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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,June 30, 2001

             [ ] 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]X No [ ]---- ---- The number of shares outstanding of the registrant's common stock as of April 30,July 31, 2001 was 483,016,500. ===============================================================================483,150,673. ================================================================================ INTERNATIONAL PAPER COMPANY INDEX
PART I. FINANCIAL INFORMATION PAGE NO.Financial Information Page No. -------- Item 1. Financial Statements Consolidated Statement of Earnings - Three Months and Six Months Ended March 31,June 30, 2001 and 2000 1 Consolidated Balance Sheet - March 31,June 30, 2001 and December 31, 2000 2 Consolidated Statement of Cash Flows Three- Six Months Ended March 31,June 30, 2001 and 2000 3 Consolidated Statement of Common Shareholders' Equity - ThreeSix Months Ended March 31,June 30, 2001 and 2000 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1114 Financial Information by Industry Segment 1822 Item 3. Quantitative and Qualitative Disclosures About Market Risk 2024 PART II. Other Information Item 1. Legal Proceedings 2125 Item 2. Changes in Securities *and Use of Proceeds 27 Item 3. Defaults upon Senior Securities * Item 4. Submission of Matters to a Vote of Security Holders *28 Item 5. Other Information *29 Item 6. Exhibits and Reports on Form 8-K 2330 Signatures 2330
* Omitted since no answer is called for, answer is in the negative or inapplicable. PART 1.I. 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, -------------------Six Months Ended June 30, June 30, -------------------------- ------------------------- 2001 2000 -------------------2001 2000 ------------- ------------ ------------ ------------ Net Sales $ 6,8946,686 $ 6,3716,780 $13,580 $13,151 ------- ------- ------- ------- Costs and Expenses Cost of products sold 5,138 4,5214,914 4,735 10,052 9,256 Selling and administrative expenses 584 521582 563 1,166 1,084 Depreciation and amortization 476 426457 439 933 865 Distribution expenses 276 266277 271 553 537 Taxes other than payroll and income taxes 75 6371 61 146 124 Merger integration costs 10 832 4 42 12 Restructuring and other charges 465 71 465 71 Impairment losses on businesses held for sale 85 - 85 - ------- ------- ------- ------- Total Costs and Expenses 6,559 5,8056,883 6,144 13,442 11,949 ------- ------- ------- ------- Earnings (Loss) Before Interest, Income Taxes, Minority Interest, Extraordinary Items and Cumulative Effect of Accounting Change 335 566(197) 636 138 1,202 Interest expense, net 248 131235 156 483 287 ------- ------- ------- ------- Earnings (Loss) Before Income Taxes, Minority Interest, Extraordinary Items and Cumulative Effect of Accounting Change 87 435(432) 480 (345) 915 Income tax provision 27 136(benefit) (156) 142 (129) 278 Minority interest expense, net of taxes 42 5537 68 79 123 ------- ------- ------- ------- Earnings (Loss) Before Extraordinary Items and Cumulative Effect of Accounting Change 18 244(313) 270 (295) 514 Gains (losses) on sales of investments and businesses, net of taxes and minority interest - - (46) 134 Cumulative effect of change in accounting for derivatives and hedging activities, net of taxes and minority interest - - (16) --- ------- ------- ------- ------- Net Earnings (Loss) $ (44)(313) $ 378270 $ (357) $ 648 ======= ======= ======= ======= Basic and Diluted Earnings Per Common Share BeforeIncome (loss) before extraordinary items and accounting change $ (0.65) $ 0.64 $ (0.61) $ 1.23 Extraordinary Items and Cumulative Effect of Accounting Change $ 0.04 $ 0.59 Earnings (Loss) Per Common Shareitems - Extraordinary Items- (0.10) 0.32 Earnings (Loss) Per Common ShareCumulative effect of accounting change - Cumulative Effect of Accounting Change- (0.03) --- ------- ------- Earnings (Loss) Per Common Share------- ------- Net earnings (loss) $ (0.09)(0.65) $ 0.910.64 $ (0.74) $ 1.55 ======= ======= Earnings (Loss) Per Common Share - Assuming Dilution $ (0.09) $ 0.91 ======= ======= Average Shares of Common Stock Outstanding 482.7 413.5483.1 421.0 482.9 417.3 ======= ======= ======= ======= Cash Dividends Per Common Share $ 0.25 $ 0.25 $ 0.50 $ 0.50 ======= ======= ======= =======
The accompanying notes are an integral part of these financial statementsstatements. 1 INTERNATIONAL PAPER COMPANY Consolidated Balance Sheet (Unaudited) (In millions)
March 31,June 30, December 31, 2001 2000 --------- ------------------------------ ------------------ Assets Current Assets Cash and temporary investments $ 1,119743 $ 1,198 Accounts and notes receivable, net 3,3153,185 3,433 Inventories 3,0062,925 3,182 Assets of businesses held for sale 1,8991,618 1,890 Other current assets 808995 752 -------- -------- Total Current Assets 10,1479,466 10,455 -------- -------- Plants, Properties and Equipment, net 15,41415,118 16,011 Forestlands 5,1274,463 5,966 Investments 296276 269 Goodwill 6,4746,607 6,310 Deferred Charges and Other Assets 3,0583,395 3,098 -------- -------- Total Assets $ 40,51639,325 $ 42,109 ======== ======== Liabilities and Common Shareholders' Equity Current Liabilities Notes payable and current maturities of long-term debt $ 2,0051,271 $ 2,115 Accounts payable 1,9941,830 2,113 Accrued payroll and benefits 395422 511 Liabilities of businesses held for sale 397363 541 Other accrued liabilities 1,9091,928 2,133 -------- -------- Total Current Liabilities 6,7005,814 7,413 -------- -------- Long-Term Debt 12,11312,787 12,648 Deferred Income Taxes 4,6604,221 4,699 Other Liabilities 2,0932,128 2,155 Minority Interest 1,3321,341 1,355 International Paper - Obligated Mandatorily Redeemable Preferred Securities of Subsidiaries Holding International Paper Debentures 1,805 1,805 Common Shareholders' Equity Common stock, $1 par value, 484.2 shares in 2001 and 2000 484 484 Paid-in capital 6,5056,443 6,501 Retained earnings 6,1445,711 6,308 Accumulated other comprehensive income (loss) (1,268)(1,358) (1,142) -------- -------- 11,86511,280 12,151 Less: Common stock held in treasury, at cost, 2001 - 1.2 shares, 2000 - 2.7 shares 5251 117 -------- -------- Total Common Shareholders' Equity 11,81311,229 12,034 -------- -------- Total Liabilities and Common Shareholders' Equity $ 40,51639,325 $ 42,109 ======== ========
The accompanying notes are an integral part of these financial statements. 2 INTERNATIONAL PAPER COMPANY Consolidated Statement of Cash Flows (Unaudited) (In millions)
ThreeSix Months Ended March 31, -----------------------June 30, ---------------------------------------- 2001 2000 --------- --------------------- ----------- Operating Activities Net earnings (loss) $ (44)(357) $ 378648 Cumulative effect of accounting change 16 --- Depreciation and amortization 476 426933 865 Deferred income tax (benefit) provision (11) 71(202) 107 Payments related to restructuring reserves, legal reserves and mergers (150) (62)merger integration costs (212) (121) Merger integration costs 10 8 Loss (gain)42 12 Restructuring and other charges 465 71 Impairment losses on businesses held for sale 85 - Losses (gains) on sales of investments and businesses 7372 (385) Other, net 17 154(15) 64 Changes in current assets and liabilities Accounts and notes receivable (83) (163)(85) (282) Inventories 6 (78)81 (69) Accounts payable and accrued(147) (71) Accrued liabilities (159) 193(257) 120 Other (97) (7)(124) 9 ------- ------- Cash Provided by Operations 54 535295 968 ------- ------- Investment Activities Invested in capital projects (189) (214)(458) (488) Mergers and acquisitions, net of cash acquired -- (590)(150) (5,355) Proceeds from divestitures 866881 1,359 Other (36) (121)11 (106) ------- ------- Cash Provided by (Used for) Investment Activities 641 434284 (4,590) ------- ------- Financing Activities Issuance of common stock -- 3515 39 Issuance of debt 104 9791,047 6,173 Reduction of debt (734) (715)(1,731) (1,487) Change in bank overdrafts 35 (61)(79) (199) Dividends paid (120) (104)(240) (207) Other (19) 224 39 ------- ------- Cash (Used for) Provided by Financing Activities (734) 156(984) 4,358 ------- ------- Effect of Exchange Rate Changes on Cash (40) (4)(50) (44) ------- ------- Change ofin Cash and Temporary Investments (79) 1,121(455) 692 Cash and Temporary Investments Beginning of the period 1,198 453 ------- ------- End of the period $ 1,119743 $ 1,5741,145 ======= =======
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) ThreeSix Months Ended March 31,June 30, 2001
Accumulated Total Other Common Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders' Shares Amount Capital Earnings Income (Loss) Shares Amount Equity ---------- --------- ---------- ---------- -------------- ----------- ---------- --------------------------- Balance, December 31, 2000 484,160 $ 484 $ 6,501 $ 6,308 $ (1,142) Issuance of stock for various plans 25 - (58) - - Cash dividends - Common stock ($0.50 per share) - - - (240) - Comprehensive income (loss): Net loss - - - (357) - Change in cumulative foreign currency translation adjustment - - - - (159) Unrealized gain (loss) on cash flow hedging derivatives - - - - (57) Total comprehensive income (loss) - - - - - ------- ----- ------- ------- -------- Balance, June 30, 2001 484,185 $ 484 $ 6,443 $ 5,711 $ (1,358) ======= ===== ======= ======= ======== Total Common Treasury Stock Shareholders' Shares Amount Equity --------- ---------- ------------- Balance, December 31, 2000 2,690 $ 117 $ 12,034 Issuance of stock for various plans 16 -- 4 -- -- (1,496) (65) 69 Repurchase of stock -- -- -- -- -- -- -- --(1,485) (66) 8 Cash dividends - Common stock ($0.250.50 per share) -- -- -- (120) -- -- -- (120)- - (240) Comprehensive income (loss): Net earnings (loss) -- -- -- (44) -- -- -- (44)loss - - (357) Change in cumulative foreign currency translation adjustment -- -- -- -- (121) -- -- (121)- - (159) Unrealized gain (loss) on cashcas flow hedging derivatives -- -- -- -- (5) -- -- (5) --------- - (57) --------- Total comprehensive income (loss) -- -- -- -- -- -- -- (170) -------- -------- -------- -------- -------- -------- --------- - (573) ----- ---- -------- Balance, March 31,June 30, 2001 484,1761,205 $ 48451 $ 6,505 $ 6,144 $ (1,268) 1,194 $ 52 $ 11,813 ======== ======== ======== ======== ======== ======== ========11,229 ===== ==== ========
ThreeSix Months Ended March 31,June 30, 2000
Accumulated Total Other Common Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders' Shares Amount Capital Earnings Income (Loss) Shares Amount Equity ---------- --------- ---------- ----------- ---------- -------------------------- ---------- ----------------------- Balance, December 31, 1999 414,584 $ 415 $ 4,078 $ 6,613 $ (739) 1,216 $ 63 $ 10,304 Issuance of stock for merger 68,706 69 2,360 - - - - 2,429 Issuance of stock for various plans 151 -- (2) -- -- (791) (41) 39160 - (1) - - (884) (42) 41 Repurchase of stock -- -- -- -- -- 630 28 (28)- - - - - 1,250 51 (51) Cash dividends - Common stock ($0.250.50 per share) -- -- -- (104) -- -- -- (104)- - - (207) - - - (207) Comprehensive income (loss): Net earnings -- -- -- 378 -- -- -- 378- - - 648 - - - 648 Change in cumulative foreign currency translation adjustment -- -- -- -- (60) -- -- (60) --------- - - - (123) - - (123) --------- Total comprehensive income -- -- -- -- -- -- -- 318 -------- -------- -------- -------- -------- -------- --------(loss) - - - - - - - 525 ------- ----- ------- ------- ------ ----- ---- -------- Balance, March 31,June 30, 2000 414,735483,450 $ 415484 $ 4,0766,437 $ 6,8877,054 $ (799) 1,055(862) 1,582 $ 5072 $ 10,529 ======== ======== ======== ======== ======== ======== ========13,041 ======= ===== ======= ======= ====== ===== ==== ========
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) which are necessary for the fair presentation of results for the interim periods. It is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto incorporated by reference in International Paper's Annual Report on Form 10-K for the year ended December 31, 2000, which has previously been filed with the Securities and Exchange Commission. On June 20, 2000, International Paper acquired Champion International Corporation (Champion) in a transaction accounted for as a purchase. Champion's results of operations are included in the consolidated statement of earnings beginning on the date of acquisition, June 20, 2000.acquisition. NOTE 2 - EARNINGS PER COMMON SHARE Earnings per common share before extraordinary items and cumulative effect of accounting change were computed by dividing earnings before extraordinary items and cumulative effect of accounting change by the weighted average number of common shares outstanding. Earnings per common share before extraordinary items and cumulative effect of accounting change, assuming dilution, were computed assuming that all potentially dilutive securities were converted into common shares at the beginning of each period. A reconciliation of the amounts included in the computation of earnings per common share before extraordinary items and cumulative effect of accounting change, and earnings per common share before extraordinary items and cumulative effect of accounting change, assuming dilution, is as follows:
