk. The investment policy permits the use of
swaps, options, forwards and futures contracts. Periodic reviews are made of
investment policy objectives and investment managers.
International Paper's pension plan asset allocation at December 31, 2003 and
2002, and target allocations by asset category are as follows:
- ------------------------------------------------------------------------------------
Percentage of
Plan Assets
at December 31,
Target ---------------
Asset Category Allocations 2003 2002
- ------------------------------------------------------------------------------------
Equity securities 52% - 63% 62% 57%
Debt securities 26% - 34% 27% 30%
Real estate 5% - 10% 8% 8%
Other 2% - 8% 3% 5%
--- ---
Total 100% 100%
=== ===
No plan assets were invested in International Paper common stock at December 31,
2003. Equity securities included $25 million (0.4% of total plan assets) of
International Paper common stock at December 31, 2002.
At December 31, 2003, total future pension benefit payments are estimated as
follows:
- --------------------------------------------------------------------------------
In millions
- --------------------------------------------------------------------------------
Estimated Future Benefit Payments
2004 $ 503
2005 472
2006 476
2007 480
2008 488
2009 - 2013 2,638
Minimum Pension Liability Adjustment
At December 31, 2002, International Paper's qualified defined benefit pension
plan had a prepaid benefit cost of approximately $1.7 billion. At the same date,
the market value of the plan assets was less than the accumulated benefit
obligation (ABO) for this plan. In accordance with the requirements of SFAS No.
87, the prepaid asset was reversed and an additional minimum liability of $2,677
million was established equal to the shortfall of the market value of plan asset
below the ABO plus the prepaid benefit cost. This resulted in an after-tax
direct charge to Accumulated other comprehensive income (OCI) of $1.5 billion,
with no impact on earnings, earnings per share or cash. This reduction to
Shareholders' equity had no adverse affect on International Paper's debt
covenants.
At December 31, 2003, a strong actual return on plan assets in the 2003 fourth
quarter increased the market value of plan assets by more than the increase in
the ABO, resulting in a reduction, since December 31, 2002, in the required
additional minimum pension liability. As a result, at December 31, 2003,
after-tax OCI was recognized in the amount of $163 million.
International Paper also incurred adjustments to the nonqualified plan
additional minimum liabilities and recorded charges to OCI of $13 million and $3
million, at December 31, 2003 and 2002, respectively.
The following table summarizes the projected and accumulated benefit obligations
and fair value of plan assets for the qualified and nonqualified defined benefit
plans at December 31, 2003 and 2002:
- --------------------------------------------------------------------------------
In millions 2003 2002
- --------------------------------------------------------------------------------
Projected benefit obligation $7,899 $7,111
Accumulated benefit obligation 7,572 6,786
Fair value of plan assets 6,436 5,584
Unrecognized Actuarial Losses
SFAS No. 87 provides for delayed recognition of actuarial gains and losses,
including amounts arising from changes in the estimated projected plan benefit
obligation due to changes in the assumed discount rate, differences between the
actual and expected return on plan assets, and other assumption changes. 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. Unrecognized
actuarial losses in the table below decreased during 2003 to approximately $2.6
billion from approximately $2.9 billion in 2002, due principally to the actual
return on plan assets exceeding the expected return in 2003. While actual future
amortization charges will be affected by future gains/losses, amortization of
cumulative unrecognized losses as of December 31, 2003, is expected to increase
pension expense by approximately $30 million in 2004, $20 million in 2005 and
$10 million in 2006.
The following table shows the changes in the benefit obligation and plan assets
for 2003 and 2002, and the plans' funded status and amounts recognized in the
consolidated balance sheet as of December 31, 2003 and 2002. The
67
benefit obligation as of December 31, 2003, increased by $788 million,
principally as a result of a decrease in the discount rate used in computing the
estimated benefit obligation. Plan assets increased $852 million principally
reflecting higher market returns.
- --------------------------------------------------------------------------------
In millions 2003 2002
- --------------------------------------------------------------------------------
Change in projected benefit obligation:
Benefit obligation, January 1 $ 7,111 $ 6,419
Service cost 107 96
Interest cost 469 466
Actuarial loss 555 533
Benefits paid (486) (466)
Divestitures (a) -- 6
Restructuring (b) (13) (3)
Special termination benefits (c) 6 2
Plan amendments 150 58
------- -------
Benefit obligation, December 31 $ 7,899 $ 7,111
======= =======
Change in plan assets:
Fair value of plan assets, January 1 $ 5,584 $ 6,502
Actual return on plan assets 1,318 (486)
Company contributions 18 15
Benefits paid (486) (466)
Acquisitions 4 --
Divestitures (a) (2) 19
------- -------
Fair value of plan assets, December 31 $ 6,436 $ 5,584
======= =======
Funded status $(1,463) $(1,527)
Unrecognized actuarial loss 2,645 2,888
Unamortized prior service cost 300 180
------- -------
Prepaid benefit costs $ 1,482 $ 1,541
======= =======
Amounts recognized in the consolidated balance sheet
consist of:
Prepaid benefit cost $ -- $ --
Accrued benefit liability (1,136) (1,202)
Intangible asset 300 180
Minimum pension liability adjustment
included in accumulated other
comprehensive income 2,318 2,563
------- -------
Net amount recognized $ 1,482 $ 1,541
======= =======
(a) Included in Net (gains) losses on sales and impairments of businesses held
for sale in the consolidated statement of earnings is $8.8 million for
2002, in curtailment losses and $10.6 million for 2002, in settlement gains
related to the divestitures of Masonite, Flexible Packaging, Decorative
Products and other smaller businesses.
(b) Included in Restructuring and other charges are $8.3 million and $2.6
million for 2003 and 2002, respectively, in curtailment losses relating to
a cost reduction program and facility rationalizations.
(c) Included in Restructuring and other charges are $6.3 million and $2.4
million for 2003 and 2002, respectively, for special termination benefits
attributable to the elimination of approximately 535 positions and 465
positions for 2003 and 2002, respectively, in connection with facility
rationalizations.
Non-U.S. Defined Benefit Plans
Generally, International Paper's non-U.S. pension plans are funded using the
projected benefit as a target, except in certain countries where funding of
benefit plans is not required. Net periodic pension expense for non-U.S. plans
was as follows:
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Service cost $ 28 $ 22 $ 18
Interest cost 29 25 22
Expected return on plan assets (24) (24) (22)
Actuarial loss 5 1 --
Amortization of prior
service cost 1 1 --
Curtailment gain (1) -- --
Estimated expenses 1 1 1
---- ---- ----
Net periodic pension
expense $ 39 $ 26 $ 19
==== ==== ====
The following table shows the changes in the benefit obligation for 2003 and
2002.
- -------------------------------------------------------------------------------
In millions 2003 2002
- -------------------------------------------------------------------------------
Change in projected benefit obligation:
Benefit obligation, January 1 $422 $366
Obligations for plans excluded
in prior year 15 --
Service cost 28 23
Interest cost 29 25
Plan participants' contributions 4 3
Plan amendments -- 1
Acquisitions -- 2
Settlement / curtailment gains (1) (2)
Actuarial loss 18 9
Benefits paid (24) (25)
Effect of foreign currency exchange
rate movements 96 20
---- ----
Benefit obligation, December 31 $587 $422
==== ====
The fair value of plan assets for non-U.S. plans as of December 31, 2003,
amounted to $423 million. For non-U.S. plans with accumulated benefit
obligations in excess of plan assets, the projected benefit obligations,
accumulated benefit obligations and fair values of plan assets totaled $293
million, $255 million and $183 million, respectively. Plan assets consist
principally of common stocks and fixed income
68
securities. International Paper incurred adjustments to the non-U.S. plans'
additional minimum liabilities, and recorded charges to OCI of $4 million and
$21 million after taxes and minority interest at December 31, 2003 and 2002,
respectively.
