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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2004
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _________ to _________
----------
Commission File Number 1-3157
INTERNATIONAL PAPER COMPANY
(Exact name of registrant as specified in its charter)
New York 13-0872805
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
400 Atlantic Street, Stamford, CT 06921
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 541-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2) of the Exchange Act.
Yes [X] No[ ]
The number of shares outstanding of the registrant's common stock as of
April 30, 2004 was 485,483,166.
INTERNATIONAL PAPER COMPANY
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Earnings - Three Months Ended
March 31, 2004 and 2003 1
Consolidated Balance Sheet - March 31, 2004
and December 31, 2003 2
Consolidated Statement of Cash Flows - Three Months Ended
March 31, 2004 and 2003 3
Consolidated Statement of Common Shareholders' Equity -
Three Months Ended March 31, 2004 and 2003 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Financial Information by Industry Segment 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 34
* Omitted since no answer is called for, answer is in the negative or
inapplicable.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Earnings
(Unaudited)
(In millions, except per share amounts)
Three Months Ended
March 31,
------------------
2004 2003
------ ------
Net Sales $6,364 $5,979
------ ------
Costs and Expenses
Cost of products sold 4,759 4,433
Selling and administrative expenses 522 491
Depreciation, amortization and cost of timber harvested 401 393
Distribution expenses 283 266
Taxes other than payroll and income taxes 64 64
Restructuring and other charges 30 23
Net gains on sales and impairments of businesses
held for sale (9) --
------ ------
Total Costs and Expenses 6,050 5,670
Reversal of reserves no longer required, net 7 --
------ ------
Earnings From Continuing Operations Before Interest, Income
Taxes and Minority Interest 321 309
Interest expense, net 196 184
------ ------
Earnings From Continuing Operations Before Income Taxes and
Minority Interest 125 125
Income tax provision 41 37
Minority interest expense, net of taxes 14 37
------ ------
Earnings From Continuing Operations 70 51
Discontinued Operation, net of taxes and minority interest 3 3
Cumulative Effect of Accounting Change - Asset retirement
obligations, net of taxes -- (10)
------ ------
Net Earnings $ 73 $ 44
====== ======
Basic and Diluted Earnings Per Common Share
Earnings from continuing operations $ 0.14 $ 0.10
Discontinued operation 0.01 0.01
Accounting Change - Asset retirement obligations -- (0.02)
------ ------
Net earnings $ 0.15 $ 0.09
====== ======
Average Shares of Common Stock Outstanding 484.4 479.0
====== ======
Cash Dividends Per Common Share $ 0.25 $ 0.25
====== ======
The accompanying notes are an integral part of these financial statements.
1
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
March 31, December 31,
2004 2003
--------- ------------
Assets
Current Assets
Cash and temporary investments $ 2,224 $ 2,363
Accounts and notes receivable, net 2,996 2,851
Inventories 2,813 2,896
Assets of business held for sale 414 424
Other current assets 968 1,096
------- -------
Total Current Assets 9,415 9,630
------- -------
Plants, Properties and Equipment, net 13,834 13,998
Forestlands 4,032 4,069
Investments 733 764
Goodwill 5,340 5,341
Deferred Charges and Other Assets 1,889 1,723
------- -------
Total Assets $35,243 $35,525
======= =======
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 1,757 $ 2,087
Accounts payable 2,284 2,270
Accrued payroll and benefits 438 461
Liabilities of business held for sale 255 248
Other accrued liabilities 1,784 1,910
------- -------
Total Current Liabilities 6,518 6,976
------- -------
Long-Term Debt 13,806 13,450
Deferred Income Taxes 1,425 1,598
Other Liabilities 3,623 3,637
Minority Interest 1,624 1,627
Common Shareholders' Equity
Common stock, $1 par value, 485.7 shares in 2004 and 485.2
shares in 2003 486 485
Paid-in capital 6,464 6,500
Retained earnings 3,034 3,082
Accumulated other comprehensive loss (1,722) (1,690)
------- -------
8,262 8,377
Less: Common stock held in treasury, at cost, 2004 - 0.4
shares 2003 - 3.7 shares 15 140
------- -------
Total Common Shareholders' Equity 8,247 8,237
------- -------
Total Liabilities and Common Shareholders' Equity $35,243 $35,525
======= =======
The accompanying notes are an integral part of these financial statements.
2
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
Three Months Ended
March 31,
------------------
2004 2003
-------- -------
Operating Activities
Net earnings $ 73 $ 44
Income from discontinued operation (3) (3)
Cumulative effect of accounting change -- 10
Depreciation and amortization 401 393
Deferred income tax (benefit) expense (9) 11
Payments related to restructuring and legal reserves (66) (90)
Restructuring and other charges 30 23
Reversal of reserves no longer required, net (7) --
Net gains on sales and impairments of businesses held for sale (9) --
Other, net 33 23
Changes in current assets and liabilities
Accounts and notes receivable (196) (154)
Inventories (33) (94)
Accounts payable and accrued liabilities 19 (4)
Other (9) (32)
------- ------
Cash Provided by Operations 224 127
------- ------
Investment Activities
Invested in capital projects (252) (173)
Proceeds from divestitures -- 44
Other 103 (45)
------- ------
Cash Used for Investment Activities (149) (174)
------- ------
Financing Activities
Issuance of common stock 93 6
Issuance of debt 1,011 1,350
Reduction of debt (1,106) (50)
Change in book overdrafts (61) (88)
Purchases of treasury stock -- (26)
Dividends paid (121) (120)
Sale of preferred securities of a subsidiary -- 150
Other (24) (48)
------- ------
Cash (Used for) Provided by Financing Activities (208) 1,174
------- ------
Effect of Exchange Rate Changes on Cash (6) 17
------- ------
Change in Cash and Temporary Investments (139) 1,144
Cash and Temporary Investments
Beginning of the period 2,363 1,074
------- ------
End of the period $ 2,224 $2,218
======= ======
The accompanying notes are an integral part of these financial statements.
3
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Common Shareholders' Equity
(Unaudited)
(In millions, except share amounts in thousands)
Three Months Ended March 31, 2004
Accumulated Total
Common Stock Issued Other Treasury Stock Common
------------------- Paid-in Retained Comprehensive -------------- Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------- ------ ------- -------- ------------- ------ ------ -------------
Balance, December 31, 2003 485,162 $485 $ 6,500 $ 3,082 $(1,690) 3,668 $ 140 $8,237
Issuance of stock for various plans 560 1 (36) -- -- (3,304) (125) 90
Cash dividends - Common
stock ($0.25 per share) -- -- -- (121) -- -- -- (121)
Comprehensive income (loss):
Net income -- -- -- 73 -- -- -- 73
Change in cumulative foreign
currency translation adjustment
(less tax expense of $9) -- -- -- -- (25) -- -- (25)
Net gains (losses) on cash flow
hedging derivatives:
Net gain arising during the period
(less tax expense of $1) -- -- -- -- 3 -- -- 3
Less: Reclassification adjustment
for gains included in net income
(less tax expense of $5) -- -- -- -- (10) -- -- (10)
------
Total comprehensive income 41
------- ---- ------- ------- ------- ----- ----- ------
Balance, March 31, 2004 485,722 $486 $ 6,464 $ 3,034 $(1,722) 364 $ 15 $8,247
======= ==== ======= ======= ======= ===== ===== ======
Three Months Ended March 31, 2003
Accumulated Total
Common Stock Issued Other Treasury Stock Common
------------------- Paid-in Retained Comprehensive -------------- Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------- ------ ------- -------- ------------- ------ ------ -------------
Balance, December 31, 2002 484,760 $485 $ 6,493 $ 3,260 $(2,645) 5,680 $ 219 $7,374
Issuance of stock for various plans 2 -- (14) -- -- (512) (21) 7
Repurchase of stock -- -- -- -- -- 713 26 (26)
Cash dividends - Common
stock ($0.25 per share) -- -- -- (120) -- -- -- (120)
Comprehensive income (loss):
Net income -- -- -- 44 -- -- -- 44
Change in cumulative foreign
currency translation adjustment
(less tax benefit of $18) -- -- -- -- 200 -- -- 200
Net gains (losses) on cash flow
hedging derivatives:
Net gain arising during the period
(less tax expense of $7) -- -- -- -- 30 -- -- 30
Less: Reclassification adjustment
for losses included in net income
(less tax benefit of $8) -- -- -- -- (27) -- -- (27)
------
Total comprehensive income 247
------- ---- ------- ------- ------- ----- ----- ------
Balance, March 31, 2003 484,762 $485 $ 6,479 $ 3,184 $(2,442) 5,881 $ 224 $7,482
======= ==== ======= ======= ======= ===== ===== ======
The accompanying notes are an integral part of these financial statements.