Three Months Ended March 31, ------------------------Six Months Ended June 30, June 30, -------------------------- --------------------------- In millions, except per share amounts 2001 2000 2001 2000 - ------------------------------------- ------------------------------------ ------------ ------------- ------------ Net earnings (loss) before extraordinary items and cumulative effect of accounting change $ 18(313) $ 244270 $ (295) $ 514 Effect of dilutive securities Preferred securities of subsidiary trust -- 4 ------ ------- 5 - 9 ------------ ------------ ------------- ------------ Net earnings (loss) before extraordinary items and cumulative effect of accounting change - assuming dilution $ 18(313) $ 248 ====== ======275 $ (295) $ 523 ============ ============ ============= ============ Average common shares outstanding 482.7 413.5483.1 421.0 482.9 417.3 Effect of dilutive securities Preferred securities of subsidiary trust --- 8.3 - 8.3 Stock options 1.0 1.2 ------ ------Options - 0.3 - 0.5 ------------ ------------ ------------- ------------ Average common shares outstanding - assuming dilution 483.7 423.0 ====== ======483.1 429.6 482.9 426.1 ============ ============ ============= ============ Earnings (loss) per common share before extraordinary items and cumulative effect of accounting change $ 0.04(0.65) $ 0.59 ====== ======0.64 $(0.61) $ 1.23 ============ ============ ============= ============ Earnings (loss) per common share before extraordinary items and cumulative effect of accounting $ (0.65) $ 0.64 $ (0.61) $ 1.23 change - assuming dilution $ 0.04 $ 0.59 ====== ================== ============ ============= ============
Note: If an amount does not appear in the above table, the security was antidilutive for the period presented. 5 NOTE 3 - MERGERS, ACQUISITIONS AND DIVESTITURES Mergers and Acquisitions: In April 2001, Carter Holt Harvey acquired Norske Skog's Tasman Kraft pulp manufacturing business for $130 million in cash. In June 2000, International Paper completed the acquisition of Champion, a leading manufacturer of paper for business communications, commercial printing and publications with significant market pulp, plywood and lumber manufacturing operations. Champion shareholders received $50 in cash and $25 worth of International Paper common stock for each Champion share. The acquisition was completed for approximately $5 billion in cash and 68.7 million shares of International Paper common stock having a market value of $2.4 billion. Approximately $2.8 billion of Champion debt was assumed. In April 2000, Carter Holt Harvey purchased CSR Limited's medium density fiberboard and particleboard businesses and its Oberon sawmill for approximately $200 million in cash. In March 2000, International Paper acquired Shorewood Packaging Corporation, a leader in the manufacture of premium retail packaging, for approximately $640 million in cash and the assumption of $280 million of debt. All of these acquisitions were accounted for using the purchase method with the related operating results included in the consolidated statement of earnings from the dates of acquisition. The accompanying consolidated balance sheet as of March 31, 2001 reflects a preliminary allocation of the purchase price of Champion to the fair value of the assets and liabilities acquired. In January 2000, International Paper sold its equity interest in Scitex for $79 million, and Carter Holt Harvey sold its equity interest in Compania de Petroleos de Chile for just over $1.2 billion. These sales resulted in a combined extraordinary gain of $134 million after taxes and minority interest.Divestitures: In March 2001, International Paper received $500 million in proceeds from the sale of approximately 265,000 acres of forestlands in the state of Washington to Ranier Timber Company, LLC. In addition, International Paper announced that it had reached an agreement to sell its Curtis/Palmer hydroelectric generating project in Corinth, New York to TransCanada Pipelines Limited for approximately $285 million. The completion of the transaction is subject to certain conditions, including regulatory review by federal antitrust authorities and the Federal Energy Regulatory Commission. In January 2001, International Paper conveyed its oil and gas properties and fee mineral and royalty interests to Pure Resources, Inc. and its affiliates in a transaction valued at approximately $260 million, resulting in an extraordinary loss of $8 million after taxes. International Paper also completed the sale of its interest in Zanders Feinpapiere AG, a European coated paper business, to Metsa Serla for approximately $120 million and the assumption of $80 million of debt. This transaction resulted in an extraordinary loss of $245 million after taxes and minority interest, which was recorded in the 2000 fourth quarter of 2000 when the decision was made to sell this business below book value. LateIn November 2000, International Paper sold its interest in Bush Boake Allen for $640 million, resulting in an extraordinary gain of $183 million after taxes and minority interest. In January 2000, International Paper sold its equity interest in Scitex for $79 million, and Carter Holt Harvey sold its equity interest in Compania de Petroleos de Chile for just over $1.2 billion. These sales resulted in a combined extraordinary gain of $134 million after taxes and minority interest. In 2000, International Paper announced a divestment program following the Champion acquisition and the completion of a strategic analysis to focus on International Paper's core businesses. Through March 31,June 30, 2001, approximately $1.7 billion of proceeds, including debt assumed by the buyers, have been realized under the program. 6 NOTE 4 - SPECIAL AND EXTRAORDINARY ITEMS INCLUDING RESTRUCTURING AND BUSINESS IMPROVEMENT ACTIONS During the second quarter of 2001, special items amounting to a net pre-tax charge of $582 million ($377 million after taxes and minority interest) were recorded. These items included a $465 million charge before taxes and minority interest ($300 million after taxes and minority interest) for asset shutdowns of excess capacity and cost reduction actions, an $85 million pre-tax loss ($55 million after taxes) for impairment losses on businesses held for sale, and a $32 million pre-tax charge ($22 million after taxes) for additional Champion merger-related costs. The $465 million charge for asset shutdowns of excess internal capacity and cost reduction actions included $240 million of asset write-downs and $225 million of severance and other charges. The following table presents additional detail related to the $465 million charge:
Asset Severance Write- and In millions Downs Other Total - -------------- ----------------- ----------------- ----------------- Printing Papers (a) $ 9 $ 23 $ 32 Consumer Packaging (b) 151 69 220 Industrial Packaging (c) 62 20 82 Industrial Papers (d) 3 5 8 Forest Products (e) 1 12 13 Distribution (f) 4 21 25 Carter Holt Harvey (g) 10 - 10 Administrative Support Groups (h) - 75 75 ----- ----- ---- $ 240 $ 225 $465 ===== ===== ====
(a) The Printing Papers business indefinitely shut down the Hudson River mill No. 3 paper machine located in Corinth, New York due to excess internal capacity. The machine was written down by $9 million to its estimated fair value of zero. A severance charge of $10 million was recorded to cover the termination of 208 employees. Also, the Printing Papers business implemented a plan to streamline and realign administrative functions at several of its locations. Charges associated with this plan included $6 million of severance costs covering the termination of 82 employees, and other cash costs of $7 million. (b) In June 2001, the Consumer Packaging business shut down the Moss Point, Mississippi mill and announced the shut down of its Clinton, Iowa facility due to excess internal capacity. Charges associated with the Moss Point shutdown included $138 million to write the assets down to their estimated salvage value, $21 million of severance costs covering the termination of 363 employees, and other exit costs of $20 million. Charges associated with the Clinton shutdown included $7 million to write the assets down to their estimated salvage value, $7 million of severance costs covering the termination of 327 employees, and other exit costs of $3 million. Additionally, the Consumer Packaging business implemented a plan to reduce excess internal capacity and streamline administrative functions at several of its locations. Charges associated with this plan included $6 million of asset write-downs, $15 million of severance costs covering the termination of 402 employees, and other cash costs of $3 million. (c) The Industrial Packaging business indefinitely shut down the Savannah, Georgia mill No. 2, No. 4 and No. 6 paper machines due to excess internal capacity. The machines were written down by $62 million to their estimated fair value of zero, with severance charges of $11 million also recorded to cover the termination of 290 employees. Also, Industrial Packaging implemented a plan to streamline and realign administrative functions at several of its locations, resulting in a severance charge of $9 million covering the termination of 146 employees. 7 (d) Industrial Papers implemented a plan to reduce excess capacity and streamline administrative functions at several of its locations. Charges associated with this plan included asset write-downs of $3 million and severance costs of $5 million covering the termination of 123 employees. (e) The Forest Products business charge of $13 million reflects the reorganization of its regional operating structure and streamlining of administrative functions. The charge included $1 million of asset write-downs, $9 million of severance costs covering the termination of 100 employees, and other cash costs of $3 million. (f) xpedx implemented a plan to consolidate duplicate facilities and eliminate excess internal capacity. Charges associated with this plan included $4 million of asset write-downs, $14 million of severance costs covering the termination of 394 employees, and other cash costs of $7 million. (g) The Carter Holt Harvey charge of $10 million was recorded to write down the assets of its Mataura mill to their estimated fair value of zero as a result of the decision to permanently shutdown this facility which had previously been idled temporarily. (h) During the second quarter of 2001, International Paper implemented a cost reduction program to realign its administrative functions across all business and staff support groups. As a result, a $75 million severance charge was recorded covering the termination of 985 employees. The $85 million charge for impairment losses on businesses held for sale reflects the reduction of the carrying value of these assets to their expected realizable value based on offers received. These businesses are currently being offered for sale as part of International Paper's divestment program. The merger-related expenses of $32 million consisted primarily of systems integration, product line rationalization, employee retention, travel and other cash costs related to the Champion merger. During the first quarter of 2001, special and extraordinary items amounting to a net pre-tax charge of $108 million ($68 million after taxes and minority interest) were recorded. These items included a $25 million charge before taxes and minority interest ($16 million after taxes and minority interest) for the cumulative impact of adopting the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for 6 PAGE> Derivative Instruments and Hedging Activities,"Activities", as amended by Statement of Financial Accounting Standards No.SFAS Nos. 137 and 138, "Accounting for Certain Derivative Instruments and Hedging Transactions," an extraordinary charge of $73 million before taxes ($46 million after taxes) for impairment losses on businesses held for sale, and a special charge of $10 million before taxes ($6 million after taxes) for additional Champion merger-related costs. During the second quarter of 2000, International Paper recorded special items amounting to a net charge before taxes and minority interest of $75 million ($45 million after taxes and minority interest). The extraordinaryspecial items included a $71 million pre-tax charge consisting($42 million after taxes and minority interest) for asset shutdowns of an adjustment to the expected loss on the sale of the Masonite businessexcess internal capacity and the loss on the sale of oilcost reduction actions and gas interests, was presented in accordance with the pooling-of-interests rules.a $4 million pre-tax charge ($3 million after taxes) for merger-integration costs. During the first quarter of 2000, a pre-tax charge of $8 million ($5 million after taxes) was recorded for merger-related expenses, primarily consisting of systems integration, employee retention, travel and other cash costs related to the Union Camp merger. 8 During the last threetwo quarters of 2000, additional charges totaling $824$749 million before taxes and minority interest ($509464 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions were recorded. The following table presents a roll forward of the cumulative severance and other costs included in these charges:
Severance Dollars in millions and Other - ---------------------- ---------------------------- Opening balance - second quarter 2000 (1,056 employees) $ 31 Additions - fourth quarter 2000 (3,187 employees) 217 Cash charges - 2000 (991 employees) (19) --------- Balance, December 31, 2000 (3,252 employees) 229 Cash charges - first quarter 2001 (1,744 employees) (86) ----Cash charges - second quarter 2001 (655 employees) (37) ----- Balance, March 31,June 30, 2001 (1,508(853 employees) $143 ====$ 106 =====
In addition, the $13 million of 1999 reserves, primarily relating to severance, which remained at the end of 2000 was paid during the first quarter of 2001. International Paper continually evaluates its operations for improvement. When any such plans are finalized, we may incur costs or charges may be incurred in future periods related to the implementation of suchthese plans. NOTE 5 - INVENTORIES Inventories by major category were:
March 31,June 30, December 31, In millions 2001 2000 - -------------- --------- ---------------------------- ----------------- Raw materials $ 426360 $ 431 Finished pulp, paper and packaging products 1,7511,752 1,912 Finished lumber and panel products 232225 261 Operating supplies 464472 473 Other 133116 105 ------ ------------- ------- Total $3,006 $3,182 ====== ======$ 2,925 $ 3,182 ======= =======
NOTE 6 - BUSINESSES HELD FOR SALE During 2000, International Paper announced a divestment program to sell certain assets that are not strategic to its core businesses. The decision to sell these businesses and certain other assets resulted from International Paper's acquisition of Champion and the completion of its strategic analysis to focus on its core businesses of Paper, Packaging and Forest Products. 79 Businesses being marketed at March 31,June 30, 2001, including those with sales pending under sales agreements, includedwere Arizona Chemical, Chemical Cellulose, Fine Papers, Masonite, Decorative Products, Flexible Packaging, and other smaller businesses. Sales and operating earnings for each of the three monthsix-month periods ended March 31,June 30, 2001 and 2000 for these businesses were:
For the ThreeSix Months Ended March 31,June 30, --------------------------------- In millions 2001 2000 - ----------- ---- ------------------ ----------------- ------------ Sales $620 $705$ 1,125 $ 1,276 Operating Earnings (Loss) (2) 44earnings 17 80
The sales and operating resultsearnings shown above for these businesses, together withplus the results of businesses sold during the first quarterhalf of 2001, are includedshown in "Other Businesses" in Management's Discussion and Analysis. The assets of these businesses, totaling $1.6 billion at June 30, 2001 and $1.9 billion at December 31, 2000, are included in "assets of businesses held for sale" in current assets in the accompanying consolidated balance sheet. The liabilities of these businesses, totaling $397$363 million at June 30, 2001 and $541 million at December 31, 2000, are included in "liabilities of businesses held for sale" in current liabilities in the accompanying consolidated balance sheet. During the second quarter of 2001, a decision was made to continue to operate the Fine Papers business that was previously held for sale. Accordingly, industry segment information for prior periods has been restated to include this business in the printing papers segment. An agreement to sell Masonite to Premdor Inc. of Toronto, Canada was entered into in September 2000.2000 and subsequently amended in July 2001. In MarchAugust 2001, International Paper reached an agreementthe Flexible Packaging business was sold to sellExo-Tech Packaging LLC, a hydroelectric generating project in Corinth, New York for $285 million. These transactions are subject to closing and regulatory approvals.company sponsored by the Sterling Group L.P. NOTE 7 - TEMPORARY INVESTMENTS Temporary investments with a maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments totaled $529$162 million and $581 million at March 31,June 30, 2001 and December 31, 2000, respectively. NOTE 8 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION Interest payments made during the three month periodsix-month periods ended March 31,June 30, 2001 and 2000 were $311$549 million and $137$309 million, respectively. Capitalized net interest costs were $3 million for the quarter ended March 31, 2001 and $7 million for the 2000 first quarter.six months ended June 30, 2001 and $13 million for the six months ended June 30, 2000. Total interest expense was $272$547 million for the six months ended June 30, 2001 first quarter and $156$326 million for the 2000 first quarter.six months ended June 30, 2000. The increase reflects debt incurred in the acquisition of Champion. Income tax payments of $42$322 million were made during the first half of 2001 first quarter and $22$161 million during the first quarterhalf of 2000. Distributions paid under all of International Paper's preferred securities of subsidiaries were $44$74 million in bothand $76 million for the first quarter ofsix months ended June 30, 2001 and 2000, respectively and are included in minority interest expense. Accumulated depreciation was $16.2$16.6 billion at March 31,June 30, 2001 and $16.1 billion at December 31, 2000. The allowance for doubtful accounts was $130$124 million at March 31,June 30, 2001 and $128 million at December 31, 2000. 10 NOTE 9 - CONVERTIBLE DEBENTURES In June 2001, International Paper completed a private placement offering of $2.1 billion principal amount at maturity zero-coupon convertible senior debentures due June 20, 2021, which yielded net proceeds of approximately $1.0 billion. The debt accretes to face value at maturity at a rate of 3.75% per annum, subject to upward adjustment if International Paper's stock price falls below a certain level for a specified period. Also, the securities are convertible into shares of International Paper common stock at the option of debenture holders upon an upward change in International Paper's stock price in relation to the accreted value of the debentures, or if the bond rating agencies downgrade International Paper's debt below investment grade, or upon the debentures being called for redemption by International Paper, or upon the occurrence of certain other corporate events as defined in the debt agreement. International Paper may be required to repurchase the securities on June 20th in each of the years 2004, 2006, 2011, and 2016 at a repurchase price equal to the accreted principal amount to the repurchase date. International Paper also has the option to redeem the securities on or after June 20, 2006 under certain circumstances. The net proceeds of this issuance were used to retire higher interest rate commercial paper borrowings. NOTE 10 - RECENT ACCOUNTING DEVELOPMENTS In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method, thus eliminating the use of pooling-of-interests accounting for business combinations. SFAS No. 142 changes the accounting for goodwill, eliminating the periodic charge to earnings for goodwill amortization for fiscal years beginning after December 15, 2001. Instead, the statement will require an annual assessment of goodwill for impairment, or more frequent assessments if circumstances indicate a possible impairment. Additionally, SFAS No.142 prescribes the accounting for identifiable intangible assets acquired in a business combination. Whereas, SFAS No. 141 is effective for all business combinations initiated after June 30, 2001, SFAS No. 142 requires companies to continue to amortize goodwill existing at June 30, 2001 through the end of the current fiscal year, with periodic amortization ceasing effective January 1, 2002. Goodwill amortization charges for the six-month period ended June 30, 2001 were $91 million with a similar charge expected for the last half of 2001. This amortization charge will be discontinued on January 1, 2002. International Paper is currently evaluating other possible impacts of adopting the provisions of SFAS No. 142, including potential impairment of existing goodwill balances, but has not yet quantified the impact on its consolidated financial position. In July 2001, the Financial Accounting Standards Board announced that it will issue SFAS No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets". SFAS No. 143 will require the accrual, at fair value, of the estimated retirement obligation for tangible long-lived assets if the company is legally obligated to perform retirement activities at the end of the related asset's life and is effective for fiscal years beginning after June 15, 2002. International Paper has not yet evaluated the impact of adopting SFAS No. 143 on its consolidated financial position. On January 1, 2001, International Paper adopted Statement of Financial Accounting StandardsSFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended by SFAS Nos. 137 and 138. These statements require that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured by its fair value. These statements also establish new accounting rules for hedge transactions, which depend on the nature of the hedge relationship. 811 The cumulative effect of adopting SFAS No. 133 was a $25 million charge to net earnings before taxes and minority interest ($16 million after taxes and minority interest), and a net decrease of $9 million after taxes to Other Comprehensive Income (OCI). The charge to net earnings primarily resulted from recording the fair value of certain interest rate swaps which do not qualify under the new rules for hedge accounting treatment. The decrease to OCI primarily resulted from adjusting the foreign currency contracts used as hedges of net investments in foreign operations to fair value. International Paper periodically uses derivatives and other financial instruments to hedge exposures to currency, interest rate, commodity and commoditycurrency risks. For hedges which meet the SFAS No. 133 criteria, International Paper, at inception, formally designates and documents the instrument as a hedge of a specific underlying exposure, as well as the risk management objective and strategy for undertaking each hedge transaction. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the value or cash flows of the underlying exposures being hedged. Derivatives are recorded in the consolidated balance sheet at fair value in other current or noncurrent assets or liabilities. The earnings impact resulting from the change in fair value of the derivative instruments is recorded in the same line item in the consolidated statement of earnings as the underlying exposure being hedged. The financial instruments that are used in hedging transactions are assessed both at inception and quarterly thereafter to ensure they are effective in offsetting changes in either the fair value or cash flows of the related underlying exposures. The ineffective portion of a financial instrument's change in fair value, if any, would be recognized currently in earnings together with the changes in fair value of derivatives not designated as hedges. The counterparties to ourInternational Paper's contracts consist of a number of major international financial institutions. International Paper monitors its positions with, and the credit quality of, these financial institutions and does not expect nonperformance by the counterparties. Interest Rate Risk Cross-currency and interest rate swaps may be used to manage the composition of portions of the company'sInternational Paper's fixed and floating rate debt portfolio. Carter Holt Harvey uses these instruments to hedge the interest rate exposure of its U.S. dollar fixed rate debt and has designated the instruments as fair value hedges with net gains and losses reported currently in interest expense. TheIn the U.S. parent company, International Paper has entered into interest rate swap agreements with a total notional amount of approximately $1 billion with maturities ranging from 1 to 23 years. These swaps do not qualify as hedges under SFAS No. 133 and, consequently, were recorded at fair value on the transition date by a charge to net earnings. For the quarter ended March 31,June 30, 2001, the change in fair value of the swaps was immaterial. Future changes in fair value of these swaps are not expected to have a material impact on earnings, although some volatility in a quarter is possible due to unforeseen market conditions is possible.conditions. At March 31,June 30, 2001, International Paper had $3.6$2.9 billion of floating rate debt with interest rates that fluctuate based on market conditions and credit returns. Commodity Risk To manage risks associated with future variability in cash flows attributable to certain commodity purchases, International Paper currently uses swap contracts with maturities of 12 months or less. Such cash flow hedges are accounted for by deferring the quarterly change in fair value of the outstanding contracts in accumulated OCI. On the date a contract matures, the deferred gain or loss is reclassified into cost of goods sold concurrently with the recognition of the commodity purchased. During the quarter ended June 30, 2001, International Paper entered into a number of contracts to hedge a portion of its U.S. forecasted purchases of natural gas through March 31, 2002, effectively fixing the price of these purchases at a weighted average price of $5.30 per MMBTU. 