Other Plans
International Paper sponsors defined contribution plans (primarily 401(k)) to
provide substantially all U.S. salaried and certain hourly employees of
International Paper an opportunity to accumulate personal funds for their
retirement. Contributions may be made on a before-tax basis to substantially all
of these plans.
As determined by the provisions of each plan, International Paper matches the
employees' basic voluntary contributions. Such matching contributions to the
plans were approximately $95 million, $66 million and $78 million for the plan
years ending in 2003, 2002 and 2001, respectively. The net assets of these plans
approximated $4 billion as of the 2003 plan year-end including approximately
$836 million (21%) in International Paper common stock.
NOTE 16 POSTRETIREMENT BENEFITS
International Paper provides certain retiree health care and life insurance
benefits covering a majority of U.S. salaried and certain hourly employees.
Employees are generally eligible for benefits upon retirement and completion of
a specified number of years of creditable service. International Paper does not
prefund these benefits and has the right to modify or terminate certain of these
plans in the future.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 was signed into law. This Act introduces a
prescription drug benefit under Medicare (Medicare Part D) as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. The measures of the
accumulated postretirement benefit obligation or net periodic postretirement
benefit cost presented below do not reflect the effects of the Act on our plan.
Specific authoritative guidance on the accounting for the federal subsidy is
pending and that guidance, when issued, could require International Paper to
change previously reported information.
The components of postretirement benefit expense in 2003, 2002 and 2001 were as
follows:
- --------------------------------------------------------------------------------
In millions 2003 2002 2001
- --------------------------------------------------------------------------------
Service cost $ 7 $ 8 $ 10
Interest cost 54 59 56
Actuarial loss 23 12 --
Amortization of prior
service cost (29) (20) (10)
---- ---- ----
Net postretirement
benefit cost (a) $ 55 $ 59 $ 56
==== ==== ====
(a) Excludes $4 million, $2.3 million and $9 million of income in 2003, 2002
and 2001, respectively, for curtailments and special termination benefits
that were recorded in Restructuring and other charges and Net (gains)
losses on sales and impairments of businesses held for sale in the
consolidated statement of earnings.
International Paper evaluates its actuarial assumptions annually as of December
31 (the measurement date) and considers changes in these long-term factors based
upon market conditions and the requirements of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
The weighted average assumptions used to determine net cost for the years ended
December 31, 2003, 2002 and 2001 were as follows:
- -------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Discount rate 6.38% 7.25% 7.50%
Health care cost trend
rate assumed for next year 9.00% 9.00% 6.00%
Rate that the cost trend
rate gradually declines to 5.00% 5.00% 5.00%
Year that the rate reaches
the rate it is assumed
to remain 2007 2006 2003
The weighted average assumptions used to determine the benefit obligation at
December 31, 2003 and 2002, were as follows:
- -------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------
Discount rate 6.00% 6.50%
Health care cost trend
rate assumed for next year 10.00% 10.00%
Rate that the cost trend
rate gradually declines to 5.00% 5.00%
Year that the rate reaches
the rate it is assumed
to remain 2008 2007
69
A 1% increase in this annual trend rate would have increased the accumulated
postretirement benefit obligation at December 31, 2003 by $65 million. A 1%
decrease in the annual trend rate would have decreased the accumulated
postretirement benefit obligation at December 31, 2003 by $60 million. The
effect on net postretirement benefit cost from a 1% increase or decrease would
be approximately $4 million.
The plan is only funded in an amount equal to benefits paid. The following table
presents the changes in benefit obligation and plan assets for 2003 and 2002.
- -------------------------------------------------------------------------------
In millions 2003 2002
- -------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation, January 1 $ 890 $ 856
Service cost 7 8
Interest cost 54 59
Participants' contributions 31 29
Actuarial loss 292 175
Benefits paid (134) (121)
Plan amendments (141) (111)
Divestitures (a) -- (5)
Special termination benefits (b) 1 --
------- -----
Benefit obligation, December 31 $ 1,000 $ 890
======= =====
Change in plan assets:
Fair value of plan assets, January 1 $ -- $ --
Company contributions 103 92
Participants' contributions 31 29
Benefits paid (134) (121)
------- -----
Fair value of plan assets, December 31 $ -- $ --
======= =====
Funded status $(1,000) $(890)
Unamortized prior service cost (267) (160)
Unrecognized actuarial loss 510 242
------- -----
Accrued benefit cost $ (757) $(808)
======= =====
(a) Included in Net (gains) losses on sales and impairments of businesses held
for sale in 2002 were curtailment gains of $1 million related to the sales
of Masonite, Flexible Packaging, Decorative Products and other smaller
businesses.
(b) Includes $1.3 million in 2003 for special termination benefits attributable
to the elimination of 37 positions in connection with a cost reduction
program.
At December 31, 2003, estimated total future postretirement benefit payments,
net of participant contributions are as follows:
- --------------------------------------------------------------------------------
In millions
- --------------------------------------------------------------------------------
Estimated Future Benefit Payments
2004 $104
2005 104
2006 104
2007 102
2008 98
2009 - 2013 448
In addition to the U.S. plan, certain Canadian and Brazilian employees are
eligible for retiree health care and life insurance. Net postretirement benefit
cost for our non-U.S. plans was $5 million for 2003 and $2 million for 2002. The
benefit obligation for these plans was $43 million in 2003 and $9 million in
2002.
NOTE 17 INCENTIVE PLANS
International Paper currently 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
nonemployee members of the Board of Directors (Committee) who are not eligible
for awards. Also, stock appreciation rights (SAR's) have been awarded to
employees of a non-U.S. subsidiary, with 9,710 and 17,745 issued and outstanding
at December 31, 2003 and 2002, respectively. We also have other
performance-based restricted share/unit programs available to senior executives
and directors.
International Paper applies the provisions 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," in
accounting for our plans.
Stock Option Program
International Paper accounts for stock options using the intrinsic value method
under APB Opinion No. 25. 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
70
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.
Under the current program, officers and certain other employees may be granted
options to purchase International Paper common stock. The option price is the
market price of the stock on the close of business on the day prior to the date
of grant. During 2001, the program was changed so that options must be vested
before they can be exercised. Upon exercise of an option, a replacement option
may be granted under certain circumstances with an exercise price equal to the
market price at the time of exercise and with a term extending to the expiration
date of the original option. Beginning in 2004, all senior executives and
certain other officers will no longer receive stock option awards. Instead, the
Board of Directors approved performance share awards for these affected
participants in 2004.