4
INTERNATIONAL PAPER COMPANY
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, in the opinion of
Management, include all adjustments (consisting only of normal recurring
accruals) that are necessary for the fair presentation of results for the
interim periods. Results for the first three months of the year may not
necessarily be indicative of full year results. It is suggested that these
consolidated financial statements be read in conjunction with the audited
financial statements and the notes thereto included in International Paper's
(the Company) Annual Report on Form 10-K for the year ended December 31, 2003,
which has previously been filed with the Securities and Exchange Commission.
Certain reclassifications have been made to prior-year amounts to conform with
the current year presentation.
NOTE 2 - EARNINGS PER COMMON SHARE
Earnings per common share from continuing operations were computed by dividing
earnings from continuing operations by the weighted average number of common
shares outstanding. Earnings per common share from continuing operations,
assuming dilution, were computed assuming that all potentially dilutive
securities, including "in-the-money" stock options, were converted into common
shares at the beginning of each period. A reconciliation of the amounts included
in the computation of earnings per common share from continuing operations, and
earnings per common share from continuing operations, assuming dilution, is as
follows:
Three Months Ended
March 31,
------------------
2004 2003
------ ------
In millions, except per share amounts
Earnings from continuing operations $ 70 $ 51
Effect of dilutive securities -- --
------ ------
Earnings from continuing operations - assuming dilution $ 70 $ 51
====== ======
Average common shares outstanding 484.4 479.0
Effect of dilutive securities
Stock options 3.0 1.1
------ ------
Average common shares outstanding - assuming dilution 487.4 480.1
====== ======
Earnings per common share from continuing operations $ 0.14 $ 0.10
====== ======
Earnings per common share from continuing operations -
assuming dilution $ 0.14 $ 0.10
====== ======
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
NOTE 3 - RESTRUCTURING, BUSINESS IMPROVEMENT AND OTHER CHARGES
During the first quarter of 2004, restructuring and other charges totaling $30
million before taxes ($19 million after taxes) were recorded. Included in this
charge were $14 million before taxes ($9 million after taxes) for organizational
restructuring programs and $16 million before taxes ($10 million after taxes)
for losses on early extinguishment of debt. The $14 million charge covered the
termination of 202 employees and included: Printing Papers - $1 million,
Industrial and Consumer Packaging - $5 million, Forest Products - $4 million,
Distribution - $2 million, and Corporate - $2 million. In addition, a $7 million
credit before
5
taxes ($4 million after taxes) was recorded for the net reversal of
restructuring and realignment reserves no longer required.
During the first quarter of 2003, restructuring and other charges totaling $23
million before taxes and minority interest ($14 million after taxes and minority
interest) were recorded for costs related to facility closures and
organizational restructuring programs.
During the last three quarters of 2003, restructuring and other charges totaling
$275 million before taxes and minority interest ($170 million after taxes and
minority interest) were recorded. These charges included a $213 million charge
before taxes and minority interest ($130 million after taxes and minority
interest) including $74 million for asset shutdowns of excess internal capacity
and $139 million for severance and other charges, a $63 million pre-tax charge
($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 in the last three quarters of
2003 for the net reversal of reserves no longer required.
The following table presents a roll forward of the cumulative severance and
other costs included in the 2003 restructuring plans:
Severance
In millions and Other
- ----------- ---------
Opening balance - first quarter 2003 $ 21
Additions - second quarter 2003 35
Additions - third quarter 2003 62
Additions - fourth quarter 2003 42
Cash charges - 2003 (72)
Reclassifications - 2003 (4)
Cash charges - first quarter 2004 (30)
Reversal of reserves no longer required (7)
----
Balance, March 31, 2004 $ 47
====
The severance charges recorded in 2003 related to 3,343 employees. As of March
31, 2004, 2,455 employees had been terminated.
International Paper continually evaluates its operations for improvement. In
July 2003, the Company announced a program targeting a reduction in annual
overhead costs by late 2004. To date, $75 million for severance and other costs
has been recorded relating to this program. Additional charges are anticipated
in the second and third quarters of 2004 when additional employees are notified
that their positions will be eliminated and severance charges can be estimated.
NOTE 4 - BUSINESSES HELD FOR SALE AND DIVESTITURES
In the first quarter of 2004, International Paper's 50.5% owned subsidiary,
Carter Holt Harvey, announced that it had entered into an agreement to sell its
tissue business to Svenska Cellulosa Aktiebolaget (SCA), with the sale
completion date expected to be effective in mid-May (see Note 12). The assets of
this business, totaling $414 million, are included in "assets of business held
for sale" in current assets in the accompanying consolidated balance sheet. The
liabilities of this business, totaling $255 million, are included in
"liabilities of business held for sale" in current liabilities in the
accompanying consolidated balance sheet.
Also in the first quarter of 2004, a $9 million gain ($6 million after taxes)
was recorded to adjust estimated gains/losses of businesses previously sold.
6
During the last three quarters of 2003, International Paper recorded a $2
million pre-tax gain ($1 million after taxes) to adjust estimated gains/losses
of businesses previously sold. In addition, 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.
NOTE 5 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Inventories by major category were:
March 31, December 31,
In millions 2004 2003
- ----------- --------- ------------
Raw materials $ 361 $ 455
Finished pulp, paper and packaging products 1,795 1,725
Finished lumber and panel products 247 182
Operating supplies 375 515
Other 35 19
------ ------
Total $2,813 $2,896
====== ======
Temporary investments with an original maturity of three months or less are
treated as cash equivalents and are stated at cost. Temporary investments
totaled $1.8 billion and $2.0 billion at March 31, 2004 and December 31, 2003,
respectively.
Interest payments made during the three-month periods ended March 31, 2004 and
2003 were $181 million and $184 million, respectively. Capitalized net interest
costs were $3 million and $2 million for the three months ended March 31, 2004
and 2003, respectively. Total interest expense was $218 million for the first
three months of 2004 and $210 million for the first three months of 2003.
Distributions paid under all of International Paper's preferred securities of
subsidiaries were $23 million and $37 million during the first three months of
2004 and 2003, respectively. The decrease is due to redeemed preferred
securities in January 2004 and June 2003. The expense related to these preferred
securities is included in minority interest expense in the consolidated
statement of earnings, except for $13 million in 2004 related to the Trust
preferred securities that were deconsolidated in the last half of 2003. Income
tax payments of $32 million and $33 million were made during the first three
months of 2004 and 2003, respectively.
Accumulated depreciation was $18.0 billion at March 31, 2004 and $17.5 billion
at December 31, 2003. The allowance for doubtful accounts was $132 million at
March 31, 2004 and $135 million at December 31, 2003.
In accordance with the provisions of SFAS No. 143, "Accounting for Asset
Retirement Obligations," adopted effective January 1, 2003, International Paper
records a liability and an asset 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 generally relate to
closure costs for landfills and other environmental liabilities resulting from
the normal operations of long-lived assets. Revisions to the liability could
occur due to changes in the estimated costs or timing of environmental closures,
or possible new federal or state regulations affecting these closures. The
following table presents an analysis of activity related to the asset retirement
obligation since January 1, 2003:
7
Three Months Ended Twelve Months Ended
In millions March 31, 2004 December 31, 2003
- ----------- ------------------ -------------------
Asset retirement obligation, beginning of the year $47.7 $19.8
Net transition adjustment -- 21.9
Liabilities settled (1.0) (3.6)
Net adjustments to existing liabilties -- 7.7
Accretion expense 0.5 1.9
----- -----
Asset retirement obligation, end of period $47.2 $47.7
===== =====
This liability is included in Other liabilities in the accompanying consolidated
balance sheet.
NOTE 6 - RECENT ACCOUNTING DEVELOPMENTS
In January 2004, the FASB issued FASB Staff Position FAS 106-1 (FSP FAS 106-1)
to provide temporary guidance concerning the recently enacted Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act). FSP FAS
106-1 permits a sponsor of a postretirement health care plan that provides a
prescription drug benefit to make a one-time election to defer recognizing the
effects of the Act until authoritative guidance on the accounting for the
federal subsidy is issued or a significant event occurs that would call for
remeasurement of a plan's assets and liabilities. International Paper elected to
defer recognition of the effects of the Act pending the issuance of
authoritative guidance and included the required disclosures for those electing
the deferral in Note 16 to the Financial Statements included in International
Paper's Annual Report on Form 10-K for the year ended December 31, 2003.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
International Paper has established reserves relating to certain liabilities
associated with exterior siding and roofing products manufactured by its former
Masonite subsidiary, which were the subject of settlements in three nationwide
class action lawsuits. These lawsuits, which were settled during 1998 and 1999,
are discussed in detail in Note 10 to the Financial Statements included in
International Paper's Annual Report on Form 10-K for the year ended December 31,
2003.