12 Contracts for a notional amount of 33.8 MMBTU's were outstanding at June 30, 2001. Approximately $48 million after taxes, representing the quarterly change in the fair market value of these contracts, was charged to accumulated OCI, and $5 million after taxes, reflecting the realized loss on maturing contracts during the period, was charged to expense. Foreign Currency Risk International Paper's policy has been to financehedge certain investments in foreign operations with borrowings denominated in the same currency as the operation's functional currency or by entering into foreign exchange contracts. These financial instruments are effective as a hedge against fluctuations in currency exchange rates. Gains or losses from changes in the fair value of these instruments, which are offset in whole or in part by translation gains and losses on the net assets being hedged, are recorded as translation adjustments in accumulated OCI. Upon liquidation or sale of the net assets being hedged, the accumulated gains or losses from the revaluation of the hedging instruments would be included in earnings. 9 Currency swaps are used to mitigate the risk associated with changes in foreign exchange rates, which will affect the fair value of debt denominated in a foreign currency. Some of these hedges have been designated as fair value hedges and others have not. Foreign exchange contracts (including forward, swap and purchase option contracts) are also used to hedge certain transactions, primarily trade receipts and payments denominated in foreign currencies, to manage volatility associated with these transactions and to protect International Paper from currency fluctuations between the contract date and ultimate settlement. These contracts, most of which have been designated as cash flow hedges, had maturities of twelve monthsfive years or less as of March 31,June 30, 2001. TheFor the three months ended June 30, 2001, a net charge of $9 million after taxes, was recorded in accumulated OCI, net of reclassifications to earnings of $1 million after taxes, related to net losses on these contracts. An estimated $5 million after taxes is expected to be reclassified to earnings by the end of 2001. Additionally, the change in the time value associated with currency options is recognized immediately in earnings. Additionally, someearnings for the quarter was immaterial. Other contracts are used to offset the earnings impact relating to the variability in exchange rates on certain monetary assets and liabilities denominated in non-functional currencies and are not designated as hedges. Changes in the fair value of these instruments are recognized currently in earnings to offset the remeasurement of the related assets and liabilities. For the quarter ended March 31, 2001, a net charge of $3 million before taxes was recorded in cost of goods sold primarily related to changes in the time value of foreign currency options. Additionally, a net charge of $8 million before taxes was recorded in OCI, net of reclassifications to earnings, related to gains and losses on foreign currency cash flow hedges. An estimated $6 million before taxes of the amount recorded in accumulated OCI as of March 31, 2001, is expected to be reclassified to earnings by the end of 2001. The following table summarizes activity in accumulated OCI related to cash flow hedges during the period from January 1, 2001, through March 31, 2001.
Balance In millions After Taxes - -------------------------------------------- ----------- Cumulative effect of adopting SFAS No. 133, net $ - Net changes in fair value of derivatives (6) Net gains reclassified from OCI to earnings 1 --- Accumulated derivative net losses as of March 31, 2001 $(5) ===
NOTE 1011 - SUBSEQUENT EVENTS On April 26,In July 2001, International Paper announcedcompleted the planned indefinite closure in June 2001sale of its Bleached Board facilityCurtis/Palmer hydroelectric generating project in Moss Point, Mississippi dueCorinth, New York to the need to align production with customer demand. The mill employs approximately 375 people and has one paper machine. On May 9,TransCanada Pipelines Limited. In August 2001, International Paper also announced that it had entered into an agreement to sellcompleted the sale of its Flexible Packaging division. It is expected that these actions will requirebusiness to Exo-Tech Packaging, LLC, a pre-tax charge of approximately $200 million incompany sponsored by the second quarter. In April 2001, an agreement was reached to sell the assets of a water company subsidiary located in the Houston, Texas area for approximately $100 million. The transaction is subject to closing conditions, permitting and regulatory approval. Also in April, Carter Holt Harvey agreed to acquire Norske Skog's Tasman kraft pulp manufacturing business for $130 million. 10Sterling Group, L.P. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations International Paper's consolidated results of operations include Champion International Corporation (Champion) from the date of acquisition, June 20, 2000. Second quarter 2001 earnings were $64 million, or $.13 per share, before special items. Earnings for the same period a year earlier were $315 million, or $.75 per share, before special items. First quarter 2001 earnings were $24 million, or $.05 per share, before special and extraordinary items and the cumulative effect of an accounting change. Earnings forThe earnings increase in the same period a year earlier were $249 million, or $.60 per share, before specialsecond quarter of 2001 compared with the first quarter was due mainly to declining costs, including lower energy costs, and extraordinary items. Fourth quarter 2000 earnings before specialimproved operating efficiencies. However, weak pulp, paper, and extraordinary items were $145 million, or $.28 per share. A weak U.S. economypackaging markets and a strongsoft U.S. dollareconomy continue to negatively impact domestic profitability and export competitiveness. In response, weresults. Export revenues continue to come under pressure due to the strengthening U.S. dollar. We took approximately 490,000430,000 tons of market-related downtime throughout our mill system. Other factors influencing firstsystem as we continue to balance production with demand. During the second quarter of 2001, we announced the elimination of approximately 4,000 positions related to capacity shutdowns, internal reorganizations, and streamlining of salaried staff functions. These announcements included plans to shut down production of 610,000 tons of U.S. containerboard capacity and 60,000 tons of U.S. coated freesheet capacity. In the second quarter of 2001, International Paper reported a net loss of $313 million, or $.65 per share, after special items. This compared with net earnings were higher energy costs, lower volumes, and downward pressure on pricing. Higher energy costsof $270 million, or $.64 per share, in the first quarter reduced International Paper's pre-tax earnings by $50 million, or $.07 per share, versus the fourthsecond quarter of 2000. Operational problems at several of International Paper's larger facilities reduced first quarter 2001 pre-tax earnings by about $40 million, or $.06 per share, from fourth quarter 2000 earnings. In the first quarter of 2001,after special items. International Paper reported a net loss of $44 million, or $.09 per share, in the first quarter of 2001, after special and extraordinary items and the cumulative effect of an accounting change. This compared with net earnings of $378 million or $.91 per shareSpecial items in the first quarter of 2000 after special and extraordinary items. International Paper reported a net loss of $371 million or $.85 per share in the fourth quarter of 2000 after special and extraordinary items. In the firstsecond quarter of 2001 a chargeincluded charges of $16$300 million after taxes and minority interest, or $.03$.62 per share, represented the cumulative impact of adopting the new accounting standard for derivativefacility closures, administrative realignment and hedging transactions. In addition, an extraordinary charge of $46related severance and $55 million after taxes, or $.10$.11 per share, for impairment losses on businesses held for sale. Also, a special charge of $22 million after taxes, or $.05 per share, represented additional anticipated losses on dispositionsChampion merger integration costs. Special charges in the second quarter of 2000 included charges of $42 million after taxes and a special chargeminority interest, or $.10 per share, for asset shutdowns of $6excess internal capacity and cost reduction actions, and $3 million after taxes, or $.01 per share, represented additional Champion merger-relatedfor merger-integration costs. International Paper posted net sales in the firstsecond quarter of 2001 of $6.9$6.7 billion, compared with $6.4$6.8 billion in the second quarter of 2000 and $6.9 billion in the first quarter of 20002001. The decline was due mainly to lower volumes and $7.2 billionprice erosion in the fourth quarter of 2000. 11 our pulp and paper and packaging businesses. The following segment discussions for the firstsecond quarter of 2001 are based on results before special and extraordinary items. Printing Papers net sales of $2.0$1.9 billion for the second quarter of 2001 were down slightly from the $2.1 billion recorded in the first quarter of 2001 were flat as compared with net sales for the fourth quarter of 2000.2001. Net sales for the firstsecond quarter of 2000 were $1.4 billion. The segment reported operating profit of $150$119 million for the second quarter of 2001 compared with $154 million for the first quarter of 2001 as compared with $252and $204 million for the fourth quarter of 2000 and $166 million for the firstsecond quarter of 2000. LowerThe lower operating profits compared withand sales continue to reflect the fourthslow general economy. The 2001 first quarter slowdown in advertising spending accelerated in the second quarter impacting demand from publishers and commercial printers. Paper pricing declined slightly during the second quarter of 2000 reflect weaker market conditions2001. European and North American pulp markets continued to weaken in the slowing U.S. economy. Commercial printing, driven largely by advertisingsecond quarter with very low demand and promotional activity, has softened and the demand for printing bristols is down. Prices fluctuated duringsharply lower pulp prices. During the quarter, but averaged about the same as the 2000 fourth quarter. Market relatedInternational Paper took market-related downtime of 110,00045,000 tons for bristols and pulp and 30,00070,000 tons for coated and supercalendaredsupercalendered papers haswhich reduced inventory levels and helped balance inventories withsupply to demand. ContinuedIn July 2001, we indefinitely shut down a coated freesheet machine, further reducing capacity by 60,000 tons. We intend to continue to take 14 market-related downtime is expected to be taken as needednecessary in the secondthird quarter of 2001 to keep internal supply aligned with customer demand. While portionsThe segment is aggressively pursuing improvement initiatives and expects significant cost savings as a result of reorganization efforts in the European market for paper remained stable, some weakness was experienced in Poland and Western Europe. Weak demand and prices for pulp continue to negatively impact both the European and North Americanbusiness. Printing Papers businesses.