For pro forma disclosure purposes, the fair market value of each option grant
has been estimated on the date of the grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
2003, 2002 and 2001, respectively:
- -------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Initial Options (a)
Risk-Free Interest Rate 2.46% 3.29% 3.91%
Price Volatility 24.06% 33.99% 41.02%
Dividend Yield 2.71% 2.74% 2.61%
Expected Term in Years 3.50 3.50 3.00
Replacement Options (b)
Risk-Free Interest Rate 1.59% 2.92% 4.40%
Price Volatility 23.70% 38.62% 39.51%
Dividend Yield 2.57% 2.33% 2.64%
Expected Term in Years 1.75 1.80 2.10
(a) The average fair market values of initial option grants during 2003, 2002
and 2001 were $5.86, $8.77 and $9.45, respectively.
(b) The average fair market values of replacement option grants during 2003,
2002 and 2001 were $4.39, $8.59 and $9.02, respectively.
A summary of the status of the Stock Option Program as of December 31, 2003,
2002 and 2001 and changes during the years ended on those dates is presented
below:
- --------------------------------------------------------------------------------
Weighted
Average
Exercise
Options (a,b) Price
- --------------------------------------------------------------------------------
Outstanding at
January 1, 2001 23,862,978 $43.12
Granted 7,399,497 35.38
Exercised (343,597) 32.83
Forfeited (1,118,971) 38.00
Expired (689,782) 51.25
---------- ------
Outstanding at
December 31, 2001 29,110,125 41.28
Granted 11,927,766 37.36
Exercised (1,345,421) 34.62
Forfeited (1,841,489) 40.51
Expired (696,961) 51.24
---------- ------
Outstanding at
December 31, 2002 37,154,020 40.11
Granted 11,315,401 37.08
Exercised (2,778,038) 31.87
Forfeited (1,823,244) 41.19
Expired (1,062,311) 51.71
---------- ------
Outstanding at
December 31, 2003 42,805,828 $39.51
==========
(a) The table does not include Continuity Award tandem stock options described
below. No fair market value is assigned to these options under SFAS No.
123. The tandem restricted shares accompanying these options are expensed
over their vesting period.
(b) The table includes options outstanding under an acquired company plan under
which options may no longer be granted.
The following table summarizes information about stock options outstanding at
December 31, 2003:
- --------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Options Weighted Weighted Options Weighted
Range of Outstanding Average Average Outstanding Average
Exercise as of Remaining Exercise as of Exercise
Prices 12/31/03 Life Price 12/31/03 Price
- ------------- ----------- --------- -------- ----------- --------
$29.31-$33.80 9,408,627 7.2 $31.68 4,565,137 $30.73
$33.81-$39.77 17,973,534 8.2 $36.72 7,566,864 $36.22
$39.78-$45.74 8,451,508 5.9 $41.79 3,830,565 $42.28
$45.75-$51.71 2,392,359 4.0 $47.42 2,392,359 $47.42
$51.72-$57.68 1,074,692 1.0 $54.54 1,074,692 $54.54
$57.69-$63.65 3,318,758 5.2 $59.03 3,318,758 $59.03
$63.66-$69.63 186,350 5.8 $64.77 186,350 $64.77
---------- --- ------ ---------- ------
42,805,828 6.9 $39.51 22,934,725 $41.71
========== ==========
71
Performance - Based Restricted Shares
Under the Restricted Performance Share Program, contingent awards of
International Paper common stock are granted by the Committee. Shares are earned
on the basis of International Paper's financial performance over a period of
consecutive calendar years as determined by the Committee. Under a Restricted
Performance Share Program approved during 2001, awards vesting over a three-year
period were granted. In 2002 and 2003, awards vesting over a three-year period
were granted. Compensation expense for this variable plan is recorded over the
applicable vesting period.
The following summarizes the activity of all performance-based programs for the
three years ending December 31, 2003:
- -------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------------
Outstanding at January 1, 2001 --
Granted 1,283,100
Issued (9,243)
Forfeited (59,757)
---------
Outstanding at December 31, 2001 1,214,100
Granted 583,690
Issued (330,437)
Forfeited (190,013)
---------
Outstanding at December 31, 2002 1,277,340
Granted 658,155
Issued (586,237)
Forfeited (164,803)
---------
Outstanding at December 31, 2003 1,184,455
=========
Continuity Award Program
The Continuity Award Program provides for the granting of tandem awards of
restricted stock and/or nonqualified stock options to key executives. Grants are
restricted and awards conditioned on attainment of specified age and years of
service requirements. Awarding of a tandem stock option results in the
cancellation of the related restricted shares. The Continuity Award Program also
provides for awards of restricted stock to key employees.
The following summarizes the activity of the Continuity Award Program for the
three years ending December 31, 2003:
- -------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------------
Outstanding at January 1, 2001 456,718
Granted 22,350
Issued (70,970)
Forfeited (a) (64,000)
-------
Outstanding at December 31, 2001 344,098
Granted 14,000
Issued (79,526)
Forfeited (a) (40,500)
-------
Outstanding at December 31, 2002 238,072
Granted 149,500
Issued (60,912)
Forfeited (a) (22,500)
-------
Outstanding at December 31, 2003 304,160
=======
(a) Also includes restricted shares canceled when tandem stock options were
awarded. 200,000 tandem options were awarded in 2001. No tandem options
were awarded in 2003 or 2002.
At December 31, 2003 and 2002, a total of 14.9 million and 12.6 million shares,
respectively, were available for grant under the LTICP. In 2003, shareholders
approved an additional 10 million shares to be made available for grant, with
100,000 of these shares reserved specifically for the granting of restricted
stock. No additional shares were made available during 2002 or 2001. A total of
2.3 million shares and 2.7 million shares were available for the granting of
restricted stock as of December 31, 2003 and 2002, respectively.
The compensation cost charged to earnings for all the incentive plans was $29
million, $28 million and $38 million for 2003, 2002 and 2001, respectively.
72
Had compensation cost for International Paper's stock-based compensation
programs been determined consistent with the provisions of SFAS No. 123, its net
earnings, earnings per common share and earnings per common share - assuming
dilution would have been reduced to the pro forma amounts indicated below:
- -------------------------------------------------------------------------------
In millions, except per share amounts 2003 2002 2001
- -------------------------------------------------------------------------------
Net Earnings (Loss)
As reported $ 302 $ (880) $(1,204)
Pro forma 258 (921) (1,257)
Earnings (Loss) Per
Common Share
As reported $0.63 $(1.83) $ (2.50)
Pro forma 0.54 (1.92) (2.60)
Earnings (Loss) Per
Common Share - assuming dilution
As reported $0.63 $(1.83) $ (2.50)
Pro forma 0.54 (1.92) (2.60)
The effect on 2003, 2002 and 2001 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 years due to the vesting period of
stock options and the potential for issuance of additional stock options in
future years.