The following table presents an analysis of the net reserve activity related to
these lawsuits for the three months ended March 31, 2004.
RESERVE ANALYSIS
- ------------------------------------------------------------
Hard- Omni-
In millions board wood Woodruf Total
- ------------------------------------------------------------
Balance, December 31, 2003 $261 $117 $ 9 $387
Payments (33) (5) (2) (40)
Insurance collections, net 5 -- -- 5
---- ---- --- ----
Balance, March 31, 2004 $233 $112 $ 7 $352
==== ==== === ====
8
The following table shows an analysis of claims statistics related to these
lawsuits for the three months ended March 31, 2004.
CLAIMS STATISTICS
- -------------------------------------------------------------------------------------------------------
In thousands Hardboard Omniwood Woodruf Total
--------------- --------------- --------------- ---------------
No. of Single Multi- Single Multi- Single Multi- Single Multi-
Claims Pending Family Family Family Family Family Family Family Family Total
- -------------------------------------------------------------------------------------------------------
December 31, 2003 26.4 2.8 1.8 0.5 0.8 0.3 29.0 3.6 32.6
No. of Claims Filed 8.8 1.4 1.1 -- 0.1 -- 10.0 1.4 11.4
No. of Claims Paid (7.2) (0.8) (0.9) (0.1) (0.1) -- (8.2) (0.9) (9.1)
No. of Claims Dismissed (3.1) (0.5) (0.1) -- -- -- (3.2) (0.5) (3.7)
March 31, 2004 24.9 2.9 1.9 0.4 0.8 0.3 27.6 3.6 31.2
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.
In November 1995, International Paper and Masonite commenced a lawsuit in the
Superior Court of the State of California against certain of their insurance
carriers (the "Indemnification Lawsuit"). This lawsuit sought to recover amounts
paid by International Paper and Masonite to property owners and others in
connection with the settlement of a lawsuit referred to as Judy Naef v. Masonite
and International Paper (the "Hardboard Lawsuit"), as well as damages for the
refusal of one insurer, Employer's Insurance of Wausau (Wausau), to provide a
defense of that lawsuit. This lawsuit is also discussed in detail in Note 10 to
the Financial Statements included in International Paper's Annual Report on Form
10-K for the year ended December 31, 2003. In addition to these proceedings, the
Company intends to seek indemnification from other insurance carriers in
arbitration proceedings as required by the policies. As of March 31, 2004,
International Paper had received an aggregate of $104 million from certain of
its insurance carriers.
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 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. As of March 31, 2004, approximately $5 million had been
paid to the third party under this settlement.
International Paper is also involved in various other inquiries, administrative
proceedings and litigation relating to contracts, sales of property,
environmental protection, tax, antitrust, personal injury and other matters,
some of which allege substantial monetary damages. While any proceeding or
litigation has the element of uncertainty, International Paper believes that the
outcome of any of the other lawsuits or claims that are pending or threatened,
or all of them combined, will not have a material adverse effect on its
consolidated financial position or results of operations.
NOTE 8 - DEBT
In March 2004, International Paper issued $600 million of 4.00% notes due April
1, 2010 and $400 million of 5.25% notes due April 1, 2016. The proceeds from
these issuances were used to retire approximately $1.0
9
billion of 8.125% coupon rate debt in April 2004. In January 2004, approximately
$1.0 billion of debt with an 8.05% blended coupon rate was retired using $1.0
billion of proceeds from 4.875% coupon rate debt issued in December 2003.
Also in March 2004, International Paper replaced its maturing $750 million bank
credit agreement with a five-year, $1.25 billion bank credit facility maturing
in March 2009. Concurrently, an existing three-year bank credit agreement
maturing in March 2006 was reduced from $1.5 billion to $750 million. Each of
these credit facilities was unused at March 31, 2004.
At March 31, 2004 and December 31, 2003, International Paper classified $1.8
billion and $1.5 billion, respectively, of current maturities of long-term debt
and bonds with put features as long-term debt. International Paper has the
intent and ability to renew or convert these obligations, as evidenced by the
credit facilities described above.
In March 2003, International Paper completed a private placement with
registration rights of $300 million of 3.80% notes due April 1, 2008 and $700
million of 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.
Maintaining an investment grade credit rating is an important element of
International Paper's corporate finance strategy. At March 31, 2004, 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. On April 27, 2004, Moody's
Investor Services affirmed International Paper's long-term rating of Baa2, but
changed the outlook from "stable" to "negative".
NOTE 9 - 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). A detailed discussion of these plans
is presented in Note 15 to the Financial Statements included in International
Paper's Annual Report on Form 10-K for the year ended December 31, 2003.
Net periodic pension cost for our U.S. qualified and nonqualified defined
benefit plans comprised the following:
Three Months Ended
March 31,
------------------
In millions 2004 2003
- ----------- ----- -----
Service cost $ 29 $ 27
Interest cost 117 114
Expected return on plan assets (148) (151)
Actuarial loss 23 11
Amortization of prior service cost 6 5
----- -----
Net periodic pension expense (a) $ 27 $ 6
===== =====
(a) Excludes $1 million in 2004 for curtailments and special termination
benefits that were recorded in Restructuring and other charges in the
consolidated statement of earnings.
10
The Company does not expect to make any contributions in 2004 to the qualified
defined benefit plan. As of March 31, 2004, no contributions have been made. The
nonqualified plan is funded to the extent of benefit payments, which equaled $36
million through March 31, 2004.
NOTE 10 - 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 completion of a specified
number of years and creditable service. International Paper does not pre-fund
these benefits and has the right to modify or terminate certain of these plans
in the future. A detailed discussion of these benefits is presented in Note 16
to the Financial Statements included in International Paper's Annual Report on
Form 10-K for the year ended December 31, 2003.
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
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 were as follows:
Three Months Ended
March 31,
------------------
In millions 2004 2003
- ----------- ---- ----
Service cost $ 2 $ 2
Interest cost 14 13
Actuarial loss 11 4
Amortization of prior service cost (9) (6)
--- ---
Net periodic pension expense (a) $18 $13
=== ===
(a) Excludes a $1 million credit adjustment in 2004 for curtailments and
special termination benefits that were recorded in Restructuring and other
charges in the consolidated statement of earnings.
NOTE 11 - STOCK OPTIONS
International Paper has a Long-Term Incentive Compensation Plan (LTICP) that
includes a Stock Option Program, a Restricted Performance Share Program and a
Continuity Award Program, administered by a committee of independent members of
the Board of Directors who are not eligible for awards. The Company accounts for
stock options granted under the plan using the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations and the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." A detailed discussion of these plans
is presented in Note 18 to the Financial Statements included in International
Paper's Annual Report on Form 10-K for the year ended December 31, 2003. No
stock option-based employee compensation cost is reflected in net earnings, as
all options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net earnings and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
11
Three Months Ended
March 31,
------------------
In millions, except per share amounts 2004 2003
- ------------------------------------- ----- -----
Net earnings, as reported $ 73 $ 44
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (12) (10)
----- -----
Pro forma net income $ 61 $ 34
===== =====
Earnings per common share
Basic and diluted - as reported $0.15 $0.09
===== =====
Basic and diluted - pro forma $0.13 $0.07
===== =====
The effect for the three months ended March 31, 2004 and 2003, on pro forma net
earnings, earnings per common share and earnings per common share-assuming
dilution of expensing the estimated fair market value of stock options is not
necessarily representative of the effect on reported earnings for future periods
due to the vesting period of stock options and the potential for issuance of
additional stock options in future periods.
NOTE 12 - DISCONTINUED OPERATION
In the first quarter of 2004, International Paper's 50.5% owned subsidiary,
Carter Holt Harvey, announced that it had entered into an agreement to sell its
tissue business to Svenska Cellulosa Aktiebolaget (SCA), with the sale expected
to be completed in May. In accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," International Paper has accounted
for this business as a discontinued operation. Accordingly, International Paper
has restated all prior periods presented to classify the tissue business as a
discontinued operation. When the transaction is completed, International Paper
estimates that it will record a pretax gain of approximately $140-$150 million.