Printing Papers - ------------------ 2001 2000 -------------- ------------------------------------------------------------------------------ ------------------------------------------------ In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 4th2nd Quarter -------------- ------------------------------Six Months ------------------------------------------------ ------------------------------------------------ Sales $2,025 $1,400 $2,000$ 2,085 $ 1,945 $ 4,030 $ 1,470 $ 1,440 $ 2,910 Operating Profit 150 166 252154 119 273 172 204 376
Industrial and Consumer Packaging net sales of $1.7 billion for the second quarter of 2001 were flat compared with net sales in the first quarter of 2001. Net sales for the second quarter of 2000 were down from$1.9 billion. The segment reported operating profit of $143 million for the 2001 second quarter compared with $116 million in the first quarter of 2001 and $236 million for the second quarter of 2000. While energy costs continued to moderate during the second quarter, the strong U.S. dollar and soft domestic market conditions caused operating results to decline versus the same period a year ago. Industrial Packaging continued to take extensive market-related downtime, which totaled 265,000 tons in the second quarter of 2001. In July 2001, we announced the indefinite shutdown of 610,000 tons of capacity to match production with customer orders. Internal initiatives centered on cost and efficiency improvements and external customer-focused programs favorably impacted both Consumer Packaging and Industrial Packaging earnings during the quarter, partly offsetting the impact of soft market conditions. The strong U.S. dollar continued to adversely affect both bleached board sales and containerboard exports. Industrial and Consumer Packaging
2001 2000 --------------------------------------------- ----------------------------------------------- In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months --------------------------------------------- ----------------------------------------------- Sales $ 1,710 $ 1,695 $ 3,405 $ 1,665 $ 1,865 $ 3,530 Operating Profit 116 143 259 192 236 428
Distribution net sales of $1.7 billion for the 2001 second quarter were slightly lower than the $1.8 billion of net sales recorded in the fourth quarter of 2000 and were flat compared with the first quarter of 2000. The segment reported $116 million of operating profit for the first quarter of 2001, a decline from the $149 million of operating profit recorded in the fourth quarter of 2000 and the $192 million recorded in the 2000 first quarter. Operating results declined in the first quarter of 2001 versus the first and fourth quarter of 2000 due to the strong U.S. dollar, related soft domestic market conditions, and high energy costs. A decline in domestic containerboard and box volume since the fourth quarter of 2000 was partially offset by stronger containerboard exports and kraft paper billings. Industrial Packaging earnings were affected by about 270,000 tons of downtime, or 20% of system capacity, that was taken to match our production with customer orders. Consumer Packaging earnings were reduced by weakened bleached board demand and an increasingly competitive marketplace.
Industrial and Consumer Packaging - --------------------------------------- 2001 2000 -------------- ------------------------------ In millions 1st Quarter 1st Quarter 4th Quarter -------------- ------------------------------ Sales $1,710 $1,665 $1,780 Operating Profit 116 192 149
12 Distribution net sales of $1.8 billion for the 2001 first quarter were slightly lower than the $1.9 billion ofand even with net sales forin the 2000 fourth quarter and slightly ahead of the firstsecond quarter of 2000. Operating profit of $14$12 million for the firstsecond quarter of 2001 was slightly down from $23 million in the fourth quarter of 2000 and $30$14 million in the first quarter of 2000.2001. Operating profit for the second quarter of 2000 was $35 million. The year-over-year sales increase relativeattributable to 2000 reflects the addition of theChampion's Nationwide distribution facilities partiallywas essentially offset by weakerlower overall market conditions.demand across the United States. The shortfallsegment continues to make progress on its internal profit improvement program but was affected by weak printing markets as well as slowing sales in earnings was primarily due to weaker sales especiallypackaging and industrial supplies in the commercial printing segment. To help offset the effectsecond quarter of slow business conditions,2001. Distribution is merging facilities and reducing jobs while pursuing sales growth initiatives.
Distribution - ------------ 2001 2000 ------------- ------------------------------------------------------------------------------- ----------------------------------------------- In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 4th2nd Quarter ------------- --------------------------------Six Months ----------------------------------------------- ----------------------------------------------- Sales $1,800 $1,750 $1,870$ 1,800 $ 1,710 $ 3,510 $ 1,750 $ 1,700 $ 3,450 Operating Profit 14 12 26 30 2335 65
Forest Products 2001 firstsecond quarter net sales of $685$720 million were up 37% from the $500$685 million reported in the first quarter of 20002001 and up slightly from the $665$460 million reported in the fourthsecond quarter of 2000. Current quarter operating profit of $136$182 million was up from the $118 million reported in the fourth quarter of 2000 and the $132$136 million reported in the first quarter of 2001 and the $151 million reported in the second quarter of 2000. Earnings for Forest ResourcesProducts increased slightly in the firstsecond quarter compared with the 2000 fourthfirst quarter of 2001 as higher volumessales of lumber and panels benefited from stumpagestrong housing starts. Prices for oriented strand board, plywood, and timberland sales offset lower average stumpagelumber improved during the quarter. Stumpage prices for the second quarter of 2001, for both pulpwood and sawtimber.sawtimber, continued their decline from 2000 levels. International Paper monetizes its forest 15 assets in various ways including sales of short and long-term harvest rights on a pay-as-cut or lump-sum bulk salesales basis, and sales of timberland. Accordingly, earnings from quarter to quarter may vary depending upon prices and volumes of such sales. TheOverall, timber sales volumes and prices dropped in the second quarter resulting in lower earnings compared with the first quarter. Earnings for the Wood Products businesses improved performance from the fourth quarter of 2000 but continue to be impacted by depressed prices in lumber and panels. Oversupply in the wood products market has prices running near 10-year lows duringsecond quarter compared with the first quarter. Permanent closuresIn July 2001, Forest Resources announced an internal reorganization designed to increase flexibility and downtimereduce its administrative costs. This reorganization will result in the industry began to favorably impact pricing as the quarter ended.lower operating costs in future quarters. Forest Products
Forest Products - ------------------ 2001 2000 ----------- -------------------------------------------------------------------------------- ----------------------------------------------- In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 4th2nd Quarter ----------- ---------------------------------Six Months ----------------------------------------------- ----------------------------------------------- Sales $685 $500 $665$ 685 $ 720 $ 1,405 $ 500 $ 460 $ 960 Operating Profit 136 182 318 132 118151 283
13 Carter Holt Harvey reported 2001 firstsecond quarter net sales of $395$400 million compared with $370$395 million recorded in the fourthfirst quarter of 20002001 and $410$460 million recorded in the firstsecond quarter of 2000. Operating profit in the 2001 firstsecond quarter of $1$5 million was downup from the $10 million recorded in the fourth quarter of 2000 and $17$1 million recorded in the first quarter of 2001, but down from the $23 million recorded in the second quarter of 2000. FirstThe decline in U.S. dollar sales compared with 2000 reflects the translation effect of a 16% stronger U.S. dollar in 2001. Although second quarter 2001 results declined due to continued weaknessimproved over the first quarter, pricing in Asian export log markets was at cyclical lows, while weak regional construction markets in Australia and New Zealand which had a majorin combination with weak housing starts continued to adversely impact on sales volumes and resulted in Carter Holt Harvey taking downtime.Harvey's earnings. Earnings for Carter Holt Harvey's Pulp and PaperWood Products business in the second quarter showed improvement over the comparable prior-yearfirst quarter principallyof 2001 due to higher prices for pulp linerboard, and to foreign exchange and mill modernization benefits. However, earnings were lower compared with the 2000 fourth quarter primarily because of lower export prices.stronger volumes. The operating results fromof the Tissue business were hurtcontinue to be adversely affected by a weak Australian dollar and cost increases for pulp.