73
Interim Financial Results (Unaudited)
- -------------------------------------------------------------------------------------------------------------
In millions, except per share amounts
and stock prices 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
- -------------------------------------------------------------------------------------------------------------
2003
Net Sales $ 6,075 $6,264 $6,373 $6,467 $25,179
Gross Margin (a) 1,569 1,600 1,619 1,588 6,376
Earnings Before Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Changes 133(b) 89(d) 83(f) 41(h) 346(b,d,f,h)
Net Earnings 44(b,c) 88(d,e) 122(f,g) 48(h,i) 302(b-i)
Per Share of Common Stock
Net Earnings $ 0.09(b,c) $ 0.19(d,e) $ 0.25(f,g) $ 0.10(h,i) $ 0.63(b-i)
Net Earnings - Assuming Dilution 0.09(b,c) 0.19(d,e) 0.25(f,g) 0.10(h,i) 0.63(b-i)
Dividends 0.25 0.25 0.25 0.25 1.00
Common Stock Prices
High $ 38.65 $39.39 $41.50 $43.32 $ 43.32
Low 33.09 33.17 35.31 36.57 33.09
2002 (Restated) (j)
Net Sales $ 6,038 $6,305 $6,343 $6,290 $24,976
Gross Margin (b) 1,573 1,717 1,732 1,698 6,720
Earnings (Loss) Before Income Taxes,
Minority Interest and Cumulative Effect
of Accounting Change 139(k) 236(l) 268(m) (272)(n) 371(k-n)
Net Earnings (Loss) (1,110)(k) 215(l) 145(m) (130)(n,o) (880)(k-o)
Per Share of Common Stock
Net Earnings (Loss) $ (2.31)(k) $ 0.45(l) $ 0.30(m) $(0.27)(n,o) $ (1.83)(k-o)
Net Earnings (Loss) - Assuming Dilution (2.31)(k) 0.45(l) 0.30(m) (0.27)(n,o) (1.83)(k-o)
Dividends 0.25 0.25 0.25 0.25 1.00
Common Stock Prices
High $ 46.19 $45.20 $44.10 $39.60 $ 46.19
Low 37.89 39.13 31.75 31.35 31.35
Footnotes to Interim Financial Results
(a) Gross margin represents net sales less cost of products sold.
(b) Includes a $23 million charge before taxes and minority interest ($14
million after taxes and minority interest) for asset shutdowns of excess
internal capacity and cost reduction actions.
(c) Includes a charge of $10 million after taxes for the cumulative effect of
an accounting change to record the charge for the adoption of SFAS No. 143,
"Accounting for Asset Retirement Obligations."
(d) Includes a pre-tax charge of $51 million ($32 million after taxes) for
facility shutdown costs and severance costs associated with organizational
restructuring programs, $20 million pre-tax charge ($12 million after
taxes) for legal reserves, a $10 million charge before taxes ($6 million
after taxes) for early debt retirement costs, a $10 million pre-tax charge
($6 million after taxes) to adjust previous estimated gains/losses of
businesses previously sold 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.
74
(e) Includes a $50 million reduction of the income tax provision resulting from
settlements of prior period tax issues and benefits from an overseas tax
program.
(f) Includes a pre-tax charge of $71 million ($43 million after taxes) for
facility closure costs and severance costs associated with organizational
restructuring programs, a $14 million charge before taxes ($9 million after
taxes) for legal reserves, an $8 million charge before taxes ($7 million
after taxes) for early debt retirement costs, a $1 million pre-tax charge
($1 million after taxes) to adjust estimated gains/losses of businesses
previously sold and an $8 million pre-tax credit ($5 million after taxes)
for the net reversal of restructuring and realignment reserves no longer
required.
(g) Includes a decrease in the income tax provision of $60 million reflecting a
favorable revision of estimated tax accruals upon filing the 2002 federal
income tax return and increased research and development credits.
(h) Includes a $91 million charge before taxes and minority interest ($55
million after taxes and minority interest) for asset shutdowns of excess
internal capacity and cost reduction actions, a $29 million pre-tax charge
($18 million after taxes) for legal reserves, a credit of $19 million
before taxes ($12 million after taxes) for gains on early extinguishment of
debt, a $21 million charge before taxes ($26 million after taxes) for net
losses on sales and impairments of businesses held for sale and a $23
million credit before taxes ($15 million after taxes) for the reversal of
restructuring reserves no longer required.
(i) Includes a $13 million credit after minority interest related to a
favorable settlement with Australian tax authorities of net operating loss
carryforward credits and a charge of $3 million after taxes for the
cumulative effect of an accounting change to record the transitional charge
for the adoption of FIN 46.
(j) 2002 first quarter net earnings have been restated as required under SFAS
No. 142, to reflect the $1.2 billion ($2.44 per share) transitional
goodwill impairment charge for the adoption of SFAS No. 142. Net earnings
as previously reported in the first quarter 10-Q were $65 million, and both
basic and diluted earnings per share, as previously reported, were $0.13.
(k) Includes a $10 million pre-tax credit ($7 million after taxes) for the
reversal of fourth quarter 2001 restructuring reserves no longer required.
(l) Includes a $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 and a $79 million charge before taxes ($50 million
after taxes) for asset shutdowns of excess internal capacity and cost
reduction actions.
(m) Includes a $3 million pre-tax gain ($1 million after taxes) related to
adjustments of previously recorded costs of businesses held for sale and a
$19 million charge before taxes and minority interest ($9 million after
taxes and minority interest) for asset write-downs and cost reduction
actions.
(n) Includes a charge of $101 million before taxes and minority interest ($71
million after taxes and minority interest) for facility closures,
administrative realignment severance costs, and cost reduction actions, a
pre-tax charge of $450 million ($278 million after taxes) for additions to
the existing exterior siding legal reserves, a charge of $46 million before
taxes and minority interest, ($27 million after taxes and minority
interest) for early debt retirement costs, a pre-tax credit of $58 million
($36 million after taxes) for the reversal of restructuring and realignment
reserves no longer required, and a credit of $10 million before taxes ($4
million after taxes) to adjust accrued costs of businesses sold or held for
sale.
(o) Reflects a decrease of $46 million in the income tax provision in the
fourth quarter of 2002 for a reduction of deferred state income tax
liabilities.
75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2003, 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-15 under the
Securities Exchange Act (the 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 Securities and Exchange Commission (SEC) rules thereunder.
Changes in Internal Control over Financial Reporting
During the fourth quarter of 2003, there were no changes in the Company's
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors is hereby incorporated by reference to our
definitive proxy statement which will be filed with the SEC within 120 days of
the close of our fiscal year. The Audit and Finance Committee of the Board of
Directors has at least one member who is a financial expert. Further information
concerning the composition of the Audit and Finance Committee and our audit
committee financial experts is hereby incorporated by reference to our
definitive proxy statement that will be filed with the SEC within 120 days of
the close of our fiscal year. Information with respect to our executive officers
is set forth on pages 3 and 4 in Part I of this Form 10-K under the caption,
"Executive Officers of the Registrant."
Executive officers of International Paper are elected to hold office until the
next annual meeting of the Board of Directors following the annual meeting of
shareholders and until election of successors, subject to removal by the Board.
The Company's Code of Business Ethics is applicable to all employees of the
Company, including the chief executive officer and senior financial officers, as
well as the Board of Directors. No amendments or waivers of the Code have
occurred. We intend to disclose any amendments to our Code of Business Ethics
and any waivers from a provision of our Code of Business Ethics granted to our
directors, chief executive officer and senior financial officers on our Internet
Web site within five business days following such amendment or waiver.
We make available free of charge on our Internet Web site at
www.internationalpaper.com, and in print to any shareholder who requests, our
Corporate Governance Principles, our Code of Business Ethics and the charters of
our Audit and Finance Committee, Management Development and Compensation
Committee, Governance Committee and Public Policy and Environment Committee.
Requests for copies may be directed to the corporate secretary at our corporate
headquarters.