Revenues associated with this discontinued operation were $117 million and $96
million for the three month periods ended March 31, 2004 and 2003, respectively.
The assets/liabilities of the tissue business are included in International
Paper's consolidated balance sheet as assets/liabilities of business held for
sale. Summarized balance sheet information for the tissue business is as
follows:
March 31, December 31,
In millions 2004 2003
- ----------- --------- ------------
Trade accounts receivable $ 38 $ 41
Inventory 85 87
Property, plant and equipment, net 272 277
Other assets 19 19
---- ----
Assets of business held for sale $414 $424
==== ====
12
Trade accounts payable $ 30 $ 34
Accrued payroll and benefits 15 15
Other current liabilities 22 8
Other long-term liabilities 32 18
Minority interest liability 156 173
---- ----
Liabilities of business held for sale $255 $248
==== ====
NOTE 13 - SUBSEQUENT EVENTS
On April 21, 2004, International Paper announced an agreement to acquire Box USA
Holdings, Inc., one of America's leading corrugated packaging companies for
approximately $400 million, including the assumption and repayment of certain
indebtedness. This acquisition is consistent with International Paper's
strategic direction to grow its core businesses of paper, packaging and forest
products. This transaction is subject to normal closing conditions, including
the expiration or termination of the mandatory waiting period under the Hart
Scott Rodino Antitrust Improvements Act of 1976.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Executive Summary
The first quarter of 2004 was, as expected, a difficult business environment for
International Paper. Average prices for paper and packaging products were lower
than in either the fourth or first quarters of 2003. Wood fiber and energy costs
also remained high, although they were more than offset by better mill operating
performance, higher sales volumes and the impact of cost reduction initiatives.
A higher effective tax rate compared with the 2003 fourth quarter also reduced
reported net earnings; however, lower special charges helped to mitigate this
impact.
Looking forward, demand for most paper and packaging products had begun to
increase at the end of the first quarter, and is expected to continue to improve
during the second quarter. Additionally, previously announced price increases in
industrial packaging, uncoated free sheet, coated papers, pulp, and bleached
board grades should result in better price realizations in the second quarter.
These factors, combined with expected lower wood fiber costs and further
benefits from cost control programs, should result in stronger second quarter
operating results.
Results of Operations
For the first quarter of 2004, International Paper (the "Company" or
"International Paper") reported net sales of $6.4 billion, compared with $6.0
billion in the first quarter of 2003 and $6.3 billion in the fourth quarter of
2003.
Net earnings totaled $73 million, or $.15 per share, in the 2004 first quarter.
This compared with net earnings of $44 million, or $.09 per share, in the first
quarter of 2003 and net earnings of $48 million, or $.10 per share, in the
fourth quarter of 2003. Amounts include the effects of special items in all
periods. Also during the 2004 first quarter, Carter Holt Harvey signed an
agreement to sell its tissue business. Accordingly, the operating results of
this business are now classified as a discontinued operation, and all prior
periods presented have been restated to reflect this presentation.
Description of Graph
The following graph compares first-quarter 2003 and 2004 earnings from
continuing operations in bar chart format (in millions). The first bar is 2003
first-quarter earnings from continuing operations of $51. This is followed by
bars representing major changes in the earnings from continuing operations
including: Costs/Operations/Mix of $40, Volume of $30, Raw Materials of ($16),
Price of ($40) and Special Items of $5. The last bar is 2004 first-quarter
earnings from continuing operations of $70.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
Earnings From
Continuing Operations
(in millions)
---------------------
2003 First Quarter $ 51
Costs/Operations/Mix $ 40
Volume $ 30
Raw Materials ($16)
Price ($40)
Special Items $ 5
2004 First Quarter $ 70
14
Earnings from continuing operations were $70 million in the first quarter of
2004 compared with $51 million in the 2003 first quarter, and $48 million in the
2003 fourth quarter. Earnings in the 2004 first quarter benefited from cost
reduction initiatives and improved mill operations ($40 million), higher sales
volume ($30 million) and reduced special charges ($5 million) compared with the
2003 first quarter, although these benefits were partially offset by higher
energy and wood fiber costs ($16 million), and lower average price realizations
($40 million). These same factors also affected earnings from continuing
operations compared with the fourth quarter of 2003 as benefits from cost
reduction initiatives and improved mill operations ($25 million), higher sales
volume ($15 million) and reduced special charges ($50 million) were partially
offset by higher energy and wood fiber costs ($10 million) and lower average
price realizations ($20 million). Additionally, the negative effect of reduced
earnings from land sales ($13 million) and a higher effective tax rate
($35 million) compared with the 2003 fourth quarter was somewhat mitigated by
lower corporate overhead expenses ($10 million).
To measure the performance of the Company's business segments from period to
period without variations caused by special or unusual items, International
Paper's management focuses on business segment operating profit. This is defined
as earnings before taxes and minority interest, excluding interest expense,
corporate charges and special items that include charges for facility shutdowns,
severance costs associated with organizational restructuring, early debt
extinguishment costs, legal reserves and the reversal of reserves no longer
required. Prior year industry segment information has been restated to conform
to minor changes in the 2004 operational structure, as well as to reflect the
classification of the Carter Holt Harvey tissue business as a discontinued
operation.
The following table presents a reconciliation of International Paper's net
earnings to its operating profits:
Three Months Ended
--------------------------
March 31, December 31,
----------- ------------
In millions 2004 2003 2003
- ----------- ---- ---- ------------
Net Earnings $ 73 $ 44 $ 48
Deduct: Discontinued Operations (3) (3) (3)
Add back: Cumulative effect of accounting change -- 10 3
---- ---- ----
Earnings From Continuing Operations 70 51 48
Add back: Income tax (benefit) provision 41 37 (42)
Minority interest expense, net of taxes 14 37 21
---- ---- ----
Earnings From Continuing Operations Before Income
Taxes, and Minority Interest 125 125 27
Interest expense, net 196 184 185
Minority interest included in operations (13) (14) (8)
Corporate items 110 88 144
Special items:
Restructuring and other charges 30 23 101
Reversal of reserves no longer required (7) -- (23)
Net (gains) losses on sales and impairments of
businesses held for sale (9) -- 21
---- ---- ----
$432 $406 $447
==== ==== ====
Industry Segment Operating Profit
Printing Papers $ 83 $121 $ 65
Industrial and Consumer Packaging 79 98 111
Distribution 17 15 18
Forest Products 232 161 236
Carter Holt Harvey 11 12 8
Specialty Businesses and Other 10 (1) 9
---- ---- ----
Total Industry Segment Operating Profit $432 $406 $447
==== ==== ====
15
Discontinued Operation and Cumulative Effect of Accounting Changes
During the first quarter of 2004, Carter Holt Harvey signed an agreement to sell
its tissue business. Accordingly, all periods presented have been restated to
present the operating results of this business as a discontinued operation for
the current and prior periods. Net earnings of the discontinued operation was
approximately $3 million in all three quarters.
Net earnings in the 2003 first quarter included as the cumulative effect of an
accounting change a $10 million after-tax charge for the adoption of the
provisions of Statement of Financial Accounting Standards (SFAS) No. 143,
"Accounting for Asset Retirement Obligations." Fourth quarter 2003 net earnings
included as the cumulative effect of an accounting change an after-tax charge of
$3 million to record the transitional charge for the adoption of Financial
Accounting Standards Board Interpretation No. 46 (FIN 46), "Consolidation of
Variable Interest Entities."
Income Taxes
The effective income tax rate for continuing operations for the 2004 first
quarter was 33% compared with a 30% effective tax rate for continuing operations
in the first quarter of 2003. This included a one-time $5 million expense
related to France that increased the first-quarter effective income tax rate by
three percent. While the Company reported pre-tax income in the fourth quarter
of 2003, a net income tax benefit was recorded reflecting 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. In addition, fourth-quarter 2003 earnings included a $20 million
reduction in the provision for income taxes reflecting a reduction in the
full-year effective tax rate, excluding special items and accounting changes, to
22 percent from the 25 percent estimated in the 2003 third quarter. The
reduction in the rate was due to a higher proportion of taxable income in lower
tax rate jurisdictions.