dollar. Carter Holt Harvey - ------------------
2001 2000 ------------- ------------------------------------------------------------------------------ ----------------------------------------------- In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 4th2nd Quarter ------------- --------------------------------Six Months ----------------------------------------------- ----------------------------------------------- Sales $395 $410 $370$ 395 $ 400 $ 795 $ 410 $ 460 $ 870 Operating Profit 1 5 6 17 1023 40
International Paper's results for this segment differ from those reported by Carter Holt Harvey in New Zealand due to (1) Carter Holt Harvey's fiscal year ends at March 31 versus our calendar year-end, (2) our segment earnings include only our share of Carter Holt Harvey's operating earnings while 100% of sales are included in Carter Holt Harvey'ssegment results, (3) our results are in U.S. dollars while Carter Holt Harvey reports in New Zealand dollars, and (4) Carter Holt Harvey reports under New Zealand accounting standards while our segment results comply with U.S. generally accepted accounting principles. The major accounting differences relate to cost of timber harvested and start-up costs. Other Businesses include the operating results for those businesses identified in International Paper's divestiture program. During the quarter, International Paper received proceeds from theBusinesses either under agreement for sale of its west coast forestlands, oil and gas properties, and its interest in Zanders Feinpapiere AG, a European coated paper business. Businessesor being marketed at the end of the firstsecond quarter of 2001 include Arizona Chemical, Masonite, the Chemical Cellulose pulp business, Decorative Products, Fine Papers, Flexible Packaging, and certain other smallersmall businesses. In addition, operating results for Bush Boake Allen, Zanders and International Paper's Petroleum and Minerals business are included in this segment for periods prior to their sale. Net sales for other businesses for the firstsecond quarter of 2001 were $655$565 million compared with $930$595 million in the fourth2001 first quarter of 2000 and $1 billion$955 million in the first quarter of 2000.2000 second quarter. Operating profit of $9was $21 million was recordedcompared with $5 million for the first quarter of 2001 compared with $33and $65 million recorded forin the fourth quarter of 2000 and $66 million for the firstsecond quarter of 2000. The declinedeclines in 2001 firstsecond quarter net sales and earnings from the fourthsecond quarter of 2000 reflect a weakweaker U.S. economy as well as the divestedsale of certain businesses sold in late 2000 and the first quarter of 2001. 16 Other Businesses
Other Businesses - ---------------- 2001 2000 -------------- ------------------------------------------------------------------------------ ----------------------------------------------- In millions 1st Quarter 2nd Quarter Six Months 1st Quarter 4th2nd Quarter -------------- -------------------------------Six Months ----------------------------------------------- ----------------------------------------------- Sales $655 $1,015 $930$ 595 $ 565 $ 1,160 $ 945 $ 955 $ 1,900 Operating Profit 9 66 335 21 26 60 65 125
14 Liquidity and Capital Resources Cash provided by operations totaled $54$295 million for the 2001 first quarterhalf of 2001 compared with $535$968 million for the comparable 2000 first quarter. Lowersix-month period, due principally to the decline in net earnings and unfavorable working capital charges accounted for most of the decrease.earnings. Working capital requirements decreased first quarter 2001reduced operating cash flow by $333 million as compared with a decrease of $55 million in operating cash flow for first quarter 2000. Investments in capital projects totaled $189$532 million and $214$293 million for the 2001 and 2000 first quarters,six-month periods, respectively, due to an increase in seasonal estimated tax payments. Investments in capital projects totaled $458 million and $488 million for the 2001 and 2000 six-month periods, respectively. Financing activities for the 2001 first quartersix-month period included a $630$684 million net reduction versusin debt compared to a $264 million$4.7 billion net increase in debt in the comparable 2000 first quarter.six-month period when borrowings were made in connection with the acquisition of Champion. During the second quarter, certain cash balances in Europe and South American were repatriated to the U.S. to reduce debt balances. Additionally, zero-coupon convertible senior debentures were issued yielding net proceeds of approximately $1.0 billion which was used to retire commercial paper borrowings. Common stock dividend payments totaled $120$240 million, or $.25$.50 per share, for the 2001 first quarter and $104half compared to $207 million, or $.25$.50 per share, for the 2000 first quarter.half. At March 31,June 30, 2001, cash and temporary investments totaled $1.1 billion$743 million compared with $1.2 billion at December 31, 2000. Mergers, Acquisitions and Divestitures Mergers and Acquisitions: In April 2001, Carter Holt Harvey acquired Norske Skog's Tasman Kraft pulp manufacturing business for $130 million in cash. In June 2000, International Paper completed the acquisition of Champion, a leading manufacturer of paper for business communications, commercial printing and publications with significant market pulp, plywood and lumber manufacturing operations. Champion shareholders received $50 in cash and $25 worth of International Paper common stock for each Champion share. The acquisition was completed for approximately $5 billion in cash and 68.7 million shares of International Paper common stock having a market value of $2.4 billion. Approximately $2.8 billion of Champion debt was assumed. In April 2000, Carter Holt Harvey purchased CSR Limited's medium density fiberboard and particleboard businesses and its Oberon sawmill for approximately $200 million in cash. In March 2000, International Paper acquired Shorewood Packaging Corporation, a leader in the manufacture of premium retail packaging, for approximately $640 million in cash and the assumption of $280 million of debt. All of these acquisitions were accounted for using the purchase method with the related operating results included in the consolidated statement of earnings from the dates of acquisition. The accompanying consolidated balance sheet as of March 31, 2001 reflects a preliminary allocation of the purchase price of Champion to the fair value of the assets and liabilities acquired. In January 2000, International Paper sold its equity interest in Scitex for $79 million, and Carter Holt Harvey sold its equity interest in Compania de Petroleos de Chile for just over $1.2 billion. These sales resulted in a combined extraordinary gain of $134 million after taxes and minority interest.17 Divestitures: In March 2001, International Paper received $500 million in proceeds from the sale of approximately 265,000 acres of forestlands in the state of Washington to Ranier Timber Company, LLC. In addition, International Paper announced that it had reached an agreement to sell its Curtis/Palmer hydroelectric generating project in Corinth, New York to TransCanada Pipelines Limited for approximately $285 million. The completion of the 15 transaction is subject to certain conditions, including regulatory review by federal antitrust authorities and the Federal Energy Regulatory Commission. In January 2001, International Paper conveyed its oil and gas properties and fee mineral and royalty interests to Pure Resources, Inc. and its affiliates in a transaction valued at approximately $260 million, resulting in an extraordinary loss of $8 million after taxes. International Paper also completed the sale of its interest in Zanders Feinpapiere AG, a European coated paper business, to Metsa Serla for approximately $120 million and the assumption of $80 million of debt. This transaction resulted in an extraordinary loss of $245 million after taxes and minority interest, which was recorded in the 2000 fourth quarter of 2000 when the decision was made to sell this business below book value. LateIn November 2000, International Paper sold its interest in Bush Boake Allen for $640 million, resulting in an extraordinary gain of $183 million after taxes and minority interest. In January 2000, International Paper sold its equity interest in Scitex for $79 million, and Carter Holt Harvey sold its equity interest in Compania de Petroleos de Chile for just over $1.2 billion. These sales resulted in a combined extraordinary gain of $134 million after taxes and minority interest. In 2000, International Paper announced a divestment program following the Champion acquisition and the completion of a strategic analysis to focus on International Paper's core businesses. Through March 31,June 30, 2001, approximately $1.7 billion of proceeds, including debt assumed by the buyers, have been realized under the program. Restructuring, Special and Extraordinary Items During the second quarter of 2001, special items amounting to a net pre-tax charge of $582 million ($377 million after taxes and minority interest) were recorded. These items included a $465 million charge before taxes and minority interest ($300 million after taxes and minority interest) for asset shutdowns of excess capacity and cost reduction actions, an $85 million pre-tax loss ($55 million after taxes) for impairment losses on businesses held for sale, and a $32 million pre-tax charge ($22 million after taxes) for additional Champion merger-related costs. The $465 million charge for asset shutdowns of excess internal capacity and cost reduction actions included $240 million of asset write-downs and $225 million of severance and other charges. The following table presents additional detail related to the $465 million charge:
Asset Severance Write- and In millions Downs Other Total - -------------- ------- ----------- ------- Printing Papers (a) $ 9 $ 23 $ 32 Consumer Packaging (b) 151 69 220 Industrial Packaging (c) 62 20 82 Industrial Papers (d) 3 5 8 Forest Products (e) 1 12 13 Distribution (f) 4 21 25 Carter Holt Harvey (g) 10 - 10 Administrative Support Groups (h) - 75 75 ------ ------ ------ $ 240 $ 225 $ 465 ====== ====== ======
(a) The Printing Papers business indefinitely shut down the Hudson River mill No. 3 paper machine located in Corinth, New York due to excess internal capacity. The machine was written down by $9 million to 18 its estimated fair value of zero. A severance charge of $10 million was recorded to cover the termination of 208 employees. Also, the Printing Papers business implemented a plan to streamline and realign administrative functions at several of its locations. Charges associated with this plan included $6 million of severance costs covering the termination of 82 employees, and other cash costs of $7 million. (b) In June 2001, the Consumer Packaging business shut down the Moss Point, Mississippi mill and announced the shut down of its Clinton, Iowa facility due to excess internal capacity. Charges associated with the Moss Point shutdown included $138 million to write the assets down to their estimated salvage value, $21 million of severance costs covering the termination of 363 employees, and other exit costs of $20 million. Charges associated with the Clinton shutdown included $7 million to write the assets down to their estimated salvage value, $7 million of severance costs covering the termination of 327 employees, and other exit costs of $3 million. Additionally, the Consumer Packaging business implemented a plan to reduce excess internal capacity and streamline administrative functions at several of its locations. Charges associated with this plan included $6 million of asset write-downs, $15 million of severance costs covering the termination of 402 employees, and other cash costs of $3 million. (c) The Industrial Packaging business indefinitely shut down the Savannah, Georgia mill No. 2, No. 4 and No. 6 paper machines due to excess internal capacity. The machines were written down by $62 million to their estimated fair value of zero, with severance charges of $11 million also recorded to cover the termination of 290 employees. Also, Industrial Packaging implemented a plan to streamline and realign administrative functions at several of its locations, resulting in a