Information with respect to compliance with Section 16(a) of the Securities and
Exchange Act is hereby incorporated by reference to our definitive proxy
statement that will be filed with the SEC within 120 days of the close of our
fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the compensation of executives and directors of the
Company is hereby incorporated by reference to our definitive proxy statement
that will be filed with the SEC within 120 days of the close of our fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
A description of the security ownership of certain beneficial owners and
management and equity compensation plan information is hereby incorporated by
reference to our definitive proxy statement which will be filed with the SEC
within 120 days of the close of our fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A description of certain relationships and related transactions is hereby
incorporated by reference to our definitive proxy statement that will be filed
with the SEC within 120 days of the close of our fiscal year.
76
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to fees paid to, and services rendered by, our
principal accountant and our policies and procedures for pre-approving those
services is hereby incorporated by reference to our definitive proxy statement
which will be filed with the SEC within 120 days of the close of our fiscal
year.
PART IV
- --------------------------------------------------------------------------------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements - See Item 8. Financial Statements and
Supplementary Data.
(2) Financial Statement Schedules - The following additional financial
data should be read in conjunction with the financial statements in
Item 8. Schedules not included with this additional financial data
have been omitted because they are not applicable, or the required
information is shown in the financial statements or the notes thereto.
Additional Financial Data
2003, 2002 and 2001
Report of Independent Auditors on Financial Statement
Schedule for 2003 and 2002 ................................................80
Report of Independent Public Accountants on
Financial Statement Schedule for 2001 .....................................80
Consolidated Schedule: II-Valuation
and Qualifying Accounts ...................................................81
(3) Exhibits:
(3.1) Form of Restated Certificate of Incorporation of International Paper
Company (incorporated by reference to the Company's Report on Form 8-K
dated November 20, 1990, File No. 1-3157).
(3.2) Certificate of Amendment to the Certificate of Incorporation of
International Paper Company (incorporated herein by reference to Exhibit
(3) (i) to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999, File No. 1-3157).
(3.3) Certificate of Amendment of the Certificate of Incorporation of
International Paper Company (incorporated by reference to Exhibit 3.1 of
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2001, File No. 1-3157).
(3.4) By-laws of the Company, as amended (incorporated by reference to Exhibit
3.4 of the Company's Annual Report on Form 10-K for the year ended December
31, 2001, File No. 1-3157).
(4.1) Specimen Common Stock Certificate (incorporated by reference to Exhibit
2-A to the Company's registration statement on Form S-7, No. 2-56588, dated
June 10, 1976).
(4.2) Indenture, dated as of April 12, 1999, between International Paper and The
Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to
International Paper's Report on Form 8-K filed on June 29, 2000, File No.
1-3157).
(4.3) Floating Rate Notes Supplemental Indenture, dated as of June 14, 2000,
between International Paper and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.2 to International Paper's Report
on Form 8-K filed on June 29, 2000, File No. 1-3157).
(4.4) 8% Notes Due July 8, 2003 Supplemental Indenture, dated as of June 14,
2000, between International Paper and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.3 to International Paper's Report
on Form 8-K filed on June 29, 2000, File No. 1-3157).
(4.5) 8 1/8% Notes Due July 8, 2005 Supplemental Indenture dated as of June 14,
2000, between International Paper and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.4 to International Paper's Report
on Form 8-K filed on June 29, 2000, File No. 1-3157).
(4.6) Forms of Floating Rate Notes, 8% Notes due July 8, 2003 and 8 1/8% Notes
due July 8, 2005 (incorporated by reference to Exhibit 4.1 to International
Paper Company's Registration Statement on Form S-4 filed on October 23,
2000, as amended November 15, 2000, File No. 333-48434).
(4.7) Zero Coupon Convertible Senior Debentures due June 20, 2021 Supplemental
Indenture (incorporated by reference to Exhibit 4.2 to International Paper
Company's Registration Statement on Form S-3 filed on September 7, 2001, as
amended October 31, 2001 and January 16, 2002, File No. 333-69082).
77
(4.8) 6.75% Notes due 2011 Supplemental Indenture between International Paper
Company and The Bank of New York (incorporated by reference to Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001, File No. 1-3157).
(4.9) 4.25% Notes due 2009 and 5.50% Notes due 2014 Supplemental Indenture dated
as of December 15, 2003 between International Paper Company and The Bank of
New York.
(4.10) 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 SEC upon request.
(10.1) Long-Term Incentive Compensation Plan, as amended (incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003, File No. 1-3157).
(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 (incorporated by
reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003, File No. 1-3157).
(10.3) Management Incentive Plan, amended and restated as of January 1, 2003
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003, File No. 1-3157).
(10.4) Form of individual non-qualified stock option agreement under the
Company's Long-Term Incentive Compensation Plan (incorporated by reference
to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001, File No. 1-3157).
(10.5) Form of individual executive continuity award under the Company Long-Term
Incentive Compensation Plan (incorporated by reference to Exhibit 10.9 to
the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1999, File No. 1-3157).
(10.6a) Form of Change of Control Agreement for Chief Executive Officer
(incorporated by reference to Exhibit 10.8a to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2001, File No. 1-3157).
(10.6b) Form of Change of Control Agreement--Tier I (incorporated by reference
to Exhibit 10.8b to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001, File No. 1-3157).
(10.6c) Form of Change of Control Agreement--Tier II (incorporated by reference
to Exhibit 10.8c to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001, File No. 1-3157).
(10.7) Unfunded Supplemental Retirement Plan for Senior Managers, as amended
(incorporated by reference to Exhibit 10.9 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2001, File No. 1-3157).
(10.8) International Paper Company Unfunded Savings Plan (incorporated by
reference to Exhibit 10.11 to the Company's Form 10K/A for the fiscal year
ended December 31, 2000, File No. 1-3157).
(10.9) International Paper Company Pension Restoration Plan for Salaried
Employees (incorporated by reference to Exhibit 10.12 to the Company's Form
10K/A for the fiscal year ended December 31, 2000, File No. 1-3157).
(10.10) $650 million credit agreement dated as of August 24, 2001, as amended by
Amendment No. 1 dated as of March 8, 2002, between the Company, Ngahere
Aotearoa, the Lenders Party thereto, Dai-Ichi Kangyo Bank, Ltd. as
Syndication Agent, Bank of Tokyo-Mitsubishi Trust Company as Documentation
Agent, Commerzbank AG New York Branch and JP Morgan Chase Bank as Managing
Agents, and Deutsche Bank AG New York Branch as Administrative Agent.
(10.11) $750 million 5-year agreement dated as of March 31, 1999, as amended by
Amendments No. 1 through No. 4 dated as of January 4, 2000, March 29, 2000,
June 6, 2000 and March 8, 2002, respectively, between the Company, the
Lenders party thereto, Citibank, N.A., Bank of America and Deutsche Bank AG
as co-syndiction agents, Chase Securities Inc. as Lead Arranger and Book
Manager and J.P. Morgan Chase as Administrative Agent.
78
(10.12) $1.5 billion 3-year credit agreement dated as of March 6, 2003 between
International Paper Company, the Lenders Party thereto, Citibank, N.A., as
Syndication Agent, Bank of America, N.A., BNP Paribas and Deutsche Bank
Securities Inc., as Documentation Agents and J.P. Morgan Securities Inc.
and Salomon Smith Barney Inc., as Joint Lead Arrangers and Joint
Bookrunners (incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, File
No. 1-3157).
(10.13) Form of Indemnification Agreement for directors.
(10.14) Agreement between John T. Dillon and the Company dated as of
January 26, 2004, relating to consulting services.