Corporate Items and Interest Expense
Minority interest expense, net of taxes, decreased to $14 million in the 2004
first quarter, compared with $37 million and $21 million in the first and fourth
quarters of 2003, respectively. The decrease in 2004 compared to first quarter
2003 reflects a reduction in minority interest expense related to preferred
securities that were replaced by debt obligations in the second half of 2003.
The decrease versus the 2003 fourth quarter reflects the inclusion in the fourth
quarter of the minority interest portion of the tax settlement mentioned above.
Net interest expense for the 2004 first quarter of $196 million was higher than
$184 million in the first quarter of 2003 and $185 million in the 2003 fourth
quarter. The increase in 2004 over first quarter 2003 was due in part to the
debt securities discussed above. Net interest expense in the 2003 fourth quarter
included approximately $13 million of interest income from tax refunds and
accrual adjustments.
Corporate expenses, net, of $110 million in the 2004 first quarter were lower
than 2003 fourth-quarter net expenses of $144 million, but were higher than net
expenses of $88 million in the first quarter of 2003. The decrease compared with
the fourth quarter was principally due to lower overhead and inventory-related
costs. Higher pension and other benefit-related costs were the major factors in
the increase from the 2003 first quarter.
Special Items
Restructuring and Other Charges
International Paper continually evaluates its operations for improvement
opportunities targeted to (a) focus our portfolio on our core businesses of
paper, packaging and forest products, (b) rationalize and realign
16
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.
It is possible that additional charges and costs will be incurred in future
periods in our core businesses should such triggering events occur.
The 2004 first quarter included a pre-tax charge of $30 million before taxes
($19 million after taxes) for restructuring and other costs, including $14
million ($9 million after taxes) for organizational restructuring programs and
$16 million ($10 million after taxes) for losses on early extinguishment of
debt. The 2003 first quarter included a net charge of $23 million before taxes
and minority interest ($14 million after taxes and minority interest) for costs
related to facility closures and organizational restructuring programs. In the
2003 fourth quarter, a pre-tax charge of $101 million ($61 million after taxes
and minority interest) was recorded for restructuring and other costs, including
$91 million ($55 million after taxes and minority interest) for facility
closures and organizational restructuring programs, $29 million ($18 million
after taxes) for additional legal reserves, and a credit of $19 million ($12
million after taxes) for gains on early extinguishment of debt.
Net (Gains) Losses on Sales and Impairments of Businesses Held for Sale
Included in the 2004 first quarter was a pre-tax credit of $9 million ($6
million after taxes) to adjust previous estimated gains/losses of businesses
sold. The 2003 fourth quarter included a pre-tax charge of $34 million ($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 in the 2003 fourth quarter to adjust estimated gains/losses of
businesses previously sold.
Industry Segment Operating Profit
Description of Graph
The following graph compares first-quarter 2003 and 2004 segment operating
profit in bar chart format (in millions). The first bar is first-quarter 2003
operating profit of $406. This is followed by bars representing major changes in
segment operating profit including: Costs/Operations/Mix of $60, Volume of $45,
Energy/Raw Materials of ($24) and Price of ($55). The last bar is first-quarter
2004 operating profit of $432.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
Industry Segment
Operating Profit
(in millions)
----------------
2003 First Quarter $ 406
Costs/Operations/Mix $ 60
Volume $ 45
Energy/Raw Materials ($24)
Price ($55)
2004 First Quarter $ 432
Industry segment operating profit of $432 million in the 2004 first quarter was
up from $406 million in the 2003 first quarter but down from $447 million in the
2003 fourth quarter. Compared with the first quarter of 2003, earnings in the
current quarter benefited from strong mill operating performance and lower
overhead costs from our cost reduction efforts ($60 million), and higher sales
volumes across all business segments ($45 million). These improvements offset
the effects of higher energy and raw material costs ($24 million)
17
and lower average paper and packaging prices ($55 million). Improved mill
operating performance and the impact of overhead cost reduction efforts ($35
million), and higher sales volumes ($20 million), particularly in uncoated free
sheet, bleached board, and containerboard, were also positive earnings factors
compared with the 2003 fourth quarter. However, average prices were lower across
all business segments ($30 million), while continued high energy and wood fiber
costs ($15 million), lower profits from forestland sales ($20 million), and
other items ($5 million) also negatively affected operating results.
During the quarter, International Paper took approximately 185,000 tons of
downtime, including very little for lack-of-order downtime, compared with
approximately 315,000 tons of downtime in the fourth quarter of 2003, which
included 185,000 tons for lack-of-orders. Lack-of-order downtime is taken to
balance internal supply with our customer demand to help manage inventory
levels, while maintenance downtime, which makes up the majority of the
difference between total downtime and lack-of-order downtime, is taken
periodically during the year. The costs for annual planned maintenance downtime
are charged to expense evenly in each quarter. Downtime costs due to
lack-of-orders are expensed in the periods in which the downtime is taken.
BUSINESS SEGMENT OPERATING RESULTS
The following presents segment discussions for the first quarter of 2004.
Printing Papers
2004 2003
----------- -------------------------
In millions 1st Quarter 1st Quarter 4th Quarter
- ----------- ----------- ----------- -----------
Sales $1,970 $1,875 $1,875
Operating Profit 83 121 65
Printing Papers net sales for the first quarter of 2004 were 5% higher than in
both the first and fourth quarters of 2003. Operating profits in the first
quarter of 2004 were 31% lower than in the first quarter of 2003 and were 28%
higher than in the fourth quarter of 2003. The decrease versus the 2003 first
quarter was principally the result of lower average uncoated paper and pulp
prices, continued high fiber costs, together with higher energy costs and the
impact of an unfavorable sales mix. These factors were somewhat offset by higher
sales volumes and improved manufacturing operations. Compared with the fourth
quarter of 2003, Printing Papers' first-quarter earnings improved as the impact
of higher sales volumes, cost improvement initiatives and improved mill
operations more than offset lower average sales prices. During the first quarter
of 2004, the segment took 120,000 tons of downtime, almost all of which was
maintenance-related. In the previous quarter, downtime totaled 200,000 tons,
including 105,000 tons due to lack-of-orders.
Operating profits for Printing Papers continued to be negatively impacted in the
2004 first quarter by high wood costs in the United States due to the impact on
harvest activity of wet weather conditions toward the end of the 2003 fourth
quarter and beginning of the 2004 first quarter, particularly in the Southeast.
The uncoated free sheet business's operating results improved during the 2004
first quarter as the impact of higher sales volumes and lower overhead costs
more than offset lower average prices. Operating results in our market pulp
business improved during the quarter as a result of higher average prices and
sales volumes offset somewhat by continued higher energy costs. Earnings in our
coated paper business declined during the first quarter as lower average sales
prices combined with higher energy and fiber costs exceeded the benefits from
improved mill operations. Sales volume for the quarter was about the same as in
the previous quarter. European papers' first-quarter earnings were higher than
the previous quarter as slightly higher sales volumes, improved mill operations
and the positive impact of foreign exchange rates more than offset lower average
sales prices. In Brazil, first-quarter earnings improved as the impact of higher
sales volume and lower operating costs more than offset lower average sales
prices.
18
Entering the second quarter, announced price increases will have a significant
effect on Printing Papers operating results. A first-quarter increase in offset,
commodity cutsize and envelope uncoated freesheet prices was supplemented by an
additional increase in offset and branded cutsize prices to be effective in the
second quarter. Additionally, three separate consecutive monthly price increases
were announced in pulp, and an increase was announced for all coated paper
grades for late in the second quarter. Demand is improving and sales volumes are
expected to be higher in the U.S. although seasonally lower in Europe. This
segment will continue to emphasize manufacturing and overhead cost reduction
initiatives, improved customer focus and further improvements in mill operations
while balancing production and inventory levels.
Packaging
2004 2003
----------- -------------------------
In millions 1st Quarter 1st Quarter 4th Quarter
- ----------- ----------- ----------- -----------
Sales $1,700 $1,620 $1,715
Operating Profit 79 98 111
Industrial and Consumer Packaging net sales for the first quarter of 2004 were
5% higher than the first quarter of 2003 and were 1% lower than fourth quarter
of 2003. Operating profits in the first quarter of 2004 were 19% lower than in
the first quarter of 2003 and were 29% lower than in the fourth quarter of 2003.
High energy and raw material costs continued to negatively affect earnings
during the 2004 first quarter. Earnings in the 2004 first quarter were down
compared with the previous quarter due to lower average linerboard and box
prices, partially offset by higher domestic box volumes and the effect of cost
reduction efforts across the segment. The segment took 64,000 tons of downtime
in the first quarter, almost all of which was maintenance related. Lack-of-order
downtime was 80,000 tons of the total 90,000 tons of downtime in the previous
quarter.