severance charge of $9 million covering the termination of 146 employees. (d) Industrial Papers implemented a plan to reduce excess capacity and streamline administrative functions at several of its locations. Charges associated with this plan included asset write-downs of $3 million and severance costs of $5 million covering the termination of 123 employees. (e) The Forest Products business charge of $13 million reflects the reorganization of its regional operating structure and streamlining of administrative functions. The charge included $1 million of asset write-downs, $9 million of severance costs covering the termination of 100 employees, and other cash costs of $3 million. (f) xpedx implemented a plan to consolidate duplicate facilities and eliminate excess internal capacity. Charges associated with this plan included $4 million of asset write-downs, $14 million of severance costs covering the termination of 394 employees, and other cash costs of $7 million. (g) The Carter Holt Harvey charge of $10 million was recorded to write down the assets of its Mataura mill to their estimated fair value of zero as a result of the decision to permanently shutdown this facility which had previously been idled temporarily. (h) During the second quarter of 2001, International Paper implemented a cost reduction program to realign its administrative functions across all business and staff support groups. As a result, a $75 million severance charge was recorded covering the termination of 985 employees. The $85 million charge for impairment losses on businesses held for sale reflects the reduction of the carrying value of these assets to their expected realizable value based on offers received. These businesses are currently being offered for sale as part of International Paper's divestment program. The merger-related expenses of $32 million consisted primarily of systems integration, product line rationalization, employee retention, travel and other cash costs related to the Champion merger. 19 During the first quarter of 2001, special and extraordinary items amounting to a net pre-tax charge of $108 million ($68 million after taxes and minority interest) were recorded. These items included a $25 million charge before taxes and minority interest ($16 million after taxes and minority interest) for the cumulative impact of adopting the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,"Activities", as amended by Statement of Financial Accounting Standards No.SFAS Nos. 137 and 138, "Accounting for Certain Derivative Instruments and Hedging Transactions," an extraordinary charge of $73 million before taxes ($46 million after taxes) for impairment losses on businesses held for sale, and a special charge of $10 million before taxes ($6 million after taxes) for additional Champion merger-related costs. During the second quarter of 2000, International Paper recorded special items amounting to a net charge before taxes and minority interest of $75 million ($45 million after taxes and minority interest). The extraordinaryspecial items included a $71 million pre-tax charge consisting($42 million after taxes and minority interest) for asset shutdowns of an adjustment to the expected loss on the sale of the Masonite businessexcess internal capacity and the loss on the sale of oilcost reduction actions and gas interests, was presented in accordance with the pooling-of-interests rules.a $4 million pre-tax charge ($3 million after taxes) for merger-integration costs. During the first quarter of 2000, a pre-tax charge of $8 million ($5 million after taxes) was recorded for merger-related expenses, primarily consisting of systems integration, employee retention, travel and other cash costs related to the Union Camp merger. During the last threetwo quarters of 2000, additional charges totaling $824$749 million before taxes and minority interest ($509464 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions were recorded. The following table presents a roll forward of the cumulative severance and other costs included in these charges:
Severance Dollars in millions and Other - ---------------------- -------------------------- Opening balance - second quarter 2000 (1,056 employees) $ 31 Additions - fourth quarter 2000 (3,187 employees) 217 Cash charges - 2000 (991 employees) (19) ---------- Balance, December 31, 2000 (3,252 employees) 229 Cash charges - first quarter 2001 (1,744 employees) (86) ----Cash charges - second quarter 2001 (655 employees) (37) ------ Balance, March 31,June 30, 2001 (1,508(853 employees) $143 ====$ 106 ======
In addition, the $13 million of 1999 reserves, primarily relating to severance, which remained at the end of 2000 was paid during the first quarter of 2001. International Paper continually evaluates its operations for improvement. When any such plans are finalized, we may incur costs or charges may be incurred in future periods related to the implementation of suchthese plans. 16 Other The effective income tax rate for both the 2001 and 2000 firstsecond quarters was 31%. The effective income tax rate after special items, but before extraordinary items and the cumulative effect of an accounting change, was 30%37% and 31%30% for the 2001 and 2000 three monthsix-month periods, respectively. The following table presents the components of pre-tax earnings and losses and the related income tax expense or benefit for each of the three monthsix-month periods ended March 31,June 30, 2001 and 2000. 20
2001 2000 ------------------------------------------- ------------------------------------------- Earnings Earnings (Loss) Before (Loss) Before Income Taxes Income Tax Income Taxes Income Tax and Minority Provision Effective and Minority Provision Effective In millions Interest (Benefit) Tax Rate Interest (Benefit) Tax Rate - -------------- ----------------------------- ------------- ----------- ----------------------------- ------------- ----------------------- Before special and extraordinary items and cumulative effect of accounting change $ 97247 $ 3076 31% $ 443998 $ 139309 31% Merger-related expenses (10)Merger integration costs (42) (14) 33% (12) (4) 40% (8) (3)33% Restructuring and other charges (550) (191) 35% (71) (27) 38% ---- ---------- ------ ----- ----- After special items $ 87(345) $ 26(129) 37% $ 915 $ 278 30% $ 435 $ 136 31% ==== ========== ====== ===== =====
During the quarter ended June 30, 2001, International Paper entered into a number of contracts to hedge a portion of its U.S. forecasted purchases of natural gas through March 31, 2002, effectively fixing the price of these purchases at a weighted average price of $5.30 per MMBTU. Contracts for a notional amount of 33.8 MMBTU's were outstanding at June 30, 2001. Forward-Looking Statements The statements under "Management's Discussion and Analysis" and other statements contained herein that are not historical facts are forward-looking statements (as such term is defined under the Private Securities Litigation Reform Act of 1995). Forward-looking statements reflect our expectations or forecasts of future events. These include statements relating to future actions, future performance or the outcome of contingencies, such as legal proceedings and financial results. Any or all of the forward-looking statements that we make in this report may turn out to be wrong. They can be influenced by inaccurate assumptions we might make or by known or unknown risks and uncertainties. No forward-looking statements can be guaranteed and actual results may vary materially. Factors which could cause actual results to differ include, among other things, whether our efforts relating to capacity rationalization, internal reorganizations, and realignment initiatives will have the results anticipated, whether expected merger savings will be realized, whether our divestiture program will achieve anticipated proceeds, the relative strength of the U.S. dollar compared with other foreign currencies, especially the Euro, and changes in overall demand, changes in domestic competition, changes in the cost or availability of raw materials, and the cost of compliance with environmental laws and regulations. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. 1721 Financial Information by Industry Segment (Unaudited) (In millions) Net Sales by Industry Segment (1)
Three Months Ended March 31, ------------------------Six Months Ended June 30, June 30, ------------------------------- ------------------------------ 2001 2000(1) ------- -------2000 2001 2000 ------------- ------------- ------------ ------------ Printing Papers $ 2,0251,945 $ 1,4001,440 $ 4,030 $ 2,910 Industrial and Consumer Packaging 1,695 1,865 3,405 3,530 Distribution 1,710 1,665 Distribution 1,800 1,7501,700 3,510 3,450 Forest Products 685 500720 460 1,405 960 Carter Holt Harvey 395 410400 460 795 870 Other Businesses (3) 655 1,015(2) 565 955 1,160 1,900 Corporate and Intersegment Sales (376) (369)(349) (100)(3) (725) (469)(3) ------- ------------- -------- -------- Net Sales $ 6,8946,686 $ 6,3716,780 $ 13,580 $ 13,151 ======= ======= ======== ========
Operating Profit by Industry Segment (1)
Three Months Ended March 31, -----------------------Six Months Ended June 30, June 30, ------------------------------- ------------------------------- 2001 2000(1) ----- ------2000 2001 2000 ------------- ------------- ------------- ------------- Printing Papers $ 150119 $ 166204 $ 273 $ 376 Industrial and Consumer Packaging 116 192143 236 259 428 Distribution 14 3012 35 26 65 Forest Products 136 132182 151 318 283 Carter Holt Harvey (2) 1 17(4) 5 23 6 40 Other Businesses (2) 21 65 26 125 Corporate - 26 (3) 9 66- 26 (3) ------ ----- ----------- ------ Operating Profit 426 603482 740 908 1,343 Interest expense, net (248) (131)(235) (156) (483) (287) Minority interest adjustment 3 24(4) 10 38 13 62 Corporate items, net (84) (53)(107) (67) (191) (120) Merger integration costs (10) (8)(32) (4) (42) (12) Restructuring and other charges (465) (71) (465) (71) Impairment losses on businesses held for sale (85) - (85) - ------ ----- ----------- ------ Earnings (loss) before income taxes, minority interest, extraordinary items and cumulative effect of accounting change $ 87(432) $ 435480 $ (345) $ 915 ====== ===== =========== ======
(1) Certain reclassifications and adjustments have been made to current year and prior year amounts. (2) Includes businesses identified in International Paper's divestiture program. (3) Includes results of operations from Champion, which was acquired on June 20, 2000, for the ten days ended June 30, 2000. (4) Includes equity earnings (in millions) of $1 inand $5 for the three months ended June 30, 2001 and $4 in 2000. Half of these equity earnings amounts are2000, respectively, and $2 and $9 for the six months ended June 30, 2001 and 2000, respectively (half in the Carter Holt Harvey segment and half are in the minority interest adjustment. (3) Includes businesses identified in International Paper's divestiture program. 18adjustment). 22 Production by Product
Three Months Ended March 31, -----------------------Six Months Ended June 30, June 30, ------------------------------- -------------------------- 2001 2000 ------ -------2001 2000 -------------- --------------- ------------ ------------ Printing Papers (In thousands of tons) White Papers and Bristols 1,641 1,380(1) 1,578 1,355 3,219 2,735 Coated Papers 698 325658 317 1,356 642 Market Pulp (b) 676 522(2) 655 516 1,331 1,037 Newsprint 27 28 2755 55 Packaging (In thousands of tons) Containerboard 1,047 1,2031,061 1,190 2,108 2,394 Bleached Packaging Board 492 532556 542 1,048 1,074 Industrial Papers 221 241193 230 415 471 Industrial and Consumer Packaging (a) (c) 1,208 1,322(1) (3) 936 1,375 1,888 2,726 Specialty Products (In thousands of tons) Tissue 41 4140 42 81 83 Forest Products (In millions) Panels (sq. ft. 3/8" - basis) (d) 649 493(4) 771 510 1,420 1,003 Lumber (board feet) 948 7151,001 713 1,949 1,428 MDF (sq. ft. 3/4" - basis) 94 6090 84 184 143 Particleboard (sq. ft. 3/4" - basis) 101 49111 95 212 143