(10.15) Agreement between James P. Melican and the Company dated as of
January 26, 2004, relating to consulting services.
(11) Statement of Computation of Per Share Earnings.
(12) Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends.
(21) List of Subsidiaries of Registrant.
(23) Consent of Independent Auditors.
(31.1) Certification by John V. Faraci, Chairman and Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification by Christopher P. Liddell, Chief 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.
(99.1) Board Policy on Severance Agreements with Senior Executives (incorporated
by reference to Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003, File No. 1-3157).
(99.2) Board Policy on Change of Control Agreements (incorporated by reference
to Exhibit 99.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003, File No. 1-3157).
(b) Reports on Form 8-K
International Paper filed a report on Form 8-K on October 16, 2003, under Items
5 and 7, announcing the election of Martha Finn Brooks as a director of
International Paper Company.
International Paper filed a report on Form 8-K on October 27, 2003, furnishing
under Item 12, the results of its operations for the quarter ended September 30,
2003.
International Paper furnished a report on Form 8-K on December 4, 2003, under
Item 9, announcing John Faraci's address at the Smith Barney Citigroup Global
Paper, Forest Products and Packaging Conference on Thursday, December 4, 2003.
International Paper filed a report on Form 8-K on December 22, 2003, to file as
an exhibit under Item 7, the underwriting agreement dated December 10, 2003, by
and between the Company and Citigroup Global Markets Inc., Credit Suisse First
Boston, LLC and Deutsche Bank Securities, Inc., as representatives of the
several underwriters.
International Paper filed a report on Form 8-K on February 2, 2004, under Items
5 and 9, reporting earnings for the fourth quarter 2003.
International Paper filed a report on Form 8-K/A on February 6, 2004, under
Items 5, 9 and 12 to amend Form 8-K filed on February 2, 2004 under Item 5.
79
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of International Paper Company:
Stamford, Connecticut
We have audited the consolidated financial statements of International Paper
Company as of December 31, 2003 and 2002, and for the years then ended, and have
issued our report thereon dated March 5, 2004; such financial statements and
report are included in your 2003 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included the financial
statement schedules of International Paper Company, listed in the accompanying
index. These financial statement schedules are the responsibility of
International Paper Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein. The
financial statement schedule for the year ended December 31, 2001, was audited
by other auditors who have ceased operations. Those other auditors expressed an
opinion, in their report dated February 12, 2002, that such 2001 financial
statement schedule, when considered in relation to the 2001 basic financial
statements taken as a whole, presented fairly, in all material respects, the
information set forth therein.
Deloitte & Touche LLP
New York, N.Y.
March 5, 2004
THIS REPORT SET FORTH BELOW IS A COPY OF A PREVIOUSLY ISSUED REPORT ON FINANCIAL
STATEMENT SCHEDULE BY ARTHUR ANDERSEN LLP. THIS REPORT HAS NOT BEEN REISSUED BY
ARTHUR ANDERSEN LLP IN CONNECTION WITH ITS INCLUSION IN THIS FORM 10-K.
To International Paper Company:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in the Company's
2001 Annual Report to Shareholders incorporated by reference in this Form 10-K
and have issued our report thereon dated February 12, 2002. Our audits were made
for the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in the accompanying index is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The schedule has been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, based on our audits,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
New York, N.Y.
February 12, 2002
80
SCHEDULE II
INTERNATIONAL PAPER COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
In millions
- ---------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2003
--------------------------------------------------------------
Additions
Balance at Additions Charged to Deductions Balance at
Beginning Charged to Other from End
of Period Earnings Accounts Reserves of Period
---------- ---------- ---------- ---------- ----------
Description
Reserves Applied Against Specific Assets
Shown on Balance Sheet:
Doubtful accounts - current $169 $ 20 $-- $ (54)(a) $135
Restructuring reserves 104 160 -- (183)(b) 81
In millions
- ---------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2002
--------------------------------------------------------------
Additions
Balance at Additions Charged to Deductions Balance at
Beginning Charged to Other from End
of Period Earnings Accounts Reserves of Period
---------- ---------- ---------- ---------- ----------
Description
Reserves Applied Against Specific Assets
Shown on Balance Sheet:
Doubtful accounts - current $179 $ 30 $-- $ (40)(a) $169
Restructuring reserves 321 119 -- (336)(b) 104
In millions
- ---------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2001
--------------------------------------------------------------
Additions
Balance at Additions Charged to Deductions Balance at
Beginning Charged to Other from End
of Period Earnings Accounts Reserves of Period
---------- ---------- ---------- ---------- ----------
Description
Reserves Applied Against Specific Assets
Shown on Balance Sheet:
Doubtful accounts - current $128 $ 82 $-- $ (31)(a) $179
Restructuring reserves 242 385 -- (306)(b) 321
(a) Includes write-off, less recoveries, of accounts determined to be
uncollectible and other adjustments.
(b) Includes payments and deductions for reversals of previously established
reserves that were no longer required.
81
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Maura A. Smith and Andrea L. Dulberg, jointly
and severally, as his or her true and lawful attorney-in-fact and agent, acting
alone, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any or all amendments
to this annual report on Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact full power and
authority to do and reform each and every act and thing requisite or necessary
to be done, hereby ratifying and confirming all that said attorney-in-fact and
agent, or her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date
- --------------------------------------------------------------------------------
/S/ JOHN V. FARACI Chairman of the Board, Chief March 8, 2004
- --------------------------- Executive Officer and Director
John V. Faraci
/S/ ROBERT M. AMEN President and Director March 8, 2004