Industrial Packaging's sales increased from the 2003 fourth quarter due
principally to higher sales volume for both containerboard and boxes offset
slightly by lower average sales prices. Operating earnings declined from the
previous quarter as the impact of improved manufacturing operations, lower
overhead costs and higher sales volume could not offset the effects of lower
price realizations and high energy costs.
Consumer Packaging's earnings declined from the previous quarter principally due
to a less favorable product mix and higher raw material and energy costs. Higher
bleached board sales volume in the first quarter helped mitigate the negative
impact of lower average prices. Operating results for converting businesses
declined slightly due largely to the effects of seasonally lower demand.
Looking forward to the second quarter, price increases in containerboard,
certain bleached board grades and boxes announced in the first quarter, together
with improved manufacturing operations, will have a positive impact on operating
results. The segment will continue to focus on further cost reductions, customer
initiatives, efficiency improvements and overhead expense control in order to
improve operating results.
Distribution
2004 2003
----------- -------------------------
In millions 1st Quarter 1st Quarter 4th Quarter
- ----------- ----------- ----------- -----------
Sales $1,465 $1,430 $1,470
Operating Profit 17 15 18
Distribution's 2004 first-quarter sales were up 2% from the first quarter of
2003 and were about flat compared with the previous quarter. Operating profits
in the first quarter of 2004 were up 13% from the first quarter of 2003 and 6%
down from the previous quarter. Compared with the 2003 first quarter, earnings
improved in the first quarter of 2004 due to higher sales volume and lower
overhead costs partially offset by
19
lower margins and higher bad debt expense. Compared with the 2003 fourth
quarter, seasonally lower demand, lower margins and higher bad debt expense all
contributed to lower earnings. Demand was slow at the beginning of the first
quarter of 2004, but showed signs of improvement late in the quarter. Increased
activity in commercial printing late in the quarter is a favorable sign for
improved operating results as 2004 progresses. Volumes improved in packaging,
facility supplies, and printing papers in comparison to the same period in 2003.
Looking forward to the next quarter, expected strengthening business activity in
most markets is expected to result in better margins and higher sales volume.
Distribution will continue to emphasize cost control initiatives to further
improve earnings.
Forest Products
2004 2003
----------- -------------------------
In millions 1st Quarter 1st Quarter 4th Quarter
- ----------- ----------- ----------- -----------
Sales $790 $675 $810
Operating Profit 232 161 236
Forest Products net sales for the first quarter of 2004 were 17% higher than in
the first quarter of 2003 and were 2% lower than in the fourth quarter of 2003.
Operating profits in the first quarter of 2004 were 44% higher than in the first
quarter of 2003 but were 2% lower than in the fourth quarter of 2003.
Compared with the first quarter of 2003, the increase in earnings in the first
quarter of 2004 was a result of higher average plywood and lumber prices
partially offset by lower earnings from reduced harvest volumes and lower
forestland sales. Earnings in the 2004 first-quarter compared with the 2003
fourth-quarter, benefited from improved earnings from our wood products
operations and reduced costs which were more than offset by lower land sales. In
the Wood Products business both lumber and plywood prices during the quarter
were about the same as in the 2003 fourth quarter. Sales volume for plywood
improved during the quarter although lumber sales volume was down. Canadian
operating results in the 2004 first quarter benefited from higher average sales
prices and volumes and strong operations compared with the previous quarter.
Harvest volumes from Company forestlands for the quarter declined from both the
prior quarter and the 2003 first quarter reflecting lower inventory of mature
sawtimber. Average stumpage prices were only slightly higher than in both the
first and fourth quarters of 2003. Together, these factors resulted in lower
gross margins from stumpage sales and recreational income. Gross margins from
forestland sales were about $20 million and $25 million lower than in the 2003
fourth and first quarters, respectively. Operating profits for the Real Estate
division in the first quarter of 2004 were about even with the 2003 fourth
quarter and about $20 million higher than the first quarter of 2003.
As the second quarter begins, average lumber and plywood prices in North America
are expected to increase with a strengthening economy and seasonal improvements
in weather conditions. Forest Resources' harvest volumes are expected to be
somewhat lower in the 2004 second quarter.
International Paper monetizes its forest assets in various ways, including sales
of short- and long-term harvest rights, on a pay-as-cut or lump-sum bulk sale
basis, as well as sale of timberlands. Accordingly, earnings from quarter to
quarter may vary depending on the number of sales, timber prices and underlying
timber volume of such sales.
20
Carter Holt Harvey
2004 2003
----------- -------------------------
In millions 1st Quarter 1st Quarter 4th Quarter
- ----------- ----------- ----------- -----------
Sales $515 $405 $515
Operating Profit 11 12 8
During the first quarter of 2004, Carter Holt Harvey announced the expected sale
of its tissue business to be completed in May 2004. Accordingly, all periods
presented have been restated to separately present the operating results of the
tissue business as a discontinued operation excluded from segment operating
results. When the transaction is completed, International Paper estimates that
it will record a pretax gain of approximately $140-$150 million.
Carter Holt Harvey's 2004 first-quarter sales were 27% higher than in the first
quarter of 2003 and were flat with the fourth quarter of 2003. Operating profits
in the first quarter of 2004 were about flat compared with the first quarter of
2003 and were up slightly from the fourth quarter of 2003. First quarter 2004
reported U.S. dollar sales and earnings continued to be impacted by the
translation effect of a stronger New Zealand dollar. In New Zealand dollars,
2004 first quarter sales were 5% higher than in the first quarter of 2003 but
were 6% lower than the fourth quarter of 2003. Operating profits, in New Zealand
dollars, in the first quarter of 2004 were about 17% below the first quarter of
2003 and about double the amount reported in the fourth quarter of 2003.
Earnings in the Forest business declined in the 2004 first quarter due
principally to lower sales volume and higher distribution costs compared with
both the first and fourth quarters of 2003 although higher sales prices helped
to mitigate the impact. Wood Products' earnings were down this quarter versus
both the 2003 first and fourth quarters, reflecting higher raw material costs
and seasonally lower sales volume. Higher average prices combined with improved
mill operations were the main factors in improved Pulp and Paper earnings in the
2004 first quarter compared with the 2003 fourth quarter. Packaging's earnings
were seasonally down compared with the 2003 fourth quarter but improved on the
same quarter last year principally due to cost reduction efforts and operational
improvements.
Overall, the outlook remains positive as demand in the log market is improving
and pulp price increases have been announced. The New Zealand housing market
remains strong, although in Australia there are signs it may be moderating.
International Paper's results for this segment differ from those reported by
Carter Holt Harvey in New Zealand in three major respects: (1) Carter Holt
Harvey's earnings include only our share of Carter Holt Harvey's operating
earnings. Segment sales, however, represent 100% of Carter Holt Harvey's sales;
(2) Carter Holt Harvey reports in New Zealand dollars but our segment results
are reported in U.S. dollars; and (3) Carter Holt Harvey reports under New
Zealand accounting standards, but our segment results comply with generally
accepted accounting principles in the United States. The major differences in
standards relate to cost of timber harvested (COTH), goodwill amortization,
depreciation and financial instruments.
Specialty Businesses and Other
2004 2003
----------- -------------------------
In millions 1st Quarter 1st Quarter 4th Quarter
- ----------- ----------- ----------- -----------
Sales $295 $345 $275
Operating Profit 10 (1) 9
21
The Specialty Businesses and Other segment includes the operating results of
Arizona Chemical, European Distribution and, prior to its closure, our Chemical
Cellulose Pulp mill. Also included are divested businesses whose results are
included in this segment for periods prior to their sale. First-quarter 2004 net
sales were 14% lower than in the first quarter of 2003 but 7% higher than in the
fourth quarter of 2003. The segment was profitable in the 2004 first-quarter
compared with a loss in the first quarter of 2003, with earnings about even with
the fourth quarter of 2003. The changes in sales and earnings are principally
due to the impact of the closure of the Natchez, Mississippi Chemical Cellulose
dissolving pulp mill that ceased operations on July 15, 2003. First quarter 2004
earnings were also negatively impacted by continuing high energy costs as well
as by the impact of a boiler outage in the Chemical business.
As the overall economy continues to improve, this segment expects to benefit
from improved sales volumes in the 2004 second quarter.