(a)(1) Certain reclassifications and adjustments have been made to current and prior yearprior-year amounts. (b) This excludes(2) Excludes market pulp purchases. (c)(3) A significant portion of this tonnage was fabricated from paperboard and paper produced at International Paper's own mills and included in the containerboard, bleached packaging board and industrial papers amounts in this table. (d)(4) Panels include plywood and oriented strand board. 1923 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information relating to quantitative and qualitative disclosures about market risk are shown in FootnoteFootnotes 9 Recent Accounting Developmentsand 10 of this Form 10-Q, and on pages 27 - 29 of International Paper's Annual Report to Shareholders for the year ended December 31, 2000 as previously filed on Form 10-K, which information is incorporated herein by reference. 2024 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The following matters discussed in previous filings under the Securities Exchange Act are updated as follows: Masonite Litigation Three nationwide class action lawsuits filed against the Company have been settled in recent years. The first suit alleged that hardboard siding manufactured by Masonite fails prematurely, allowing moisture intrusion that in turn causes damage to the structure underneath the siding.siding (Naef Lawsuit). The class consisted of all U.S. property owners having Masonite hardboard siding installed on and incorporated into buildings between 1980 and January 15, 1998. FinalThe Court granted final approval of the settlement was granted by the Court on January 15, 1998. The settlement provides for monetary compensation to class members meeting the settlement requirements on a claims-made basis. It also provides for the payment of attorneys' fees equaling 15% of the settlement amounts paid to class members, with a non-refundable advance of $47.5 million plus $2.5 million in costs. The second suit made similar allegations with regard to Omniwood siding manufactured by Masonite (Omniwood Lawsuit). The class consisted of all U.S. property owners having Omniwood siding installed on and incorporated into buildings from January 1, 1992 to January 6, 1999. The third suit alleged that Woodruf roofing manufactured by Masonite is defective and causes damage to the structure underneath the roofing (Woodruf Lawsuit). The class consisted of all U.S. property owners who had incorporated and installed Masonite Woodruf roofing from January 1, 1980 to January 6, 1999. FinalThe Court granted final approval of the settlements of the Omniwood and Woodruf lawsuits was granted by the Court on January 6, 1999. The settlements provide for monetary compensation to class members meeting the settlement requirements on a claims-made basis, and provide for payment of attorneys' fees equaling 13% of the settlement amounts paid to class members with a non-refundable advance of $1.7 million plus $75,000 in costs for each of the two cases. International Paper believes that the large majority of the settlement relating to the Naef Lawsuit is covered by insurance and that it will prevail in the insurance coverage litigation that it was forced to file against certain of its insurers because of their refusal to cover that settlement. Nevertheless, due to the inherent uncertainties involved in litigation, International Paper has estimated total insurance recoveries of approximately $70 million, for purposes of establishing the reserve for Masonite claims. Reserves for these matters total $102$61 million at March 31,June 30, 2001, net of expected future insurance recoveries of $44 million.recoveries. This amount includes $25 million added to the reserve for hardboard siding claims in the fourth quarter of 1999 (some of which has now been paid to claimants) and an additional $125 million added to the reserve in the fourth quarter of 2000, resulting primarily from a higher number of hardboard siding claims than anticipated. It is reasonably possible that the higher number of hardboard siding claims might be indicative of the need for one or more future additions to this reserve. However, whether or not any future additions to this reserve become necessary, we believe that these settlements will not have a material adverse effect on our consolidated financial position or results of operations. The Company believes that the large majority of the Naef settlement is covered by insurance and that it will prevail in the insurance coverage litigation that it was forced to file against certain of its insurers because of their refusal to cover that settlement. Nevertheless, due to the inherent uncertainties involved in litigation, the Company has assumed, for the sole purpose of creating the reserve for Masonite claims, that it would collect a total of $70 million from its insurers. Through March 31,June 30, 2001, net settlement payments of $283$324 million, including theapproximately $51 million of non-refundable advances of attorneys' fees discussed above, have been made. Payments of $5 million, including the $3.4 million of non-refundable advances referred to above, have been made to the attorneys for the plaintiffs in the Omniwood and Woodruf lawsuitsLawsuits through March 31,June 30, 2001. Also, we have received $27 million from our insurance carriers through March 31,June 30, 2001. International Paper and Masonite 21 have the right to terminate each of 25 the settlements after seven years from the dates of final approval. The liability for these matters will be retained after the planned sale of Masonite is completed. Other Litigation Purchasers of high-pressure laminates have filed a number of purported class actions under the federal antitrust laws in various federal district courts in different states, alleging that International Paper's Nevamar division participated in a price-fixing conspiracy with competitors. These cases have been consolidated in federal district court in New York. Indirect and direct purchasers of high-pressure laminates have also filed similar purported class action cases under various state antitrust and consumer protection statutes in California, Florida, Maine, Michigan, Minnesota, New Mexico, New York, North Dakota, South Dakota, Tennessee and the District of Columbia. We are alsofiled a motion to dismiss one of the cases in federal court, which was denied by the court without prejudice. The federal plaintiffs filed a consolidated amended complaint on February 22, 2001. On February 26, 2001, International Paper filed a motion to dismiss the case pending in New York State court and has filed answers in California, New Mexico, South Dakota and one of two complaints filed in Michigan. On May 2, 2001, our motion to dismiss in the case pending in New York State court was granted. Environmental On December 30, 1999, Champion entered into a Consent Order with the Florida Department of Environmental Protection relating to alleged violations of the wastewater discharge permit at the Pensacola, Florida mill. The Consent Order required Champion to take additional steps to control the discharge of suspended solids, nutrients and oxygen-consuming material in the mill's wastewater and to pay a civil penalty of $137,730. The Consent Order became effective in April 2001, when an administrative challenge of the Consent Order was resolved. In April 1999, the Franklin, Virginia mill received a Notice of Violation (NOV) from the EPA, Region 3 in Philadelphia, and an NOV from the Commonwealth of Virginia alleging that the mill violated the Prevention of Significant Deterioration (PSD) regulations. The Franklin mill was owned by Union Camp at the time of the alleged violations and was one of seven paper mills in Region 3 owned by different companies that received similar NOVs. On May 11, 2001, the Commonwealth of Virginia informed International Paper that it does not intend to pursue the allegations identified in the NOV, and we do not anticipate further enforcement action from the EPA. International Paper is involved in other contractual disputes, administrative and legal proceedings and investigations of various types. While any litigation, proceeding or investigation has an element of uncertainty, we believe that the outcome of any proceeding, lawsuit or claim that is pending or threatened, or all of them combined, will not have a material adverse effect on our consolidated financial position or results of operations. 2226 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) In June 2001, International Paper completed a private placement offering of $2.1 billion principal amount at maturity zero-coupon convertible senior debentures due June 20, 2021, for aggregate net proceeds of approximately $1.0 billion. Each $1,000 principal amount at maturity debenture was issued at a price of $475.66 and accretes at a rate of 3.75% per annum, subject to upward adjustment under certain circumstances. The securities are convertible into shares of International Paper common stock if certain conditions are met. The debenture holders option to convert can be triggered by an upward change in International Paper's stock price in relation to the accreted value of the debentures, or if the bond rating agencies downgrade International Paper's debt below investment grade, or upon the debentures being called for redemption by International Paper, or upon the occurrence of certain other corporate events as defined in the debt agreement. International Paper may be required to repurchase the securities on June 20th in each of the years 2004, 2006, 2011, and 2016 at a repurchase price equal to the accreted principal amount plus any accrued and unpaid cash interest to the repurchase date. International Paper also has the option to redeem the securities on or after June 20, 2006 under certain circumstances. The net proceeds of this issuance were used to retire higher interest rate commercial paper borrowings. The transaction was completed without registration in reliance upon Section 4(2) of the Securities Act. The securities were initially sold to Credit Suisse First Boston and Goldman Sachs & Co. for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act. 27 ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Shareholders of the Company was held on May 8, 2001. (b) Shareholders elected four directors to Class I for three-year terms expiring at the annual meeting in 2004. The vote tabulation for individual directors were:
For Withheld --- -------- John T. Dillon 414,443,891 4,876,569 James A. Henderson 414,791,640 4,528,820 Robert A. Kennedy 414,745,389 4,575,071 W. Craig McClelland 414,509,347 4,811,113
Other directors whose terms of office continued after the meeting were Samir G. Gibara, Robert J. Eaton, John R. Kennedy, Donald F. McHenry, Patrick F. Noonan, Jane C. Pfeiffer, Jeremiah J. Sheehan, Charles R. Shoemate and C. Wesley Smith. (c) The shareholders approved the appointment of Arthur Andersen LLP as International Paper's independent auditor for 2001. There were 407,221,998 votes cast in favor of the ratification, 9,167,883 votes cast against the ratification, and 2,931,579 votes in abstention. (d) N/A 28 ITEM 5. OTHER INFORMATION On June 12, 2001, Standard & Poor's lowered International Paper's long-term credit and senior long-term debt ratings from BBB+ negative to BBB stable and affirmed our short-term and corporate credit and commercial paper ratings of A-2. On August 3, 2001, Moody's announced that it had placed International Paper's senior unsecured debt and preferred stock under review for a possible downgrade. 29 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (11)3.1 Certificate of Amendment of the Certificate of Incorporation of International Paper 4.1 In accordance with Item 601 (b) (4) (iii) (A) of Regulation S-K, certain instruments respecting long-term debt of the Company have been omitted but will be furnished to the Commission upon request. 11 Statement of Computation of Per Share Earnings (12)12 Computation of Ratio of Earnings to Fixed Charges (b) Reports on Form 8-K Reports on Form 8-K were filed on January 25, 2001 and April 18, 2001 in each caseand July 17, 2001 under Item 5 and reporting earnings for the quarters ended December 31, 2000 and March 31, 2001, respectively.and June 30, 2001, respectively, and on June 13, 2001 under Item 5 containing the press release of International Paper announcing the private offering of zero- coupon convertible debentures. 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 14,August 13, 2001 By /s/JOHN V. FARACI ----------------------------------- John V. Faraci Executive Vice President and Chief Financial Officer Date: May 14,August 13, 2001 By /s/ ANDREW R. LESSIN -------------------- Andrew R. Lessin Vice PresidentPresident-Finance and Chief Accounting Officer 2330