- ---------------------------
Robert M. Amen
/S/ MARTHA FINN BROOKS Director March 8, 2004
- ---------------------------
Martha Finn Brooks
/S/ ROBERT J. EATON Director March 8, 2004
- ---------------------------
Robert J. Eaton
/S/ SAMIR G. GIBARA Director March 8, 2004
- ---------------------------
Samir G. Gibara
/S/ JAMES A. HENDERSON Director March 8, 2004
- ---------------------------
James A. Henderson
/S/ ROBERT D. KENNEDY Director March 8, 2004
- ---------------------------
Robert D. Kennedy
/S/ W. CRAIG MCCLELLAND Director March 8, 2004
- ---------------------------
W. Craig McClelland
/S/ DONALD F. MCHENRY Director March 8, 2004
- ---------------------------
Donald F. McHenry
82
/S/ JANE C. PFEIFFER Director March 8, 2004
- ---------------------------
Jane C. Pfeiffer
/S/ CHARLES R. SHOEMATE Director March 8, 2004
- ---------------------------
Charles R. Shoemate
/S/ CHRISTOPHER P. LIDDELL Senior Vice President and March 8, 2004
Chief Financial Officer
- ---------------------------
Christopher P. Liddell
/S/ ROBERT J. GRILLET Vice President and Controller March 8, 2004
- ---------------------------
Robert J. Grillet
83
Appendix I
2003 Listing of Facilities
(all facilities are owned except as
noted otherwise)
PRINTING PAPERS
Business Papers, Coated Papers,
Fine Papers and Pulp
U.S.:
Courtland, Alabama
Selma, Alabama
(Riverdale Mill)
Pine Bluff, Arkansas
Ontario, California leased
(C & D Center)
Cantonment, Florida
(Pensacola Mill)
Augusta, Georgia
Bastrop, Louisiana
(Louisiana Mill)
Springhill, Louisiana
(C & D Center)
Bucksport, Maine
Jay, Maine
(Androscoggin Mill)
Westfield, Massachusetts
(C & D Center)
Quinnesec, Michigan
Sturgis, Michigan
(C & D Center)
Sartell, Minnesota
Ticonderoga, New York
Riegelwood, North Carolina
Wilmington, North Carolina leased
(Reclaim Center)
Hamilton, Ohio
Saybrook, Ohio leased
(C & D Center)
Hazleton, Pennsylvania
(C & D Center)
Eastover, South Carolina
Georgetown, South Carolina
Sumter, South Carolina
(C & D Center)
Franklin, Virginia (2 locations)
International:
Arapoti, Parana, Brazil
Mogi Guacu, Sao Paulo, Brazil
Hinton, Alberta, Canada
Quesnel, British Columbia, Canada
Maresquel, France
Saillat, France
Saint Die, France
(Anould Mill)
Kwidzyn, Poland
Svetogorsk, Russia
Inverurie, Scotland
INDUSTRIAL AND CONSUMER PACKAGING
INDUSTRIAL PACKAGING
Containerboard
U.S.:
Prattville, Alabama
Savannah, Georgia
Terre Haute, Indiana
Mansfield, Louisiana
Pineville, Louisiana
Vicksburg, Mississippi
Roanoke Rapids, North Carolina
International:
Arles, France
Corrugated Container
U.S.:
Bay Minette, Alabama
Decatur, Alabama
Conway, Arkansas
Fordyce, Arkansas leased
Jonesboro, Arkansas
Russellville, Arkansas
Carson, California
Hanford, California
Modesto, California
Stockton, California
Putnam, Connecticut
Auburndale, Florida
Forest Park, Georgia
Savannah, Georgia
Statesboro, Georgia leased
Chicago, Illinois
Des Plaines, Illinois
Fort Wayne, Indiana
Lexington, Kentucky
Lafayette, Louisiana
Shreveport, Louisiana
Springhill, Louisiana
Auburn, Maine
Howell, Michigan
Kalamazoo, Michigan
Monroe, Michigan
Minneapolis, Minnesota
Houston, Mississippi
Kansas City, Missouri
Geneva, New York
King's Mountain, North Carolina leased
Statesville, North Carolina
Cincinnati, Ohio
Solon, Ohio
Wooster, Ohio
Lancaster, Pennsylvania
Mount Carmel, Pennsylvania
Washington, Pennsylvania
Georgetown, South Carolina
Spartanburg, South Carolina
Morristown, Tennessee
Murfreesboro, Tennessee
Dallas, Texas
Edinburg, Texas (2 locations)
El Paso, Texas
Ft. Worth, Texas
San Antonio, Texas
Richmond, Virginia
Cedarburg, Wisconsin
Fond du Lac, Wisconsin
A-1
International:
Las Palmas, Canary Islands
Tenerife, Canary Islands
Rancagua, Chile
Chengdu, China
Guangzhou, China
Arles, France
Chalon-sur-Saone, France
Chantilly, France
Creil, France
LePuy, France
Mortagne, France
Guadeloupe, French West Indies
Asbourne, Ireland
Bellusco, Italy
Catania, Italy
Pomezia, Italy
San Felice, Italy
Alcala, Spain leased
Almeria, Spain leased
Barcelona, Spain
Bilbao, Spain
Gandia, Spain
Valladolid, Spain
Thrapston, United Kingdom
Winsford, United Kingdom
Kraft Paper
Courtland, Alabama
Savannah, Georgia
Mansfield, Louisiana
Roanoke Rapids, North Carolina
Franklin, Virginia
CONSUMER PACKAGING
Bleached Board
Pine Bluff, Arkansas
Augusta, Georgia
Riegelwood, North Carolina
Prosperity, South Carolina
Texarkana, Texas
Beverage Packaging
U.S.:
Turlock, California
Plant City, Florida
Cedar Rapids, Iowa
Framingham, Massachusetts
Kalamazoo, Michigan
Raleigh, North Carolina
International:
London, Ontario, Canada
Longueuil, Quebec, Canada leased
Shanghai, China
Santiago, Dominican Republic
San Salvador, El Salvador leased
Ducart, Israel
Fukusaki, Japan
Seoul, Korea
Banowi, Saudi Arabia
Taipei, Taiwan
Guacara,Venezuela
Foodservice
U.S.:
Visalia, California
Shelbyville, Illinois
Kenton, Ohio
Jackson, Tennessee
International:
Brisbane, Australia
Santiago, Chile leased
Bogota, Columbia
Shorewood Packaging
U.S.:
Waterbury, Connecticut
Indianapolis, Indiana
Louisville, Kentucky
Clifton, New Jersey
Edison, New Jersey
Englewood, New Jersey
Harrison, New Jersey leased
Teaneck, New Jersey leased
West Deptford, New Jersey
Hendersonville, North Carolina
Weaverville, North Carolina
Springfield, Oregon
Danville, Virginia
Newport News, Virginia
Roanoke, Virginia
International:
Brockville, Ontario, Canada
Smith Falls, Ontario, Canada
Toronto, Ontario, Canada,
(2 locations) 1 leased
Guangzhou, China
Ebbw Vale, Wales, United Kingdom
DISTRIBUTION
xpedx
U.S.:
Stores Group
Chicago, Illinois
141 locations nationwide
133 leased
South Central Region
Greensboro, North Carolina
32 branches in the Southeast States
and Ohio
19 leased
Midwest Region
Denver, Colorado
39 branches in the Great Lakes,
Rocky Mountain, Mid-America,
and South Plain States
25 leased
West Region
Downey, California
26 branches in the
Northwest and Pacific States
19 leased
Northeast Region
Hartford, Connecticut
19 branches in New England
and Middle Atlantic States
14 leased
International:
Papeteries de France
Pantin, France
(2 locations) 1 leased
Chihuahua, Mexico
(10 locations) all leased
Scaldia, Nijmegen, Netherlands
A-2
FOREST PRODUCTS
Forest Resources
U.S.:
Approximately 8.3 million acres
in the South and North
International:
Approximately 1.5 million
acres in Brazil
Realty Projects
Daufuskie Island, South Carolina
(Haig Point Incorporated)
Wood Products
U.S.:
Chapman, Alabama
Citronelle, Alabama
Maplesville, Alabama
Opelika, Alabama
Thorsby, Alabama
Gurdon, Arkansas
Leola, Arkansas
McDavid, Florida
Whitehouse, Florida
Augusta, Georgia
Folkston, Georgia
Meldrim, Georgia
Springhill, Louisiana
Wiggins, Mississippi
Joplin, Missouri
Armour, North Carolina
Seaboard, North Carolina
Johnston, South Carolina
Newberry, South Carolina
Sampit, South Carolina
Camden, Texas
Corrigan, Texas
Henderson, Texas