Other
In July 2003, the Company announced a program targeting additional reductions in
overhead costs by late 2004. This program will include the elimination of
approximately 3,000 salaried positions in the United States by late 2004,
including some achieved through normal attrition. To date, the Company has
recorded $75 million for severance costs in connection with this program.
Additional severance charges will be recorded in future quarters when additional
employees are notified that their positions will be eliminated and severance
charge costs can be estimated.
The Company is currently implementing a supply chain initiative that includes
targeting a further reduction in maintenance and repair parts inventories of
approximately $160 million over the three-year remaining program life from
enhanced management techniques that will reduce purchases and improve usage.
Some of these reductions may be from dispositions of inventory that, based on
the new approach, will be considered excess.
International Paper continually evaluates its operations for improvement. When
any such improvement plans are finalized, we may incur costs or charges in
future periods related to the implementation of such plans. As this review
process is ongoing, it is possible that significant additional charges will be
incurred in future periods in our businesses should such triggering events
occur.
Liquidity and Capital Resources
Cash provided by operations totaled $224 million for the first three months of
2004, compared to $127 million for the comparable 2003 period. Higher net
earnings and decreased working capital requirements, primarily due to a lower
investment in inventory, led to the operating cash flow increase.
Investments in capital projects totaled $252 million and $173 million for the
first three months of 2004 and 2003, respectively. Full year capital spending
for 2004 is now expected to be approximately $1.3 billion, which is below
projected depreciation and amortization charges.
Financing activities for the first three months of 2004 included a $95 million
net decrease in debt and preferred securities versus a $1.5 billion net increase
in the comparable 2003 three-month period. First quarter 2004 activity included
the March issuance of $400 million of 5.25% notes due April 1, 2016 and $600
million of 4.00% notes due April 1, 2010. The proceeds from these issuances were
used to retire $1.0 billion of 8.125% coupon rate debt in April 2004. In January
2004, approximately $1.0 billion of debt with an 8.05% blended coupon rate was
retired using $1.0 billion of proceeds from 4.875% coupon rate debt issued in
December 2003.
At March 31, 2004 and December 31, 2003, International Paper classified $1.8
billion and $1.5 billion, respectively, of current maturities of long-term debt
and bonds with put features as long-term debt.
22
International Paper has the intent and ability to renew or convert these
obligations, as evidenced by the credit facilities described below.
Also during the first three months of 2004, approximately 3.3 million treasury
shares were issued for various incentive plans, including stock option exercises
that generated $93 million of cash. In the first three months of 2003,
approximately 713,000 shares had been added to treasury stock at a cost of $26
million with approximately 512,000 treasury shares issued for various incentive
plans, including stock option exercises that generated $6 million of cash.
Common stock dividend payments totaled $121 million and $120 million for the
first three months of 2004 and 2003, respectively. Dividends were $.25 per share
for both periods.
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.
Maintaining an investment grade credit rating is an important element of
International Paper's corporate finance strategy. At March 31, 2004, 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. On April 27, 2004, Moody's
Investor Services affirmed International Paper's long-term rating of Baa2, but
changed the outlook from "stable" to "negative".
International Paper can meet projected capital expenditures, service existing
debt and meet working capital and dividend requirements during 2004 through cash
from operations and its various existing credit facilities.
At March 31, 2004, International Paper's contractually committed bank credit
agreements provided for facilities amounting to $2 billion. In March 2004,
International Paper signed a new $1.25 billion, five-year credit agreement,
replacing a $750 million five-year credit agreement that matured in March 2004.
At the same time, International Paper reduced the facility under another credit
agreement maturing in March 2006 from $1.5 billion to $750 million. Both
agreements generally provide for interest rates at a floating index plus a
predetermined margin dependent upon International Paper's credit rating. As of
March 31, 2004, there were no loans outstanding under either facility.
In addition, through its receivables securitization program established in
December 2001, International Paper has up to $650 million of committed funding
available. The liquidity component of the program extends through December 2004.
The receivables purchase agreement within the program extends through December
2006. Borrowing rates under the program are commercial-paper based. As of March
31, 2004, there were no loans outstanding under this program.
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.
23
Income Taxes
The effective income tax rate for continuing operations was 33% and 30% for the
2004 and 2003 three-month periods, respectively, including the tax effects of
certain special and unusual items that can affect the effective income tax rate
in a given quarter, but that may not recur in subsequent quarters. The 2004
first quarter rate also included approximately 3% for the effects of a one-time
adjustment in France. Management believes that the effective tax rate computed
after excluding these special or unusual items provides a better estimate of the
rate that could be expected in future quarters of the current calendar year if
no additional special or unusual items were to occur in those quarters. The
effective tax rates for the three-month periods ended March 31, 2004 and 2003
excluding these items were 30% and 31%, respectively.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires International Paper to
establish accounting policies and to make estimates that affect both the amounts
and timing of the recording of assets, liabilities, revenues and expenses. Some
of these estimates require judgments about matters that are inherently
uncertain.
Accounting policies whose application may have a significant effect on the
reported results of operations and financial position of International Paper,
and that can require judgments by management that affect their application,
include SFAS No. 5, "Accounting for Contingencies," SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," SFAS No. 142, "Goodwill
and Other Intangible Assets," SFAS No. 87, "Employers' Accounting for Pensions,"
as amended by SFAS No. 132, "Employers' Disclosures About Pension and Other
Postretirement Benefits," and SFAS No. 109, "Accounting for Income Taxes."
The Company has included in its Annual Report on Form 10-K for the year ended
December 31, 2003, a discussion of these critical accounting policies, which are
important to the portrayal of the Company's financial condition and results of
operations and require management's judgments. The Company has not made any
changes in any of these critical accounting policies during the first quarter of
2004.
Significant Accounting Estimates
Pension Accounting. Net pension expense totaled approximately $27 million for
International Paper's U.S. plans for the three months ended March 31, 2004, or
about $21 million higher than the pension expense recorded for the first three
months of 2003. Net pension expense for non-U.S. plans was about $11 million and
$9 million for the three-month periods in 2004 and 2003, respectively. The
increase in U.S. plan pension expense was principally due to an increase in the
amortization of unrecognized actuarial losses.
After consultation with our actuaries, International Paper determines key
actuarial assumptions on December 31 of each year that are used to calculate
liability information as of that date and pension expense for the following
year. The discount rate assumption is determined based on the internal rate of
return for a portfolio of high quality bonds (Moody's Aa Corporate bonds) with
maturities that are consistent with projected future plan cash flows. The
expected long-term rate of return on plan assets is based on historical and
projected average rates of return for current and planned asset classes in the
plan investment portfolio. At March 31, 2004, the market value of plan assets
for International Paper's U.S. plans totaled approximately $6.5 billion,
consisting of approximately 62% equity securities, 27% fixed income securities,
and 11% real estate and other assets.
While International Paper may elect to make voluntary contributions to its plans
in the coming years, it is unlikely that there will be any required minimum
contributions to the plans before 2006 unless interest rates decline below
current levels or investment performance is significantly below projections.
24
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.
Under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
expense for stock options is measured at the grant date based on a computed fair
value of options granted, and then charged to expense over the related vesting
period. Had this method of accounting been applied, additional after-tax
expenses of $12 million and $10 million would have been recorded in the first
thee months of 2004 and 2003, respectively, decreasing the reported earnings per
share to $.13 and $.07 in the first three months of 2004 and 2003, respectively.
During each reporting period, earnings per share assuming dilution 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.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, and in particular,
statements found in Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations that are not historical in nature may
constitute forward-looking statements. These statements are often identified by
the words, "will," "may," "should," "continue," "anticipate," "believe,"
"expect," "plan," "appear," "project," "estimate," "intend," and words of
similar import. Such statements reflect the current views of International Paper
with respect to future events and are subject to risks and uncertainties. Actual
results may differ materially from those expressed or implied in these
statements. Factors which could cause actual results to differ include, among
other things, the timing and strength of an economic recovery, changes in
interest rates and plan asset values which could have an impact on reported
earnings and shareholders' equity, the strength of demand for the Company's
products, changes in overall demand, whether announced price increases and
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.
25
INTERNATIONAL PAPER COMPANY
Financial Information by Industry Segment
(Unaudited)
(In millions)
Sales by Industry Segment
Three Months Ended
March 31,
------------------
2004 2003 (1)
------ --------
Printing Papers $1,970 $1,875
Industrial and Consumer Packaging 1,700 1,620
Distribution 1,465 1,430
Forest Products 790 675
Carter Holt Harvey 515 405
Other Businesses (2) 295 345
Corporate and Inter-segment Sales (371) (371)
------ ------
Net Sales $6,364 $5,979
====== ======
Operating Profit by Industry Segment
Three Months Ended
March 31,
------------------
2004 2003 (1)
----- --------
Printing Papers $ 83 $ 121
Industrial and Consumer Packaging 79 98
Distribution 17 15
Forest Products 232 161
Carter Holt Harvey 11 12
Other Businesses (2) 10 (1)
----- -----
Operating Profit 432 406
Interest expense, net (196) (184)
Minority interest (3) 13 14
Corporate items, net (110) (88)
Restructuring and other charges (30) (23)
Net (losses) gains on sales and impairments
of businesses held for sale 9 --
Reversal of reserves no longer required, net 7 --
----- -----
Earnings from continuing operations before
income taxes and minority interest $ 125 $ 125
===== =====
(1) Prior-year industry segment information has been restated to conform to
minor changes in the 2004 operational structure, as well as to reflect the
Carter Holt Harvey tissue business as a discontinued operation.
(2) Includes Arizona Chemical, Chemical Cellulose Pulp (closed in 2003) and
businesses identified in our divestiture program.
(3) Operating profits for industry segments include each segment's percentage
share of the profits of subsidiaries included in that segment that are less
than wholly owned. The pre-tax minority interest for these subsidiaries is
added here to present consolidated earnings before income taxes, minority
interest, and cumulative effect of accounting changes.
26
INTERNATIONAL PAPER COMPANY
Sales Volumes By Product (1) (2)
(Unaudited)
International Paper Consolidated (excluding Carter Holt Harvey)
Three Months Ended
March 31,
------------------
2004 2003
----- -----
Printing Papers (In thousands of short tons)
Uncoated Papers and Bristols 1,658 1,571
Coated Papers 526 506
Market Pulp 556 510
Packaging (In thousands of short tons)
Containerboard 541 485
Bleached Packaging Board 379 317
Kraft 148 150
Industrial and Consumer Packaging 1,125 1,077
Forest Products (In millions)
Panels (sq. ft. 3/8" - basis) 509 460
Lumber (board feet) 878 842
Carter Holt Harvey (3)
Three Months Ended
March 31,
------------------
2004 2003
---- ----
Printing Papers (In thousands of short tons)
Tissue 32 33
Market Pulp 147 121
Packaging (In thousands of short tons)
Containerboard 119 101
Bleached Packaging Board 20 23
Industrial and Consumer Packaging 39 40
Forest Products (In millions)
Panels (sq. ft. 3/8" - basis) 43 46
Lumber (board feet) 118 122
MDF and Particleboard (sq. ft. 3/4" - basis) 139 147
(1) Sales volumes include third party and inter-segment sales.
(2) Sales volumes for divested businesses are included through the date of
sale.
(3) Includes 100% of volumes sold.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosures about market
risk are shown on pages 30 and 31 of International Paper's Form 10-K Annual
Report for the year ended December 31, 2003, which information is incorporated
herein by reference.
28
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended
(Exchange Act), Company management, including the Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) as
of March 31, 2004. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report. As
required by Exchange Act Rule 13a-15(d), Company management, including the Chief
Executive Officer and Chief Financial Officer, also conducted an evaluation of
the Company's internal control over financial reporting to determine whether any
changes occurred during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting. Based on that evaluation, there has been no
such change during the quarter covered by this report.
29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following matters discussed in previous filings under the Exchange Act, are
updated as follows:
Exterior Siding and Roofing Litigation
A discussion of developments relating to the financial impact of certain class
action lawsuits that were settled in 1998 and 1999 is found in Note 7 in this
Form 10-Q.
Other Litigation
On September 16, 2002, International Paper was served in Federal District Court
in Columbia, South Carolina with a class action lawsuit by a group of private
landowners alleging that International Paper and certain of its fiber suppliers,
known as "Quality Suppliers," engaged in an unlawful conspiracy to artificially
depress the prices at which International Paper procures fibers for its mills.
The suit seeks injunctive relief as well as treble damages and other costs
associated with the litigation. On March 31, 2004, the case was certified as a
class action. International Paper has filed for permission from the U.S. Court
of Appeals for the Fourth Circuit to appeal the District Court's order granting
class certification.
On May 14, 1999, and May 18, 1999, two lawsuits were filed in federal court in
the Eastern District of Pennsylvania against International Paper, the former
Union Camp Corporation (acquired by International Paper in 1999), and other
manufacturers of linerboard. These suits allege that the defendants conspired to
fix prices for 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. International Paper's share of the
settlement, which is subject to court approval, is $24.4 million. The
International Paper portion of the settlement also covers the claims brought
against Union Camp Corporation. A final fairness hearing on the proposed
settlement is scheduled for November 25, 2004.
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. It is expected that all
of the federal opt-out cases will be consolidated for pre-trial purposes in the
federal court in the Eastern District of Pennsylvania, where the class action
litigation is also pending. Discovery in the 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 have removed the matter to federal court, but
the Kansas state plaintiffs have filed a motion to remand, which is currently
pending.
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. 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. On April 23,
2004, International Paper agreed with the federal class plaintiffs to seek court
approval of a $31 million
30
settlement. On April 29, 2004, the federal court preliminarily approved the
settlement and set a hearing date of July 14, 2004 for final approval of the
settlement. On April 23, 2004, International Paper agreed with the California
state court indirect purchaser putative class plaintiffs to seek court approval
of a $3.5 million settlement with an indirect purchase settlement class. In the
third quarter of 2002, International Paper completed the sale of the Decorative
Products operations, but retained any liability for these cases.
Environmental
In March 2003, the 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 and on
April 30, 2004, the EPA reduced the civil penalty amount to $86,649.
- --------------------------------------------------------------------------------
International Paper is also involved in various other inquiries, administrative
proceedings and litigation relating to contracts, sales of property,
environmental protection, tax, antitrust, personal injury and other matters,
some of which allege substantial monetary damages. While any proceeding or
litigation has the element of uncertainty, International Paper believes that the
outcome of any of the other lawsuits or claims that are pending or threatened,
or all of them combined, will not have a material adverse effect on its
consolidated financial position or results of operations.
31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Restricted Stock Plan for Non-Employee Directors (incorporated
by reference to Exhibit 99 to the company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999, File No.
1-3157)
11 Statement of Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends
31.1 Certification of principal executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of principal financial officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Stock Purchase Agreement dated as of April 20, 2004 by and
among International Paper Company, Box USA Holdings, Inc., the
Controlling Sellers named therein and Roger W. Stone, in his
capacity as Controlling Sellers' Representative
(b) Reports on Form 8-K
International Paper filed a Current Report on Form 8-K on March 19,
2004 under Item 7, for purposes of filing certain documents with
reference to the Registration Statement on Form S-3, as amended, of
International Paper Company filed with the Securities and Exchange
Commission on March 12, 2003 and amended on March 26, 2003.
International Paper filed a Current Report on Form 8-K on March 26,
2004 under Item 9, announcing that its 50.4% owned subsidiary, Carter
Holt Harvey, had entered into an agreement to sell its Tissue business
and its 50% owned interest in Sancella to Svenska Cellulosa
Aktiebolaget for NZ$ 1.015 billion.
International Paper filed a Current Report on Form 8-K on April 2,
2004 under Items 5 and 7, announcing that the Company had entered into
a 5-Year Credit Agreement, dated as of March 30, 2004, with an
aggregate principal amount of $1.25 billion. In connection with
entering into the 5-Year Credit Agreement, the aggregate commitments
under the pre-existing 3-Year Credit Agreement, dated as of March 6,
2003, were reduced from $1.5 billion to $750 million.
International Paper filed a Current Report on Form 8-K on April 22,
2004 under Items 5 and 7, announcing that the Company had agreed to
acquire Box USA Holdings, Inc., a corrugated packaging company.
32
International Paper filed a Current Report on Form 8-K on April 23,
2004 under Item 12 - Results of Operations and Financial Condition
furnishing a copy of the press release reporting the results of its
operations for the quarter ended March 31, 2004.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL PAPER COMPANY
(Registrant)
Date: May 6, 2004 By /s/ CHRISTOPHER P. LIDDELL
----------------------------------------
Christopher P. Liddell
Senior Vice President and Chief
Financial Officer
Date: May 6, 2004 By /s/ ROBERT J. GRILLET
----------------------------------------
Robert J. Grillet
Vice President - Finance and Controller
34
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as................................. 'SS'