New Boston, Texas
Franklin, Virginia
International:
Santana, Amapa, Brazil
Hinton, Alberta, Canada
Strachan, Alberta, Canada
Sundre, Alberta, Canada
Burns Lake, British Columbia,
Canada (2 plants)
Houston, British Columbia, Canada
100 Mile House, British Columbia,
Canada
Quesnel, British Columbia,
Canada (2 plants)
Williams Lake, British Columbia,
Canada
CARTER HOLT HARVEY
Forestlands
Approximately 795,000
acres in New Zealand
owned & leased
Wood Products
Sawmills and Processing Plants
Morwell, Australia leased
Oberon, New South Wales,
Australia leased
Mt. Gambier, South Australia,
Australia
(2 plants) leased
Box Hill, Victoria, Australia leased
Myrtleford, Victoria, Australia leased
Kopu, New Zealand
Nelson, New Zealand
Putaruru, New Zealand
Rotorua, New Zealand
Taupo, New Zealand
Timber Merchants - Australia
Sydney, New South Wales leased
Hamilton Central, Queensland leased
Mt.Gambier, South Australia
Box Hill, Victoria leased
Perth, Western Australia leased
Plywood Mills
Nangwarry, South Australia,
Australia
Myrtleford, Victoria, Australia
Whangarei, Marsden Point,
New Zealand
Decorative Products Processing Plants
Auckland, New Zealand
Decorative Products Distribution Center
Christchurch, New Zealand leased
Panel Production Plants - New Zealand
Auckland
Kopu
Rangiora
Panel Production Plants - Australia
Oberon, New South Wales (2 plants)
St. Leonards, New South Wales
leased
Tumut, New South Wales
Gympie, Queensland
Mt. Gambier, South Australia (2 plants)
Bell Bay, Tasmania
Building Supplies Retail Outlets
Retail Outlets, 37 branches
in New Zealand (20 leased)
Frame and Truss
Auckland, New Zealand leased
Christchurch, New Zealand leased
Rotorua, New Zealand leased
Upper Hutt, New Zealand leased
Pulp and Paper
Kraft Paper, Pulp, Coated and
Uncoated Papers and Bristols
Kinleith, New Zealand
Cartonboard
Whakatane, New Zealand
Containerboard
Kinleith, New Zealand
Penrose, New Zealand
Fiber Recycling Operations
Auckland, New Zealand leased
Tissue
Pulp and Tissue Mills
Box Hill, Victoria, Australia
Kawerau, New Zealand
Conversion Sites
Box Hill, Victoria, Australia
Keon Park, Victoria, Australia
leased
Suva, Fiji leased
Auckland, New Zealand
Kawerau, New Zealand
Te Rapa, New Zealand
A-3
Packaging
Case Manufacturing
Suva, Fiji
Northern, Auckland, New Zealand
Case South Island, Christchurch,
New Zealand
Hamilton, New Zealand
Central, Levin, New Zealand
Carton Manufacturing
Smithfield, New South Wales,
Australia
Crestmead, Queensland,
Australia leased
Woodville, South Australia,
Australia
Dandenong, Victoria,
Australia leased
Reservoir, Victoria,
Australia leased
Auckland, New Zealand
Corrugated Manufacturing
Melbourne, Australia leased
Sydney, Australia leased
Paper Bag Manufacturing
Penrose, New Zealand
Paper Cups
Brisbane, Queensland, Australia
Packaging and Tissue Head Office
South Yarra, Victoria,
Australia leased
Graphics (Pre-Press)
Mentone, Victoria, Australia
SPECIALTY BUSINESSES AND OTHER
Chemicals
U.S.:
Panama City, Florida
Pensacola, Florida
Port St. Joe, Florida
Savannah, Georgia
Valdosta, Georgia
Picayune, Mississippi
Dover, Ohio
International:
Oulu, Finland
Niort, France
Greaker, Norway
Sandarne, Sweden
Bedlington, United Kingdom
Chester-le-Street, United Kingdom
IP Mineral Resources
Houston, Texas leased
Chocolate Bayou Water Company
Alvin, Texas
Industrial Papers
U.S.:
Lancaster, Ohio
De Pere, Wisconsin
Kaukauna, Wisconsin
Menasha, Wisconsin
International:
Heerlen, Netherlands
Polyrey
Bergerac, France
(Couze Mill)
Ussel, France
A-4
Appendix II
CAPACITY INFORMATION
(in thousands of short tons)
AMERICAS,
OTHER
U.S. Europe THAN U.S. Total
- --------------------------------------------------------------------------------
Printing Papers
Uncoated Freesheet 3,900 1,260 450 5,610
Bristols 800 -- -- 800
Uncoated Papers and Bristols 4,700 1,260 450 6,410
Coated Freesheet 700 70 -- 770
Coated Groundwood 1,200 -- 225 1,425
Total Coated Papers 1,900 70 225 2,195
Uncoated Groundwood (SC Paper) 100 -- -- 100
Total Coated and SC Papers 2,000 70 225 2,295
Dried Pulp* 1,340 270 675 2,285
Newsprint -- 120 -- 120
----- ----- ----- ------
Total Printing Papers 8,040 1,720 1,350 11,110
- --------------------------------------------------------------------------------
Industrial and Consumer Packaging
Containerboard 4,500 170 -- 4,670
Kraft Paper 470 -- -- 470
Bleached Board 1,700 260 -- 1,960
----- ------ ----- ------
Total Industrial and Consumer Packaging 6,670 430 -- 7,100
- --------------------------------------------------------------------------------
Specialty Businesses and Other
Industrial Papers 360 15 -- 375
----- ------ ----- ------
Total Specialty Businesses and Other 360 15 -- 375
Carter Holt Harvey (CHH) (Pacific Rim)
owned 50.5% by International Paper
- --------------------------------------------------------------------------------
Pulp & Paper (in thousands of short tons)
Containerboard 435
Dried Pulp 565
Tissue 175
Bleached Board 95
- --------------------------------------------------------------------------------
Wood Products (Units - MM)
Medium Density Fiberboard (sq. ft. 3/4" basis) 380
Particle Board (sq. ft. 3/4" basis) 400
Plywood (sq. ft. 3/8" basis) 120
Laminated Veneer Lumber (cubic ft.) 90
Lumber (board ft.) 580
- --------------------------------------------------------------------------------
Forestlands (M Acres)
795
* International Paper has a net surplus pulp position of 1.3 million tons. This
is the difference between the 2.3 million tons of dried pulp capacity and 1.0
million tons of dried pulp purchased and consumed.
Forest Products
- --------------------------------------------------------------------------------
U.S. Wood Business (Units - MM)
21 Lumber mills (bd. ft.) 2,400
5 Plywood mills (sq. ft. 3/8" basis) 1,600
1 Laminated Veneer Lumber mill (cubic ft.) 3
2 Pole plants (cubic ft.) 4
- --------------------------------------------------------------------------------
Weldwood of Canada Limited (Units - MM)
7 Lumber mills (bd. ft.) 1,250
2 Plywood mills (sq. ft. 3/8" basis) 450
1 Laminated Veneer Lumber mill (cubic ft.) 3
- --------------------------------------------------------------------------------
Forest Resources (M Acres)
We own, manage or have an interest in more than 18
million acres of forestlands worldwide. These forestlands and associated acres
are located in the following regions
South 6,300
North 2,000
-----
Total U.S. 8,300
CHH 795
Brazil 1,500
Total 10,595
We have harvesting rights in:
Canada 7,900
Russia 190
Total 8,090
A-5
STATEMENT OF DIFFERENCES
The copyright symbol shall be expressed as..............................'c'
The registered trademark symbol shall be expressed as...................'r'
The trademark symbol symbol shall be expressed as.......................'TM'
The British pound sterling sign shall be expressed as...................'L'